sset-based fraudulent financial reporting schemes typically involve one

or more of the following seven approaches:

1. Creating phony assets, accomplished by capitalizing expenditures that

should be reported as expenses or through the use of journal entries

(sometimes a complex series of entries) to create an asset on the books

2. Failing to record impairment losses on legitimate assets, resulting

from declines in fair values of assets below their recorded book

values

3. Misclassifying unrealized losses in other comprehensive income that

should be included in profit or loss

4. Using inappropriately long useful lives in connection with recording

depreciation or amortization expense on long-lived assets requiring

such expense, resulting in assets remaining on the books at higher book

values and for longer periods than what would be appropriate

5. Misclassifying noncurrent assets as current in order to inflate an entity’s

current ratio

6. Misclassifying long-lived assets as nondepreciable or nonamortizable

when the assets should be subject to depreciation or amortization,

resulting in the recorded book value remaining on the books for

longer than it would have if it were subject to depreciation or amortization

7. Fraudulently recording gains on assets that are carried at fair value.

The incentives behind each of these categories of fraud are similar—to

make an entity appear to be more financially attractive than it really is. And

fair value accounting plays a role in virtually every one of these schemes to

varying degrees.
Before explaining specific accounting rules and the frauds that can be

perpetrated based on those rules, a few general concepts and definitions

are important for readers to understand.