One of the methods of creative accounting that constitutes a host of procedures taken by an entity’s management to substantially decrease its current earnings per share (EPS) in order to be able to meet future earnings targets. These income-decreasing procedures may improve the probability of paying out EPS at the planned levels in the future. The process means that revenues will be deferred through accelerated write-offs.
A big bath usually involves assets’ writing down or writing-off, while creating provisions for expected or estimated losses/ expenses which may arise in the future. As a result, income will decrease for current period, but at the same time future income will increase (as income of current period absorbs future losses that might have impacted future income).
This method is also known as “taking a bath“.
