Assume the role of the ethical accountant. The company you work for manufactures pharmaceuticals and has a large stock of inventory for a new drug as the fiscal year end approaches. The company has a compensation system that relies partially on individual performance and partially on the company's net income for the year. A large contract with a nearby hospital was recently cancelled after production of the drugs had been completed. The shelf life of those drugs that are included in inventory is three months, while there are six months of sales being held as a result of the contract loss. In discussion with the CEO, she indicates that the inventory is measured at cost as required by IFRS so she sees no problem with the assets recorded on the statement of financial position. She further explains that there has been no damage to the inventory and it is all fully saleable at year end so the net realizable value still exceeds its cost.
Instructions
Address the CEO's comments and explain how ethical issues may impact decision-making in terms of accounting for inventory. What steps have accounting standards taken to avoid this type of situation?