2.1.

APC

The APC chemical company's balance sheet as of Dec 31, 2020 included (among other
items) the following items:

Common stock= Share capital,

129,054,600 shares
at £4.00 nominal value .................................... £516,218,400

Share premium=
Additional paid-in capital ……………………...……£923,541,870

Retained earnings .........................................£1,816,421,666

Total shareholders' fund ............................. £3,256,181,936

Total assets....................................................£6,686,175,337

a. An angry shareholder commented: "Why can't that big chemical company

use these damned hundreds of millions of pounds in retained earnings to
pay higher wages and dividends? Discuss.

b. "The amount that results when Total Liabilities are subtracted from Total
Assets is what shareholders would get should the company be liquidated". Is
this statement…:

* always true
* sometimes true, or true only by coincidence
* never true

Why? Why not?

c. At what price or range of prices can we expect an APC share to be traded on

the London Stock Exchange? Discuss.
2.2. A STORE OF PRINCIPLES

"A store of principles" is an upscale retail store located on an upscale street of an upscale
city. Its sole owner, Mr. Rose, is the proud inheritor of a long family tradition in the
apparel business.

Some days ago, Mr. Rose was wondering whether the firm's accountant was doing a good
job or not. Mr. Rose knew all the particulars of the store and he suspected that the
accounting books did not reflect what was actually going on in his business. There were a
few facts that had not been registered by the accountant and that seemed nevertheless
pretty important.

a. Real estate speculation had been an undeniable fact for the last ten years. The
store was purchased for 10,000,000 ptas. in 1979, but because of the district's
appeal, the current market value of the 250 sq.m. was definitely much
higher. Mr. Rose had received a tentative offer of 400,000 € ( 1 € = 166.39
ptas.) for the retail space.

b. Furniture, as well as many other assets, had not been subject to speculation,
but Mr. Rose was firmly convinced that most of those items were
undervalued due to inflation. For example, the display tables purchased in
2011 cost 18,000 €, but in 2011 1 € had the same purchasing power as 2 €
today!!!!. Furthermore, should he need to replace them, there was no way to
find anything equivalent in the market for less than 30,000 €.

c. Mr. Rose had heard something about "goodwill". He thought "Let me see:
according to our last balance sheet, our assets are 167,000 € and our liabilities
66,500 €. Should I conclude that if I wanted to sell the business to someone
who was interested in continuing the operations, I would be getting only
100,500 € ? No way. What about the goodwill? This store has got a name, a
reputation, a group of steady customers, and this has a value. This is not
only a bunch of clothes and drawers put together. Here, clothes and drawers
are assembled in a way that makes sense, that works and that is appreciated
by both customers and suppliers. The space alone, as I said, could be bought
for 400,000 €. The other assets alone, could be bought for maybe 150,000. But
I would never even think of selling the whole business for a penny less than
2,100,000€. And I know that for that price, there would be plenty of
prospective buyers. Now, that is goodwill"

d. Mr. Rose would reluctantly admit that he did not consider everything to be
undervalued. All those T-shirts with themes based on the Lord of the Rings,
so fashionable for a while, now looked rather out-of-date. In the balance
 sheet, the stacks of those T-shirts were valued at 12,000 €, that is, probably
overvalued. Mr. Rose thought their market value was no more than 3,000 €.
However, the blue and green blouses that had been quite fashionable in 2015
appeared to be again the "hip" item for the next season, according to the
international fashion magazines. Those blouses, currently valued as
inventories for 2,750 €, were likely to already have a market value of at least
twice as much.

e. Mr. Rose had withdrawn some money (a total of 12,000 €) from the
company's bank accounts, depositing the amounts in a private pension plan
offered by a solid financial institution. He could not quite understand why
the accountant insisted on registering the withdrawals, since, after all, Mr.
Rose was the sole-owner of the firm. According to Mr. Rose, his business
was his life, and the two things could not be artificially separated.
(Note: what about recording the pension plan?)

1) Discuss the accounting and reporting treatment of each of the previous points,
referring to all the traditional accounting principles involved. As a result of this
discussion, state whether traditional accounting systems would be likely to
record these events or not. For those evets that you consider would likely be
recorded, use the basic accounting equation to indicate the plausible entry.

2) Which variation, if any, should be introduced in the foregoing discussion if

accounting systems operate under the IAS / IFRS conceptual framework?
2.3.NO ROOM FOR OWN GOALS IN FINANCING SOCCER´S FUTURE

The early 90s were a turbulent time in terms of accounting policies in football clubs.
Between May 1992 and May 1993, Manchester City spent 1,200,000 GBP to buy two
players (see press clipping below). Assume that this figure was the cost of contracting
two players for six years, after which time they would be retired with no chance of being
bought by any other club (time marches on remorselessly). Based on the article “No
room….” (Financial Times, provided in separate attachment)

a) How would the purchase of the two players be registered according to the
Manchester City´s accounting criteria at that time? Be particularly careful to show
the impact of this purchase on the profit and loss accounts for the six years they
are expected to belong to the club (for the sake of simplification, assume both
operations take place May 31th, 1993).
b) Same as above, but according to the method suggested by Gerry Boon and
Touche Ross

Discuss the attached article (“No room…”) (Financial Times, Oct 1st 1993) taking into
account the traditional accounting principles and the IASB conceptual framework:

a) What are the key accounting dilemmas here?

b) Which traditional accounting principles would be relevant to inform the
recommended options to take regarding these dilemmas? What would each of
these principles suggest? What would traditional accounting principles suggest
as a whole? What would the IASB conceptual framework suggest? Which
alternative would you recommend?

Manchester City leaps 68%

Mr. Peter Swales, who is currently embroiled in an increasingly acrimonious battle for control of
Manchester City, said yesterday that no formal proposals had been received regarding an offer for the
Premier league club.
Mr. Swales, chairman of the club, had earlier claimed that other unnamed buyers were keen to acquire the
club in opposition to the consortium set up by Mr. Francis Lee, a former player. The statement
accompanied the club´s results for the 12 months to May 31 which showed pre-tax profits ahead 68% from
£632,000 to £1.06mGBP. Turnover increased from £8.97m to £11.01m. The outcome was struck after
net expenditure on players of £1.2m (£ 0.2m in the previous year). Net assets amounted to £3.8m (£
2.8m) although this figure takes no account of any valuation of the players or the full value of the stadium
(…)

FT, Oct 2nd, 1993

2.4. MARKS AND SPENCER plc

Marks and Spencer’s (UK) complete annual report, including financial statements and
associated notes, is available online.

a. Give two examples of where historical cost information is reported in M&S’s financial
statements and related notes. Give two examples of the use of fair value information
reported in either the financial statements or related notes.

b. Give two examples of where the aim to provide a prudent and faithful representation
leads to the use of estimates involving judgement.

c. How can we determine that the accounting principles used by M&S are prepared on a
basis consistent with those of last year?