Question

Exercise 1-03 (Essay)

Angela Duffy, president of Duffy Company, has instructed Jana Barth, the head of the accounting department for Duffy Company, to report the company’s land in the company’s accounting reports at its fair value of $170,000 instead of its cost of $100,000. Duffy says, “Showing the land at $170,000 will make our company look like a better investment when we try to attract new investors next month.”

Explain the ethical situation involved for Jana Barth, identifying the stakeholders and the alternatives.

Answer 1

1-03)

The ethical situation before Jana Barth, the head of accounting department, is that according to GAAP, the fixed assets should be accounted at their cost value, net of accumulated depreciation. But Angela Duffy, the President asking Jana to account the company’s land at its fair value of $170000 instead of its cost of $100000. Jana’s act towards the accounting the land at the fair value will be unethical and against the accounting policies. The affecting stakeholders would be the shareholders and the prospective investors because the balance sheet has been expanded and the Retained Earnings will include the unrealized income/revaluation reserve which will provide wrong impression towards company’s earnings.

According the IFRS, only investment related assets could be valued at the Fair Value and appreciated value is recorded as the unrealized income till the asset is disposed-off. But the company’s land is being used for operation of the company and not an investment asset so its accounting could not be done at the fair value.

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