uestion A2 arnings quality and reporting quality are the two elements of the quality spectrum. Explain ach of the scenarios outlined below in the context of the quality spectrum. a) La_Shang Ltd had $510 million in earnings in 2020, which shows an over 50% increase compared to the last year. The company had closed one of its overseas operations for a one-time gain of $260 million. La_Shang has had a 510 per cent increase in earnings during the last two years. As a listed firm, the company has complied with the stock exchange disclosure requirements and accounting standards in publishing accounts. (12=2 marks) b) AB Manufacturing Ltd has changed the depreciation method of plant and machinery from a straight line method to a reducing balance method. Managers justify the decision that a reduction in earnings in the short run will compensate in the long run. The company has disclosed that the change in the depreciation methods is allowed under the applicable accounting standards (IFRs). However, the disclosure statement doesn't carry sufficient information on the effect of the change on the firm's performance. (12=2 marks ) c) Medico has been spending a fair amount on its medical research and development activities compared to the industry benchmark. Due to the COVID-19 pandemic, the company increased its research expenditures significantly in 2020 . The company has capitalised over 60% of the expenditure and wrote off the balance to the income statement. The auditors recommended writing off the total amount as expenses, which will significantly reduce net profits. Medico has not provided sufficient disclosure on the issue. (12=2 marks ) uestion A2 arnings quality and reporting quality are the two elements of the quality spectrum. Explain ach of the scenarios outlined below in the context of the quality spectrum. a) La_Shang Ltd had $510 million in earnings in 2020, which shows an over 50% increase compared to the last year. The company had closed one of its overseas operations for a one-time gain of $260 million. La_Shang has had a 510 per cent increase in earnings during the last two years. As a listed firm, the company has complied with the stock exchange disclosure requirements and accounting standards in publishing accounts. (12=2 marks) b) AB Manufacturing Ltd has changed the depreciation method of plant and machinery from a straight line method to a reducing balance method. Managers justify the decision that a reduction in earnings in the short run will compensate in the long run. The company has disclosed that the change in the depreciation methods is allowed under the applicable accounting standards (IFRs). However, the disclosure statement doesn't carry sufficient information on the effect of the change on the firm's performance. (12=2 marks ) c) Medico has been spending a fair amount on its medical research and development activities compared to the industry benchmark. Due to the COVID-19 pandemic, the company increased its research expenditures significantly in 2020 . The company has capitalised over 60% of the expenditure and wrote off the balance to the income statement. The auditors recommended writing off the total amount as expenses, which will significantly reduce net profits. Medico has not provided sufficient disclosure on the issue. (12=2 marks )
