What are the factors a manager might consider in making various expensing-capitalisation choices? - While accounting standards play a very important role in determining accounting treatment, this does not remove the need for professional judgement in the application of accounting principles. According to agency theory, the application of judgement in accounting policy choice may be influenced by incentives arising from the economic consequences, particularly in relation to the outcomes for contracting parties. In deciding whether to account for an item of expenditure (e.g., cost of maintenance that also enhances the efficiency of the asset) as an asset or an expense, management may consider the effect of the alternative accounting treatments on their remuneration, the firm’s proximity to debt covenants, and the political visibility of the firm.
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