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    Case 9.2 Departures from GAAP: Are They Ethical?

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    Martin Myers owns Myers Construction Co. The company maintains accounting records for the purposes of exercising control over its construction activities and meeting its reporting obligations regarding payrolls and income tax returns. As it has no other financial reporting obligations, Myers does not prepare formal financial statements.
    The company owns land and several other assets with current market values well in excess of their historical costs. Martin Myers directs the company's accountant, Maureen O'Shaughnessey, to prepare a balance sheet in which assets are shown at estimated market values. Myers says this type of balance sheet will give him a better understanding of where the business stands. He also thinks it will be useful in obtaining bank loans, as loan applications always ask for the estimated market values of real estate owned.

    Would the financial statements requested by Martin Myers be in conformity with generally accepted accounting principles?

    Is Myers Construction under any legal or ethical obligation to prepare financial statements that do conform to generally accepted accounting principles?

    Discuss any ethical issues that O'Shaughnessey should consider with respect to Myers's request.

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    Would the financial statements requested by Martin Myers be in conformity with generally accepted accounting principles?

    The financial statements are not in accordance with GAAP as GAAP requires that land and real estate be reported at historical cost or net realizable value, if lower. Adjusting the original (historical) cost up to market value may be useful to banks, but this should be done on the loan application, not the GAAP financial statement. Banks are familiar with the GAAP requirement to report cost and would not be put off by a difference between the application market value and the historical cost in ...

    Solution Summary

    Discussion is 413 words and explains how this is unethical, how the matter could be handled (three options).

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