HSBC Loan Stock, Measurement Basis, Ideal Conditions of Uncertainty, COVID-19 Implications and Finan

Question 1: HSBC loan stock offering

Question 1 Answer parts a) and b)

a) HSBC issued £5,000,000 of loan stock at par on 1st January 2019. The nominal annual interest rate of 6%. Interest is payable in on 31 December each year and the loan stock has a three-year term. Each £4,000 loan stock can be converted at any time up to maturity for 1200 of £1 ordinary shares. If the conversion option is not taken up, they will be redeemed at par. The prevailing market interest rate or similar debt without conversion options is 9%. The company prepares financial statement to 31 December each year.

Required:

1. Calculate the separate components of the financial instrument on initial recognition;
2. Prepare an amortised cost table for the life of the financial liability;
3. Prepare the ledger account for the financial liability;
4. Prepare the relevant financial statement extracts for years 2019, and 2020;
5. Prepare the accounting entries on redemption if (a) the conversion is taken up; (b) the conversion option is not taken up.
6. ‘Fair value accounting is the wrong scapegoat for the 2007-08 global financial crisis’. Critically appraise whether you agree/disagree with this statement (Discuss fair value accounting as part of your answer).

Question 2 Answer parts a) and b)

a) A single measurement approach (e.g. fair value) is not ideal when the market is incomplete. That is, in reality markets are imperfect so that the best market prices are not available for all assets and liabilities (Whittington, 2010). With respect to the above statement, critically examine the case for and against a single ideal measurement basis.

b) ABC Ltd operates under ideal conditions of uncertainty. On January 1, 2020, ABC Ltd acquired an asset to be used in its operations. Its cash flows depend on the economic conditions. The asset will last three years, at which time itssalvage value will be £100. ABC Ltd financed the asset purchase by issuing ordinary shares. In 2020, net cash flows will be £1400 if the economic conditions are favourable and £500 if they are unfavourable. In 2021, cash flows will be £2000 if the economic conditions are favourable, and £700 if they areunfavourable. In 2022, cash flows will be £2300 if the economic conditions are favourable, and £800 if they are unfavourable. Cash flows are received at yearend. In 2020, the probability that the economic conditions are favourable is 0.3 and 0.7 that they are unfavourable. In 2021 and 2022, the probability that the economic conditions are favourable is 0.4 and 0.6 that they are unfavourable. The interest rate in the economy is 10% in all three years. ABC Ltd pays a dividend of £200 at the end of 2020.

In 2020, the economic conditions are favourable. Economic conditions for 2021 and 2022 are not yet known. Prepare a statement of financial position (balance sheet) as at the end of 2020 and a statement of income for 2020.

Question 3

The COVID-19 pandemic crisis and its economic effects mean that investors and other stakeholders need high-quality financial information more than ever. Critically discuss the implications of the COVID-19 pandemic on financial reporting.

Question 4 Answer parts a) and b)

1. a) Drawing on prior earnings management literature, critically appraise managerial incentives in manipulating reported earnings.
2. b) Using examples, discuss three techniques used by firms to manage reported earnings.

Question 5 Answer parts a) and b)

1. a) Critically appraise the benefits and drivers of international financial reporting convergence and harmonisation undertaken by the International Accounting Standard Board (IASB). Define the term ‘financial reporting convergence’ as part of your answer.
2. b) ‘The quality of financial reporting standards issued by the International Accounting Standard Board (IASB) is better than those issued by the U.S. Financial Accounting Standard Board (FASB)’ Discuss this statement.