Capitalization vs. Expense
One of your responsibilities as division manager of an important component of P aramount Industries is to oversee accounting for the division. One of the issues you grapple with on an almost continuous basis is whether particular costs should be expensed immediately or whether they should be capitalized. The company has an accounting policy manual that includes a section on this topic, but it is rather vague in this regard. It simply says that if a cost benefits multiple accounting periods, the cost should be capitalized; otherwise, that cost should be expensed immediately. It also makes a brief reference to materiality by stating that, if a cost is sufficiently small, it should be immediately expensed despite the fact that it may benefit multiple accounting periods. No additional guidance is provided with regard to how these general concepts should be applied.
Over several years you have noticed a tendency of your staff to capitalize rather than expense more costs. While you and your coworkers in the division do not receive a bonus or other direct compensation that is tied to your division’s performance, you know that upper management monitors carefully the financial performance of divisions. From time to time in various meetings and in written correspondence, comments are made praising individuals and divisions of the company for their positive financial performance. In fact, within your division you have done the same when you meet with your employees and either compliment them for strong financial performance or express concern about weak financial performance.
Paramount Industries has a code of professional conduct that is discussed with employees when they are hired. Within that code are references to personal integrity and the responsibility of employees to carry out company policy and not engage in activities that benefit themselves at the expense of the company. Like the accounting policies referred to above, there is no guidance on how this general principle might be carried out.
Instructions
a. What behavior may your comments in meetings with your employees, or the comments made to you from upper management, be motivating in terms of the continuous decisions that are being made about capitalizing and expensing costs?
b. What steps might you take to ensure that you and the employees in your division are taking actions that are consistent with the company’s accounting policies and code of professional conduct?
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