A May 2002, Business Week story by Stanley Holmes and Mike France entitled “Boeing’s Secret” discusses issues surrounding the timing of the disclosure of information at the giant airplane manufacturer. To summarize, on December 11, 1996, Boeing closed a giant deal to acquire another manufacturer, McDonnell Douglas. Boeing paid for the acquisition by issuing shares of its own stock to the stockholders of McDonnell Douglas. In order for the deal not to be revoked the value of Boeing’s stock could not decline below a certain level for a number of months after the deal.
The article suggests that during the first half of 1997 Boeing suffered significant cost overruns because of severe inefficiencies in its production methods. Had these problems been disclosed in the quarterly financial statements during the first and second quarter of 1997, the company’s stock most likely would have plummeted, and the deal would have been revoked. Company managers spent considerable time debating when the bad news should be disclosed. One public relations manager suggested that the company’s problems be revealed on the date of either Princess Diana’s or Mother Teresa’s funeral, in the hope that it would be lost among those big stories that day. Instead, the company waited until October 22 of that year to announce a $2.6 billion write-off due to cost overruns. Within one week the company’s stock price had fallen 20%, but by this time the McDonnell Douglas deal could not be removed.
c) What assumptions or principles of accounting are relevant to this case?
In this case, several assumptions or principles of accounting are relevant. Here are some that can be identified:
1. Materiality Principle: The materiality principle suggests that financial information should be disclosed if it is significant enough to impact the decision-making of financial statement users. In this case, the significant cost overruns experienced by Boeing would be considered material information that should have been disclosed.
2. Full Disclosure Principle: The full disclosure principle requires that all material information be disclosed in the financial statements or in accompanying notes. The decision to delay the disclosure of the cost overruns until October 22, 1997, rather than reporting them in the first and second quarter financial statements, could be seen as a violation of the full disclosure principle.
3. Consistency Principle: The consistency principle states that accounting methods and principles should be applied consistently over time, unless a change is justified. In this case, the fact that Boeing delayed the disclosure of the cost overruns could be seen as a lack of consistency in the timing of reporting negative financial information.
4. Timeliness Principle: The timeliness principle suggests that information should be disclosed in a timely manner to be useful to decision-makers. Delaying the disclosure of the cost overruns until October 22, 1997, several months after they were known, could be seen as a violation of the timeliness principle.
It is important to note that these are just a few of the assumptions and principles of accounting that may be relevant to this case. Different accountants or financial professionals may have different interpretations of which principles apply and how they should be applied in this specific scenario.