Parent Ltd and Child Ltd are companies that are incorporated in Singapore. On 1 January 20x0,...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Parent Ltd and Child Ltd are companies that are incorporated in Singapore. On 1 January 20x0, Parent Ltd acquired 60% of the ordinary shares of Child Ltd, which gave Parent Ltd control over Child Ltd. As at 1 January 20x0, the fair value of identifiable net assets of Child Ltd was equal to the book value of net assets, except that Child Ltd had a 30% chance of losing a lawsuit and having to compensate $500 million to a customer and a 70% chance of not having to pay any compensation at all. Stacy works as a junior accountant at Parent Ltd. She had joined the company since her graduation from university two years ago. Molly, her senior during university, had recommended the job to her. Molly is a more experienced accountant at Parent Ltd, having worked in the company for about four years. Stacy was checking the draft consolidated financial statements of Parent Ltd when she discovered that Parent Ltd had not recognised Child Ltd's contingent liability in the consolidated financial statements for the year ended 31 December 2022. Stacy did some rough calculations using the financial information that she had access to. She discovered that if Child Ltd's contingent liability had been recognised in the consolidated financial statements, there would be a decrease in goodwill on acquisition of $150 million and an increase in total consolidated liabilities of $150 million. Stacy told Molly what she had discovered and asked whether she should inform their superiors about her findings. Molly felt there were no issues with the accounting treatment for contingent liability. Molly raised the following arguments in support of Parent Ltd not recognising Child Ltd's contingent liability in the consolidated financial statements: Since Child Ltd would not have recognised its contingent liability in its own financial statements, why is there a need for Parent Ltd to recognise the contingent liability in the consolidated financial statements? Since subsidiaries' contingent assets are not recognised in the consolidated financial statements but are merely disclosed in the notes, why is there a need for Parent Ltd to recognise the contingent liability in the consolidated financial statements? The subsidiary may not lose the lawsuit and may not have to pay any compensation, given that the probability of losing the lawsuit is only 30%. Molly also mentioned that the increase in total liabilities from the recognition of Child Ltd's contingent liability may affect Parent Ltd's upcoming Initial Public Offering (IPO) and may result in the company failing to raise sufficient funds for its capital expenditure. This may affect the company's ability to operate in the near future and may, in turn, affect their job security. Molly advised Stacy to keep her findings to herself and not reveal them to anyone else. She said, "Stacy, think of those of us who are the sole breadwinners of our families. Surely you don't want such an inconsequential matter to affect the company and, in turn, affect our bonuses, and maybe even cause all of us to lose our jobs?" Required: (a) Assuming you are Stacy, analyse the ethical issues that you encounter in the situation described above, based on the Josephson's Six Pillars of Character and the Institute of Singapore Chartered Accountants' (ISCA) Code of Professional Conduct and Ethics. (b) Assuming you are Stacy, examine the possible courses of action to deal with the ethical issues discussed in Question 2(a) and justify the appropriate action or actions to take. Parent Ltd and Child Ltd are companies that are incorporated in Singapore. On 1 January 20x0, Parent Ltd acquired 60% of the ordinary shares of Child Ltd, which gave Parent Ltd control over Child Ltd. As at 1 January 20x0, the fair value of identifiable net assets of Child Ltd was equal to the book value of net assets, except that Child Ltd had a 30% chance of losing a lawsuit and having to compensate $500 million to a customer and a 70% chance of not having to pay any compensation at all. Stacy works as a junior accountant at Parent Ltd. She had joined the company since her graduation from university two years ago. Molly, her senior during university, had recommended the job to her. Molly is a more experienced accountant at Parent Ltd, having worked in the company for about four years. Stacy was checking the draft consolidated financial statements of Parent Ltd when she discovered that Parent Ltd had not recognised Child Ltd's contingent liability in the consolidated financial statements for the year ended 31 December 2022. Stacy did some rough calculations using the financial information that she had access to. She discovered that if Child Ltd's contingent liability had been recognised in the consolidated financial statements, there would be a decrease in goodwill on acquisition of $150 million and an increase in total consolidated liabilities of $150 million. Stacy told Molly what she had discovered and asked whether she should inform their superiors about her findings. Molly felt there were no issues with the accounting treatment for contingent liability. Molly raised the following arguments in support of Parent Ltd not recognising Child Ltd's contingent liability in the consolidated financial statements: Since Child Ltd would not have recognised its contingent liability in its own financial statements, why is there a need for Parent Ltd to recognise the contingent liability in the consolidated financial statements? Since subsidiaries' contingent assets are not recognised in the consolidated financial statements but are merely disclosed in the notes, why is there a need for Parent Ltd to recognise the contingent liability in the consolidated financial statements? The subsidiary may not lose the lawsuit and may not have to pay any compensation, given that the probability of losing the lawsuit is only 30%. Molly also mentioned that the increase in total liabilities from the recognition of Child Ltd's contingent liability may affect Parent Ltd's upcoming Initial Public Offering (IPO) and may result in the company failing to raise sufficient funds for its capital expenditure. This may affect the company's ability to operate in the near future and may, in turn, affect their job security. Molly advised Stacy to keep her findings to herself and not reveal them to anyone else. She said, "Stacy, think of those of us who are the sole breadwinners of our families. Surely you don't want such an inconsequential matter to affect the company and, in turn, affect our bonuses, and maybe even cause all of us to lose our jobs?" Required: (a) Assuming you are Stacy, analyse the ethical issues that you encounter in the situation described above, based on the Josephson's Six Pillars of Character and the Institute of Singapore Chartered Accountants' (ISCA) Code of Professional Conduct and Ethics. (b) Assuming you are Stacy, examine the possible courses of action to deal with the ethical issues discussed in Question 2(a) and justify the appropriate action or actions to take.
Expert Answer:
Related Book For
International Financial Reporting A Practical Guide
ISBN: 978-1292200743
6th edition
Authors: Alan Melville
Posted Date:
Students also viewed these accounting questions
-
PART B - Draw a free-body diagram for thecar Problem 4.41 A car is skidding to a stop on a level stretch of road. Part A Identify the number of the action/reaction pairs of forces between the car and...
-
I know how to perform consolidation for companies with a simple group structure, but Ive not learned how to perform consolidation for companies with a complex group structure. I prepared these draft...
-
There are 24 bags of cement and 2300 bricks at a construction site. The mass of each brick is 2kg and the mass of each bag of cement is 30kg. What is the total mass of the cement at the construction...
-
Find the point on the plane z = x + y + 1 closest to the point P = (1, 0, 0). Minimize the square of the distance.
-
A garden hose attached with a nozzle is used to fill a 20-gal bucket. The inner diameter of the hose is 1 in and it reduces to 0.5 in at the nozzle exit. If the average velocity in the hose is 8...
-
Use the following statement of stockholders equity to answer the following questions about Flannery Corporation: 1. How much cash did the issuance of common stock bring in during 2018? 2. How much in...
-
Frank Pepes Pizzeria Napoletana has opened one of the most recognizable pizzerias in the United States using word-ofmouth marketing. After returning from World War I, Frank Pepe initially began with...
-
Laraby Company produces a single product. It sold 25,000 units last year with the following results. Sales .........$625,000 Variable costs ...... 375,000 Fixed costs ........1, 50,000 Income before...
-
10. If lines are parallel and cut by a transversal, then... Corresponding Angles are Alternate Interior Angles are Alternate Exterior Angles are Same Side Interior Angles are Same Side Exterior...
-
1. Which process should VBB choose to produce?? 2. How much would VBP be willing to pay for the testing that is currently offered, for each batch?? 3. Would we be considered a perfect test, at twice...
-
1. You recently went to work for Allied Components Company, a supplier of auto repair parts used in the after-market with products from Daimler AG, Ford, Toyota, and other automakers. Your boss, the...
-
In reaching her destination, a backpacker walks with an average velocity of 1.43 m/s, due west. This average velocity results, because she hikes for 5.92 km with an average velocity of 2.49 m/s due...
-
Have you thought about power in the organizations you are a part of previously? If so, in what ways? If not, are you more inclined to do so now? What does trust look like to you? Thinking about trust...
-
- Determine the remainder for the following division questions. a) (x-3x+5)+(x+2) b) (x +7x-3)+(x-1)
-
Klingon Widgets, Incorporated, purchased new cloaking machinery four years ago for $8 million. The machinery can be sold to the Romulans today for $7.3 million. Klingon's current balance sheet shows...
-
Two rockets are flying in the same direction and are side by side at the instant their retrorockets fire. Rocket A has an initial velocity of +6600 m/s, while rocket B has an initial velocity of...
-
Oriole Company issues 9,700 shares of restricted stock to its CFO, Mary Tokar, on January 1, 2017. The stock has a fair value of $485,000 on this date. The service period related to this restricted...
-
What is the order p of a B + -tree? Describe the structure of both internal and leaf nodes of a B + -tree.
-
(a) International standard IFRS9 (which must be applied in accounting periods that begin on or after 1 January 2018) classifies financial assets into three categories. Identify and explain each of...
-
(a) Explain what is meant by a "discontinued operation". (b) Explain why IFRS5 requires the results of discontinued operations to be presented separately in the financial statements.
-
The statements of financial position of TT Ltd and UU Ltd as at 31 May 2018 are as follows: The following information is available: (i) TT Ltd acquired 70% of the share capital of UU Ltd on 31 May...
-
Tyson Company bottles and distributes NO-KAL, a diet soft drink. The beverage is sold for 40 cents per 16-ounce bottle to retailers, who charge customers Instructions (a) Prepare a CVP income...
-
ABC, Inc. has a target debt-equity ratio of 0.4. Its cost of equity is 16 percent and its cost of debt is 8 percent. If the tax rate is 32 percent, what is ABC's WACC? a. 10.3847% b. 11.6723% c....
-
Assuming they have the same (positive) expected rate of return, which of the following investments should be cheapest? a. One that promises to pay you $100 in five years. b. One that promises to pay...
Study smarter with the SolutionInn App