Question 1 (20 Marks) FIN324 Ltd.'s income statements for the three years 2019, 2018, 2017 are given below (all amount in $ million). Addition information items are given (refer item 1,2,3,4, and 5). In addition to that, 3 (three) alternative income measures are prepared, noted as Alternative income measure 1, Alternative income measure 2 and Alternative income measure 3. Exhibit 1: Income Statement 2019 3500 -1604 1896 - 1500 2018 3215 -1297 1918 - 1299 2017 2999 -1157 1842 -1110 -795 Sales COGS Gross profit Selling, general administration Restructuring Goodwill impairment Other income (expense) Tax provision Income from continuing operations Income from discontinued operation Gain on discontinued operation Net income -23 110 -153 330 30 55 415 33 -215 437 43 55 42 34 52 480 86 Additional information Item 1. Other income(expense)comprised followings: Exhibit 2: Other income (expenses) 2018 173 -189 2017 194 - 130 Interest income Interest expense Loss on early extinguished of debt Gain (loss) from sale of business units Gain (loss) from sale of marketable securities Unrealized gain (loss) on trading securities Early retirement charge 2019 159 -215 - 13 80 122 11 -34 110 55 -6 -11 2 33 55 Item 2. In 2019, cost of goods sold included inventory write-off of $55 million. This write-off pertained to obsolete inventory that was not sold for many years. The written down inventory was unsold at the end of 2019. Item 3. Selling, administration included share compensation expense of $25, $3land 25 million, respectively for 2019,2018 and 2017. This expense relates to option grants given to the new CEO in 2017, which was valued at around $67million n the date of grant. Item 4. The restructuring charge in 2017 was taken with the charge of $795 million, $342 million was in the form of asset impairments and the remaining S453 million was cash payments related to lease cancellation, employee retrenchment and reorganization costs. It was expected that this restructuring would lead to cost reductions and improved efficiency that would last at least Exhibit 3: The following items were reported in the statement of shareholder's equity 2019 2018 2017 Foreign currency translation gains Unrealized gain (loss) on available for sale securitites Postretirement benefit adjustment 20 20 165 205 2 -30 333 305 50 -35 -425 -410 Item 5. The company has significant office property that is reported at amortized cost on balance sheet. The fair market value of this property was considerably larger than its amortized cost, as shown in the table below; Exhibit 4: The fair market value and Amortized value 2017 Amortized cost Fair market value 2019 110 257 2018 104 223 118 204 2019 330 2018 437 2017 34 0 0 0 795 0 0 Exhibit 5: Alternative income measure 1 Determination of alternative income measure 1 Income from continuing operation Pre tax adjustment Inventory write-off Restructuring charge Goodwill impairment Loss on early extinguishment of debt Gain/loss from sale of business units Gain/loss from sale of marketable securities Unrealized gain/loss on trading securites Early retirement charge Total pre-tax adjustment Tax effect Total after-tax adjustment Alternative income measure 1 0 55 0 23 13 -80 -122 - 11 34 -88 0 -55 6 0 -49 17 -32 405 0 0 11 -2 0 804 -281 523 557 31 -57 273 Exhibit 6: Alternative income measure 2 2017 2019 415 2018 480 86 Determination of alternative income measure 2 Net income Other alternative income measure 2 Foreign currency translation gains Unrealized gain (loss) on available for sale securities Postretirement benefit adjustment Alternative income measure 2 20 20 50 -35 2 -30 333 785 165 -425 -324 620 2019 620 25 2018 785 31 Exhibit 7: Alternative income measure 3 Determination of alternative income measure 3 Alternative income measure 2 Add: compensation expense Less : Option grants Add : Unrealized gain office property Total pre-tax adjustment Less: tax portion Total after-tax adjustment Alternative income measure 3 28 53 -19 34 654 33 64 -22 42 827 2017 -324 25 -67 0 -42 15 -27 -351 2019 257 110 147 28 2018 223 104 119 33 2017 204 118 86 0 Determining unrealized gain on office prop Fair market value Amortized cost Difference Change in difference * Assume the marginal tax rate of 35% on all adjustments made to income Required: (a) Based on above information, identify which alternative income measure is regarded as (1) Comprehensive Income (2) Core Income and (3) Economic income. Justify each of your answer. (6 marks) (b) Discuss the reporting and accounting on Item 2 inventory write-off). (3 marks) (c) Explain why Item 2 is included in the determination of Alternative Income Measure 1. (4 marks) Discuss is there any impairment of assets should be reported? Justify your answer. (5 marks) (d) Question 1 (20 Marks) FIN324 Ltd.'s income statements for the three years 2019, 2018, 2017 are given below (all amount in $ million). Addition information items are given (refer item 1,2,3,4, and 5). In addition to that, 3 (three) alternative income measures are prepared, noted as Alternative income measure 1, Alternative income measure 2 and Alternative income measure 3. Exhibit 1: Income Statement 2019 3500 -1604 1896 - 1500 2018 3215 -1297 1918 - 1299 2017 2999 -1157 1842 -1110 -795 Sales COGS Gross profit Selling, general administration Restructuring Goodwill impairment Other income (expense) Tax provision Income from continuing operations Income from discontinued operation Gain on discontinued operation Net income -23 110 -153 330 30 55 415 33 -215 437 43 55 42 34 52 480 86 Additional information Item 1. Other income(expense)comprised followings: Exhibit 2: Other income (expenses) 2018 173 -189 2017 194 - 130 Interest income Interest expense Loss on early extinguished of debt Gain (loss) from sale of business units Gain (loss) from sale of marketable securities Unrealized gain (loss) on trading securities Early retirement charge 2019 159 -215 - 13 80 122 11 -34 110 55 -6 -11 2 33 55 Item 2. In 2019, cost of goods sold included inventory write-off of $55 million. This write-off pertained to obsolete inventory that was not sold for many years. The written down inventory was unsold at the end of 2019. Item 3. Selling, administration included share compensation expense of $25, $3land 25 million, respectively for 2019,2018 and 2017. This expense relates to option grants given to the new CEO in 2017, which was valued at around $67million n the date of grant. Item 4. The restructuring charge in 2017 was taken with the charge of $795 million, $342 million was in the form of asset impairments and the remaining S453 million was cash payments related to lease cancellation, employee retrenchment and reorganization costs. It was expected that this restructuring would lead to cost reductions and improved efficiency that would last at least Exhibit 3: The following items were reported in the statement of shareholder's equity 2019 2018 2017 Foreign currency translation gains Unrealized gain (loss) on available for sale securitites Postretirement benefit adjustment 20 20 165 205 2 -30 333 305 50 -35 -425 -410 Item 5. The company has significant office property that is reported at amortized cost on balance sheet. The fair market value of this property was considerably larger than its amortized cost, as shown in the table below; Exhibit 4: The fair market value and Amortized value 2017 Amortized cost Fair market value 2019 110 257 2018 104 223 118 204 2019 330 2018 437 2017 34 0 0 0 795 0 0 Exhibit 5: Alternative income measure 1 Determination of alternative income measure 1 Income from continuing operation Pre tax adjustment Inventory write-off Restructuring charge Goodwill impairment Loss on early extinguishment of debt Gain/loss from sale of business units Gain/loss from sale of marketable securities Unrealized gain/loss on trading securites Early retirement charge Total pre-tax adjustment Tax effect Total after-tax adjustment Alternative income measure 1 0 55 0 23 13 -80 -122 - 11 34 -88 0 -55 6 0 -49 17 -32 405 0 0 11 -2 0 804 -281 523 557 31 -57 273 Exhibit 6: Alternative income measure 2 2017 2019 415 2018 480 86 Determination of alternative income measure 2 Net income Other alternative income measure 2 Foreign currency translation gains Unrealized gain (loss) on available for sale securities Postretirement benefit adjustment Alternative income measure 2 20 20 50 -35 2 -30 333 785 165 -425 -324 620 2019 620 25 2018 785 31 Exhibit 7: Alternative income measure 3 Determination of alternative income measure 3 Alternative income measure 2 Add: compensation expense Less : Option grants Add : Unrealized gain office property Total pre-tax adjustment Less: tax portion Total after-tax adjustment Alternative income measure 3 28 53 -19 34 654 33 64 -22 42 827 2017 -324 25 -67 0 -42 15 -27 -351 2019 257 110 147 28 2018 223 104 119 33 2017 204 118 86 0 Determining unrealized gain on office prop Fair market value Amortized cost Difference Change in difference * Assume the marginal tax rate of 35% on all adjustments made to income Required: (a) Based on above information, identify which alternative income measure is regarded as (1) Comprehensive Income (2) Core Income and (3) Economic income. Justify each of your answer. (6 marks) (b) Discuss the reporting and accounting on Item 2 inventory write-off). (3 marks) (c) Explain why Item 2 is included in the determination of Alternative Income Measure 1. (4 marks) Discuss is there any impairment of assets should be reported? Justify your answer. (5 marks) (d)