Paramount Projects Limited: Financial and Business Implications of Change in Accounting Policy

The recommendation of the newly appointed auditors of Paramount Projects Limited ushered in an unexpected dilemma for Sachin Menon, its Chief Financial Officer. The auditors recommended a switch from its existing output-based policy to an input-based policy for measuring the Percentage of Completion of Paramount's construction projects. Accepting the auditors' recommendation appeared a technical exercise that would not impact the company's cash flows or business prospects, hence the bank financing. However, the bank indicated that the accounting change would jeopardize the financing available to Paramount because of the decline in the qualifying assets to support the bank loans. Should Menon recommend going against the recommendation of the auditors that Paramount's board had recently appointed? While the new auditors' rationale for the recommendation to change accounting policy was sound, Paramount's existing policy also complied with accounting principles and was acceptable to the earlier auditors. Should Menon accept the recommendation to change accounting policy even if that entailed higher interest costs? Which accounting policy was conceptually sounder? How would different stakeholders respond to a voluntary change in the accounting policy? How would the change in accounting policy affect Paramount's systems and employee behavior? Menon had to present his final recommendation to the audit committee in its forthcoming meeting. This multidisciplinary case provides an experiential learning opportunity for students to understand that accounting policy decisions often affect other business functions. The case is appropriate for an MBA course in accounting in sessions on accounting policy, revenue recognition, earnings management, or flexibility in financial reporting. It can also be used in undergraduate accounting courses and executive training programs to illustrate the holistic nature of management decisions.