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Submitted To –Tapan MahmudLecturerFaculty of Business StudiesBangladesh University of professionals Presented By-

Mohiuddin Al Faruk ID-M1415009

Tomal Kanto Paul ID-M1415010

Kadiza Bagum ID-M1415025

Sharmin Sultana ID-M1415030

Khondoker Somir ID-M1415051

Topic: Window Dressing

WINDOW DRESSING

General Definition of Window Dressing

Basically it can be defined as “Window Dressing refers to actions taken or not taken prior to issuing financial statements in order to improve the appearance of the financial statements.

Business Definition for Window DressingWindow Dressing-Finance and Investment termWindow Dressing-Banking termWindow Dressing-Accounting term

Window Dressing-Finance and Investment term

It can be defined as, trading activity near the end of a quarter or fiscal year that is designed to dress up a portfolio to be presented to clients or share-holders.

Window Dressing-Banking term

In Banking, Window dressing refers to special adjustments in financial position to give the appearance of adequate liquidity, often to comply with reporting requirements. It gives the appearance of a healthy balance sheet, whereas actual conditions may state otherwise.

Window Dressing-Accounting term

In accounting, Window dressing is the actions taken by management to improve the appearance of a company's financial statements, usually shortly before the end of an accounting period. Window dressing is particularly common when a business has a large number of shareholders, so that management can give the appearance of a well-run company to investors who probably do not have much day-to-day contact with the business.

Examples of window dressing in accounting

• Cash: Postpone paying suppliers, so that the period-end cash balance appears higher than it should be.

• Accounts receivable: Record an unusually low bad debt expense, so that the accounts receivable (and therefore the current ratio) look better than is really the case.

• Revenue: Offer customers an early shipment discount, thereby accelerating revenues from a future period into the current period.

• Expenses: Withhold supplier expenses, so that they are recorded in a later period.

Why Windows Dressing Used In Accounting?

To show Good PerformanceTo Show More Liquidity To Decrease the Value of Taxation To Show Good Return on InvestmentTo Show Good Performance of Mutual Funds

Method used to Window Dressing

Sale and leasebackShort term borrowingChasing debtorsBringing sales forwardChanging depreciation policyIncluding intangible assetsChanging stock valuation policy

Reasons for Window Dressing

To show a stronger market position than is warranted.To influence share price.To reduce liability for taxation.To hide liquidity problems.To ward off takeover bids.To encourage investors.To re-assure lenders of finance.To hide poor management decisions.To satisfy the demands of major investors concerning the level of return.To achieve sales or profit target thereby ensuring that management bonuses

are paid.

Beneficiaries of Window Dressing

In most cases, beneficiaries of window dressing are those who use this practice, i.e., companies and mutual fund managers. In many cases, managers’ remuneration (i.e., salaries and bonuses) depend on how well their companies or mutual funds performed; so there is a direct interest in making financial results or liquidity look better than they really are.

Importance of Window Dressing

To get praise from share holders and potential share holders.

Similarly, window dressing is important to enable the firm to raise present and future capital from the stock market given their positive account balance.

Also to avoid tax payment a firm may present a poor financial return or position to the general public.

Disadvantages of Window Dressing

There are several disadvantages of window dressing like-

Fooling the BankersHoodwinking the ShareholdersGo Directly to Jail

How to Spot Window Dressing

The ability to compare and attentiveness to detail can help recognize window dressing in a company or mutual fund’s reporting. When analyzing overall management performance, business owners and shareholders should review all financial statements and any additional available information to determine whether:

• A positive cash balance is a result of short-term borrowing or non-operating activities (refer to the statement of cash flows to see which activities generated cash)

• There is an abnormal increase or decrease in any balances• The company’s policies were changed during the period• Strong sales are accompanied by increases in accounts payable

Company’s window dressing example

Let us look at an example of window dressing used by a company’s management.

Assume the company has its accounting year ending on Dec. 31, 2013.

At Dec. 27, 2013, the balance in the cash account is tk 2,000. Before the end of the year

the company must pay tk. 3,000 for the services it received during the year. Paying this

obligation will negatively impact the company’s liquidity, so it decides to do some

window dressing. The company postpones the payment of tk. 3,000 till Jan. 4, 2014, by

negotiating the payment terms with the vendor. The company also decides to sell a fixed

asset for tk 4,000 cash. Refer to the extract of the balance sheet below to see how these

two actions of window dressing impacted the company’s financial position .

ABC Company

Extract of Balance Sheet as of Dec. 31, 2013

  Without Applying

window dressing

After Applying window

dressing

Assets

Current assets:    

Cash and cash equivalents (1,000) 6,000

Accounts receivable 5,000 5,000

Inventories 9,000 9,000

Total current assets 13,000 20,000

Straight Line Expanse

Balance Sheet

Accelerated Expanse

Balance sheet

1 2,000 8,000 4,000 6,000

2 2,000 6,000 2,400 3,600

3 2,000 4,000 1,440 2,160

4 2,000 2000 1,080 1,080

5 2,000 0 1,080 0

year Cost Salvage Value

Useful life

0 10,000 0 N=5

Straight Line vs Accelerated Depreciation

let’s assume company XYZ is just starting out as a business and they bought several new computers for their staff.

The purchase value of the computers is $10,000.Computers also deteriorate in value much quicker in the first year than the later years so an accelerated depreciation method is more than satisfactory.

At the end of five years, computers are generally worthless so the salvage value will be $0

Effect of Windows Dressing in Financial Statements

Why does this financial statement Window dressing take place?1.To ensure the lenders of finance about the liquidity position of the company.2.To camouflage poor management decisions taken on part of the company.3.To display steady profitability position and encourage investors.4.To bring down liabilities for taxation purpose.5.To shoot up the market price of shares and build good future expectations.

Is window dressing legal? \Legality of Window Dressing

Generally, window dressing is considered to be an unethical practice because it involves deception and advancement of management’s interests instead of interests of information users (i.e., owners, investors, government).From the legal point of view window dressing isn't illegal, but in some cases it can be so. Window dressing can be an illegal or fraudulent action if it contradicts the law or accounting standards. Some well-known examples of illegal window dressing practices relate to Enron, Peregrine Systems, WorldCom, and Xerox.

Rules & Regulations get though on ‘Window Dressing

The International Accounting Standards Board published final rules that also require greater disclosure of off-balance sheet entities where the bank or company still has some ties, such as the buyer having a right to sell them back, or the bank itself having a right to repurchase the assets.

Although the IASB has stopped short of requiring banks to produce the disclosures in a specified format, it will require them to be in one place, rather than scatter through the accounts. It has also suggested various formats.

Conclusion

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