(a) ‘Measurement in financial statements’, Chapter 6 of the ASB’s Statement of Principles, was published in 1999. Amongst the theoretical valuation systems considered is value in use – more commonly known as economic value.

Required:

Describe the Hicksian economic model of income and value, and assess its usefulness for financial reporting.

(b) Jim Bowater purchased a parcel of 30,000 ordinar y shares in New Technologies plc for £36,000 on 1 Januar y 20X5. Jim, an Australian on a four-year contract in the UK, has it in mind to sell the shares at the end of 20X7, just before he leaves for Australia. Based on the company’s forecast growth and dividend policy, his broker has advised him that his shares are likely to fetch only

£35,000 then.

In its annual report for the year ended 31 December 20X4 the company had forecast annual dividend pay-outs as follows:

Year ended: 31 December 20X5, 25p per share 31 December 20X6, 20p per share 31 December 20X7, 20p per share Required:

Using the economic model of income:

(i) Compute Jim’s economic income for each of the three years ending on the dates indicated above.

(ii) Show that Jim’s economic capital will be preserved at 1 January 20X5 level. Jim’s cost of capital is 20%.