NBJ11e_IM_AppA_ethical_dilemma_answers - APPENDIX A:...

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APPENDIX A: ANSWERS TO “ETHICAL DILEMMAS” Chapter 2 This ethical dilemma allows the student to apply the conceptual framework to a property, plant and equipment valuation judgment. Management’s decision would be a clear violation of the historical cost principle. However, class discussion can be stimulated by expanding the discussion to include the tradeoff between relevance and reliability. In the typical setting, PP&E items are not intended to be sold and the relevance of fair value information may not outweigh the reliability inherent in historical cost information. In the merger context, the fair value information may be the most relevant information to market participants. In addition, the reliability of the fair value information is greatly enhanced by the periodic valuations by independent appraisals. Therefore, management’s argument that the information is relevant and sufficiently reliable does have merit. Many students may take issue that GAAP will not allow upward revaluations of assets when more relevant information with sufficient reliability can be provided, even though downward revaluations (impairments) are an established part of GAAP. The discussion can also expand to include the increased use of fair value measurements in recent FASB standards. Chapter 3 This ethical dilemma is concerned with the accountant’s responsibility upon discovering a mistake in a prior period’s adjusting entries. Many students will argue that the fact that the adjustments are immaterial is a key element that can justify hiding the mistake in the first quarter adjusting journal entries. However, even though external stakeholders are not affected, this element is not central to the ethical dilemma. An honest mistake has been made and covering up this mistake is not the ethical course of action demanded by the accounting profession. The accountant should report the mistake to the controller, and the appropriate action to correct this mistake (discussed in Chapter 23) should be made. Chapter 4 This ethical dilemma addresses the accountant’s responsibilities in preparing financial statements. It should be noted that revising estimates is not, by itself, unethical. Estimates are an inherent part of the financial reporting process and affect many different balance sheet and income statement valuations. However, estimates should not be altered merely to achieve a desired financial result. The accountant’s first responsibility should be to present financial statements that best reflect the economic reality of the transactions that affect the company. Some students may provide a “greater good” argument. That is, changing an estimate to save the company, employees’ jobs, and customers who like the company’s products, would outweigh the harm caused by changing the estimate. However, the student should not overlook the costs of changing the estimate (e.g., economic losses by investors who were misled as to the true financial position of the company). An alternative course of action would be to
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This note was uploaded on 10/12/2011 for the course AC300 01 taught by Professor Smith during the Spring '11 term at Kaplan University.

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NBJ11e_IM_AppA_ethical_dilemma_answers - APPENDIX A:...

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