A new accounting standard requires ABC Ltd to recognise as expense all share-based payments,specifically the issue of options to its employees.Prior to this standard,the company need not do anything until the options are exercised.The manager of ABC Ltd is worried about this new standard as the company is close to a technical violation of its borrowing agreements that the debt-to-equity ratio be less than 40%.Most of the options on issue are cash-settled and will require an increase in liabilities.Which of the following accounting policies if adopted by the company could reduce the likelihood of a debt covenant violation?

Question

Quizplus · Accepted Answer

Switching from accelerated to straight-line depreciation will reduce the expense recognized in the current period, thus potentially increasing net income and equity. Decreasing provision for warranty expenses will also reduce expenses and potentially increase net income, thus equity. Revaluing assets upwards directly increases equity. All these measures can improve the debt-to-equity ratio.

A New Accounting Standard Requires ABC Ltd to Recognise as Expense