IFRS reporting rules that apply in many countries outside the U.S permit management to, for example, revalue long lived assets upwards, the choice of either capitalizing or expensing interest incurred on long term construction related borrowings, and reversals of impairment losses(U.S GAAP rules specify that long lived assets be measured at original cost minus both accumulated depreciation & impairment costs (if any), prohibit subsequent reversals of previously recognized impairment losses & require companies to capitalize "avoidable" construction related borrowing costs)
a. What effect would a non US construction company's policy of capitalizing substantial borrowing costs rather than expensing have on financial statement based ratios typically found in debt covenants? (Be specific, including some explanations on the effectson the ratios
b. Explaining its change in accounting policy of recognizing property development income from the completed contract method to the percentage of completion method in the news in 1996, the Managing Director of OPH said "the change in accounting policy at group level is to bring the reporting of OPH's results inline with those of other publicly listed companies in the industry which generally adopt the percentage of completion method of income recognition".
It was also reported in the news that change in accounting policy "increased group sales by$97 million", that the "total turnover recognized from property under development and completed projects was $102 million for the first half of the year using percentage completion method", that "property developments continue to be the major contributor to its turnover and earnings", and that OPH"reported a 90% jump in interim net earnings to $21.6million".
1. Besides comparability as stated, what other factors might have influenced OPH's management to change their accounting policy to the Percentage of Completionmethod in 1996.
2. Given the change, do you expect positive effects on reported profits to continue in later years? Explain why or why not.