The executive officers of Coach Corporation have a performance-based compensation plan that links performance criteria to growth in earnings per share. When annual EPS growth is 12%, the Coach executives earn 100% of a predetermined bonus amount; if growth is 16%, they earn 125%. If EPS growth is lower than 8%, the executives receive no additional compensation.
In 2011, Joanna Becker, the controller of Coach, reviews year-end estimates of bad debt expense and warranty expense. She calculates the EPS growth at 15%. Peter Reiser, a member of the executive group, remarks over lunch one day that the estimate of bad debt expense might be decreased, increasing EPS growth to 16.1%. Becker is not sure she should do this, because she believes that the current estimate of bad debts is sound. On the other hand, she recognizes that a great deal of subjectivity is involved in the calculation.
Discuss the financial reporting issues. Assume this is a public company.