(a) Your assistant has been reading the IASB’s Framework for the preparation and presentation of financial statements (Framework) and as part of the qualitative characteristics of financial statements under the heading of ‘relevance’ he notes that the predictive value of information is considered important. He is aware that financial statements are prepared historically (i.e. after transactions have occurred) and offers the view that the predictive value of financial statements would be enhanced if forward-looking information (e.g. forecasts) were published rather than backward-looking historical statements.
Required:
By the use of specific examples, provide an explanation to your assistant of how IFRS presentation and disclosure requirements can assist the predictive role of historically prepared financial statements. (6 marks)
(b) The following summarised information is available in relation to Rebound, a publicly listed company:
Income statement extracts years ended 31 March:
Analysts expect profits from the market sector in which Rebound’s existing operations are based to increase by 6% in the year to 31 March 2012 and by 8% in the sector of its newly acquired operations.
On 1 April 2009 Rebound had:
$3 million of 25 cents equity shares in issue.
$5 million 8% convertible loan stock 2016; the terms of conversion are 40 equity shares in exchange for each
$100 of loan stock. Assume an income tax rate of 30%.
On 1 October 2010 the directors of Rebound were granted options to buy 2 million shares in the company for $1 each. The average market price of Rebound’s shares for the year ending 31 March 2011 was $2·50 each.
Required:
(i) Calculate Rebound’s estimated profit after tax for the year ending 31 March 2012 assuming the analysts’ expectations prove correct; (3 marks)
(ii) Calculate the diluted earnings per share (EPS) on the continuing operations of Rebound for the year ended 31 March 2011 and the comparatives for 2010. (6 marks)