You are a CEO operating under a bonus plan similar to the one assumed by Healy

(Section11.3). Explain whether you would react favorably or negatively to an exposure draft of a proposed change in GAAP that has the following effects on your financial statements.

Treat each effect as independent of the others.

a. The effect will be to increase liabilities. Examples of such GAAP changes include capitalization of long-term leases (Section7. 2.2), and recording of pension plan obligations and other postretirement benefits (Section7.2.6).

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. An example is the expensing of employee stock options (Section8.

3) and the ceiling tests for property, plant, and equipment (Section7.

2.5), and purchased goodwill (Section7.

4.2).

d. The effect will be to eliminate alternative ways of accounting for the same thing. For example, a new standard might remove LIFO inventory method from GAAP.