Question

Reporting of Subsequent Events.

Overview:

Corporate executives make thousands of operational decisions every day on behalf of their companies. Those decisions are often made to present the best possible financial picture, but is that ethical?

Instructions:

Lionel Industries, Inc. Board of Directors authorized the sale of $15,000,000 of corporate bonds in May, 2017. The treasurer, William Browning, is concerned about the date when the bonds will be issued. The company really needs the cash, but he is worried that if the bonds are issued before the December 31, 2017, year-end that the additional liability will have an adverse effect on a number of important financial ratios. In June, 2017, he explains to the company CEO Julie Friesling that if they delay issuing the bonds until immediately after December 31, 2017 the bonds will not affect the financial statements until 2018. The 2017 financial statements would then only need a footnote disclosure and Browning feels that "no one pays attention to those numerous pages of notes anyway." Answer the following questions: If the bond issue is delayed as

1)Browning suggests, why would a footnote disclosure be needed in 2017?

Answer 1

The financial statements should be presented in the manner which best reflects the true and fair view of the state of affairs. All the information which would affect the decision making ability of the various stakeholders analysing the financial statements of the company are considered material and appropriately disclosed in the notes to the financial statements. When the company delays a material financial decision and rolls over it to next financial year in order to present a healthy balance sheet figure, this decision cannot be said to be ethical.

In the given situation, despite the company in being reall need of cash, the treasure , William Brownings suggested deferreing the issue of corporate bonds after December 31,so that the impact of the debt funds would not affect financial ratios for the financial year 2017. This suggestion cannot be said to be in the best interest of the various stakeholders and the company. When the board has authorised the issue of bonds in May 2017 and the company will issue the bonds in the next financial year i.e. 2018, as per IAS 10 events after the reprting period the company needs to make the disclosure of all material items which would materialy impact the profitability and financial position of the company. Hence, the disclosure is required if the bond is issued after 2017.