MAA363 - Corporate Accounting - Explain Accounting Theory - Accounting Assignment Help

Assignment Task

Unit Learning Outcome (ULO)
ULO 1: Explain accounting theory, principles, and accounting standards in theglobal financial reporting environment.

ULO 2: Identify, discuss, evaluate, and apply the relevant accounting standards relating to definition, recognition, measurement and disclosure requirements of a reporting entity’s assets, liabilities, equity, income and expenses.

ULO 3: Identify and analyse complex business problems

Part A – Financial Instruments
(a) The directors of Avco, a public limited company, are reviewing the financial statements of two entities which are acquisition targets, Cavor and Lidan. They have asked for clarification on the treatment of the following financial instruments within the financial statements of the entities.
Cavor has two classes of shares: A and B shares. A shares are Cavor's ordinary shares and are correctly classed as equity. B shares are not mandatorily redeemable shares but contain a call option allowing Cavor to repurchase them. Dividends are payable on the B shares if, and only if, dividends have been paid on the A ordinary shares. The terms of the B shares are such that dividends are payable at a rate equal to that of the A ordinary shares.
Lidan has in issue two classes of shares: A shares and B shares. A shares are correctly classified as equity. Two million B shares of nominal value of $1 each are in issue. The B shares are redeemable in two years' time. Lidan has a choice as to the method of redemption of the B shares. It may either redeem the B shares for cash at their nominal value or it may issue one million A shares in settlement. A shares are currently valued at $10 per share. The lowest price for Lidan's A shares since its formation has been $5 per share.

Required
Discuss whether the above arrangements regarding the B shares of each of Cavor and Lidan should be treated as liabilities or equity in the financial statements of the respective issuing companies. Your answer should refer to relevant IFRSs and the Conceptual Framework.

(b) At its recent general meeting, a shareholder asked the board to explain how it decides whether certain financial instruments are classified as equity whereas other seemingly similar financial instruments are classified as debt. The shareholder suggested that the directors do not understand the impact of the classification on investors and their analysis of the financial statements.

Required
(i) Explain the key classification differences between debt and equity under IFRSs.
(ii) Explain why it is important for entities to understand the impact of the classification of a financial instrument as debt or equity in the financial statements.

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