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      Question

      A company operates a bonus scheme that pays a variable

      lump-sum to employees annually, dependent on achieving an annual profit target and employees remaining employed at the payout date (2 months after year-end). The scheme is discretionary and not contractually promised. How should the company account for the bonus?
      A Recognise a liability and expense at year-end because an obligation exists. Correct Answer Incorrect Answer
      B Do not recognise a liability at year-end; recognise expense only when payable (after performance and retention confirmed). Correct Answer Incorrect Answer
      C Recognise a provision equal to the expected payout because past practice creates constructive obligation. Correct Answer Incorrect Answer
      D Capitalise into inventory because it’s linked to production performance. Correct Answer Incorrect Answer
      E Recognise as an equity transaction. Correct Answer Incorrect Answer

      Solution

      For discretionary bonuses not contractually obligating the entity, liability is recognised only when there is a present legal or constructive obligation. If the entity retains discretion until after performance/retention is confirmed, no liability at year-end; expense when obligation crystallises.

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