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B. DETAILED REPORT

4. Detailed findings and recommendations

1st Priority: Fine from the Nakolian Telecommunications Regulatory Authority (NTRA).

Failure to deactivate unregistered users has attracted a penalty of S$87 billion with negotiations
having secured a reduction to S$58 billion. As a result we have suffered a 25% share price drop

and the market has seen a ratings downgrade of Nakolia. A legal challenge has been mounted
but prospects are unclear. Nakolia is our biggest market contributing 36% of group revenues so
we are concerned about the resulting deterioration of our relationship with the new government

in that country. Whilst this matter is outside our scope, there is an ethical dimension that is
addressed in section 5 of this report. Our brief here is to evaluate the capital structure
implications, prepare the company for the year-end audit and recommend a suitable group

financial strategy.

1. 2015 Financial statement adjustments

We have adjusted the 2015 financials applying the relevant International Financial Reporting
Standards (IFRS) and International Accounting Standards (IAS) taking into account 'matters to
consider' as were provided (See Appendix 5). The key observation is a shift from an operating

profit of S$49.6 billion in 2014 to an operating loss of S$5.2 billion in 2015 and an increase in
our gearing (book value of debt to equity) from 40% (S$53,279m/S$133,442m) to 66%

(S$56,059m/S$84,523m). We present below our analysis and consequent adjustments:

1.1 S$58 billion fine from Nakolia Government

The applicable requirement is the IAS 37 which deals with the accounting recognition and
disclosure of provisions, contingent liabilities and contingent assets in financial statements. We

have a legal obligation which arises from a past event (i.e. non-compliance with law to
deactivate unregistered users). Timing of payment is uncertain as we await the court ruling but it
is probable that it will entail an outflow of resources embodying economic benefits and the

amount can be reliably estimated as S$58 billion. The required provision therefore debits the
Statement of comprehensive income with $58 billion and credit the Statement of Financial
position with $58 billion. A quantitative and qualitative disclosure should then be made

separately.

Developed by The CharterQuest Institute for 'The CFO Business Case Study Competition 2016'
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