Treatment of Accounting Issues - Case Study Example

Treatment of Accounting Issues Thank you Mr. Rafael for your inquiry in relation to some of the accounting issues which are creating uncertainty regarding their correct treatment. According to the information provided in the given situation, it seems as if Mr. Julian, Chief Executive Officer, has changed some of the previous accounting policies of the company and made some adjustments in order to boost up the earnings so that his share of profits can be increased. Upon careful observation of each accounting issue, the most likely correct treatment of every issue is discussed in the following paragraphs.

It is strongly advised to you to take a closer look at every issue along with its relevant treatment and feel free to consult me, had you require any further assistance. Marketing and Advertising Expenses According to the International Financial Reporting Standards, the marketing and advertising expenses should be charged to Income Statements the year which these marketing and advertising expenses incur. In the light of above criteria, the policy adopted by Mr. Julian to expense out 50% of the marketing and advertising expenditures in the profit and loss account while capitalizing the rest of 50% of the expense in the balance sheet and amortizing over the period of 5 years, seems as a deviation from the IFRS.

Since, Mr. Julian is mainly interested in presenting the financial statements more profitable, that is why Mr. Julian has adopted this strategy. In this way, he could have avoided the 50% expenditures incurred the current year which would eventually have increased the profits substantially. Therefore, Mr. Rafael should disregard this policy of Mr. Julian and should instruct him to rectify the financial statements and charge out the capitalized amount of marketing and advertising expenses for the current year.

Slow Moving Inventory The older policy of writing off the slow moving inventory was a bit conservative approach. The change in the policy introduced by Mr. Julian in this regard seems a bit rational. The reason behind this new strategy is that boots and other products of BCL can be sold later. The fashion of using such products can come back at a later stage. Unless a product deteriorates in respect of its physical conditions, it should not be charged to income statement. In this way, this new policy followed by Mr.

Julian to present financial statements in a truer manner seems a better approach to reflect higher profits. Therefore, in the light of above justifications, Mr. Rafael is advised to approve this policy as there seems no harm in adopting this strategy. On the other hand, the increasing profits as a result of this strategy would ultimately increase the amount of profits which is the core objective of Mr. Rafael. Allowance for Bad Debts To be on a more conservative side, Mr. Julian should have planned this strategy of providing credit options to customers.

The amount of revenues would definitely increase as a result of supplying the products on credit. But this strategy would increase the likelihood of debtors’ amount going to be written off. In case if the allowance for bad debts is not maintained, there are chances that in a particular year, there may not be any case of bad debts or as opposed to it, many of the debts may become irrecoverable. Therefore, in order to balance the bad debt expense for a number of years to come, a precautionary method of maintaining allowances for bad debts should be formulated.

This allowance for bad debts would make the earnings more stable and prevent the volatility of earnings due to bad debts. Because of this method, a specific amount of bad debts would be charged to income statement every year. In case if the actual amount of bad debts may show some discrepancy, that discrepancy would be adjusted by this allowance. In such case, Mr. Rafael should urge Mr. Julian to bring in this allowance for bad debts in the financial statements to make them true and fair. Conclusion Since Mr.

Julian is mainly interested in the amount of higher profits as he is entitled to share 25% percent of the profits after taxes, he would be interested in adopting every strategy that would increase the profits. Mr. Rafael should discuss these key points with Mr. Julian, make the appropriate changes in the current financial statements and then approve those amended financial statements. Overall, the proposed amendments are not so harsh, but reasonable adjustments are pretty much achievable with the current disclosures of financial statements.

References R. A. Brealy, S.C. Myers, and F. Allen. (2008). Principles of Corporate Finance (8th ed.). Northwestern University: McGraw-Hill/Irwin P.