Harriman Plc
Paper, Order, or Assignment Requirements
The newly-appointed Chairman of Harriman plc is particularly anxious to know about the company’s financial performance and position for the year ended 31 December 2014 in response to pressure from several investors and a decision regarding a proposed final dividend. The Finance Director has already provided her with the same information that is available in part 1 above.
The Chairman is well known for her attention to detail and is rather curious about all the “advice” offered above. She feels that the subjectivity and estimates associated with this sort of advice is “accounting speak” and is likely to distort the reported results for the year ended 31 December 2014. You are aware that her knowledge of accounting issues was acquired a long time ago. It is with these thoughts in mind that the Finance Director has forwarded the following e-mail from her:
Note (A) – surely this loan note costs us 2% or £3 million per annum – this is quite clear from the interest payment already made to the loan note holders? I doubt the Board would have agreed to the loan if, as the note claims, it is really costing us 8%. This sounds like another accounting ploy to reduce profits and increase directors’ bonuses. As the loan note holders are almost certain to convert into equity shares on 31 December 2017 shouldn’t we treat this as equity – and improve our gearing? Accountants are always going on about “substance over form” and here the substance seems to be that these are equity shares.
(8 marks)
Note (B) – how “safe” is the revaluation of our leased property? This just looks like an accounting device to make the balance sheet look stronger and increase profits and cash flow. We haven’t revalued our property before – do we have to start now?
(6 marks)
Note (D) – I understand the index you are using for this fund, but surely this is a movement on equity? The gain or loss should not be reported in the statement of profit or loss as we are not an investment company and, in any event, we haven’t sold the investment so surely the gain or loss isn’t “real” (or “realised” as I believe accountants call it).
(5 marks)
Note (E) – I thought all lease agreements had to be reported “ON the balance sheet”. The note suggests you can be selective with these. Surely a lease is a lease and we never have legal title to the asset anyway? What does the “interest rate implicit in the lease” mean here?
(7 marks)
Note (F) – although it was before I was appointed, I recall we were unable to pay a final dividend last year – please remind me why. I do feel we should further reward the shareholders with a final dividend this year and I would like the Board to accept my recommendation for a final dividend of 10 pence per share.
(4 marks)
Requirement for part 2:
Prepare a briefing note for the Chairman of Harriman plc to respond to each of the above points.
