Discussion - Reporting of Subsequent Events

Overview

Corporate executives make thousands of operational decisions every day on behalf of their companies. Those decisions are often made to present the best possible financial picture, but is that ethical?

Instructions:

Lionel Industries, Inc. Board of Directors authorized the sale of $15,000,000 of corporate bonds in May, 2017. The treasurer, William Browning, is concerned about the date when the bonds will be issued. The company really needs the cash, but he is worried that if the bonds are issued before the December 31, 2017, year-end that the additional liability will have an adverse effect on a number of important financial ratios. In June, 2017, he explains to the company CEO Julie Friesling that if they delay issuing the bonds until immediately after December 31, 2017 the bonds will not affect the financial statements until 2018. The 2017 financial statements would then only need a footnote disclosure and Browning feels that "no one pays attention to those numerous pages of notes anyway."

Answer the following questions:

1. If the bond issue is delayed as Browning suggests, why would a footnote disclosure be needed in 2017?

2. Who are the primary financial statement users, and is Browning correct in his assumptions as to how they view the information included in the footnotes?

3. What ethical issues are involved in Browning's suggestion and do you think that Friesling should agree to the delay?