Ethical Dilemma (Recognizing Revenue from Gold in the Ground)
You are the president and founder of Gold Strike Inc., a mining company that acquires land and mines gold. The success of your company is largely dependent on finding large deposits of gold. To do this requires expensive geological surveys and testing. You have used an engineering firm in the past that has proven quite reliable in its estimates of gold quality and quantity. Because of recent events around the world, the price of gold has declined approximately 15% in the past 6 months. Accounting practice allows your company to recognize revenue when the gold is mined and processed rather than waiting until it is actually sold. Because of the recent unexpected decline in gold prices, you find that your revenue has suddenly declined even though the quality and quantity of the gold being produced have been maintained. To avoid arousing investor concerns about your business’s future, you consider the following option. The engineering firm assures you that, based on its tests, large amounts of gold still exist in your mines. Because you can recognize revenue when the gold is mined and you know it is in the ground (based on your engineer’s assurances), could you recognize revenue for the gold that is in the ground but has not yet been mined? Now remember, you are not talking about accounting for fictitious gold. This gold does exist (again, based on your engineer’s estimates).