Question

Security devises Inc. needs additional office space to accommodate expansion. SDI wants to avoid income statement effects that would disrupt its attempt to “smooth” income over time

Question: If SDI used operating lease to avoid "Front-loaded" as the lessee, but it is not allowed under IFRS Because there are no operating leases for losses under IFRS

3. Does SDI's reporting objective pose an ethical dilemma? Why?

4. Who may be affected by SDI's reporting objective? Why?

Answer 1

3. The reporting objective does pose an ethical dilemma since the company here has to choose between correct reporting as well meeting shareholder expectations. Income smoothing if done legally and as per the prevailing financial reporing standards is acceptable. However in this case the company is attempting to deviate IFRS to show lower net income which is certainly against ethics. Such move must not be adopted as it will ultimately discovered during external audit or by the income tax authorities. This will hurt stakeholder sentiment and can have negative market reaction.

4. Those effected by SDIs reporting objective include shareholders, government authorities, employees, lenders. Shareholders who primarily rely on the financials to ascertain the financial performance of the company can be misled by under reporting of expenses and when it is ultimately discovered it can reduce the value of their shareholding. Tax authorities can be effected when the company pays higher taxes and may go on to take refunds in the future or can adopt different expensing method to reduce taxes. Employees can be affected due to incorrect reporting and can lead to job losses when the frauds are discovered. Lenders who base their loans on the financials of the company can have losses on account of non payment of debts as the company never had the money it showed in the financials.