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ACCA Strategic Professional · Strategic Business Reporting (International) · Group accounting including statements of cash flows

Omega, a listed parent, is negotiating a bank covenant that requires group gearing below 50%. The finance director instructs the group accountant to structure a sale of a subsidiary's debt-funded plant to a special entity controlled by Omega's chief executive, so the borrowing is not consolidated, even though Omega retains the benefits and risks of the entity. Under IFRS and the ACCA ethical framework, what is the most appropriate response of the group accountant?

The accountant should refuse to leave the entity out and assess control under IFRS 10, escalating through those charged with governance if pressed. Structuring to hide debt breaches the fundamental principles of integrity and professional behaviour and would mislead users.

  1. AComply, because the director has authority over reporting
  2. BComply but disclose the arrangement in a note only
  3. CRefuse to omit the entity, applying IFRS 10 control assessment, and escalate the concern internally if the director persistsCorrect
  4. DResign immediately without raising the matter with anyone

Explanation

Control under IFRS 10 depends on power, exposure to variable returns and ability to use power, not legal form. Omega retains risks and benefits, so the entity should probably be consolidated. Integrity and professional behaviour require the accountant not to be associated with misleading information and to escalate through governance channels.

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