"Playing with Numbers: Revealing the Secrets of Earning Manipulation"

Technique-1: Recording Revenue before Completing Material Obligations Under the Contract.

According to accounting principles, revenue is only recognized when earned, which is when services have been fully performed.

Many companies don't follow this practice.

Instead, they record sales to related parties, particularly when the parent company has recently invested in them, without delivering the product or services.

Calendar games

Any company that fails to meet sales targets provided market participants (all the brokerage reports). Their share price falls after the quarterly or annual report has been published.

So, to avoid share prices falling, these companies manipulate their financial reporting by stretching out the end date of their fiscal quarters.

To illustrate, let's say a company changes its quarter end from March 29 to March 31 in order to compensate for a revenue shortfall. By adding those two extra days, the company can record lakhs in sales and make its financial situation appear more favorable than it actually is.

In simpler terms, these companies play "calendar games" to manipulate their financial results, giving the illusion of success and meeting targets by adjusting their reporting periods. But in financial markets, such tactics raise concerns about transparency and the accuracy of financial reporting.

Change in Revenue Recognition Policy

It is crucial for an investor to understand the change in decision rules for when revenue recognition begins and where the sales discounts are categorized in the income statement.

For example: Company A

Under the Revenue Recognition policy company defines its principles as follows.

FY 2018: define revenue from consumer direct sales is recognized upon product delivery, In addition, the sales discounts, are netted against sales in the consolidated income statements.

FY 2020: revenue from consumer direct sales is recognized upon product delivery, and in some cases upon product shipment. In addition, the sales discounts, are netted against sales or recorded in operating and selling expenses in the consolidated income statements.

The change in accounting principles allows Company A to report higher sales, net sales, and gross profit amounts in FY 2020.

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