Bliss Air Line Limited Case Study

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a stock dividend, the economic substance of the transaction is more of a stock split. Due to the large amount of shares to be issued, capital markets will see as a stock split and will likely value each share at 50% of its fair value before the stock split. This will likely occur since shareholders will recognize that there are no new funds coming into the company and that it is really only the number of shares increasing. This transaction will not affect retained earnings which is one of the main reasons why you would prefer to issue a stock dividend.

Recommendation

The transaction should be recorded as a stock split because it is the true representation of what BALL is doing, since such a large number of shares are being issued as a stock dividend.This will not help the issue of reducing retained earnings, however it is the only option under IFRS and best represents the actual transaction to the shareholders. BALL should consider giving a smaller stock dividend which can then be accounted for as a dividend and not a split. This will not create a large decrease in retained earnings, but will create a decrease nonetheless and will result in transferring some value to the shareholders.

Investment in EnviroCo Inc.

The issue here is BALL has invested in EnviroCo Inc. (ECI) whereby they own 15% of the shares and the classification of this investment must be determined.

Option #1 – Significant Influence

ECI could be accounted for as a significant investment because BALL has representation on the Board of Directors and is one of the 3 directors and thus would have influence over the company’s major decisions.Furthermore, BALL uses the ECI resources to help achieve the air pollution requirements in the next three years and there is an interchange of managerial personnel for consulting therefore BALL may influence ECI’s operations as both a customer and a consultant. Lastly, at least two members of the Board of Directors and Michael are interested in holding the ECI shares for the long term and therefore could be a long term investment.

Alternative #2 – Non-Strategic Investment

Generally, 20% is the threshold to consider whether significant influence exists and BALL only holds 15% of ECI’s shares. This would result in the share being shown as fair value through net income whereby the shares will be revalued to fair value at each balance sheet date and only dividend income will be recorded by BALL.

Recommendation

Based on the involvement of the owners in the operation of ECI as described above, BALL appears to have significant influence over ECI and therefore should be accounted for using the equity method. Furthermore, the threshold of 20% is not a concrete rule and where there are other factors indicating significant influence, investments with less than 20% ownership can be considered an equity investment. Using the equity method, the cost of the investment should be recorded and the pro-rata share (i.e. 15%) of ECI’s income or losses should be recorded in BALL’s financial statements. This will help with the faithful representation of the financial statements because it appropriately reflects BALL’s relationship with ECI and will help to forecast future cash flows from this investment.

Presentation and Disclosure Issues regarding Share Capital

BALL has recently become a public company with two classes of common shares and one class of preferred shares. There are several disclosure requirements with respect to the share capital structure: BALL must disclose the unlimited number of voting and restricted common shares as well as the 70,000 voting retractable preferred shares. Furthermore, since there are two classes of common shares, one class being voting with 100 votes per share and one being restricted to 1 vote per share, this must be disclosed by BALL.The preferred shares also have several unique rights including dividend preference, cumulative dividends of $200 per share, that can be called by BALL after four years at $4,100 per share or retractable by the shareholders at $4,500 per share plus accrued dividends at any time. Since the preferred shares are cumulative, any dividends in arrears for these shares must be disclosed. Finally, BALL must also disclose information about their objectives, policies and processes for managing share capital to give users a better insight into the way the company’s share capital is managed.

Recommendation

In order to comply with IFRS which is a requirement for a public company, BALL must

ensure that all of the above disclosures are included in order to fairly present the

financial statements.