Respond to the following prompts. Please type using a word processing program and bring a printed copy to class. Write as much or as little as you feel necessary to answer each question to the best of your ability. You may use all available resources to complete this case – e.g., lecture slides, notes, your book, and the Accounting Standards Codification. Collaboration with others in your group is vital. How you work together is up to you – however, I encourage everyone in the group to take at least some part for both questions. Please turn in only one finished assignment for each group. Groups will be randomly assigned with three or four participants each and can be found on Canvas. Consider each prompt separately.
For grading, I will focus primarily on the analysis and communication that you provide. There is not necessarily a “right answer” that I will be looking for and I will not grade based on that your opinion, as long as it is well-justified and communicated. Instead, I want to be able to follow your own accounting and ethical decision-making clearly and to be able to not just understand what your decision(s) should be, but also why you feel that they are best, considering the impact on ALL the entity’s stakeholders, including yourself.
You have gone to work at a growing automotive company which offers unique vehicles which, in particular, provide a ’green’ alternative to driving through extremely low-emission and no-emission vehicles. The vehicles use complex software in order to maximize the efficiency of the car’s engine(s) and to provide the driver with the optimal driving experience. In order to get the best possible talent, the company previously offered an extremely generous benefits package, which included equity compensation, equity options, retirement benefits (including post-retirement benefits such as healthcare) and numerous perquisites such as on-site meals and
When the company was private, the company simply expensed these benefits when they were incurred, such as paying outside vendors for the meals and paying retirement benefits when actual costs were realized. Given that the company was still young, it had few realized retirement expenses and did not expect to see many for several decades. The company, however, is now considering going public and must follow U.S. Generally Accepted Accounting Principles (GAAP). GAAP requires expensing benefits expenses when the liability is incurred – such as when the work is done, rather than when the expenditure occurs. After doing some preliminary calculations, the company’s CFO realizes this will result in hundreds of millions of more dollars in expenses and almost a billion dollars of liabilities. They call the accounting team together and discuss solutions.
“This is unacceptable. This will put us in the red now and in every year in the future just because of some dumb accounting rules,” the CEO, known for their rather tactless public appearances and social media communication, says.
“We don’t really have a choice,” the CFO explains. “GAAP is GAAP.”
“Surely we’ve got a choice. For now, at least, let’s stop all employee hiring and contract out everything we can,” the CEO responds.
“We’ve still got a massive liability from our current employees, though,” the CFO continues. “This will scare off a lot of investors.”
“Can we ‘transition’ some of them to another team? Even better, let’s spin off manufacturing to a separate company but keep it all in-house. We’ll then sell all but 49% of the equity to another company – I know a guy who will take it on and still keep doing everything the way we want. Then can we take these expenses and liabilities off?” the CEO proposes.
What do you think of the CEO’s plan? What do you think of the possible accounting treatment? Think carefully about everyone impacted by the decision and who stands to benefit or suffer.
