A New Accounting Standard Requires ABC Plc to Recognise as Expense

question 34

Multiple Choice

A new accounting standard requires ABC Plc 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 Plc 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?

• A)switching from accelerated depreciation to straight-line depreciation method
• B)decreasing provision for warranty expenses
• C)revaluing assets upwards
• D)All of the given answers are correct.

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Definitions:

Goodwill

The intangible asset that arises when a company acquires another business for a price higher than the fair value of its net identifiable assets.

Business Combination

The process of joining two or more companies into a single entity, often to expand market share, diversify, or achieve other business objectives.

Outstanding Shares

The total number of shares of stock that are currently owned by all shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s insiders.

Copper Production

The process of extracting copper from its ores and converting it into pure metal for use in various industries, including electrical wiring, construction, and automotive.