Reference no: EM132835767

On 1 January, 2010, Grains secured a 15% loan from OneTouch ltd amounting to GHS20million payable on installments for 10years. On 1 January 2019, OneTouch Ltd accepted GHS500,000 in full settlement of the remaining amount owed by Grains International because of the financial crisis faced by Grains International. The Gain on the debt would attract a tax at the corporate tax rate of 28%. Grains International is in financial difficulty and would find it difficult paying such taxes. The chief financial accountant is of the view that the debt gain (debt forgiveness) should not be treated as revenue to avoid the payment of such tax. Grains International has therefore treated this under equity and shown under other comprehensive Income.

• The Auditors of Grains International have raised audit quells on the treatment of this debt forgiveness. The auditors are of the view that, for the financial statements to be fairly represented, the debt forgiveness should be treated in the profit or loss account. The auditors have threaten to issue a qualified report or give an emphasis of matter on the issue, if the treatment in other comprehensive income is not corrected. The chief accountant have advised the chief executive officer (CEO) of Grains, Mrs Leticia Esi Boadi, to change the auditor as the issue of a qualified report would adversely affect the reputation of the company.

• In view of these misunderstandings, the financial statements for 2019 has not been authorised.

Required:

Problem a) Comments on the validity or otherwise of the chief accountant's treatment in respect of the debt forgiveness.

Problem b) Discuss the ethical issues surrounding the debt forgiveness