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ACCA Strategic Professional · Strategic Business Reporting (International) · Employee benefits

Marlow Group's finance director asks the group accountant to omit the accrual for an annual bonus of $4m that the board announced to staff in December, with payment in February, in order to meet a lender covenant on profit at the 31 December year end. The bonus is based on year-end results and the announcement created an expectation among employees. What is the correct treatment and response?

The $4m must be accrued at year end because the December announcement created a constructive obligation with a reliable estimate. Leaving it out to satisfy a covenant would be misleading reporting and breach the ethical principles of integrity and objectivity, so the accountant should resist the instruction.

  1. AAccrue the $4m as an expense because a constructive obligation exists, and challenge the request as a threat to integrity and objectivityCorrect
  2. BDisclose the $4m as a contingent liability only, since payment is after the year end
  3. COmit the accrual in the year and expense it in February when paid, since the covenant is a business necessity
  4. DAccrue only half, as a compromise between covenant needs and IAS 19

Explanation

The December announcement created a constructive obligation from a past event, with a reliable estimate, so IAS 19 requires a liability and expense at year end. Omitting it to meet a covenant is earnings manipulation and breaches fundamental ethical principles (integrity, objectivity) under the IESBA Code. A contingent liability is wrong because the obligation is present, and partial accrual has no basis in the standard.

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