Extremely abnormal the operating profit for the

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extremely abnormal. The operating profit for the single month of December 2012 is ¥80.6 billion, which is the highest profit on record and is an amount that significantly exceeds the sales amount of ¥63.7 billion. (Investigation Report, page 266). Clearing the Stuffed Channels Overstatement of profits through channel-stuffing continued during FY 2013, although the amounts did not grow appreciably during that year. Starting from May 12, 2014, channel-stuffing matters were discussed at emergency meetings in which CEO Tanaka participated. At the eighth such meeting held on July 18, 2014, it was decided to record a loss of ¥50.2 billion in FY 2014, of which ¥30.0 billion resulted from correcting the overstatement of profits from channel-stuffing. Although this plan was discussed in Toshiba’s Corporate Management Meeting on September 16, 2014, and Toshiba’s Board of Directors meeting on September 18, 2014, no details were revealed. Instead, the Board was told that of the ¥50.2 billion amount, operating expenses of ¥45.0 billion would be the costs for ‘‘ sales and inventory measures, production adjustments, impairment, etc. related to the withdrawal ’’ resulting from the ‘‘ PC Business structural reform issue. ’’ It was noted that as of the end of the third quarter of FY 2014 (ending December 31, 2014), ‘‘ the overstatement of profits using Buy-Sell Transactions had resolved naturally ’’ (Investigation Report, page 257). The Investigation Committee apportioned blame for the overstating of profits through channel-stuffing all around, concluding that such actions had been carried out ‘‘ under the awareness and tolerance of the . . . top management, and based on the decision(s) made by the PCS Company President . . . and carried out with the institutional behavior involving the PCS Company’s and Corporate’s related departments ’’ (Investigation Report, page 261). II. REQUIREMENTS Requirement 1 a. Explain (i) whether the use of masking prices violated any accounting principle(s) and (ii) whether it was appropriate for Toshiba to increase profit by the amount of the Masking Difference at the time of supplying parts to ODMs. In which circumstances would it be appropriate for Toshiba to record Masking Differences in its consolidated financial statements? b. The case mentions that during the last three quarters of FY 2012, Toshiba recorded parts supplied to TIH (its subsidiary) also at masking prices. Explain whether it was appropriate for Toshiba to record the Masking Difference on these supplies as a reduction in the cost of goods manufactured. What was Toshiba’s plausible motivation to record the supply of parts to TIH at masking prices? 13 During the entire period of Toshiba’s accounting scandal (2008–2014), Ernst & Young’s audit clients included several high technology companies including Hewlett-Packard Company and Apple Inc., whose business practices were likely similar to those used by Toshiba.

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