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 focuses on the customer loyalty program of Qutoutiao Inc. (QTT, NASDAQ: QTT). Financial analysis, unit economics, and accounting treatments will be explored in the case. QTT operated a mobile content platform, "Qutoutiao," in China, which literally meant "fun headlines" in Chinese. QTT aggregated mobile content from various sources and used AI-based algorithms to present customized content to users. The data analytics capabilities of the algorithms enabled QTT to analyze user data and customize feeds to users in order to generate more advertising revenue. In December 2019, Wolfpack Research (Wolfpack) published a report on QTT, casting serious doubts about the sustainability of its business model, in particular, the customer loyalty program. The program comprised "user engagement" and "user acquisition" activities that were found to be "extremely expensive." Days later, Wolfpack published a follow-up report extensively using unit economics to support its claims. Students will be asked to apply unit economics to analyzing QTT's operating and financial data. For financial analysis and forensic accounting purposes, students will also grapple with questions on how to substantiate the loyalty program expenses and liabilities, and to assess the financial implications of QTT's accounting treatment in recording the loyalty program expenses.
This case is based on a hypothetical company that was newly established for a mobile gaming app. Before the company was incorporated, an experienced game developer and "creative strategist," Leon, and Lucas, a gaming influencer and streamer who was very popular in the Spanish-speaking world, had jointly created a game called sangre y acero®, meaning "Blood and Steel" in Spanish. Lucas's name on his streaming channel on Twitch and YouTube was Rey de Acero®, meaning "King of Steel" in Spanish. This game had passed most of the game-testing stages. A trademark had been obtained for the game's name and logo. A copyright was also obtained for the game's codes, art, music, scripts, and story and plot. These were the pre-incorporation events. Later, Leon and Lucas contributed their sangre y acero® trademark and this copyrighted game to the incorporation of the company. Their friends contributed funds. A new company, SYA Inc., was formed on 1 January 2022. On 1 July 2022, the app was fully launched. The purpose of the case is to have students prepare financial statements based on provided financial data, touching on a wide array of accounting concepts and common issues.
This case explores the accounting treatment of revenue recognition for a biopharmaceutical company in the life sciences sector, HUTCHMED (China) Limited (HCM, HKEx: 13, NASDAQ: HCM). As a subsidiary of CK Hutchison Holdings Limited (CK Hutchison, HKEx: 1), HCM operated to discover, develop, and commercialize "targeted therapies" and "immunotherapies" for the treatment of patients with cancer and immunological diseases. Founded in 2000, HCM was initially a pioneer in discovering drugs aimed at creating novel therapies in China. Over the past fifteen years, HCM had created numerous drug candidates. These successes in discovering drugs had led to some collaborations with leading global pharmaceutical companies such as AstraZeneca and Eli Lilly. Due to the business model of life science companies, commonly with the extensive use of license and collaborative arrangements with external parties, the accounting for revenue is particularly complex. Through the case, students will grapple with some practical questions. For instance, what were those specific traits as in HCM's business model? Upon identification of the traits, students will be asked about how each of these traits had impacted HCM's accounting policy on revenue recognition. In addition, what were the financial implications attributable to such accounting policy as adopted by HCM?
This case explores the accounting treatment for embedded derivatives of China Evergrande Group (HKEx: 3333). It had been the second-largest property developer in China by property sales and largest by land reserves and borrowing size. On 24 September 2020, a suspicious "letter" was widely circulated on the Internet. The stock price plunged. The "letter" was purportedly sent by Evergrande to the Chinese government, urging the approval of a "listing plan" which was crucial in the "reorganization plan" of the Group. Back in December 2016, Evergrande used this plan to attract new "strategic investors" (SIs) to inject capital. To attract SIs, Evergrande and the SIs had agreed that if the reorganization could not be executed by 31 January 2021, the SIs could exercise either one of the two rights. One right was to demand Evergrande to repurchase their shares. Another right was to demand Evergrande to compensate 50% of their shares. Later the SIs invested RMB130,000mn in total, instantly enabling Evergrande to alleviate liquidity strains and continued to expand aggressively by leverage. Was the RMB130,000mn properly accounted for in financial statements, despite RMB2,500mn of "financial derivative liability" throughout 2017 to 2020? Should the two "rights" be treated as "options" in accounting?
This case explores the reasons why Wirecard AG (Wirecard, FRA: WDI) could have concealed its fraudulent accounting practices for more than a decade. As a German payment processor and financial services provider founded in 1999, Wirecard became listed on the Frankfurt Stock Exchange in 2017 and one year after that, became a constituent stock of the DAX index. From 2017 when Wirecard was listed, the stock price rose from around EUR50 to almost EUR200 during its peak in 2018 with a market capitalization of more than EUR24bn. Despite its size and reputation, Wirecard was first alleged by whistleblowers about its fraudulent practices in early 2018. In-house legal team and news media started to uncover more and more truths later on. It was revealed that Wirecard had not properly obtained licenses for most of its overseas operations. For instance, the business addresses were faked, so as the cash at banks, revenues as well as profits. Not until KPMG issued a special audit report in April 2020 did the regulatory authorities take investigative actions. During June 2020, Wirecard's stock price fell to below EUR2, and below EUR1 two months later. The case seeks to highlight the accountability of different parties to the corporate governance failure, namely the management, board of directors/supervisors and audit committee, external auditors, and regulators. Through the case, students will grapple with the practical questions of how to understand and evaluate the effectiveness of corporate governance of a large-scale organization in multi-national setting.
This case explores a way to identify an industry by simply examining a set of financial ratios. Certain industries have unique financial statement items and, hence, unique financial ratios. Some, on the other hand, have a few financial ratios that are consistently high or low. Students will grapple with practical questions on the identification of various industries simply by analyzing sets of financial ratios. In a practical context at school or workplace, students will then be able to reverse the process, i.e., to identify and apply financial ratios to certain significant industries, such as a stock exchange, banking, insurance, oil and gas, IT consultancy, e-commerce, and pharmaceutical.
This case explores the accounting treatment for the "rent concessions" offered by lessors to lessees during the Covid-19 pandemic. The protagonist company is Xiabuxiabu Catering Management (China) Holdings Co., Ltd. (Xiabuxiabu or the Group, HKEx: 520). Xiabuxiabu was one of the hot-pot restaurant chains with the highest relevant market share in mainland China. As the Group had been serving retail customers in its retail branches, the newly promulgated "Covid-19 Related Rent Concessions" had a significant impact on lease accounting for its branches. During the pandemic, many lessees had obtained rent concessions granted by lessors in numerous forms, such as a rent payment (lease payment) holiday, a reduction in rent payments for certain period of time, a deferral of rent payments, and a change to the lease term etc. In May 2020, the International Accounting Standards Board (IASB) issued "Covid-19-Related Rent Concessions" as a "practical expedient" to lessees. This expedient came as an "optional" relief to lessees from the mandatory application of IFRS 16. As such, lessees had the option of not accounting for rent concessions as "lease modifications". This greatly simplified lease accounting particularly during the pandemic. Xiabuxiabu had chosen to adopt such an expedient since the financial year 2020.
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.
This case explores the general observations and financial implications behind the short squeeze that had happened on the GameStop Corp. (NYSE: GME), an American chain of brick-and-mortar video game stores. The company had struggled in recent years due to competition from digital distribution companies and the adverse impacts of the COVID-19 pandemic. As the share price of GME went up due to the hope of possible digital transformation since August 2020, there had been increasingly extensive short selling activities of GME stock by many institutional investors believing the firm was overpriced. Some of those short sellers were sizable hedge funds. The case seeks to highlight the definition, underlying factors, and mechanism of short selling, naked short selling and short squeeze. The reasons for market participants to do the above, the forthcoming risks, as well as the corresponding impact to the market are discussed. The case will discuss the interaction between social media and financial system nowadays. The perspectives (including interests and concerns) of the following parties will be analyzed, namely the retail investors, hedge funds and/or market makers, brokers (especially the FinTech-enabled zero-commission brokers), and regulators. Understanding the observations and implications of the case, students will be able perform a more comprehensive analysis on how social media and new technology shape the new investment world. Students will also be able to assess their own risks in conducting trades amid a short squeeze, or in anticipation of a short squeeze.
Ping An OneConnect Bank (Hong Kong) Limited is a virtual bank that has pioneered the use of Fintech to provide efficient banking services to both SMEs and retail customers. The bank uses innovative credit risk and loan pricing models that rely on big data analytics, including detailed customs data for its small and medium-sized enterprise (SME) customers in the import/export business.
This case explores the major considerations involved when choosing the most suitable listing market. In August 2020, Shanghai Lujiazui International Financial Asset Exchange Co Ltd, better known as Lufax, filed a confidential application to the US Securities and Exchange Commission for initial public offering in August 2020. The news stirred up heated discussions in the market, as Lufax was obviously of Chinese background. US-Sino relations had been experiencing more and more tensions. Even the US securities regulations had turned against US-listed Chinese firms. Amid this backdrop, is the US market the right choice for Lufax to go for an IPO? The market wonders if Lufax made a wise choice on the listing venue. The case seeks to highlight the considerations of Lufax in deciding on a jurisdiction to be listed in. Every venue has its own listing requirements and should fit differently for firms with different intentions and characteristics. Through the case, students will grapple with the step-by-step practical questions concerning the comprehensive list of considerations for choosing the suitable listing market and conduct an analysis of the suitability of the US market as Lufax' listing choice, compared to the market in Hong Kong and mainland China.
This case explores how Haitong International Securities Group Limited (Haitong, the Group, or SEHK: 665) had been accounting for margin loans under the Hong Kong Financial Reporting Standard 9 Financial Instruments (HKFRS 9) since the mandatory adoption date on 1 January 2018. Haitong belonged to one of the largest financial groups listed on the Hong Kong Stock Exchange in terms of market capitalization. Because of the fame and size of the Group, the protagonist Nancy (regional CFO) made reference to this company in finding out the accounting issues that could potentially occur in starting margin financing business in Hong Kong. Haitong incurred 'impairment charges, net of reversal' (net impairment charges) of HKD238.8mn and HKD634.5mn respectively in the year ended 31 December 2018 (FY2018) and 31 December 2019 (FY2019). The portion attributable to advances to customers in margin financing (margin loans or margin loan receivables etc.) constituted HKD353.7mn (148.1%) and HKD532.3mn (83.9%) of the aforesaid net impairment charges in the respective years. The case seeks to highlight the advantages and disadvantages of entering the securities margin financing business when IFRS 9 is in place. Students will learn the classification of margin loans under IFRS 9 and the measurement of expected credit loss (ECL) of these assets by three "stages" as prescribed by IFRS 9. Students will also grapple with questions on formulating the internal controls in credit risk management under the context of securities margin financing.
This case explores the accounting treatment of the essential items that appeared in the financial statements of Madison Holdings Group Limited (Madison Holdings or the Group, stock code: 8057.HK). A seller of alcoholic beverages for decades, the Group had no expertise and know-how in financial technology. Through acquisitions, Madison Holdings opened the new blockchain services segment without the need to build everything from scratch on its own. However, the lifespan of the segment was unexpectedly short. Management disposed of the whole segment due to unsatisfactory performance in less than two years. The company's stock price dropped by more than 90% from its peak, largely due to the huge impairment loss recognized in the cryptocurrency mining activities. The case seeks to highlight the accounting treatment of various financial statement items of a company that engages in cryptocurrency mining activities. Through the case, students will grapple with the practical questions of whether Madison Holdings appropriately recognized its cryptocurrency mining revenue and recorded the corresponding costs of cryptocurrency mining activities, including the depreciation expenses and impairment loss of plant and mining equipment.
This case explores the corporate finance issues arising from the privatization of Li & Fung Limited (Li & Fung, prior stock code: 494.HK) in May 2020. A public announcement was made earlier in March of the same year, while its closing stock price surged by 88.0%, from HKD0.50 to HKD0.94, the following trading day. Such price movement reflected the market expectation of successful execution of the privatization proposal. The case seeks to highlight the considerations of Li & Fung in deciding on privatization, from a corporate finance perspective. Through the case, students will grapple with the practical questions of how controlling shareholders of a listed company should balance their own interests and the interests of disinterested shareholders in the market in formulating a privatization deal. There are always some signals that indicate a listed company may have a plan for privatization. Shareholders need to be alert to certain signals that may possibly indicate a good opportunity for speculation. Li & Fung is a good example for students interested in investment.