Diamond Food Case Project

Requirement 1

1. Manipulation of commodity cost. As a common practice in the company, management would instruct related accounting employee to decrease the commodity costs by a small incremental at a time, until the desired earning numbers for that period was achieved.
2. Special accounting treatment of grower payments. Diamond made “continuity payment” and “momentum payment” to manipulate cost to growers. These payments were claimed to be advances for multi-year supply from growers, hence the company delay the recognition of these amounts as costs in later periods. However, payments to growers were actually for the crop in prior year although Diamond insisted the payments were for current year; and growers who already cancelled their contracts with Diamond still received this payment, which suggested that these payments, in substance, should have been for previous periods.
Diamond used this controversial accounting method to continuously defer part of its payments to later periods, which reduced current costs and increased net income. Conversely, Diamond also increased its current cost by making more payment, when its EPS exceeded the expectation. The “continuity payment” method was continuously applied, and it created a cost pool in future period, which gave the company room to adjust costs and expenses in accordance with the management’s goals.

Requirement 2
No, both recording of “continuity” payments and “momentum” payments did not comply with GAAP. As mentioned, Diamond delayed recording costs or expenses by treating the payments as advances for later periods, while they were actually for previous periods. According to matching principle in GAAP, expenses and costs recognition should be consistent with revenue recognition. However, by adjusting the amounts of payment, Diamond recognized only partial costs, not matching