Advanced Financial Reporting and Regulation

SECTION A Question 1 Answer both parts a) and b) a) Much of the current thinking of accounting standard setters about measurement seems to be based on an idealized view of markets as being complete and in perfectly competitive equilibrium. In such conditions, there is a unique market price based on a full set of information for every asset and liability. There is an obvious attraction in using this price as a measure for accounting, which explains standard setters enthusiasm for single ideal measurement methods based on market price, such as fair value (FV), defined in SFAS 157 and IFRS 13 as a market selling price (Whittington, 2010).

Given that in reality ideal conditions of markets are unlikely to hold, critically appraise whether a single measurement basis in financial reporting is appropriate. (25 marks)

b) M&S plc operates under ideal conditions of both certainty and uncertainty. At the beginning of its operation, M&S plc acquired an asset to be used in its business. The asset will last three years, at which time its salvage value will be 500. M&S plc financed the asset purchase by issuing ordinary shares. In the first year of operation, net cash flows will be guaranteed at 4,000. However, its cash flows in the second and third years depend on the demand conditions. In the second year, cash flows will be 3,000 if the demand conditions are favourable and 1,200 if they are unfavourable. In the third year, cash flows will be 3,200 if the demand conditions are favourable and 1,000 if they are unfavourable. Cash flows are received at year-end. In the second year, the probability that the demand conditions are favourable is 0.3 and 0.7 that they are unfavourable. In the third year, the probability that the demand conditions are favourable is 0.4 and 0.6 that they are unfavourable. The interest rate in the economy is 8% in all three years. M&S plc pays a dividend of 300 at the end of the first year and 500 in the second year. In the second year, the demand condition is favourable. Demand condition for the third year is not yet known.

Prepare the statement of financial position (balance sheet) and the statement of income for the first and second years. (25 marks) (Total = 50 marks) 3 Question 2 Answer both parts a) and b)

1. Pontio plc issued 3,000,000 of 6% convertible bond at par on 1st January 2016. Interest is payable in on 31 December each year and the bond has a three-year term. Each 3,000 bond can be converted at any time up to maturity for 1,200 of 1 ordinary shares. If the conversion option is not taken up, they will be redeemed at par. The prevailing market interest rate for similar debt without conversion options is 8%. The company prepares financial statement to 31 December each year.
2. Required: i. Calculate the separate components of the financial instrument on initial recognition; (5 marks)
3. ii. Prepare an amortised cost table for the life of the financial liability; (5 marks) iii. Prepare the relevant financial statement extracts for years 2016 and 2017; (10 marks)
4. iv. Prepare the accounting entries on redemption if (a) the conversion is taken up; (b) the conversion option is not taken up. (5 marks)
5. b) The use of fair value accounting for measuring assets and liabilities has been a source of ongoing controversy. Critically appraise benefits and challenges of fair value measurements with respect to the global financial crisis. Explain the issues relating to the Fair Value Hierarchy measurement (IFRS 13) as part of your answer. (25 marks) (Total = 50 marks)
6. 4 SECTION B: Answer ONE question Question 3 Answer both parts a) and b) a)
7. Based on the extant earnings management literature, critically appraise motivations underlying earnings management. Define the concept of earnings management as part of your answer. (30 marks) b) Critically explain the key features of the Sarbanes-Oxley Act 2002 which aims at protecting investors from the possibility of fraudulent accounting activities. (20 marks) (Total = 50 marks)
8. Question 4 By referring to the extant literature, critically explain the benefits and drawback of the IASBs Conceptual Framework for Financial Reporting. Explain the two fundamental qualitative characteristics of accounting information as discussed in the conceptual framework. (Total = 50 marks)
9. Question 5 Answer both parts a) and b) a) By referring to prior research studies, discuss the effects of IFRS adoption on the value relevance of financial statement information. Define the concept of value relevance as part of your answer. (30 marks)
10. b) Critically appraise the benefits of IFRS convergence undertaken by the IASB from the perspective of investors. (20 marks) (Total = 50 marks)