accounting problems with A+ answers fall 2015-Bula Ltd and The IASB conceptual

Question 1

Bula Ltd is an investment company which plans to develop a new resort in Fiji. The project requires a

total investment of $30 million. Half the funds will be raised through a bank loan. However the company

must raise the remaining $15 million from equity. Bula Ltd is considering three different ways to raise

equity capital:

a) Public Offering

b) Private Placement

c) Rights Issue

Additional Information ?

· The issued capital of Bula Ltd is $25 million. Of that amount, Shareholder A owns 60%, Shareholder B owns 30% and the remaining 10% is owned by various small shareholders.

· Bula Ltd’s shares are currently trading at $2.50 on the stock exchange.

· Underwriters charge a commission ranging from 3% to 8%

· The demand for shares among institutional investors is quite high and the Provident Fund has expressed interest in the project. According to stockbrokers, the demand for shares among smaller investors is moderate (average).

· Shareholder B has access to large amounts of cash but Shareholder A is currently facing liquidity problems.

Required

Prepare a report to the management of Bula Ltd, addressing the following issues:

i) Of the three methods being considered by the company, advise the most suitable way to raise

the required equity capital. In arriving at your answer, you should consider the benefits, costs

and risks associated with each method.

ii) Explain whether Shareholders A and B are likely to support your proposal in i) above.

Question 2

The IASB conceptual framework outlines the definition criteria for assets and liabilities.

a) IAS 17 is the accounting standard dealing with measurement and disclosure of leases. It

distinguishes between finance and operating leases, based on the transfer of risks and rewards

associated with ownership.

b) In 2013, the IASB issued an Exposure Draft, which proposed a change in accounting for leases. The

Exposure Draft does NOT distinguish between finance and operating leases. Instead Sections 28 to

35 of the Exposure Draft specify two types of leases based on the nature of a leased item. These

sections also prescribe a few supplementary tests which may alter the classification of a particular

lease.

Required

Consider the lease classifications in IAS 17 and the IASB Exposure Draft on Leasing.

i) Discuss which approach is more consistent with the definition of liabilities provided in the

conceptual framework

ii) Discuss which approach provides more useful information to users of general purpose financial

statements. In your answer, you should consider leased assets as well as lease liabilities.