Accounting Case #1

Huaraz Limited

Huaraz Limited (Huaraz) is a private Canadian company, incorporated 18 years ago. Huaraz was audited for the first time in the year ended Dec. 31, 2014 and it received a qualified audit opinion because the company didn’t record depreciation expense. During the current year, the CFO has indicated that the company wishes to have an unqualified opinion for the year ended Dec. 31, 2015 as he anticipates that the company will go public in three to five years. Management believes that a pattern of smooth earnings will be the most attractive to potential shareholders and allow the company to receive the highest possible price for its shares.

The CFO has provided you, an accountant who works in Huaraz’s finance department a list of contentious accounting issues facing the company.

Required: Prepare a report to the CFO that addresses the contentious accounting issues. Provide support for your recommendations.

(You should provide brief solutions to each of these issues. In coming up with a solution you should recognize that not every problem has a definite solution. Accounting decisions often require judgement and interpretation of facts. So before coming up with THE answer, consider the context: Who are the key players in the situation and what do they want? Who are you and what are you trying to do? Are there any limitations on what you can do? If there are, what are they? Once you establish the context then draft a response.)

Contentious Accounting Issues

1. Huaraz has not in the past recorded depreciation on its some of its capital assets. The president’s feelings about this subject were noted in last year’s report to the shareholders as follows: “Certain of our capital assets are increasing in value, not decreasing. In my opinion, the recording of a fictitious expense like depreciation makes our financial statements unreliable and less useful to investors and creditors.

2. During 2015, Huaraz was sued by a customer who incorporated...