QUESTION FOUR

The following information was extracted from Nalda Supermarket for the year 2013 annual report:

During the first quarter we made several decisions resulting in a Sh. 130 million charge to earnings. A new accounting standard IAS 36 impairment of assets, seeks to ensure that entitys assets are not carried out more than their recoverable amount (i.e. the higher of fair value less cost of disposal and the value in use).

The magnitude of this loss created a window of opportunity for the company to address several other issues that, in the companys best long interest needed to be resolved. We amended our defined benefit plan and took significant reorganization and special charges. These charges, including IAS 36, totaled to almost sh. 130 million. The result was a sh 71 million loss for the quarter and a small net loss for the year. Although these were difficult decisions because of their short term impact, they will have positive implications for future years

Nakia Supermarkets net income for2011 and 2012 was Sh. 86 million and Sh. 90 million respectively.

1. Explain the earnings management strategy that appear to have been used by Nakia Supermarket in the 2013 fiscal year in conjunction with the IAS 36 charge (Note shat Sh 71 million charge from adoption of IAS is unavoidable. (5 marks)
2. Discuss the above earnings strategy and the main possible reason why the company chose it. (6 marks)
3. Discuss other earnings management strategies that typically are used by companies to influence their reported earnings.
4. As an analyst doing accounting analysis discuss the factors you may need to consider/evaluate before concluding that earnings management was undertaken in a company that is the subject of your analysis. (8 marks) (Total 25 marks)