British Airways, Plc. (BA), a U.K. company, prepares its financial statements according to International Financial Reporting Standards. BA's annual report for the year ended March 31, 2009, which includes financial statements and disclosure notes, is included with all new textbooks and can be found at When answering questions, focus on BA's “Group” financial information (which is equivalent to “Consolidated” under U.S. GAAP).

1. Sealy Corporation reported the following line items in its statement of cash flows for the nine months ended August 30, 2009:
Amortization of discount on secured notes ...... 351,000
Amortization of debt issuance costs and other ... 2,925,000

In British Airways' financial statements, Note 28: “Long-term borrowings” describes the company's long-term debt. Neither of the two items above is reported in the financial statements of British Airways, and neither is likely to appear there in the future. Why?
2. Examine the long-term borrowings in BA's balance sheet and the related note. What, if any, convertible securities does the company have outstanding? Suppose BA issued £300 million fixed rate 8.75 percent Eurobonds, due 2031, at 101 in 2011 and that the bonds are convertible into shares of BA ordinary shares. Suppose, too, that the company simultaneously issued at 99, bonds similar in all respects except they are not convertible. Prepare the journal entry BA would use to record the issue of the convertible bonds. Prepare the journal entry BA would use to record the issue of the convertible bonds if BA used U.S. GAAP.
3. BA does not elect the fair value option (FVO) to report its financial liabilities. Examine Note 32: “Financial Instruments.” If the company had elected the FVO for all of its fixed rate borrowings, what would be the balance at March 31, 2009, in the fair value adjustment account?
4. Is IFRS or U.S. GAAP more restrictive for determining when firms are allowed to elect the fair value option for financial assets and liabilities? Explain.

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