Assessment Task 2 — Written Assessment Part A Due date: Wednesday of Week 7 (23:45 AEST)

Weighting: 20%

Objectives

This assessment item relates to the following unit learning outcomes:

ASSESSMENT 2A

•   Interpret the technical requirements and conceptual aspects of selected accounting standards that address advanced issues in financial reporting.
•   Exercise professional judgement to apply the requirements of relevant accounting standards and conceptual accounting knowledge to solve advanced accounting problems.
•   Justify and communicate accounting advice and ideas in straightforward contexts to influence specialists and non-specialists.
•   Reflect on performance feedback to identify and action learning opportunities and self-improvements.

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Question 1 20 marks

Himalaya is a hiking equipment medium sized retailer which runs over 500 retail stores throughout Australia with significant online exposure. Katherine Kay is a newly appointed chief financial officer in Himalaya. She decided to recommend share options and exchange traded share options to leverage the risk of volatile shares or earn the return from the share market. Katherine have asked you as a financial accountant to prepare a memorandum to the board of directors for Katherine’s signature. Considering the members of the board have limited understanding of financial instruments such as exchange traded share options, Katherine request you to draft the memorandum with the explanations of the exchange traded share options. The below questions need to be addressed in the memorandum.

•   What is an option? Distinguish call options from put options.
•   What is an exchange traded share option? How does an exchange traded share optionwork?
•   Are exchange traded share options financial instrument in accordance with AASB 9 Financial Instrument? What type of financial instruments are they according to AASB 9 (for example, primary, compound, hybrid, derivative)? Explain your answers.
•   For example, Himalaya has entered the contract of options on FashionCo Ltd on 1 July 2023. Explain the rights and obligations of Himalaya.
•   Then assuming on 1 September 2023, the company writes 100,000 exchange traded call options in FashionCo at a premium of $2.50 per option. The options have a fair value to the holder of $1.50 each on 31 January 2024. Explain whether it is beneficial for the company to write the exchange traded call options. Use this example as the assumption in the memorandum to present the accounting entries and its relevant explanations on recognition and measurement.Question 1 continued over the page

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Question 1 (continued)

Word Limit

Word limit is 700 words. You can exceed this limit by 10% (an extra 70 words) with no penalty. Note that the following are not included in the word count:

•   The Memorandum title and heading block, and
•   The reference list.Resources

  The following are sources of information about share options for this assignment:

•   Chapter 11 or 12 of the new edition on prescribed textbook. This chapter contains information about the requirements of AASB 9Financial instruments in relation to classification, recognition, and measurement.
•   An introductory finance textbook. This will provide you with some useful information. However, it will be at a more advanced levelthan what is required here. It will not include discussion of the requirements of AASB 9 Financial Instruments.
•   Another accounting textbook. A good starting point is chapter 14 of Financial Accounting by Craig Deegan. The 9th edition (published in2020) is available online through the CQU library.
•   Information from the internet via a search.
•   We will also discuss the assignment question during one (or more) of the weekly workshops.
•   In some cases you may come across interest rate swaps on investments. These types of swaps are different to the one in this question as the interest is received from the investment rather than, as is the case here, being paid on a loan.Page | 3

Criteria for ACCT19061 Advanced Financial Accounting Written Assessment Rubric

Content

The writing should demonstrate competence in the subject and the ability to articulate knowledge and communicate effectively. This requires consideration of the purpose of the writing task and the intended audience.

Relevance. Content is relevant when it contributes to fulfilling the purpose of the writing task. The relevance of content is also affected by the intended audience (for example, their prior knowledge about a topic) and the scope of the writing task (for example, limitations such as word length). The document should:

•   Include all relevant content: no relevant content should be omitted, and
•   Not include any irrelevant content.
  Development refers to the ways the writing explores and illustrates the topic. It may include one or more of the following: research, synthesis,

  analysis, critique, identification, explanation, evaluation, description, discussion, examination, justification, argument, and exploration.

  Level of detail. The level of detail (depth) should be appropriate for the writing task.

  Accuracy. The content should be accurate: complete and free from error. Errors result from mistakes (for example, misstating a definition, using of out-of-date material, and incorrectly interpreting and/or applying an accounting requirement) or omissions (for example, omitting part of a definition or part of an accounting requirement).

  Writing style. This refers to word choice, word usage, sentence length/structure, and paragraph length/structure. The writing style should be appropriate for the writing task. Some of the characteristics of the ‘business writing style’ are:

•   Writing that is concise, clear, precise, and direct,
•   The use of short sentences and paragraphs,
•   The appropriate use of abbreviations and jargon, and
•   The use of highlighting techniques to help the reader access and understand the content. Highlighting techniques include graphics (tables and figures), white space, boldface text, italics, underlining, varied font sizes, and numbered and/or bulleted lists.Page | 4

Organisation

Tone is the use of words and writing style to convey the writer’s attitude towards or feelings about a topic. The tone adopted by a writer should be appropriate for the writing task. For most business writing, the tone should be formal, objective, and impersonal.

Sources. The content should be adequately supported by appropriate (authoritative, relevant, and credible) sources. Typical sources used include references to textbooks, journal articles, and accounting standards.

The content should be well-organised which requires both of the following:

•   An organisational pattern that is clear, logical, and appropriate for the writing task. Organisational pattern refers to the systematic arrangement (sequencing) of the writing.
•   Good use of structuring elements. The structuring elements are the parts of a writing task that form the basis for an overall pattern and include: the introduction, use of sections, headings and sub-headings, transitions, and conclusion.Writing conventions. The writing task should follow the writing conventions (the rules of syntax, grammar, spelling, and punctuation) of standard written Australian English. Sources should be correctly cited using the APA referencing style.

  Standard of presentation. Presentation refers to the layout of the document: the way the writing looks on the page. The presentation should be neat and tidy.

Writing conventions

Document design

Format. The format of the writing task (which are specified in the assignment material) should be appropriate.

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ASSIGNMENT INFORMATION

1The writing context
All writing is shaped by a writing context that influences what the text says and how the text says it. Figure 1 (below) illustrates the key elements of the writing context which are:

•   The purpose of the writing task,
•   The intended audience of the writing task, and
•   The writer.Figure 1: The writing context (Adapted from Copeland, n.d.).

  Purpose of the writing task

  The purpose is the reason (or reasons) why the writer is undertaking a particular writing task. The purpose of the writing task, according to Copeland (n.d.) is important because it affects:

•   The selection of the content,
•   The organisation of the content,
•   What supporting evidence is appropriate, and
•   How much to write.

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Copeland (n.d.) goes on to state that there are two steps that should be undertaken by the writer to determine the purpose. Firstly, the writer should determine the general purpose of the writing task which could be one or more of the following:

•   To give information about something: this could be to inform, describe, or explain.
•   To argue.
•   To persuade.
•   To propose or recommend a course of action.
•   To entertain.
•   To evaluate or analyse.
•   To solve a problem.Once this is done, the writer should then determine the specific purpose (or purposes) of the writing task. For example, the writer’s purpose might be to explain the accounting requirements for fair value and cash flow hedges.

  Intended audience of the writing task

  The content is also shaped by the intended audience of the writing task. The writer should determine who the intended audience of the writing task is and then consider the following characteristics of the intended audience and how they might affect the writing task:

•   Demographics: this includes characteristics of the intended audience such as their age range, their ethnicity, their religious beliefs, and their gender. It is important to understand that demographic characteristics may only be relevant for some writing tasks.
•   Education: for example, such things as sentence length and complexity and word choices would differ depending on whether the audience comprised academics or high school students.
•   Prior knowledge: what does the audience already know about the topic? For example, an audience of accountants would be expected to be familiar with the term ‘asset’. However, an audience of non- accountants might require ‘asset’ to be defined and explained. In many cases, the writer will have to make reasonable assumptions about the prior knowledge possessed by the intended audience.
•   Expectations: the expectations of the intended audience include such things as expectations about the format used for the writing task (for example, that a letter includes a return address), the level of formality or informality in the tone, and the use of correct grammar and spelling. The intended audience also has expectations of the content based on the purpose of the writing task and the organisation of the content. (Adapted from University of Minnesota Libraries Publishing, 2015).The writer

  The final element is the writer. Through self-analysis, the writer should identify aspects about themselves that they can then use to enhance the effectiveness of the content of the writing task in relation to the purpose of the writing task and the intended audience (Lumen Learning, n.d.). In the self-analysis, you should ask yourself the following questions:

•   What personal motivations do I have for writing about this subject?
•   What background knowledge do I already have on this subject?

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•   What personal experiences have I had that directly relate to this subject? How do these personal experiences influence my perspectives on the subject?
•   What formal training or professional experience do I have that is related to this subject?
•   What skills do I have as a communicator? How can I make use of these in this project?
•   What should audience members know about me for them to trust what I have to tell them? How will I convey this in my writing? (Adapted from Lumen Learning, n.d.).Tone and style

  Two important aspects of all writing tasks that are affected by both the purpose of the writing task and the intended audience are writing style and tone (Mclean, n.d.; University of Minnesota Libraries Publishing, 2015).

  Writing style is defined as the way a writer writes: not what is said but how it is said. The writing style depends on word choice, word usage, sentence length and structure, and paragraph length and structure. For example, the writing style for a report might include simple denotative words, short simple sentences and short paragraphs supplemented by graphics.

  The characteristics of business (technical) writing include the following:

•   Prose (writing) that is concise, clear, precise, and direct,
•   Short sentences and paragraphs,
•   Appropriate use of acronyms, abbreviations and jargon depending on the level of knowledge of the audience, and
•   Use of highlighting techniques to help the reader access and understand the content. Highlighting techniques include graphics (tables and figures), white space, boldface text, italics, underlining, varied font sizes, and numbered and/or bulleted lists. Highlighting techniques should enhance accessibility and understandability and should not be overused.The writing style impacts the tone of a writing task. Tone refers to a writer’s use of words and writing style to convey his or her attitude towards or feelings about a topic. Tone usually comes across as the effect of the entire writing task rather than individual phrases, sentences, or paragraphs. Some examples of tone include: formal, aggressive, amused, angry, arrogant, colloquial, condescending, critical, defensive, enthusiastic, objective, restrained, sarcastic, and whimsical.

  The tone should create the kind of reaction that the writer wants in the reader. For example, the writer may want to:

•   Make the reader excited or angry,
•   Push the reader to act, or support a cause or to challenge an idea, or
•   Entertain or inform the reader.For most business (technical) writing, the tone is formal, objective, and impersonal.

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Completing the writing task

Completing a writing task, such as a Memorandum, involves the following three steps which are adapted from Curtin University (2015):

1. Planning

•   Identify and define the purpose of the writing task. You should read the information in the question carefully and define key terms.
•   Identify and define the intended audience. Consider their level of understanding of the topic and what they need to know.
•   Establish parameters. Consider the scope and level of detail required as well as the length.
•   Gather information. Undertake research to locate relevant material. 2. Writing

 Prepare a rough draft to get the relevant material and your ideas onto the page.

3. Revision

•   Revise and edit the draft.
•   Format the document as necessary.
•   Proof-read the document for spelling and grammar.

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2Memorandum format conventions
There are many forms of written business communication including, Emails, letters, reports, business proposals, PowerPoint presentations, newsletters, brochures, and web pages. One form is the Memorandum (abbreviated to Memo) that is a formal written document that is typically used for internal communication within an organisation and may be addressed to an individual (for example, the sales manager), a small group (for example, the sales team) or a large group (for example, all employees of a department or the organisation).

This section, which is based on Gerson (2015) as well as May and May (2015), specifies the format conventions that you should comply with when preparing your Memorandum. The Memorandum format conventions include the following:

(a) Title and heading block

At the top of the first page is the title ‘Memorandum’ which may be capitalised and/or in boldface. It is either centered on the page or left-aligned.

This is followed by a heading block which includes the following items:

•   Date: the date the Memorandum was prepared.
•   To: the intended recipient or recipients of the Memorandum.
•   From: the name (and position) of the person sending the Memorandum.
•   Subject: this indicates the subject matter of the Memorandum and should be clear and concise.The headers (Date, To, From, and Subject) are left-aligned and may be capitalised and/or in boldface. The content of each line is often indented as in the example of a Memo at the end of this section.

  (b) Parts of the Memorandum

  The content of the Memorandum comes immediately below the heading block and comprises three parts:

1. Introduction: the purpose of the introduction is to:

•   Explain the purpose of the Memorandum: tell the reader why you are writing,
•   Explain what you are writing about,
•   Provide a brief overview of the contents, and
•   Provide, if necessary, any relevant background information.The introduction should be concise but informative.

2. The body: the body of the Memorandum is organised into a series of paragraphs that are left-aligned.Headings can be used to organise the material into sections to assist readers, but these should not be overused. Headings should be in boldface so that they clearly stand out. The body can include bulleted or numbered lists (that should be indented) as well as tables, figures, and pictures.
3. Conclusion: the purpose of the conclusion is to summarise the key points/main findings. The conclusion should not introduce any new material that was not included in the body. The conclusion may also:
   •   Tell the reader what’s next, and/or
   •   Include information about any follow-up action.

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(c) Tone

The tone of the Memorandum depends on the purpose of the Memorandum and the relationship between the writer and recipient/s. For this writing task, the tone should be formal, objective and impersonal.

You should also note that a Memorandum does not contain:

•   A salutation (for example, ‘Dear Rebecca’) at the beginning, or
•   A complimentary close (for example, ‘Yours Sincerely’ or ‘Regards’).(d) Font

  You should use a sans-serif font such as Arial, Calibri, or Verdana. The size of the font should be 11 point or 12 point with a larger font (for example, 14 point) used for the title. The font colour should be black.

  (e) Highlighting

  You can user italics, underlining, coloured fonts and boldface to highlight important information. These effects should be applied consistently and not overused.

  (f) Spacing

  Spacing should be consistently applied throughout the Memorandum. A common approach is to use one- and-a-half line spacing with paragraphs separated by a space, and sections by two spaces.

  (g) Alignment

  The heading block and paragraphs should be left-aligned. Bulleted or numbered lists should be indented. The text may be justified or left-aligned.

  (h) Page numbering

  The pages of the Memorandum should be consistently numbered.

  Example of a Memorandum

  An example of a Memorandum, which you can use as a template, is shown on the following pages.

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Date: To: From: Subject:

Introduction

MEMORANDUM

1 August 2018
Senior Management of Dunedin Ltd
L. May, Chief Accountant
Accounting for fair value and cash flow hedges

The purpose of this Memorandum is to explain the requirements of AASB 9 Financial Instruments in relation to accounting for fair value hedges and cash flow hedges.

Fair value hedges

A fair value hedge is a hedge of the exposure to changes in the fair value of either a recognised asset or liability or an unrecognised firm commitment, that is attributable to a particular risk and could affect profit or loss. An example of a fair value hedge of foreign exchange risk using a forward exchange contract includes a forward contract to buy USD to hedge a recognised account payable in USD. The accounting requirements for a fair value hedge are that:

•   The gain or loss on the hedging instrument is recognised in profit or loss (or other comprehensive income, if the hedging instrument hedges an equity instrument for which an entity has elected to present changes in fair value in other comprehensive income),
•   The hedging gain or loss on the hedged item is adjusted against the carrying amount of the hedged item (if applicable) and recognised in profit or loss, and
•   When the hedged item is an unrecognised firm commitment, the cumulative change in the fair value of the hedged item subsequent to its designation is recognised as an asset or a liability with a corresponding gain or loss recognised in profit or loss. When a hedged item in a fair value hedge is a firm commitment to acquire an asset or assume a liability, the initial carrying amount of the asset or the liability that results from the entity meeting the firm commitment is adjusted to include the cumulative change in the fair value of the hedged item that was recognised in the statement of financial position.Cash flow hedges

  A cash flow hedge is a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with all, or a component of, a recognised asset or liability or a highly probable forecast transaction and could affect profit or loss. In addition, a hedge of the foreign currency risk of

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a firm commitment may be accounted for either as a fair value hedge or as a cash flow hedge. A fair value hedge is used to manage (eliminate or reduce) the exposure that arises from changes in the fair value of a financial asset (for example, an account receivable arising from a sale) or financial liability (for example, an account payable arising from a purchase). In contrast, a cash flow hedge is used to manage (eliminate or reduce) the exposure that arises from changes in the cash flows of a financial asset or a financial liability. An example of a cash flow hedge of foreign exchange risk using a forward exchange contract includes a forward contract to buy USD to hedge a highly probable purchase of inventory in USD.

The requirements for accounting for a cash flow hedge are similar to those for accounting for a fair value hedge. However, there are some significant differences between accounting for a fair value hedge and a cash flow hedge. For a fair value hedge, the hedging instrument (a forward exchange contract) is measured at fair value with changes (gains and losses) in fair value being recognised in profit or loss. For a cash flow hedge, the hedging instrument (a forward exchange contract) is also measured at fair value. However, the effective portion of the change in fair value is deferred in other comprehensive income (OCI) and presented within equity (cash flow hedge reserve) whilst the ineffective portion (the difference between the effective portion of the change in the fair value of the hedging instrument and the full change in the fair value) is recognised immediately in profit or loss. There will only be an ineffective portion when the change in the fair value of the hedging instrument exceeds the change in the fair value of the future cash flows of the hedged item (this is referred to as an ‘overhedge’).

The requirements are that the separate component of equity associated with the hedged instrument (cash flow hedge reserve) is adjusted to the lower of the following (in absolute amounts):

•   The cumulative gain or loss on the hedging instrument from inception of the hedge, and
•   The cumulative change in fair value of the hedged item from inception of the hedge.The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge (the portion that is offset by the change in the cash flow hedge reserve) is recognised in OCI, whilst any remaining gain or loss on the hedging instrument (or any gain or loss required to balance the change in the cash flow hedge reserve) is hedge ineffectiveness that is recognised in profit or loss.

  The change in the fair value of the hedging instrument that is deferred in OCI is reclassified to profit or loss at a future date when the hedged item affects profit or loss (for example, when the payment associated with an anticipated transaction occurs).

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The requirements of AASB 9 are:

•   If a hedged forecast transaction subsequently results in the recognition of a non-financialasset or non-financial liability, or a hedged forecast transaction for a non-financial asset or a non-financial liability becomes a firm commitment for which fair value hedge accounting is applied, the entity shall remove that amount from the cash flow hedge reserve and include it directly in the initial cost or other carrying amount of the asset or the liability.
•   For other cash flow hedges, the amount shall be reclassified from the cash flow hedge reserve to profit or loss as a reclassification adjustment (see AASB 101) in the same period or periods during which the hedged expected future cash flows affect profit or loss (for example, in the periods that interest income or interest expense is recognised or when a forecast sale occurs).
•   However, if that amount is a loss and an entity expects that all or a portion of that loss will not be recovered in one or more future periods, it shall immediately reclassify the amount that is not expected to be recovered into profit or loss as a reclassification adjustment (see AASB 101).Conclusion

  A fair value hedge is a hedge of the exposure to changes in fair value of a: recognised asset or liability; or an unrecognised firm commitment, that is attributable to a particular risk and could affect profit or loss. For a fair value hedge, the gain or loss on the hedging instrument is recognised in profit or loss and the hedging gain or loss on the hedged item adjusts the carrying amount of the hedged item (if applicable) and is recognised in profit or loss.

  A cash flow hedge is a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with all, or a component of, a recognised asset or liability or a highly probable forecast transaction. A hedge of the foreign currency risk of a firm commitment may be accounted for as a fair value hedge or a cash flow hedge. The hedged item is measured at fair value with gains or losses recognised in profit or loss whilst for the hedging instrument, the effective portion is recognised in other comprehensive income whilst any ineffective portion is recognised in profit or loss. In the period when the expected future cash flows that are hedged affect profit, the accumulated balance of the cash flow hedge reserve is reclassified to profit or loss or if a hedged forecast transaction has resulted in the recognition of a non-financial asset or liability, the balance of the cash flow hedge reserve is included in the initial cost or other carrying amount of the asset or liability.

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3Referencing
Your assignment should include references (both in-text and in a reference list) that conforms to the American Psychological Association (APA) style.

A copy of ‘The Abridged American Psychological Association Referencing Style Guide (APA) 2020’ can be accessed from the CQUniversity Referencing Guides web page:

https://sportal.cqu.edu.au/learning-support/academic-and-study-help/referencing
However, you can adopt a simplified approach to the in-text referencing of accounting standards as follows:

•   Your first reference to an accounting standard should be in full. For example, ‘According to paragraph 27 of AASB 101 Presentation of Financial Statements (Australian Accounting Standards Board [AASB], 2015), financial statements should be prepared using …’.
•   Subsequent references to this accounting standard can be abbreviated. For example, ‘It is a requirement of paragraph 36 of AASB 101 that …’.

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References & bibliography

Copeland, M. (n.d.). The writing context: Writer, subject, purpose, audience, and form. Retrieved from: https://unmtaosenglish.files.wordpress.com/2012/11/writing-context.pdf

Curtin University. (2015). Report writing. Retrieved from: https://life.curtin.edu.au/local/docs/CL_D-report- writing-08-2015.pdf

Gerson, M. S. (2015). Writing that works. A teacher’s guide to technical writing. Topeka, KS: Kansas Curriculum Center, Washburn University.

Lumen Learning. (n.d.). Guide to writing. Retrieved from: https://courses.lumenlearning.com/styleguide/

May, C. B., & May, G. S. (2015). Effective writing: A handbook for accountants (10th ed.). Upper Saddle River, N.J: Pearson.

McCulloch, R., & Reid, A. (2013). Academic skills for international students. Frenchs Forest, NSW: Pearson Australia.

Mclean, S. (n.d.). Communication for business success (v. 1.0). https://2012books.lardbucket.org/
University of Minnesota Libraries Publishing. (2015). Writing for success. https://doi.org/10.24926/8668.2801 Walter, E., & Woodford, K. (2015). Collins easy learning writing (2nd ed). Glasgow: HarperCollins.

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