ACCA Strategic Professional · Strategic Business Reporting (International) · Analysis and interpretation of financial and non-financial information and measurement of performance
Vantor plc's finance director is under pressure from the CEO, whose bonus depends on earnings per share, to reclassify $12m of ongoing development spend that does not meet the IAS 38 capitalisation criteria as an intangible asset. Profit before this adjustment is $60m with 100m shares. Ignoring tax, what is the effect on EPS if capitalised, and what is the correct professional response?
Capitalising the $12m would lift profit from $60m to $72m and EPS from $0.60 to $0.72, but this would be improper because the costs fail IAS 38 criteria. The accountant should refuse and escalate, since bonus-driven pressure threatens integrity under the IESBA Code.
- AEPS would rise from $0.60 to $0.72, which would be an unjustified overstatement; the accountant should refuse and escalate if needed under the IESBA CodeCorrect
- BEPS would rise from $0.60 to $0.72, which is acceptable as a judgement within management's discretion
- CEPS would rise from $0.60 to $0.48; the accountant should proceed because it is prudent
- DEPS would be unchanged because capitalised costs do not affect profit
Explanation
Capitalising $12m cuts expenses, so profit becomes $72m and EPS $0.72 versus $0.60. Costs that fail IAS 38 criteria must be expensed, so this is manipulation driven by self-interest, creating a threat to integrity. The accountant should refuse, and escalate to those charged with governance if pressure continues.
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