Flavio Ltd is a public company whose shares are traded on the ASX. Last year, the company made a public announcement of $3.5bn in profit. A large amount of this profit comes from a gold mine that generated approximately $2.5bn in revenues and $0.5bn in expenses per year for the last few years. This year, the company was charged with engaging in criminal activity for bribing public servants at the Environment Agency (EA) who were investigating severe environmental damage.

Your company is hired to provide a recommendation on their financial statements. Using the appropriate accounting standard and the new conceptual framework issued by IASB in 2018.

Second year

The previous CEO resigned after enormous pressure. The new CEO is working very hard to restore the company's reputation. She brought in your company to provide advice on how to manage this problem. She is adamant that this has to be managed in a way that provides some good news for shareholders. She constantly states that they are innocent of the actions of the former management, and she wants to protect them. Your manager advised you that she also has a sizeable bonus, largely composed of executive share (aka stock) options. These were awarded to her when the company's shares were trading at their lowest price in 5 years.

Your manager suggests that Flavio create provision for at least $5bn for this disaster. Flavio's new CEO was not impressed with this advice and started muttering rude things under her breath about that 'loco gringo nut job'. Your manager asked you to prepare briefing notes that she will use when she next meets the Flavio's CEO. Your manager asked you to consider 4 scenarios.

In all scenarios described below, the CEO will announce, before the end of this year, that the company will set up a fund for restoration work, and[PZ1] that Flavio deeply regrets its actions. The company will also develop a marketing campaign showing the public how the company works to assist the environment and indigenous communities.

In the 1^st and 2^nd scenarios Flavio will set up and administer a $5bn fund. In the second scenario, the only change is that the amount set aside is $4bn.

In the 3^rd and 4^th scenarios, Flavio will work with a third party (such as a well-known charity) to set up the fund. The fund will be administered by the other party. Any remaining funds will be returned to Flavio. In the 3^rd scenario, the amount set aside will be $5bn. In the 4^th scenario, the amount set aside will be $4bn.

Your manager wants to prepare summary general journal entries for these scenarios over the life of the funds. Using those journal entries, prepare brief discussion paper for Flavio's CEO on which way Flavio should proceed.

You know your manager hates to be embarrassed in front of clients. She tells you to ensure you state any assumptions you make in your analysis, and identify how changes in these could affect the outcome.

Do you expect that the executive share options will impact the decision of Flavio's CEO? Justify your response.

Discuss whether it is more ethical to set up the fund using $5b or $4b.

You must provide the basis of your recommendation including appropriate references.