You are a CEO operating under a bonus plan similar to the one assumed by Healy (Section 11.3). Explain whether you would react favourably or negatively to an exposure draft of a proposed change in GAAP that has the following effects on your financial statements and, as a result, on your bonuses. Treat each effect as independent of the others.

Required

a. The effect will be to increase liabilities. An example of such GAAP changes is expansion of requirements for lease capitalization (Section 7.3.2).

b. The effect will be to increase the volatility of reported net income. An example would be a standard that required unrealized gains and losses on capital assets and securities to be included in net income.

c. The effect will be to exert downward pressure on reported net income. Examples include the expensing of employee stock options (Section 8.6), impairment tests for property, plant, and equipment (Section 7.3.5), and purchased goodwill (Section 7.11.2).

d. The effect will be to eliminate alternative ways of accounting for the same thing. For example, a new standard might require fair value accounting for property, plant, and equipment, rather than optional at present under IAS 16 (Section7.3.4).