George Longfellow is a financial controller with a listed industrial firm which has a long period of sustained growth. This has necessitated substantial use of external borrowing.
During the great financial crisis it has become harder to roll over the loans as they mature. To make matters worse sales revenues have fallen 5% for the financial year, debtors have taken longer to pay, and margins have fallen. The managing director has said that he doesn't want to report a loss for the first time in the company's history as it might scare financiers.
The finance director (FD) has told George to make every effort to get the result to come out positively.
He suggests that a number of expenses should be shifted to prepayments, provisions for doubtful debts should be lowered, and new assets should not be depreciated in the year of purchase but rather should only commence depreciation in the next financial year on the argument that new assets take a while to become fully operational.
In the previous year the company had moved into a new line of business where a small number of customers paid in advance. Because these were exceptional the auditors were persuaded to allow you to avoid the need to make the systems more sophisticated to decrease revenue and to recognise a liability. After all, it was immaterial in the overall group. Fortunately, that new line of business has grown substantially in the current financial year and it was suggested that the auditors be told that the revenue in advance should not be taken out of sales because a precedent had been set the year before.
George saw this as a little bit of creative accounting and was reluctant to do what he was instructed.
When he tentatively made this comment to the FD he was assured that this was only temporary to ensure the company could refinance and that next year, when the economy recovered, all the discretionary adjustments would be reversed and everyone would be happy. After all, the employment of the 20,000 people who work for the group depends upon the refinancing and it was not as if the company was not going to be prosperous in the future. The FD emphasised that the few adjustments were, after all, a win-win situation for everyone and George was threatening the livelihood of all of his colleagues - many with children and with mortgage payments to meet.
Required:
Discuss who would or could benefit or lose from the Finance Director's proposals.