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

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The company can reduce its debt-to-equity ratio by increasing its equity or decreasing its debt. Revaluing assets upwards (C) will increase equity. Decreasing provision for warranty expenses (B) will also increase equity. Switching from accelerated depreciation to straight-line depreciation method (A) will decrease debt.

A New Accounting Standard Requires ABC Ltd to Recognise as Expense