Financial Accounting and Reporting

Evaluate any damaging financial and ethical repercussions of failure to include the inventory write-downs in the financial statements. 

Failure to include the inventory write-downs in the financial statements can lead to various ethical and financial implications to a company. The intent of inventory write-downs is to eliminate some of the inventories that are no longer of value to the company. Inventory that contributes no return to the company is a burden to organizations when they are included in the financial statements. However, the concept of a write-down of inventory should ensure that the inventory is still included in the financial statements it still has some value. The value of the write-down inventory should be equal to the original price of the particular inventory less the current market replacement value. According to the International Accounting Standards 2 (IAS2), is the loss of an inventory write-down is small it can be reported as a component of the cost of the goods sold. 

n the other hand, if the amount of the inventory write-down is large, then it should be recorded separately in the income statement (Weil Schipper & Francis, 2013). However such transaction in the financial statement is wrong since it can lead to the misrepresentation of the financial statements that often result in the overestimation of the financial performance of the company. A company that engages in such practices will misrepresent the financial statement of the company hence mislead the investors and potential investors that the company has a strong financial performance. This is an ethical concern since it can make the investors make wrong investment decisions door to the provision of wrong information by the company. 

Furthermore, the action can also lead to several financial and ethical issues that include excessive compensation of managers, fraud penalties, loss of the confidence of the shareholders, and losing the image and value of the company (Henderson et al., 2015). 

Prepare a recommendation to the CFO, evaluating the negative impact of a civil fraud penalty on the corporation as a result of the IRS audit. In the recommendation, include essential internal control procedures to prevent fraudulent financial reporting from occurring, as well as the major obligation of the CEO and CFO to ensure compliance. 

As a partner in the consulting firm hired to perform the audit, the following are the recommendation deemed appropriate for the firm. The accountants who do not consider and follow the full accounting standards when preparing the financial statements, not only violates the accounting standards but also violates ethics and trust of other stakeholders. It is recommended that the CFO and CEO of the company consider the impacts of the assessment of the Internal Revenue Service, especially negative effects. In many audit assessment regarding the inventory write-downs, firms have been using such opportunity to help reduce their taxable income. In essence, the inventory write-downs perhaps were just a scheme to reduce the taxable income of the company. Besides, the inventory write-downs were not included in the financial statements. In this case, Internal Revenue Service has the authority to investigate such incidents and come up with applicable penalties to the company. 

Examine the negative results on stakeholders and the financial statements of an IRS audit which generates additional tax and penalties or subsequent audits. Assume that the subsequent audit and / or additional tax and penalties result from the taxpayer’s use of an inventory reserve account, applying a 10 percent reduction to inventory over three (3) years.  Discuss the applicable federal tax laws, regulations, rulings, and court cases related to the inventory write-downs, and explain the specific relevance of each to the write-down. 

The federal laws and regulations allow for some of the writedowns in the inventory. Some of the write-downs of inventory such as the damaged inventory, the unsellable inventory and the stolen inventory can be used to help the organization reduce its tax payable. Given the federal laws governing inventory write down, it is required that a given firm determines the value of the affected inventory using an appropriate valuation method that is approved by the Internal Revenue Service (Beatty & Liao, 2014). Using the cost method, all the direct and indirect cost associated with the investors including transportation cost are considered for the calculations. Alternatively, it can consider the lowest cost or market value as the current value of the inventory. In order to claim inventory write-downs, there should be a loss of the inventory due to fire, theft, flood or if the inventory cannot be sold in the market. In this case, it can be considered as part of the goods sold. In some cases, the inventory write-down can be considered as a separate adjustment. 

There are a number of rulings as well as court cases that are related to the inventory write-down. Among the cases and rulings includes the case of: “Citing Best Auto Sales, Inc, TC Memo 2002-297”. The case is the best example that is comparable to the problem of the inventory write-down as evidenced in the firm. In the case, the Internal Revenue Authority determined that the taxpayer failed to account for its inventory write-downs and this led to a violation of the IRC 471 by using the Inventory Reserve Account. As was in the case, the company was using the lower of cost or market value approach to value its inventory. The taxpayer writes down the value of the inventory in the period when the decline occurred if when there was no sale of the goods (Wang, 2014). The court rulings were that it is necessary for the actual deduction to be carried out to compensate for the malpractices. However, the court indicated that the deduction will not be used in the computation of the taxes. Another reference that resembles that same issue is evident in the case of “Covina Motors, Inc TC Memo 2008-237.” The company also did not disclose its write-downs in the financial statements and this understated its taxable income. In this case, the court also ordered for the restatement of the financial statement of the company. 

Research the current generally accepted accounting principles (GAAP) regarding stock option accounting. 

Based on the US Generally Accepted Accounting Principles (US GAAP), the Financial Accounting Standards 123 (FAS 123) is considered as the definitive benchmark that is prescribed by the Accounting Standards Board of the country or the financial accounting information and data contained in the financial statement. The rules set under this provision must be applied when preparing all the financial statements of companies so as to provide a fair and true value of the financial performance of the company. Besides, it can ensure that there is a standardized method that enables for the comparison of the financial statements across different firms. The expenses of a company should be recognized through the use of the fair measurements or intrinsic value measurement. In the intrinsic value measurement, the expense associated of a particular contribution date or other further measurement date is considered as the excess of the stated market price over a specified exercise price that should be paid by the employee. In the fair value approach, the measurement of the expense with respect to the grant value date given the award value and recognized over the service period. Based on the opinion number 25 in the Accounting Standard Board, businesses are allowed to apply the intrinsic value approach for accounting and this is in contrast to the IFRS2. 

In this case, the top-level executives of the company have exercised during the period and that expense for the same transaction has not been recorded in the financial statements. The treatment is justified by the US GAAP and FAS 123R. However, the company should be able to provide for the compensation cost which the firm incurs as a result of issuing stock options to the top level executives of the company. 

Research the reporting requirements for lease reporting under GAAP and International Financial Reporting Standards (IFRS). Based on your research, create a proposal for future lease transactions to the CFO. Within the proposal, discuss the use of off-the-balance sheet financing arrangements, capital leases, and operating leases, and indicate the related business and financial risks of each. 

The CFO of the company should identify the risks and benefits associated with each of the stock appreciation rights and stock option plan. Achieving this requires an assessment of the financial statement that can inform appropriate decision making. One of them is cash flow statements which can help a company to make an appropriate decision regarding the choice of the stock option. In case of the stock appreciation rights, it is evident that the increase in the price of the stock of the company is paid by the firm in cash to the employees. The payment in cash to the employee can affect the cash flow of the company. In the case of a stock option, only stocks are issued by the company and this does not involve cash outflows. This implies that a company with a good cash flow can take the option of the stock appreciation rights while those with poor cash flow can go for the stock option plan. This means that the decisions regarding the appropriate compensation plan should be based on the performance of the cash flow statement of the company and thus can vary from one firm to the other. 

Another factor that can be considered is the dilution of the ownership. Ideally, the per-share earnings of individuals can decline if the number of the shares issued by the company using the stock option is huge. This means that it can dilute the ownership which is not appropriate for the closely held companies. On the other hand, the stock appreciation option does not lead to the dilution of the ownership and thus suitable for the large ownership. The other factor is the costs and administrative complexity. The option pricing model can prove complicated to apply and can require the services of an outside consultant. On the other hand, the stock appreciation right proves simple when accounting for expenses. 

Create an argument for or against a single set of international accounting standards related to lease accounting based on the global market and cross border leases of assets. Examine the benefits and risks of your chosen position. 

A single financial statement is appropriate since it ensures that all companies at different country follow the same basic principle when preparing a financial statement. Uniformity in the financial statement can reduce the chances of financial manipulation since the rules will be similar across different countries. The benefit of using a single financial reporting is that it can facilitate effective cross-border trade as it will make global companies to compare their financial performance. 

Examine the major implications of SAS 99 based on the factors you discovered during the initial evaluation of the company. Provide support for your rationale. 

The SAS 99 considers the fraud in the financial statement of the companies. It gives the opportunity for the company to identify the possible cause of the fraud through brain storming and identifying vulnerable areas. The SAS 99 is appropriate in the case since it can help investigate what happened at correct. It also can help inform the causes of the fraud and help develop future measures to eliminate such type of fraud. 

Analyze the potential for a material misstatement in the financial statements based on the issues identified in your initial evaluation. Make a recommendation to the CFO for the issuance of        restated financial statement restatement. Identify at least three (3) significant issues that can result from the failure to issue restated financial statements. 

The material restatement is necessary in the case it is determined that the previous financial statement contains some errors and inaccuracy. The necessity to restate the financial statements and figures can be due to the financial and accounting errors, failure to comply with the accounting standards, fraud, simple clerical error or the misrepresentation. The negative restatement often sends the wrong signal to the investors of the affected company and thus reduces their confidence. This can eventually lead to the decline of the price of the stock of the company. However, the restatement of the financial statement of a company is deemed fit when the past financial statement is establshed to have some errors and level of inaccuracy. 

In this case, it is recommended the CFO of the form considers the material restatement of the financial statement of the company so as to correct the past mistakes. There are many transactions that have been omitted in the previous financial statements that the CFO needs to incorporate in the new state in order to correct the errors. The past financial statement failed to include the inventory write-downs in the financial statements. Also, the company did not disclose and expense the compensation cost of the employees in terms of the stock options. This failure of the company to include this transaction in the financial statement is adequate to support the material restatement. Ideally, the current financial statements do not depict a true picture of the company financial performance and thus can lead investors to make inappropriate investment decisions. Also, the financial statement underestimated the real performance of the company thus amounts to evading of tax by the firm. It is evident that failure by the company to restate the financial statement of the company can result to a number of issues such as legal action under Sarbanes-Oxley Act, the corporate governance non-compliance, restriction of the stock exchange trade and delisting of the shares of the company. These consequences can affect the performance of the company and thus it is necessary that the CFO consider restating the financial statements. 

Examine the economic effect of restatement of the financial statements on investors, employees, customers, and creditors. 

The restatement of the economic statement can have several consequences for the investors, employees, customers and the creditors. Basically, the effects of the restatement of the financial statements can have different effects on the stakeholders of the company. With regards to the investors, the restatement of the financial statement will make them lose the confidence in the company. The investors will develop a feeling that the company is involved in certain malpractices to deceive them that the company is profitable while in the real sense it is struggling in the market. As the investors lose confidence in the company, they will not be interested in purchasing its shares. This can lead to a decline in share prices of the company which eventually will negatively impact on its financial performance. The investors can also lose a significant amount of money invested in the company due to the penalties and fines that can be imposed by the Internal Revenue Service. In essence, the restatement will lead to a reduction of the income of the company and this can affects the share prices leading to the reduction of earnings by the investors. 

The employees of the company can also be affected by the restatement of the company. The top-level executive who was awarded by the stock option can be required to return such option since they were obtained illegally. Specifically, it can create the bad relationship between the employees and investors or the shareholders thus leading to a rejection of their compensation. In the event that the restatement results to negative profitability, the operation of the company can halt and this can render some of the employees jobless. 

Another notable stakeholder that will be affected by the restatement of the income statement can be argued to be the customers. The customers normally prefer to be associated with a company that is responsible and adhered to the stipulated laws and regulations in a particular industry. The customers can develop a negative attitude against the company and thus avoid purchasing their products as a result of participating in certain malpractices. As a result, the customers will reduce their spending on the company and instead chose to deal with firms known to implement sound financial management practices. 

Interestingly, the creditor can be the group of stakeholders that can be heavily affected by the restatement of the financial statement of the company. In the first place, the creditors can lose the trust of the company and rate it low in terms of its ability to pay its obligation (Flower, 2015). Low credit ratings can mean that the company will be offered with more strict terms and conditions when applying for loans. Also, the credit can lose their amount of money that the company owes them. When the restatement of the financial statement lead to the negative income statement, there is the likelihood that the company can collapse or go bankrupt and this can make many creditors to lose a huge amount of money. This can reduce their financial performance and affects their operation in the market. 

References 

Beatty, A., & Liao, S. (2014). Financial accounting in the banking industry: A review of the empirical literature. Journal of Accounting and Economics ,    58 (2), 339-383. 

Flower, J. (2015). The international integrated reporting council: a story of failure.    Critical Perspectives on Accounting ,    27 , 1-17. 

Henderson, S., Peirson, G., Herbohn, K., & Howieson, B. (2015).    Issues in financial accounting . Pearson Higher Education AU. 

Wang, C. (2014). Accounting standards harmonization and financial statement comparability: Evidence from transnational information transfer.    Journal of Accounting Research ,    52 (4), 955-992. 

Weil, R. L., Schipper, K., & Francis, J. (2013).    Financial accounting: an introduction to concepts, methods and uses . Cengage Learning.