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Fair value accounting is argued to be conceptually and practically preferable to amortized cost accounting for most financial instruments, especially for financial institutions holding matched positions in these instruments What are your views about this statement

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Jamar Ferry
Jamar FerryLv2
28 Sep 2019

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Derivatives Statement No. 133 Accounting for Derivative Instruments and Hedging Activities establishes accounting and reporting standards for derivative instrument embedded in other contracts and for hedging activities. The statement requires that an entity recognize all derivatives as either assets or liabilities in the statements of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as: (a) A hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment. (b) A hedge of the exposure to variable cash flows of a forecasted transactions or (c) A hedge of the foreign currency exposure a net investment in a foreign operation, an unrecognized firm commitment, an available for sale security or a foreign currency denominated forecasted transactions. Requirements Review Statement No. 133 and evaluate the standard in terms of the conceptual framework. Define a derivative from an accounting perspective. Provide at least three characteristics of a derivative. Name and describe three derivatives. When was the implementation date of the statement? Briefly summarize the statement.

Common Size Income statement

2017

2016

$M

Percentage

$M

Percentage

Operating revenue

2319

100%

2375

100%

Operating expenses

-1666

-71.84%

-1725

-72.63%

Earnings before interest, tax, depreciation, amortisation,changes in fair value of hedges and other signifcant items(EBITDAF)

653

28.16%

650

27.37%

Depreciation and amortisation

-264

-11.38%

-236

-9.94%

Impairment of assets

-10

-0.43%

-4

-0.17%

Loss on sale of assets

-4

-0.17%

-1

-0.04%

Net change in fair value of electricity and other hedges

-76

-3.28%

-15

-0.63%

Operating profit

299

12.89%

402

16.93%

Finance Cost

79

3.41%

80

3.37%

Interest Income

2

0.09%

2

0.08%

Net change in fair value of treasury instruments

55

2.37%

-68

-2.86%

Net profit before tax

277

11.94%

256

10.78%

Income tax expense

-80

-3.45%

-71

-2.99%

Net proft after tax attributed to the shareholders of the parentcompany

197

8.50%

185

7.79%

Earnings per share (EPS) attributed to ordinary equityholders of the parent

cents

cents

Basic and diluted earnings per share

7.7

0.33%

7.2

0.30%

COMPREHENSIVE INCOME STATEMENT

COMPREHENSIVE INCOME STATEMENT

2017

2016

$M

Percentage

$M

Percentage

Net profit after tax

197

8.50%

185

7.79%

Other comprehensive income

Intems that will not be reclassifed to profit or loss

Asset revaluation

428

18.46%

889

37.43%

Defferred tax on the above item

-120

-5.17%

-248

-10.44%

Items that may be reclassified to profit or loss

308

641

Net gain on cash flow hedges

2

0.09%

Exchange differences arising from translation of foreignoperation

1

0.04%

-23

-0.97%

Income tax on the above items

3

0.13%

-23

-0.97%

Other comprehensive income for the year, net of tax

311

13.41%

618

26.02%

Total comprehensice income for the year, net of tax attributedto shareholders of parent company

508

21.91%

803

33.81%

BALANCE SHEET

2017

2016

$M

Percentage

$M

Percentage

Current Assets

Cash and cash equivalents

80

0.92%

118

1.38%

Trade receivables

260

3.00%

194

2.27%

Financial Instruments

59

0.68%

71

0.83%

Other assets

32

0.37%

23

0.27%

Total Current Assets

432

5.00%

406

5.00%

Non-current assets

Property, plant and equipment

7961

91.88%

7771

91.02%

Intangible assets

58

0.67%

47

0.55%

Deferred tax

43

0.50%

40

0.47%

Financial Instruments

172

1.98%

274

3.21%

Total non-current assets

8234

95.00%

8132

95.00%

Total assets

8665

100.00%

8538

100.00%

Current Liabilities

Payables and accuals

296

3.42%

205

2.40%

Employee entitlements

15

0.17%

15

0.18%

Current portion of termborrowings

170

1.96%

214

2.51%

Finance lease payable

1

0.01%

1

0.01%

Financial Instruments

67

0.77%

48

0.56%

Current tax payable

30

0.35%

30

0.35%

Total current Liabilities

579

6.68%

513

6.01%

Non-current liabilities

Term borrowings

1022

11.79%

1000

11.71%

Deferred tax

1710

19.73%

1617

18.94%

Provisions

9

0.10%

8

0.09%

Finance lease payable

46

0.53%

47

0.55%

Financial Instruments

124

1.43%

203

2.38%

Term payables

93

1.07%

100

1.17%

Total non-current liabilities

3004

34.67%

2975

34.84%

Total liabilities

3583

41.35%

3488

40.85%

Net assets

5082

58.65%

5050

59.15%

Shareholders' equity

Share capital

1598

18.44%

1597

18.70%

Reserves

3484

40.21%

3453

40.44%

Total shareholders' equity

5082

58.65%

5050

59.15%

Using the following financial ratiosfor 2016 and 2017 periods, and other associated

information available in the publicdomain, assess the financial health of MEL from the

view of an investor.

Liquidity ratios

b) Asset management efficiencyratios

c) Profitability ratios

d) Market ratios

Assume you are a banker evaluating aloan request from Meridian Energy Limited

(MEL) for $220 million. ConsideringMEL’s recent earnings announcements and

earnings forecast updates, what wouldbe your concerns in deciding on approval or

denial of the loan request? Use thecompany’s capital structure ratios for 2016 and 2017

in your explanation.

Chapter 1 Financial Accounting and Accounting Standards

The essential characteristics of accounting are (1) theidentification, measurement, and communication of financialinformation about (2) economic entities to (3) interested partiesFinancial accounting is_________________________________________________________________________________________________________________________________________________.For example accounting information is used by financial accountingto decide whether to invest in the company, evaluate borrowingcapacity to determine the extent of a loan to grant or buy, sell,hold equity and debt instruments.

Managerial accounting is_________________________________________________________________________________________________________________________________________________.

The financial statements* most frequently provided are (1)_______________________ (2) _______________________ (3)_______________________ (4) _______________________ *Also part ofthe financial statements are the notes of the financial statements.Other means of financial reporting that are not financialstatements include the president’s letter or supplementaryschedules in the corporate annual report, prospectuses, reportsfiled with government agencies, news releases, managementforecasts, and social or environmental impactstatements.

a) The objectives of Financial Reporting The objective;__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

General-purpose financialstatements_______________________________________________________________________________________________________________________________________________________________.

Entity perspective____________________________________________________________________

Provide decision-useful_________________________________________________________________________________________________________________________________________________.

The accounting profession has developed a set of standards andprocedures called _________________________________________________________

Which of the following represents a form of communicationthrough financial reporting but not through financialstatements?

A. Notes to financial statements. B. Balance sheet. C.President's letter. D. Income statement.

The objective of financial reporting places most emphasison:

A. providing specific guidance related to specific needs. B.providing information to individuals who are experts in the field.C. reporting on stewardship. D. reporting to capital providers.

General-purpose financial statements are prepared primarily for:A. external users. B. auditors. C. internal users. D. governmentregulators.

LO 1.2 Identify the major policy-setting bodies and their rolein the standard-setting process.

Three organizations: Securities and Exchange Commission (SEC):______________________________

American Institute of Certified Public Accountants (AICPA):_______________________________________________________________

Financial Accounting Standards Board (FASB):____________________________

The federal government established the SEC to help develop andstandardize financial information presented to stockholders. Mostcompanies that issue securities to the public or are listed on astock exchange are required to file audited financial statementswith the SEC._____________________________________________________________________________________________________________________________________.

Under the direction of the SEC the__________________________________ was created by the AICPA in_______. It was the first private sector organization that had thetask of setting accounting standards in the United States. ___________________________________________________ that narrowedthe wide range of alternative accounting practices then inexistence. In _______. the __________________________________ wasformed to meet the demand for more structured accounting standards.The APB issued pronouncements on accounting principles until_______. the pronouncements where known as _________________, whenit was replaced by the __________________________________ .WheatCommittee’s recommendations resulted in creation of FASB.

The FASB represents the current rule-making body within theaccounting profession. The mission of the FASB is to establish andimprove standards of financial accounting and reporting for theguidance and education of the public, which includes issuers,auditors, and users of financial information. The FASB differs fromthe predecessor APB in the following ways: a.__________________________________ b.__________________________________ c.__________________________________ d.__________________________________ e.__________________________________

In 1984, the FASB created the __________________________________The purpose of the Task Force is to reach a consensus on how toaccount for new and unusual financial transactions that have thepotential for creating differing financial reporting practices.

Which organization was responsible for issuing AccountingResearch Bulletins? A. The Accounting Principles Board. B. The SEC.C. The Committee on Accounting Procedure. D. The FASB.

The Financial Accounting Standards Board (FASB) was proposed bythe A. Study Group on the Objectives of Financial Statements. B.American Institute of Certified Public Accountants. C. Study Groupon establishment of Accounting Principles (Wheat Committee). D.Accounting Principles Board.

The major distinction between the Financial Accounting StandardsBoard (FASB) and its predecessor, the Accounting Principles Board(APB), is A. a majority of the members of the FASB are CPAs who aredrawn from public practice. B. all members of the FASB possessextensive experience in financial reporting.C. all members of theFASB are fully remunerated, serve full time, and are independent ofany companies or institutions. D. the FASB issues exposure draftsof proposed standards.

The FASB issues two major types of pronouncements: a. When theFASB issues a new standard it is refers as_________________________________to communicate changes to the FASBCodification. They are considered GAAP and must be followed inpractice. o How the FASB has changed US GAAP, including eachspecific amendment to the FASB Codification o Why the FASB decidedto change US GAAP and background information related to the changeo When the changes will be effective and the transition method. b.__________________________________ The SFACs represent an attemptto move away from the problem-by-problem approach to standardsetting that has been characteristic of the accounting profession.The Concept Statements are intended to form a cohesive set ofinterrelated concepts, a conceptual framework that will serve astools for solving existing and emerging problems in a consistentmanner. Unlike FASB statements, the Concept Statements do notestablish GAAP.

Prior to 2009 the FASB issued several type of pronouncementswhich had different levels of authority. The type of pronouncementsare listed in descending order of relative weight of authority theyhad within GAAP

 __________________________________

 ______________ : these pronouncements refined GAAP byclarifying conflicting or unclear issues relating to previouslyissued standards

 ______________ FASB staff issued pronouncements to providemore timely and consistent application guidance and to make narrowand limited revision of standards.

 ______________: FASB staff issue these pronouncements toclarify and explain, or elaborate on accounting and reportingproblems.  __________________________________

Which of the following is not a publication of the FASB? A.Statements of Financial Accounting Concepts B. Accounting ResearchBulletins C. Interpretations D. Technical Bulletins

_________________________________________________________________________The FASB has established the following procedures for developingaccounting standards. These procedures are used for major projects.Not all of the steps may be necessary for projects focused onnarrower application and implementation issues. Many other stepsare followed during the course of the project that are notspecifically required by the Board’s Rules of Procedures.

Why was it believed that accounting standards that were issuedby the Financial Accounting Standards Board would carry moreweight? A. The FASB board had a smaller membership. B. The FASBboard members were well-paid. C. The FASB follows due process. D.The FASB board members were CPAs.

GAAP

The FASB developed the Financial Accounting Standards BoardAccounting Standards Codification _____________________________ toprovide in one place all the authoritative literature related to aparticulartopic._________________________________________________________________________________________________________________

Major sources of GAAP:

 _______________________________________

 _______________________________________

 _______________________________________

Most countries have recognized the need for more globalstandards. _____________________________________________ and U.S.rule-making bodies are working together to reconcile U.S. GAAP withthe IASB _________________________________________

Major challenges in the financial reporting environment.

______________________________________________________________________

______________________________________________________________________

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