Page 24 - CIMA SCS Workbook November 2018 - Day 2 Suggested Solutions

SUGGESTED SOLUTIONS

Another key issue is that there is a prestige factor associated with being a listed company. Stock
market entry requirements are usually quite onerous, so only very successful and low risk
companies are allowed to become listed. Therefore, becoming listed usually reduces the overall
cost of capital and gives the company a more solid standing when negotiating interest rates with
banks. This reduces interest costs on the company’s borrowings.
Some other advantages are:

 Market exposure - having a company's shares listed on an exchange can attract the
attention of large important investors such as hedge funds, market makers and institutional
traders.

 Brand equity - having a listing on a stock exchange also affords the company increased

credibility with the public, having the company indirectly endorsed through having their
shares and bonds traded on the exchange.

 Listed companies can offer securities in the acquisition of other companies (e.g. share for
share exchanges can be used rather than having to raise cash to fund acquisitions).

 Share options programmes can be offered to employees, making the listed company
attractive to top talent.

Conclusion
Admittedly it is not always easy to deal with the intense scrutiny that comes with being a listed
company, but the advantages of being listed are generally thought to outweigh the disadvantages
for most large companies.

The provisions of IFRS 7

Introduction
IFRS 7 explains how risks associated with financial instruments have to be disclosed in a
company’s accounts. As Henry Wong notes in his email, complying with IFRS 7 enables a company
to communicate important information to its shareholders.
I’ll explain the main disclosures below (in both general terms and then specific to Novak) after
first defining some of the key terminology associated with this important accounting standard.

Terminology

The definition of a financial instrument is that it is “any contract that gives rise to a financial asset
of one entity and a financial liability of another entity”.

Examples of financial assets are cash, receivables, investments and loans to other companies.
Examples of financial liabilities are payables, bank borrowings and bonds in issue.

So basically IFRS 7 explains the sort of accounting disclosures that need to be made regarding
most of the assets and liabilities of a company. The disclosures made under IFRS 7 should enable
the users of the accounts to assess the significance of financial instruments for the entity’s
financial position and performance, and also the nature and extent of risks arising, and how the
entity manages those risks.

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