Financial Reporting and Analysis for Decision Making
You are required to either submit an essay on the topical issue, or a report on the given business case. You are free to choose either the essay or the case analysis.
For the essay, you are required to analyze the topical issue using financial reporting and related theories and with reference to the current business and financial reporting situations, and to express your views on the issue in particular to what extent you would agree to the observation of the topical issue and how you would improve the situation on a theoretical / practical perspective.
For the case analysis, you are required to analyze this case, identify the possible issues of concern and suggest ways to solve the issues as you consider appropriate. Your solutions should be able to sustain assessments based on the criteria of feasibility, problem solving ability and theoretical soundness.
There is no limit on the length of your submitted answer, nor is there any specification on the design and layout of the submitted essay / report. All markswill go to the contents alone including clarity of presentation but disregarding the cover design, professional layout, etc. of the submitted document.
The Essay Question
With increasing complexity of business operations and expanding channels of financial reporting communications, it has been observed that new or revised accounting standards are issued in bulk volumes every year. Many financial analysts, business executives and even accountants are criticized of not being able to catch up with the evolution of the accounting regulations as well as practices. Thus, there is criticism that it is increasingly difficult for both the management to prepare a set of financial report and the reader to understand the said report.
Based on the above statements, please give your own analysis and comments about the current situation in Hong Kong and state to what extent you believe that accountants and management of Hong Kong listed companies provide annual financial reports with prompt legal and regulatory compliance and readers of reports could reasonably understand the accounting and economic contents thereof.
The Case Analysis Question
The Case of Moonrock Ltd
It was November 2012. While preparing to take a vacation with his family members to London during the Christmas, Mr. Li, an executive director and CFO ofMoonrock Ltd. was also busily preparing for the forth coming meeting that would be held for the processes to put Moonrock on the Main Board of the Hong Kong Stock Exchange. However, Mr. Li suffered from severe headaches after he had identified the financial reporting problems that could deter the listing process of the corporation. He was wondering if his listing plan could be “killed” by some cumbersome and detrimental accounting standards.
Moonrock Ltd. (the Company) was the ultimate holding company of a group of local and Mainland companies. The Company was first established as a small company by the Wong family 40 years ago and subsequently developed into the current size after decades of hard working and effective business management. Mr. Li was employed by the Wong family to management the group of companies since 2000, and he also held about 3% of the current issued shares of the group through stock option schemes. Moonrock was involved invarious business segments from hospitality operations to trading and retailing. Annual turnover of Moonrockincluding her subsidiaries amounted to HK$36.5 billionsin the year ended 31 December 2011.
The Moonrock group was famous among the local communities for its reputation and business integritythat most investors believed that the group always treated them fairly and provided attractive benefits for the investors. Members of the Wong family who are still the majority shareholders of the group were also proud of their business integrity and the whole group had adopted this ethics policy as her fundamental mission in running the business. Mr. Li also believed in this philosophy and firmly followed the ethics policy in running the group of companies
Corporate Financial Performance
Moonrock prepared her financial reports each year in accordance with the Hong Kong laws and accounting standards issued by the Hong Kong Institute of Certified Public Accountants (HKICPA). Her five years financial summary indicated that the corporation had successfully maintained a rising trend both on her turnover as well as profitability in absolute terms, except in the year 2009.
Because of the outbreak of the financial tsunami by the 4th quarter of 2008, the whole world was turned into afireball that burned out many corporations and dried up the financial resources and profitability of even morecorporations. As a result, both the InternationalAccounting Federation and the Hong Kong Institute had issued a series of new accounting standards, notably IFRS 9 and HKFRS 9 that changed drastically on the financial reporting treatments of listed companies. Moonrock tried to comply with changes in accounting standards as soon as possible and turned to use all newly issued accounting standards for the year ended 31 December 2009 even though some of these standards’ effective date was as far remote as year 2013. The effect of such had led to an increased reporting profit for the group in the few years from 2009 to 2011. However, this act was out of the initiative of Mr. Li as CFO without the knowledge of other senior operational executives in Hong Kong, although he had reported this initiative to the Chairman, Mr. Wong. BecauseMoonrock was still a private limited company, the general public in Hong Kong and the Mainland was not aware of this effect.
In the year ended 31 December 2011, Moonrock had a record breaking turnover of $36.50 billions with profits amounted to $6.25 billions. A majority part of these turnover and profits came from her subsidiaries in the Chinese Mainland, while the group companies in Hong Kong actually contributed only about 25% to the corporation’s record breaking results. Also part of the record breaking results was also a consequence of therevised accounting policies done in 2009. Mr. Liexpected that the turnover and profitability for the corporation would remain consistent on this rising trendfor the next four to five years. Net assets of the corporation were valued at $48.30 billion in accordance with the current Hong Kong GAAP. Thus, he considered that it was good time to plan for going listedat the Hong Kong Stock Exchange.
The Move to Going Listed
As Moonrock was a private corporation at present, the move to go listing was initiated by Mr. Li and other senior executives and approval was obtained from the parent corporation to start the listing process with the engagement of a Big Four accounting firm as consultant for this IPO process. The results of going listed, in the views of Mr. Li and other senior executives, would bring special benefits to the whole group in terms of capital funds amounting to HK$22 billions through the issuance of 25% of total outstanding shares to the institutional investors and the general public. It would also be beneficial to these senior executives as they might then be offered share options at a substantially lowered price as a reward for their great contributions toMoonrock. Mr. Li had estimated that should share option scheme be implemented before or after the listing, he alone could gain benefits of more than $200 million. However, while this was seemingly agreeable by the Board of Directors, this side move to issue share options to the senior executives was not disclosed to the knowledge of other staff in general or to the knowledge of the institutional investment analysts as well.
Moonrock intended to apply for the Main Board listing with first trading date in March 2013, and issue 25% to 30% of her shareholding to the public during the IPO to meet the listing requirement. During the initialdiscussions with the consultancy firm, it seemed thatMoonrock had safely met the financial requirements of the Hong Kong Stock Exchange for the corporation to apply for listing. With the help of the consultancy firmwhich is a Big Four accounting firm, the preliminary documents were prepared with the purpose for submission to the Hong Kong Stock Exchange.
The Management Team of Moonrock
The management team of Moonrock was composed of talents in various business functions and most senior executives had been working for the corporation for more than 10 years. They were quite loyal to the corporation and regarded the protection and enhancement of the corporate image and profitability as a major mission to them. Most executives were also regarded as very ethical from the business and professional perspective, although their social behaviourmay sometimes be viewed as walking along the steelline. Mr. Li as the executive director of Moonrockadopted a collective leadership mode and he always liked to convey meetings and listened to the views of the senior executives on important issues before making the final decisions except the financial reporting incidence in 2009 as mentioned above.
Early Adoption of New Accounting Standards
Before going for listing, Mr. Li was suddenly informed by the consulting firm that they might have made errors which could contribute to a material misstatement of the audited accounts of Moonrock for the years ended in 2009, 2010 and 2011 respectively. Mr. Li challenged the comment of the consulting firm as those accounts were audited and agreed by the auditor. But the partner of the Big Four accounting firm commented that both the Mr. Li himself and the auditor had incorrectly interpreted some newly issued standards. Since the accounting reports might include material misstatement, the consulting firm advised Mr. Li to take actions in rectifying the contents of the reports first before submitting for IPO.
Mr. Li immediately discussed this with the auditor (which is not a Big Four firm). Both he himself and the auditor believed they had exercised their best knowledge in preparing and auditing the relevant accounts. But they also could not ascertain if they were correct in interpreting the newly issued accounting standards. Thus Mr. Li could not confirm at the time being if the reports were incorrect to a significant extent.
Although Mr. Li was having severe headache because of this accounting standards issue, he had to make a decision fairly quickly as it was already close to the end of the year 2012, and the annual financial reports must be prepared soon to facilitate the auditing process in meeting the reporting requirements within the time period specified by law. Any delay in producing the financial reports would surely cast doubts on the ability to go listing in the coming March 2013. Despite this urgency, Mr. Li was unsure what kind of instructions he should give to the other senior executives. He was also afraid of the possible retrieval of the fact that in 2009the corporation had wrongly interpreted accountingstandards without the consent of most senior executives who might challenge him on breaching the norm of the corporation.
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