Question

See below Writen / Ethics /Research The following is from a conversation between the Chief Executive Officer and the Chief Financial Officer of Smith Restaurants Worldwide. CEO: The auditors are coming in to audit our year-end financial statements next week. Do you see any problems we need to address? CFO: You know about our "Lobster For Alr acquisition from a three years ago. We booked $18,500,000 of goodwill from that acquisition, and the accounting rules require us to recognize any impairment of goodwill. As you know, we shut down 1/3 of them last fiscal year, which hits the financial statements we're finalizing now. We have been talking about shutting down the rest of the chain during the current fiscal year CEO: That doesn't sound good for this or next year's numbers, but we knew that and planned for it already What's the concem now? Goodwill- not physical CFO: My valuation team has just realized that the goodwill right-off might be as high as $8,000,000 rather than the $6,000,000 we had planned because these properties were in areas where land value dropped significantly. So, our auditor will insist that we write off the full $8,000,000 of goodwill to reflect the impaired value. CEO: We can't let that happen. Do everything you can keep it at $6,000,000. We just can't take that additional hit this year. The most we could stand is $6,500,000. What can your team do to keep the write-off to 6 or 6.5? T C70 Should responol ha How should the CFO respond to the CEO? The c70 shauld re consicer wrting- 4 0s not impared re por Ha intahigble assets use in the Page 1 of 1 Since goociwiis the whic dhey C0 expense secton e.esc.edu/pluginfile.php/3093989/mod resource/c...r%20Decision % 20Makers % 20Assignments%20Module % 203.de ome Statemunt

Answer 1

It is certainly unethical on the CEO’s part to not write off the impaired goodwill just to show inflated profits and better financial figures. The CFO must explain to the CEO that accounting is done on the basis of prudence concept and any asset that does not have revenue generation capabilities must not be accounted for. Also, the CEO must be told that the impaired goodwill must be written off in the future if not now and the financial impact will be same in the latter years as well. If the same is highlighted during audit it will result in qualification of the audit report which may not augur well for the future of the company. The team to keep the write off amount lesser can take a actuarial valuation to determine the an approximate accurate valuation and also justify the same during audit that an expert opinion has been taken while determining the write off.