Question

The cloudy afternoon mirrored the mood of the conference of division managers. Claude Meyer, assistant to the controller for Hunt Manufacturing, wore one of the gloomy faces that were just emerging from the conference room. “Wow, I knew it was bad, but not that bad,” Claude thought to himself. “I don’t look forward to sharing those numbers with shareholders.”

The numbers he discussed with himself were fourth-quarter losses which more than offset the profits of the first three quarters. Everyone had known for some time that poor sales forecasts and production delays had wreaked havoc on the bottom line, but most were caught off guard by the severity of damage.

Later that night he sat alone in his office, scanning and rescanning the preliminary financial statements on his computer monitor. Suddenly his mood brightened. “This may work,” he said aloud, though no one could hear. Fifteen minutes later he congratulated himself, “Yes!”

The next day he eagerly explained his plan to Susan Barr, controller of Hunt for the last six years. The plan involved $300 million in convertible bonds issued three years earlier.

Meyer: By swapping stock for the bonds, we can eliminate a substantial liability from the balance sheet, wipe out most of our interest expense, and reduce our loss. In fact, the book value of the bonds is significantly more than the market value of the stock we’d issue. I think we can produce a profit.

Barr: But Claude, our bondholders are not inclined to convert the bonds.

Meyer: Right. But, the bonds are callable. As of this year, we can call the bonds at a call premium of 1%. Given the choice of accepting that redemption price or converting to stock, they’ll all convert. We won’t have to pay a cent. And, since no cash will be paid, we won’t pay taxes either.

1. What would be the impact of following up on Claude’s plan? Who would be affected if the plan is implemented? Who would benefit? Who would be injured? Consider people or related parties both inside and outside of the company.

2. Do you perceive an ethical dilemma? Use at least one of “The Ethical Guidelines”.

3. Should Susan follow Claude’s suggestion? Why or why not?

Answer 1

solution :

--Do you perceive an ethical dilemma?

Indeed, I see a moral difficulty. The component of a convertible bond is to give the office to the holder for the alternative of changing over the cling to stock. The primary issue being that Claude Meyer needs to offer a low premium to guarantee that the investors won't consider liquidating out and rather changing over to stock. In any case, Claude can't establish that the bondholder's will choose to do this. It is on the grounds that the bonds are callable, hence gives the organization to alternative to repurchase the bonds.

- What might be the effect of following up on Claude plan?

As I would like to think whether the majority of the bondholders do take the alternative of transforming their securities into stock, at that point all things considered the Claude can trust that the organization can divert a little benefit from decrease of costs as the market esteem is presently more than the book esteem

- Who might profit?

The main who might profit by the transformation would be the organization Hunt Manufacturing

- Who might be harmed?

As indicated by me the bondholder's wouldn't really be harmed, however ought to have the choice to money out their securities at a high premium, in this way they could be gambling potential business later on

The activity by Claude Meyer is especially conceivable under IFRS in light of the fact that :

1) The year has not finished yet, so CEO can influence an endeavor to address/to improve the year's outcome.

2) The bonds are callable or convertible, so changing over into offers will take out the intrigue cost of the year and in this way, changing over misfortunes into benefits.

3) The investor's are just given the evaluated money related outcomes, so controller can make a move to improve the outcomes before review amid the year.

4) The move made by Controller with the guidance of Assistant is inside the Prudence and Materiality guideline of bookkeeping. Besides, as exchanges are recorded in current year, so dependability and Going concern standards are likewise conformed to under the activity.

5) The financial substance rule additionally material here as controller activity is for the advantages of the organization and proprietors, the investors.

In this way, Claude Meyer can propose the transformation of the bonds to Controller to enhance the misfortunes of the year.