Assessing Bond Options For High PG Ltd: Essay And Recommendations.

As the personal assistant of the CFO L. Winters, you have been asked to evaluate the following opportunities to acquire $15 million of new capital and to provide advice at the board of directors meeting on September 10th, 2018.

You are asked to present your advice in the following format:

(1) Provide a short introduction.

(2) Provide and explain the journal entries for the High PG Ltd Step-up Bond from 1 January 2019 to 31 December 2021. Refer to the specific Australian accounting standards.

(3) Provide and explain the journal entries for the High PG Ltd Convertible Bond from 1 January 2019 to 31 December 2021. Refer to the specific Australian accounting standards. Assume the bond is converted at maturity.

(4) Assuming a net profit (after interest and tax) of 10 MAUD, provide a forecast of the equity and liability sections of the Balance sheet as at 31 December 2019 for each bond. Based on the effects of these different options on the financial statements of High PG Ltd, provide a recommendation to the CFO and board of directors.

Journal Entries for the High PG Ltd Step-up Bond (1 Jan 2019 - 31 Dec 2021)

The assessment aims in depicting the difference journal entries, which are used by the organisation for portraying their financial report. The adequate journal entries are mainly calculated in the to depict the level of interest payment that needs to be conducted by the company over the period. In addition, the different entries that needs to be conducted for normal bonds and convertible bonds are adequately depicted. This segregation of the journal entries mainly helps in depicting the changes in liability section of the company at the end of 31^st December 2019. Adequate recommendations are mainly provided to the organisation regarding the choice of bonds that can be taken into consideration. Moreover, with the identified journals the relevant adequate valuation of the organisation could be identified for the duration of 2019. The decision regarding the choice of convertible or regular bond is essential for any CFO, as it helps in altering its overall capital structure.

Above tables mainly help in depicting the journal entries that needs to be maintained by the organisation for the particular bonds. In addition, adequate Australian accounting standard is evaluated to depict the level of changes that needs to be taken under bond issue. Th Austrian accounting standard AASB 9 is mainly used in the preparation of the journal entries, which has been conducted in the above tables. The AASB 9 paragraph B3.2.8 directly depicts the contractual provisions that permit the issuer to repay the debt instrument and consider it as payables, which can be listed in the liability section of the annual report. There are other standards such as AASB 9 paragraph B4.1.30.(c), which can be help in detecting the level of cash flows, payments and interest payments that needs to be conducted for bond purchase. Fargher et al., (2016) stated that with the help of AASB standards organisations are able to depict an accurate financial report, which could depict their current financial performance. On the other hand, Tahat et al., (2016) criticises that the loopholes in the financial standards were the main reason behind the drastic decline of financial market during the mortgage crisis of 2008. The instrument A and B of paragraph B4.1.13 is mainly used by the standards for depicting the bonds in their current financial report.

The AASB 9 adequately depicts all the relevant information regarding the bond valuation, which needs to be conducted by the organisation, while preparing their annual report. This discloser mainly helps in depicting the accurate fair value of the bonds each year, as per their valuation in the market. The current AASB 9 standard listed in 2014 directly depicts different levels of methods, which needs to be adopted by the company for listing their bonds in the balance sheet. In this context, Houqe and Monem (2016) stated that changes in the AASB standards has mainly allowed the regulators to uplift the quality of the information provided by the company in their annual report. Hoang and Ruckes (2017) further added that this change in the AASB standard was drastically escalated after the financial crisis of 2008, which nearly wiped the financial sector of the world.

Journal Entries for the High PG Ltd Convertible Bond (1 Jan 2019 - 31 Dec 2021)

The calculations conducted in the above table directly indicates the level of journals that can be instigated when the organisations use convertible bonds for acquiring the required level of funds. In addition, from the evaluation it could be detected that adequate journals need to be conducted by the organisation for increasing the level of debt and changing it to share capital after the completion of the bond tenure. Under AASB 9 paragraph B4.1.13 Instrument E relevant measures that needs to be taken by the organisation for the particular convertible bonds are adequately depicted. Further elaboration about the current convertible indicates that the holders is mainly alternating the long-term liabilities of the organisation to equity after the overall completion of the annual report. Houqe & Monem (2016) mentioned that convertible bonds are useful for the organisation, as it helps in reducing the cash outflow after the completion of the bond tenure. On the other hand, Hoang & Ruckes (2017) criticises that companies without adequate growth and future prospects are not able to sell their bonds at par value, which reduces their capability to support their finance requirement.

The calculations conducted in the above tables mainly represent the balance sheet value in two different situations. In addition, from the evaluation it could be detected that using the normal bond or convertible bonds for the current fiscal period of 2019 will not alter the composition of total liabilities and equity. However, the composition of the total liabilities and equity will only change after the completion of bonds, which is at the fiscal year of 2021. This alteration is only detected, as after the completion of normal bonds the company must pay back the bond in cash, which will reduce the total liability section, while the equity remains same. On the other hand, the convertible bond effect will directly change the value of total liabilities to total equity after the completion of the bond tenure. Hence, the organisation can be using the convertible bond measure for acquiring the required level of capital to support its business decision. This will allow the investors to switch their current bond position of equity position in three years’ time, if the company is making progress. Moreover, the convertible bond might also help in reducing the cash flow that needs to be conducted by the company after the completion of the bond tenure. Therefore, use of convertible bond is advisable for the organisation.

Conclusion:

From the overall evaluation conducted in the above assessment the fair valuation, which needs to be conducted by organisation for their bonds are adequately depicted. In addition, the different type of AASB ruling, which needs to be followed by the organisation is also depicted for the valuation of their issued bonds. Hence, with the implementation of AASB 9 ruling the organisation can adequately depict the accurate financial progress, which has been made during the fiscal year. Therefore, after evaluating the whole situation the use of convertible bonds would be much profitable for the company, as its helps in minimising the level of cash outflow after the completion of the bond tenure.

References

Aasb.gov.au, (2018). Aasb.gov.au. Retrieved 3 September 2018, from https://www.aasb.gov.au/admin/file/content105/c9/AASB9_12-14.pdf

Fargher, N., Sidhu, B. K., Tarca, A., & Van Zyl, W. (2016). Accounting for financial instruments with characteristics of debt and equity: finding a way forward. Accounting & Finance.

Hellman, N., Carenys, J., & Moya Gutierrez, S. (2018). Introducing More IFRS Principles of Disclosure–Will the Poor Disclosers Improve?. Accounting in Europe, 1-80.

Hoang, D., & Ruckes, M. (2017). Corporate risk management, product market competition, and disclosure. Journal of Financial Intermediation, 30, 107-121.

Houqe, M. N., & Monem, R. M. (2016). Reply to the Discussion of “IFRS Adoption, Extent of Disclosure, and Perceived Corruption: A Cross-Country Study”. The International Journal of Accounting, 51(3), 382-384.

Iasplus.com. (2018). Iasplus.com. Retrieved 3 September 2018, from https://www.iasplus.com/en/standards/ifrs/ifrs9

Iasplus.com. (2018). Iasplus.com. Retrieved 3 September 2018, from https://www.iasplus.com/en/news/2017/12/iasb-premeeting-summaries

Leuz, C., & Wysocki, P. D. (2016). The economics of disclosure and financial reporting regulation: Evidence and suggestions for future research. Journal of Accounting Research, 54(2), 525-622.

Smith. (2015). Accounting for convertible bonds, Journal of Accounting, 11-23.

Tahat, Y. A., Dunne, T., Fifield, S., & Power, D. M. (2016). The impact of IFRS 7 on the significance of financial instruments disclosure: Evidence from Jordan. Accounting Research Journal, 29(3), 241-273.