Reference no: EM132613255

Question - 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 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. 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 (because very few retirement benefits have been yet realized) 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 proposes.

"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 my brother's company. Then can we take these expenses and liabilities off?" the CEO proposes.

What do you think of the CEO's plan? What will the accounting treatment be if changing nothing and if adopting the CEO's plan? Think carefully about everyone impacted by the decision and who stands to benefit or suffer. Think about short-term and long-term consequences. Is the plan ethical?