Reference no: EM132776508

In an official announcement to the stock market, ABC Ltd noted that the corporation expects its "underlying profit before tax" to fall below the range previously forecasted and announced to the equity market.

Please read below:

• "ABC Ltd on Wednesday said the subdued trading conditions had coincided with a period of "significant disruption" for the company including introducing a new wage model for its front-end sales staff, an ongoing review of its shop network and putting in new sales systems. ABC Ltd managing director said the overall results would be disappointing. Although the company's corporate results were strong especially in the United States, United Kingdom and Asia, the sluggish regional result means ABC Ltd now expects its underlying profit before tax for the 12 months to June 30 to fall to between $535 million and $560 million, below the $590 million to $620 million range it initially targeted. The mid-point in this new range, $547.5 million, represents a 10 per cent decrease on the record $584.7 million underlying profit before tax it recorded last year."

• The underlying profit metrics are different from the profit to be reported in the financial statements.

Requirement:

Problem 1) Utilising positive accounting theory (PAT) assumption, critically analyse the possible motivation for using an alternative measure of profit used by ABC Ltd in the announcement.

Problem 2) Discuss whether the corporations are allowed to use and disclose this alternative measure even if it fails to comply with accounting standards? Why would the managers do this.

Problem 3) As a user of the corporation's financial information (ABC Ltd), discuss the potential reaction toward such an announcement?