A renowned "short selling activist," Muddy Waters Capital LLC (Muddy Waters) claimed that 90% of YY Live's live streaming revenue was fake. YY Live was one of the live streaming platforms JOYY Inc. (JOYY, NASDAQ: YY) operated. The vast majority of JOYY's revenue came from live streaming, in particular, the YY Live platform. Revenue was in the form of virtual gifts that paying users (PUs) sent to performers (channels). Muddy Waters used various methods to substantiate that most PUs were fake paying users (FUs) under direct control of JOYY itself. Rather than substantiating Muddy Waters's work, students will grapple with questions about how to assess the reasonableness of the 90% fraud estimate from financial and statistical points of view. They will answer the question of how to choose an appropriate reporting period or year for adjustments. Across the balance sheet, profit and loss, and cash flow statement, which financial items should be adjusted and how? Based on the adjusted financial statements, how would various profitability ratios, insolvency ratios, liquidity ratios, P/E, and price-to-book ratio (P/B), and so on be affected?
This case explores the accounting treatment for the costs attributable to cloud computing arrangements. The protagonist company is Dexus Diversified Fund (Dexus or the Group, ASX: DXS), one of the largest and most prominent real estate groups in Australia. In April 2021, the International Accounting Standards Board (IASB) ratified an agenda decision entitled Configuration and Customisation Costs in a Cloud Computing Arrangement. This decision governed the appropriate accounting treatment of cloud computing costs. This update on accounting treatment was added because of the global trend toward technology, data, and connectivity. It was more common for customers to not possess the underlying software. Rather, customers accessed and used the software on an as-needed basis. As the original IFRS did not contain explicit guidance on accounting for cloud computing costs, this update was aimed at clarifying this aspect. Dexus had deployed SaaS in its operations and incurred millions in cloud computing costs. Throughout its latest annual report as of 2021, the Group adopted the update in its accounting treatment and clearly disclosed the financial impacts. This case is developed for use in elementary, intermediate, and advanced accounting courses at bachelor, postgraduate, doctoral, and executive levels. The decision-making tree, accounting treatment, and financial implications for an entity to apply the update should be the key concepts to explore in the case. The issues on how to consider changes in accounting policies and in accounting estimates and errors are also explored in the case.
This case explores the fuel hedging strategy of Cathay Pacific Airways Ltd. (Cathay, HKEx: 293). Cathay's operating policy was to reduce exposure to fuel price risk by hedging a percentage of its expected fuel consumption. Cathay used fuel derivatives that were economically equivalent to forward contracts to achieve its desired hedging position. Because of the unexpected reductions in airflight capacity due to the COVID-19 pandemic, Cathay's projected fuel consumption far exceeded its actual consumption. Fuel hedging losses skyrocketed. Comparing 2020 to 2019, the total fuel cost decreased by HKD18.4bn or 61.8%. Despite the drop in gross fuel costs (i.e., actual costs on fuel consumption) by HKD21.3bn or 71.9%, the fuel hedging losses increased by an astonishing HKD2.9bn or 28.9 times. According to management, this increase in hedging losses was the result of the steep decline in both fuel usage and fuel prices. In 2019, fuel hedging losses were only -2.9% of the operating profit, whereas in 2020, fuel hedging losses contributed to 16.6% of Cathay's operating losses. In this case, students will grapple with questions about the accounting treatment and financial analysis surrounding hedging transactions. Students will be asked about the major types of hedges and their accounting treatments. Further, students will be asked about the factors affecting the effectiveness of a hedging transaction and, hence, how this effectiveness can impact the accounting treatment.
From 2008 to 2015, Valeant Pharmaceuticals International Inc. (Valeant) was a Wall Street darling under the leadership of CEO Michael Pearson. The company's stock price soared as Pearson went on an acquisition spree. Critics questioned Valeant's capacity for organic growth and its lack of commitment to research and development (R&D). In October 2015, investors began losing confidence when Valeant was subpoenaed to testify before the U.S. Senate Committee about its price-gouging practice. On-going investigations by the U.S. House Committee and Attorney's Offices regarding Valeant's patient assistance program and business relationships with Philidor Rx Services also contributed to the company's downfall. In May 2016, Valeant hired Joseph Papa to replace Pearson as CEO. One of Papa's top priorities was to pay down the $30 billion debt amassed to finance the company's acquisitions. In Case (A), students learn about the company's executive incentive compensation philosophy, acquisitions, and governance practices and are asked to assess the financial impact of Valeant's acquisitions. In Case (B), students are asked to identify the factors driving Valeant's stock price down and to assess the company's ability to pay down its $30 billion debt.
Supplement to case HEC199. From 2008 to 2015, Valeant Pharmaceuticals International Inc. (Valeant) was a Wall Street darling under the leadership of CEO Michael Pearson. The company's stock price soared as Pearson went on an acquisition spree. Critics questioned Valeant's capacity for organic growth and its lack of commitment to research and development (R&D). In October 2015, investors began losing confidence when Valeant was subpoenaed to testify before the U.S. Senate Committee about its price-gouging practice. On-going investigations by the U.S. House Committee and Attorney's Offices regarding Valeant's patient assistance program and business relationships with Philidor Rx Services also contributed to the company's downfall. In May 2016, Valeant hired Joseph Papa to replace Pearson as CEO. One of Papa's top priorities was to pay down the $30 billion debt amassed to finance the company's acquisitions. In Case (A), students learn about the company's executive incentive compensation philosophy, acquisitions, and governance practices and are asked to assess the financial impact of Valeant's acquisitions. In Case (B), students are asked to identify the factors driving Valeant's stock price down and to assess the company's ability to pay down its $30 billion debt.
The case looks at the board structure of Research in Motion Limited (RIM) since the probe of the Ontario Securities Commission (OSC) and Securities Exchange Commission (SEC) into the company's stock option granting practices in late 2006. Institutional investors, more specifically Northwest & Ethical Investments LP (NEI), were concerned about RIM's leadership and board structure in 2011 not because of non-compliance with regulations or accounting errors, but because of the drastic fall of the company's share price (see TN-Exhibit 1). Indeed, 2011 was a challenging year for RIM (see TN-Exhibit 2 for a list of events affecting RIM in 2011) as its launch of its tablet PlayBook was not as successful as compared to Apple's iPad 2. There was also increasing competition from Apple's iPhone 4S and other smartphones using the Android platform. In addition, a number of executives left the company in summer and early fall. There was also a service disruption, due to a failure of core switch in RIM's infrastructure, which interrupted email messages and internet services for millions of BlackBerry users over five continents in October 2011. Apart from these serious strategic and operational issues, institutional investors, more specifically NEI, questioned the dominance of executives on RIM's Board and asked for a split of the Chair and Co-CEO roles. In order to avert a showdown with shareholders at the Annual General Meeting (AGM) on July 12, 2011, RIM made an agreement with NEI to establish "a committee of independent directors to study its board structure, the merits of a lead director versus a chair, and the 'business necessity' for the company's co-CEOs to hold 'significant' board-level titles". This sets the theme of the case, i.e., assess RIM's board structure in 2011 and recommend resolutions to be included in the report due on January 31, 2012 to address the governance issues raised by NEI.