The CFO of Andarex, Inc. (Ticker symbol ANDX on the NASDAQ) has called
the Accounting Manager into his office to discuss an issue dealing with capitalization
of interest on a factory building Andarex is constructing for a new product
line. The CFO is slightly upset, because
the Accounting department has determined that Andarex should stop capitalizing
interest on the building very soon as it is near completion. The CFO would prefer that interest continue
to be capitalized for several additional months and wants to debate the
treatment with the Accounting Manager.
Following is an excerpt of their conversation:
wanted to talk to you about the interest on the Worcester factory. I understand that Accounting thinks we should
stop capitalizing interest on the project at the end of next month. Why is that?
I was under the impression that we would continue to capitalize interest
until we were ready to use the factory which is probably another six months.
Well, that’s a bit different than what the accounting rules allow,
although the language might be similar.
The rules allow us to capitalize interest on the project until the building
itself is ready for its intended use, not when we are ready to use
it. And since the project should be
completed next month, we would need to stop capitalizing interest then.
CFO: Wait a minute. That seems a little nitpicking. Don’t we control when the building is
completed? Couldn’t we just slow it down
a little? I’m sure the contractor will
work with us on it. This was a big
contract for them.
Well, really the building is essentially done now. We just need to clean up a few last items and
go through final inspection. I think the
spirit of the accounting rules…
That sounds pretty technical to me. And,
who besides us is even going to know exactly how close to complete we are? Listen, it’s really important that we continue
capitalizing interest until we are ready to start using the building. Shouldn’t be more than six months. I need you to get this done for us, OK? Make sure that happens, please.
The Accounting Manager is obviously uncomfortable with what the CFO has
ordered. Answer the following three
questions. Make sure that each answer is
complete and supported.
1. Why is the CFO so motivated
to continue capitalizing interest?
Explain the financial reporting implications of continuing to capitalize
interest on the building past its expected completion date. Be specific.
2. Identify two outside parties
that could be impacted by the CFO’s decision and explain how the decision could
negatively impact the parties. Examples
could be investors, lenders, employees, customers, etc. You can pick those or others. Be specific on how they could be impacted.
3. Using the tools we discussed
in class (Golden Rule, Public Disclosure Test, Universalization Test, Violation
of Trust Test), analyze the ethical implications of the scenario and formulate
an argument that the Accounting Manager can use to persuade the CFO to change
his decision. Use at least one of tools we use in class in your argument. You may use more if you wish.
Ethical Decision Making Assignment– What to consider
impacted by the decision? Many different stakeholders may be affected.
Lenders, Suppliers, Employees, Retirees, Customers, and others
I use to assess the decision?
Rule – I should make the
same decision affecting others that I would want others to make if the decision
Disclosure Test – How would
I feel if the decision I make was published on the front page of the Boston
Test – Would it be a good
thing if the decision I made was made the same way by every other party making
a similar decision?
Violation of Trust –
Is my decision violating a trust that some party has placed in me?