Question

ETHICS (Expense Recognition Principle) Anderson Nuclear Power Plant will be "mothballed" at the end of its useful life (approximately 20 years) at great expense. The expense recognition principle requires that expenses be recognized as assets are used up or liabilities are incurred. Accountants Ana Alicia and Ed Bradley argue whether it is better to allocate the expense of mothballing over the next 20 years or ignore it until mothballing occurs.

Instructions

Answer the following questions.

(a) What stakeholders should be considered?

(b) What ethical issue, if any, underlies the dispute?

(c) What alternatives should be considered?

(d) Assess the consequences of the alternatives.

(e) What decision would you recommend?

Short answer

Users of financial statement are the stakeholders. Maintaining honesty and integrity in the reporting of financial statement is the ethical issue. Applying expense recognition principle is the alternative method.

Step-by-step solution

Accounting information

Accounting information is a diverse term and includes budgets, production worksheets, income statements, balance sheet, cash flow statements, and the pro forma reports of a company. In simple words, it is the compiled data of all the business transactions of a company.

Users of the accounting information: The various groups such as the creditors, or the stakeholders, or the internal management need the accounting information to analyze the business performance. These groups are the users of the accounting information.

Who are the stakeholders

(a) The current and the future users of the financial statements, such as the investors, creditors, are the stakeholders to be considered.

Ethical issue

(b) The ethical issues that underlines the dispute are to maintain the integrity and honesty while reporting the financial statements to correctly estimating the cost of the mothballing, the profits manipulation and to assure that the stakeholders have the useful information, and whether the costs involved will cost the job security of the individuals involved.

Alternative available

(c) The alternatives available are whether to apply the expense recognition principle and allocate the expense over the useful life of the plant, or to not apply the expense recognition principle and expensing the mothballing later when it occurs.

Consequence of the alternatives

(d) The main concern is to correctly estimate the cost of the mothballing. By applying the expense recognition principle and allocating the expense over the useful life of the plant results in lower profits and higher rate for consumers, On the other hand, non-application of the expense recognition principle and expensing the mothballing later when it occurs generates higher profits, lower rates for consumers and a greater potential job security.

Recommendation

(e) The company should estimate the expense of the mothballing and accrue the expense over years. This method will state the earnings accurately. Also, the effect on the consumer should be considered. Deferring the expense allocation will benefit the consumers today at the expense of the consumers in future.