RUN, Inc. Case Study Group 5-A

1. RUN, Inc. Case Study Group 5-A Silka Gonzalez Silvia Orozco Blanca Wegener

2. Accounting for a Change in Estimates APB 20 • FASB 154 supersedes APB 20– Issued on May 2005. For accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 . • A change in estimate is a normal, recurring correction or adjustment. • It is accounted for in the period of change, if the change affects that period only, or in the period of change and in future periods if the change affects both.

3. Accounting for a Change in Estimates APB 20 • When the effect of a change in principle cannot be separated from the effect of a change in estimate, the change is accounted for as a change in estimate. • The effects of a change in estimate on income before extraordinary items, net income, and related per share amounts affecting several future periods must be disclosed.

4. Prior Period Adjustments SFAS 16 • This Statement limits adjustments of previously issued annual financial statements to correction of a material error and recognition of certain income tax benefits relating to pre-acquisition loss carry forwards of a purchased subsidiary.

5. What are the practical differences in the accounting for a change in estimate and a correction of an error? • A change in estimate differs from an error correction because it is based on new information or subsequent developments. • The change in estimate is accounted for in the current income statement and the error correction is a prior period adjustment. • A change to a generally accepted accounting principle from one that is not is an error correction.

6. Why might managements prefer one approach to another? • Management will prefer a change in estimate. • When a change in estimate is used, management is reflecting a normal adjustment that is only accounted in the current income statement. • The correction of an error creates prior period adjustments impacting the retained earnings within balance sheet statements.

7. What pictures do the two accounting presentations paint for readers outside the company? Change in Estimate • Financial statements will not be providing accurate information. • Use of this approach is incorrect and misleading. • Most users will not notice the inaccuracies of the information presented.

8. What pictures do the two accounting presentations paint for readers outside the company? Correction of an Error • Users of the financial statements will realize that the information that was provided to them in the past was inaccurate and misleading. • This situation could raise concerns and distrust among investors and general users of the financial statements. • This situation can also reflect to investor and general users that the company was not performing as well as they were reporting to the public. • This situation could affect the value of the company’s stock and the jobs of individuals in top management positions within the company.

9. What pictures do the two accounting presentations paint for readers outside the company? • In the Run, Inc case, management faces the dilemma presented before. • There is pressure from top management to use a change in estimate approach. • The new Controller faces an ethical dilemma of using proper accounting principles or potentially losing his job.

10. Where does Controller’s responsibility begin and end regarding the company financial statements? The following are some of the primary responsibilities of a Controller: • Development and implementation of budgets • Control of organizational costs • Supervision of the accounting process and data entry • Promotion of the integrity and accuracy of the accounting systems and financial statement data • Identification and correction of accounting and reporting issues

11. Where does Controller’s responsibility begin and end regarding the company financial statements? The following are some of the primary responsibilities of a Controller: • Implementation of adequate internal controls • Coordination required with internal and external auditors • Promote the implementation of best accounting and control practices

12. Where does Controller’s responsibility begin and end regarding the company financial statements? Although a Controller is not one of the most senior officers of a company, the individual who holds this position is ultimately responsible for the quality, accuracy and integrity of all the financial data of the organization, including information used internally and externally.

13. Does the Controller have a different responsibility for the financial reports than the Vice President of manufacturing, for example? • The Controller’s responsibility for financial reports is significantly higher that the responsibility of another employee such as the Vice President of Manufacturing. • A Controller is responsible for internal and external financial reporting and risk monitoring, in addition to the analysis and construction of daily and monthly P/L statements. • A Controller also creates financial reports for submission to internal management and various authorities.

14. Does the Controller have a different responsibility for the financial reports than the Vice President of manufacturing, for example? • A Controller is also responsible for protecting the company’s capital by ensuring a sufficient capital ratio is maintained as well as administering and managing company’s payments. • A VP of Manufacturing will focus on internal matters such as manufacturing engineering, facilities and equipment, and production quality assurance.

15. Where should the Controller’s loyalties lie where there is a conflict between interests of management and GAAP reporting? • A Controller’s position should always follow the requirements stipulated by generally accepted accounting principles (GAAP). • A Controller should always maintain an ethical position when fulfilling his\her professional responsibilities even when facing organizational and management’s pressures.

16. Does the Controller have a different responsibility to the public than the Vice President of Manufacturing for example? • A Controller has a different responsibility to the public than other management members within an organization. • The Controller’s responsibility expands beyond the boundaries of the organization. • An individual in this position has a serious responsibility with the public and society in general.

17. Does the Controller have a different responsibility to the public than the Vice President of Manufacturing for example? • Both internal and external users will rely on the financial information provided by Controllers to make different types of business decisions. • If the information that is provided is inaccurate and\or misleading, the public will make decision based on inaccurate information which could potentially harm them in the future.

18. Would your answer to the above question be different if the controller was or was not a CPA? • The responsibilities of a Controller are the same whether the professional has obtained the Certified Public Accounting license or not. • A Controller should always behave ethically in all professional endeavors. • A Controller should ensure that all stakeholders' interests are appropriately balanced, protected and preserved. • A Controller should have a high level of integrity, competency, fulfill his\her professional responsibilities, exercise appropriate due care and act in good faith.

19. Where might a Controller look for guidance, for help in managing a conflict between his or her perception of what GAAP requires and what the rest of the management team believes to be in the best interest of the company? • External auditors • The AICPA • The Financial Accounting Standard Board • Different accounting associations • Legal Counselors

20. In your opinion, what is the theoretically correct answer? • The Controller must apply proper generally accepted accounting principles at all times. • The Controller must behave professionally and ethically at all times. • The Controller should correct the error in the receivables and inventory accounts.

21. How might that answer be helpful or hurtful for the company? • This option will be hurtful to the company. • The company will have to report less earning for prior years. • If management decides to present a correction of an error, the users of the financial statements will realize that the information that was provided to them in the past was inaccurate and misleading.

22. How might that answer be helpful or hurtful for the company? • Such a situation could raise concerns and distrust among investors and general users of the financial statements. • This situation can also reflect to investor and general users that the company was not performing as well as they were reporting to the public. • This situation could affect the value of the company’s stock and the jobs of individuals in top management positions within the company.

23. For Mr. and Mrs. White? • This option will also be hurtful to Mr. and Mrs. White. • They were planning to retire and potentially sell their company stocks. • The proper correction of the error will hurt the value of the stock and the image of the company. • The realized profit after selling their stocks in the company will be reduced.

24. For the other members of the management team? • This option will also be hurtful for top management members. • If the error correction option is selected, that could reflect negatively on their performance both professionally and ethically. • These individuals might not be able to retain their existing jobs. • These individuals could be prosecuted for their fraudulent activities.

25. For existing stockholders? • This option will also affect stockholders. • The value of the stock will be negatively impacted. • They could have to absorb losses due to the actions of the company’s management.

26. For any potential new stockholders? • Potential stockholders will probably have more concerns about the value of this company’s stocks. • They will also have more concerns with the overall quality and integrity of the company’s management. • Potential stockholders will be more cautious when investing on this company.

27. If some are hurt and some are helped, how should that conflict be resolved? • Applying the correct accounting treatment and acting ethically should not be affected by the impact such a decision will have on all the individuals involved. • The correct accounting treatment should be applied regardless of the consequences.

28. What should Mr. Field do, once he has finished his cup of coffee? • The Controller should not even consider management’s fraudulent proposition. • This case presents an example of an ethical dilemma that many Accountants could face at some point in their career. • Mr. Field should maintain a professional and ethical position. • He needs to indicate to the company’s management that he will apply the correct accounting treatment and correct the error properly even if that action could result in him losing his job.

29. THANK YOU!!!