ACCT 335 CHRIS D.

BURNLEY
ETHICS & CONCEPTS ASSIGNMENT
EMMA TWENEBOAH-KODUAH
576971865
QUESTION 1
The main ethical issue faced at Nikit Ltd. is fraudulent financial reporting. This is
because the CEO, Jane Savory, has suggested that certain vital information should be
omitted from the companys financial statements. This is intended to maintain the
company's own financial position as well as to persuade the bank into approving and
financing the loan. This failure to disclosure pertinent information to investors and
creditors that could change their decisions about investing is ethically wrong.
The parties likely to be harmed by not disclosing this information about Air Bangla Ltd.
include the owners of the company, Tim and Allan McCloy, the employees who own
voting shares in the company and possibly the bank that would be financing the loan to
Nikit Ltd. The company may benefit in the short-run by being able to secure the bank
loan but may suffer significantly in the long-run as they would likely not have an
adequate asset base to buffer the effect of the higher liability incurred.
As a CPA who is bound by the Generally Accepted Accounting Principles (GAAP), it is
my responsibility to ensure that the preparation and presentation of financial statements
is accurate and in accordance with the principle of full disclosure. It is ethically and
professionally wrong on my part as the controller to deliberately omit information that
would significantly affect the companys financial position and the decisions of our
investors and creditors. Since the survival of Air Bangla Ltd. for the next year is
uncertain but highly doubtful, I am obligated to disclose this information in the financial
statements to stakeholders. The allowance should also be adjusted, even if slightly, to

accommodate the current risk associated with the material receivable from Air Bangla
Ltd.
In light of this, we may decide to choose one of three alternatives for the current period:

Disclose information and adjust the allowance accordingly

Do not disclose the information, but slightly adjust the allowance
Do not disclose the information and do not adjust the allowance

If we disclose the information and adjust the allowance for this receivable, the company
is likely to not get the bank financing and this may result in the company going out of
business. However, the shareholders and owners would be able to make decisions
based on this information and may decide to either look for alternate financing options
such as equity financing. This would likely reduce the severity of the impact of Air
Banglas receivables not being collected. By not disclosing the information but slightly
adjusting the allowance, Nikit Ltd. may be able to secure the loan from the bank and
thus be in a better financial position to cushion a portion of the blow from Air Bangla.
However, this would leave the shareholders and owners worse off as they would now
have a greater liability to offset. The companys assets would also be lower as the
receivables from Air Bangla would no longer be available. However, because some
adjustments have been made to accommodate the increased possibility of noncollection of this receivable, the effect on the shareholders and owners would be lesser
than if we decide to not disclose the information and not adjust the allowance. In this
case, adequate provision has not been provided for the receivable thereby resulting in a
greater burden being suffered by the shareholders should the loan be approved and Air
Bangla be unable to provide the materials. It is worth noting however that, if Air Bangla
survives, then Nikit Ltd. would be in a good position financially by not disclosing the
information. In the long-run however, banks may be skeptical to lend to the company if

they find out such an important information was withheld. The company may also suffer
immensely if the bank decides to call back the loan once they find this out.
The most ethical alternative would be to disclose the information on the increased doubt
of Air Bangla being able to provide the material receivable and adjust the allowance
accordingly, while providing possible remedies to cushion the severity. The stakeholders
in this situation will therefore be able to make their decisions based on all available and
up-to-date information.
QUESTION 2
1. The behaviour is unethical as it goes against the academic policies of the
institution. This gives her and the other classmates who do so an upper hand in
the class and hence, an undue advantage over the others. Even if I am sure of
not getting caught, I would not use this information as it might have an adverse
effect in the long-run. I would possibly not have a strong understanding of the
material covered in the course and this might affect my ability to perform when
tasked with a job in this field in this future.
2. This behaviour would also be unethical as I would be taking advantage of my
smaller suppliers as a result of their size and bargaining power. These suppliers
may be hurt in the long-run as a result of high account receivables. I might
however take this approach as it would save my company some money as
payments would be deferred for as long as possible with minimal interest
charges. The extra cash can then be used for other activities and this would
result in a higher net cash from operating activities for my company.

QUESTION 3

1. The term measurement uncertainty refers to the situation whereby an asset or

liability cannot be accurately measured and thus, an estimated value is applied to
it. In as much as using estimates does not make a financial information
irrelevant, the Board believes that when there is high measurement uncertainty,
the estimates used may cause the financial information to be less relevant. With
respect to property, plant and equipment, it is sometimes difficult to determine the
useful economic life of the asset in calculating its depreciation. Estimates used in
depreciating property, plant and equipment affect the book value of the assets
and where there is a high measurement uncertainty, the book values may not
provide relevant information as they may not be the best estimates of the assets
value or would not accurately reflect the usefulness and nature of the assets.
(Exposure Draft, 2015)
2. By substance over legal form, the Board is proposing that although the legal
aspects of transactions and events are of great importance, they should be
accounted for and presented in accordance with their economic effects and
essence rather than just the set legal rules for reporting them. This would make
the financial information more relevant as it would express how events and
transactions actually affect the assets, liabilities and equity of a firm rather than
simply reporting it under the various categories based on legal regulations or
principles. A current accounting standard that reflects this notion is the materiality
principle that states that an accounting standard can be ignored if this would not
mislead readers of the financial information. Hence, the impact (materiality) of an
event or a transaction can supersede another accounting principle as to whether
and how to record it. (Exposure Draft, 2015)
3.

a. Prudence in this context refers to taking extra caution when making

decisions that involve a level of uncertainty or estimates. This means that
the preparer of the financial statements should be cautious when making
judgements where there is uncertainty in over to avoid overstating or
understanding the estimates used as this would make the financial
information less relevant. (Exposure Draft, 2015)
b. The Boards proposed reintroduction does NOT mean they favour a
conservative bias whereby assets or revenue are not overstated and
liabilities or expenses are not understated deliberately. However, the
Board proposes that judgement calls on how these values are estimated
should be made with caution to ensure that estimates given truly reflect
the companys financial position.
c. The Boards definition of prudence slightly differs from the notion of
conservatism in that, the Boards focus is on making the estimates neutral
and as close to perfect as possible, rather than deliberately estimating in
such a way as to make a firms financial position look good.
d. This means that some users of financial statements would like to see an
overstatement of assets and revenue and an understatement of liabilities
and expenses if this bumps up net income and would benefit the firm. This
deliberate over or under estimation is done to take into account other
consequences of reporting those figures. The users, usually management,
justifies this position by stipulating that the firm may be better off in the
long-run through this, rather than a strictly prudent approach as this
method helps to conserve capital. (Cooper, 2015)

References
Cooper, S. (2015, June). Investor Perspectives - A tale of Prudence. IFRS. Retrieved
from http://www.ifrs.org/Investor-resources/Investor-perspectives2/Documents/Prudence_Investor-Perspective_Conceptual-FW.PDF
International Accounting Standards Board. (2015, May 28). Conceptual Framework
for Financial Reporting. London, United Kingdom. Retrieved from
http://www.ifrs.org/current-projects/iasb-projects/conceptualframework/documents/may%202015/ed_cf_may%202015.pdf