ACCT2542SeminarQuestions with solutions_SeminarTopics1to5

ACCT2542SeminarQuestions with solutions_SeminarTopics1to5 -...

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Seminar Questions to be covered in class (time permitting) 7 Dec Lecture Topic 1 Introduction to Corporate Financial Reporting Describe the Australian external financial reporting environment and regulatory framework Describe the standard setting process in Australia Describe the Conceptual Framework and explain how it is used Seminar Questions: Picker et al, Chapters 1 DQ14 Picker et al, Chapters 2 Problems 2.1 and 2.12 Chapter 1, Discussion Question 14 14. As part of its national economic development programme, the Australian government is working vigorously to promote the growth of small high-tech companies. Because these companies tend to have limited cash resources, they compensate their employees partly in shares of their own stock. If the employees work hard and the company prospers, the employees prosper. The accounting standard setter in that country is a board within the national professional accountancy organisation. The AASB has proposed to require that the fair value of the shares of stock given to employees be recognised as compensation expense in measuring net profit or loss. The high tech companies do not want to recognise the expense since it will reduce their reported profits or add to their reported losses and, thereby, discourage investors from putting capital into the company. Because they think the AASB is not listening to their concerns, the companies urge their national legislature to intervene by passing a law to prohibit expense recognition for the shares of stock given to employees. They tell the legislators that the accounting standard setter is acting contrary to the country’s national economic growth policy. Comment on the proposed legislation from the point of view of (a) an investor in the high tech companies, (b) the head of the stock exchange on which many of the high tech companies are listed, and (c) a legislator. a. The investors of high tech companies primarily want to get relevant and reliable financial information of the companies so as to make investing decisions. Investors argue that: 1. Stock options are a form of valuable compensation to employees. Employees would demand higher cash compensation if they were not given options. Options have a value that must be accounted for. 2. Stock options have cash value, and the company could sell the options and pay the employees the fair value of the options in cash.
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3. The employees provide valuable services to the company that must be accounted for, regardless of the form of employee compensation. 4. Stock options are an equity instrument. Companies must account for the issuance of all equity instruments, whether it is shares of stock or stock options. 5. Stock options have a dilutive effect on the per-share earnings of existing shareholders.
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This note was uploaded on 01/19/2012 for the course ACCT 2542 taught by Professor Knapp during the Three '11 term at University of New South Wales.

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ACCT2542SeminarQuestions with solutions_SeminarTopics1to5 -...

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