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• You are required to submit your answer before the finishing time. To submit your
answer, click on “Finish Attempt” on the bottom right corner in your Moodle site,
and then Submit ALL and Finish. If you do not submit your work, Moodle is set
up to automatically submit your work at the finishing time.
• You are not allowed to speak once the exam starts. If you have any questions,
please raise your hand.
• You should stay in sight of the webcam for the duration of the exam.
• You are not allowed to leave the room without seeking permission from the exam
invigilator. Toilet breaks are permitted but permission must be sought from the
You must answer all questions.
Analyse three differences between sustainability report and the annual financial report.
You can consider the differences from the perspective of the users’ focus and compliance
level. (5 Marks)
Students are expected to analyse the differences based on the following points:
|Annual financial Report||Sustainability Reporting|
|Length||Past financial year because
of the direction of
|Past, present and future looking|
|Focus||Directly related to the
organisation because of the
reporting entity concept.
|Direct and indirect economic,
environmental and social
|Information||Main focus is financial
|Non-financial, however, it might
also produce non-mandatory
|Compliance level||Mandatory for listed
|Voluntarily comply or explain
|Main users||Shareholders, investors
(Users are mostly external
to the organization)
suppliers, Investors (Users are
both Internal and external to the
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Question 2 (15 marks)
Cranbourne Ltd. has been measuring a Machine on Balance Sheet based on the historical
cost of $50,000. In the current year, the Directors would like to change to measure that
item based on the fair value.
a. Critically evaluate the decision of the Directors to change the measurement from
historical costs to fair value. (6 marks)
b. Suggest how the Directors of Cranbourne Ltd can measure the fair value of the
Machine. (9 marks)
Suggested answer: Students are expected to provide detailed answers to the points
a. Comparative analysis between fair value and historical cost:
• In comparing fair value to historical cost, fair value is typically considered to be
more relevant to the intended users of general purpose financial reports
• However, it is a more subjective measurement basis if an active market does not
exist for an item
• If a valuation model is applied – because there is not an active market – then
many assumptions and professional judgments must be made
• Determining fair value can be problematic when markets are volatile, for
example when there is a serious financial crisis, or when an asset is of a type that
is not regularly traded. In such situation, management’s own judgments and
assumptions will impact measurement
b. Fair values can be determined in different ways:
• Techniques that rely upon observable market values (market prices) are often
referred to as mark-to-market approaches
• Techniques that rely upon valuation models are often known as mark-to-model
approaches and require the identification of both an accepted valuation model,
and the inputs required by the model to arrive at a valuation.
• The IASB’s accounting standard on fair value measurement establishes a ‘fair
value hierarchy’ in which the highest attainable level of inputs must be used to
establish the fair value of an asset or liability. Levels 1 and 2 in the hierarchy can
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be referred to as mark-to-market situations, with the highest level, level 1, being
(paragraph 76 of IFRS 13):
– Level 1 inputs are quoted prices (unadjusted) in active markets for identical
assets or liabilities that the entity can access at the measurement date.
– Level 2 are directly observable inputs other than level 1 market prices (level
2 inputs could include market prices for similar assets or liabilities, or market
prices for identical assets but that are observed in less active markets).
– Level 3 inputs are mark-to-model situations where observable inputs are not
available and risk-adjusted valuation models need to be used instead.
Question 3 (10 marks)
CLP is a listed company in the power generation industry. The raw materials used by the
company in its thermal plants power production are coals. In its 2019 annual report, as
shown below, there is a graph showing a trend of its CO2 emissions in consecutive years.
(Source: CLP annual report 2019. Retrieved from
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a. How do you evaluate CO2 emission management performance in the past and the
future? Justify your answers using figures in the graph. (5 marks)
b. Based on figures in the graph, suggest an issue for a further investigation. Why do
you think it might be an issue? (5 marks)
Suggested answer: Students are expected to provide detailed explanations to the points
a. CO2 emission management performance has increase in the past 12-13 years.
– Upon unveiling climate vision 2050 set in 2007, the company achieved its
2010 carbon intensify target in 2010.
– The general trend is downward since 2010 to 2020, reducing from 0.80 kg
CO2/kWh in 2020 to 0.62 kg CO2/kWh in 2019 and continued to reduce to
0.60 in 2020.
– Predictions are the trend continued in the future years, which indicated a
level of just 0.15 kg CO2/kWh in 2050. During that period, there will be
retirement of castle peak A, of Yallourn and phasing out of coal-fired
b. Issues for further investigations:
– The acquisition of energy business in Australia raises a question of why CLP
still wants to invest in energy business.
– Increased equity of Hongkong’s fossil fuel portfolio – is it for profit, as clearly
it is not in line with CLP’s position in reducing carbon intensity.
– The actual carbon intensity levels are still projected to be above the sciencebased target – can CLP do better?
Question 4 (10 marks)
Edexcel Pty Ltd (Edexcel) is a firm owning and leasing two large commercial properties
in central business district of Melbourne. Every year Edexcel rewards its CEO with a
fixed cash bonus. In the last two years, because of the lengthy impact of Covid-19 on the
commercial rental market, the firm made big losses, the firm’s share prices substantially
reduced, the CEO received no bonuses although he worked very hard. Now it is time for
him to renegotiate and renew the contract with the shareholders for another 3 years.
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The CEO is in his negotiation to reward him a bonus that is determined based on the net
profit of the firm.
a. Briefly explain the normative theory and the positivist theory. Suggest if the
positivist theory is adopted for this negotiation, how it would support the CEO
to increase his bonuses in the future? (5 marks)
b. Critically evaluate this accounting-based bonus plan and suggest an
alternative bonus plan. (5 marks)
a. Explanation and suggestion
• The normative theory advises accountants, managers and other
stakeholders what should be done based on theories and standards;
• The positivist theory advises what is likely to happen based on data
and observations in the past
• The positivist theory hypotheses that managers of firms with bonus
plans are more likely to use accounting methods that increase current
period reported income – this is also called management
b. Managers’ bonuses based on accounting earnings:
• The decision to reward managers on the basis of accounting profits
might initially be introduced for efficiency reasons (it motivates them
to work in a way that also benefits the principals),
• however it may subsequently induce managers to manipulate
accounting numbers (the opportunistic perspective)
• Bonuses based on profits cause short-term rather than long-term focus
• The alternative could be market-based bonuses which is more
appropriate to remunerate managers in terms of market value of
firm’s securities (shares)m include:
– cash bonus based on share price increases
– options to buy shares
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Question 5 (5 marks)
‘X’ Ltd. produced only annual report up until 2015 to inform its financial performance to
shareholders. However, it started to produce a separate sustainability report from 2016
along with annual report to highlight its social and environmental performance, which
were not mandatory but have been adopted by other companies operating in the same
industry for a few years.
Required: Using one of the theories you have studied in this unit, provide an explanation
as to why ‘X’ Ltd would seek to highlight its environmental performance to external
stakeholders through sustainability report (5 marks)
Suggested answer: Students are expected to provide detailed answers to the points
• Using stakeholder theory: Many stakeholders are directly interested in the firm’s
environmental performance. Sustainability report may therefore be used as an
informative source to satisfy these stakeholders, many of whom may use such
information to influence their decision process and support the organisation.
• Using legitimacy theory: there is so-called social contract that represents the
implicit and explicit expectations that society has about how the organisation
should conduct its operations. Public expectations have changed so organisations
are now required to not only publish financial information but also to address
human, environmental and other social issues. Society allows the organisation to
continue operations to the extent that it meets their expectations – which is often
considered as being the same as being ‘legitimate’.
• Using institutional theory:
– ‘deviants’ will have problems gaining or maintaining legitimacy
– Certain ways ‘of doing things’ are seen as legitimate – they become
– Once process become institutionalised they effectively become ‘beyond
the discretion of individuals and organisations:.
END OF EXAM
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