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- Use the concept of relevance to defend New Century’s policy of recognizing revenue as it securitized and sold mortgages. What was the policy’s major weakness? (5 marks)
- Outline a more conservative accounting policy for New Century’s mortgage sale transactions. Consider both statement of financial position and net income effects of your policy. (Hint: Read Theory in Practice 8.3, textbook, p. 314.) (4 marks)
- Use two characteristics of investor behaviour based on psychology to explain the rapid rise in New Century’s share price. Be sure to identify the specific behavioural characteristics you draw on in your answer. (8 marks)
- Despite your answer in part (c), is the rapid rise in New Century’s share price necessarily inconsistent with (semi-strong) securities market efficiency? Explain. (4 marks)
- Note that retained interests meet the definition of a financial instrument. How would these financial instruments be accounted for under IAS 39? (4 marks)
