You have been asked to attend a hastily called meeting of Landfil’s senior executives. The meeting was called to formulate a strategy for responding to questions from shareholders, analysts, and the media about Landfil’s accounting for site development costs. A major competitor, Chambers Development, announced yesterday that it would no longer capitalize site development costs but instead would expense those costs as they were incurred. Stock market reaction to the Chambers announcement was swift and negative, with the stock down 57% at this morning’s opening of the NYSE.
Landfil Inc. acquires, operates, and develops nonhazardous solid waste disposal facilities. Landfil is the third largest waste management company of its type in the United States with 37 disposal sites. Sales have been growing at the rate of 30% annually for the last five years, and the company has established a solid record of earnings and operating cash flow performance. Accounting Policy
Landfil capitalizes site development costs in much the same way that Chambers Development did prior to its announcement yesterday. Under the old accounting method at Chambers Development, when the firm spent $20 million on landfill site development, it would book the entire amount as a deferred asset. Then Chambers would spread the cost over 10 years by charging $2 million to earnings each year. Under the new accounting method, all $20 million is expensed in the first year.
Landfil has included the following description of its site development accounting in all annual reports issued during the last five years:
The Company capitalizes landfill acquisition costs, including out-of-pocket incremental expenses incurred in connection with the preacquisition phase of a specific project (for example, engineering, legal, and accounting due-diligence fees); the acquisition purchase price, including future guaranteed payments to sellers; and commissions. If an acquisition is not consummated, or a development project is abandoned, all of such costs are expensed. Salaries, office expenses, and similar administrative costs are not capitalized. Landfill development and permitting costs, including the cost of property, engineering, legal, and other professional fees, and interest are capitalized and amortized over the estimated useful life of the property upon commencement of operations.
The Meeting
Discussion at the meeting became rather heated as several different points of view emerged. Some members of the executive team argued that Landfil should do nothing but reaffirm its capitalization policy, informing shareholders and others who contacted the company that this policy was consistent with GAAP and disclosed fully in the annual report. Other members of the team argued for a more proactive response involving both direct communication with shareholders and analysts as well as press releases to the media. These communications would also reaffirm the company’s capitalization policy but in a more strident manner. Still other members of the executive team argued that Landfil should immediately announce that it too was discontinuing capitalization in favor of immediate expensing. No clear consensus emerged as the meeting progressed, and the group decided to take a 10-minute break before resuming discussion.
As the meeting was about to reconvene, the CEO stopped by your chair and said, “I’ve been handed a phone message indicating that our largest shareholder has just called. She wants to know our reaction to the events at Chambers Development. I have to call her back in 15 minutes with an answer. When the meeting starts, I’d like you to summarize the major issues we face and to state how you think we should proceed.”

Prepare your summary.

  • CreatedSeptember 10, 2014
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