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ACCA PasscardsPaper P2Corporate Reporting (International and United Kingdom)

Passcards for exams up to June 2015

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Professional Paper P2Corporate Reporting (International and UK )

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First edition 2007, Ninth edition June 2014ISBN 9781 4727 1130 4

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A catalogue record for this book is available from theBritish Library

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2014

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Contents

Page iii

Preface

Welcome to BPP Learning Medias new syllabus ACCA Passcards for Professional Paper P2 CorporateReporting (International and UK Stream). They focus on your exam and save you time. They incorporate diagrams to kick start your memory. They follow the overall structure of BPP Learning Medias Study Texts, but BPP Learning Medias ACCA

Passcards are not just a condensed book. Each card has been separately designed for clear presentation.Topics are self contained and can be grasped visually.

ACCA Passcards are still just the right size for pockets, briefcases and bags.Run through the Passcards as often as you can during your final revision period. The day before the exam, tryto go through the Passcards again! You will then be well on your way to passing your exams.

Good luck!

(000)ACP2PC14 Int_FP_Ricoh.qxp 5/16/2014 2:06 AM Page iii

ContentsPreface

Page1 Financial reporting framework 12 Professional and ethical duty

of the accountant 73 Environmental and social reporting 134 Non-current assets 215 Employee benefits 336 Income taxes 417 Financial instruments 478 Share-based payment 639 Provisions, contingencies and EARP 6710 Related parties 7111 Leases 75

Page12 Revision of basic groups 8113 Complex groups and joint arragements 9514 Changes in group structures 10315 Continuing and discontinued interests 10916 Foreign currency transactions and

entities 11317 Group statements of cash flows 12118 Performance reporting 12719 Current developments 14520 Reporting for specialised entities 15121 Reporting for small and medium-sized

entities 159

(000)ACP2PC14 Int_FP_Ricoh.qxp 5/16/2014 2:06 AM Page iv

1: Financial reporting framework

Topic List

Regulatory frameworkConceptual framework Revenue recognition

This chapter sets the scene for your Corporate Reportingstudies.The reporting environment changes constantly throughnew regulations, standards etc.International influences are increasing, through the IASBand multinational business.

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Regulatoryframework

Revenuerecognition

Conceptualframework

Regulatory framework

National Listing Rules tobe complied with by listedcompanies.

Listed companies havecomplied with IAS since2005.

IASC Foundation

Trustees

International Standing StandardsAccounting Interpretations AdvisoryStandards Committee Council

Board (SIC) (SAC)(IASB)

International Accounting Standards European Union

Stock Exchange

OtherNational laws Take precedence over

IFRS/IASOECD Undertakes its own research

into accounting standards, viaad hoc working groups,issuing guidelines formembers


Revenuerecognition

1: Financial reporting frameworkPage 3

Regulatoryframework

Conceptualframework

Conceptual framework a statement of generally accepted theoretical principles which form theframe of reference for financial reporting.

Avoids patchwork or firefighting approachLess open to criticism of political/externalpressureSome standards may concentrate on theincome statement, others on the SOFP

Advantages

Financial statements are intended for a varietyof users single framework may not suit allMay need different standards for differentpurposesPreparing and implementing standards is stilldifficult with a framework

Disadvantages


Revenuerecognition

Regulatoryframework

Conceptualframework

IASB Conceptual FrameworkThe IASB Framework for the Preparation and Presentation of Financial Statements was produced in 1989 andis gradually being replaced by the new Conceptual Framework for Financial Reporting.It is a joint IASB/FASB project and is being produced in phases. Phase 1: Chapters 1 and 3, published in September 2010

Chapter 1: The objective of general purpose financial reporting Chapter 3: Qualitative characteristics of useful financial information

Chapter 2 The Reporting Entity has not yet been published and is still an ED Chapter 4 includes the remaining chapters of the 1989 Framework:

Underlying assumption The elements of financial statements Recognition of the elements of financial statements Measurement of the elements of financial statements Concepts of capital and capital maintenance

Discussion paper issued in July 2013 proposing topical areas for revision and amendment


Revenuerecognition

1: Financial reporting frameworkPage 5

Regulatoryframework

Conceptualframework

IAS 18Revenue is that which arises in the course of ordinary activities such as that from sales, services provided,interest, royalties and dividends.

Fair value of considerationreceived/receivable. Deferred amountsdiscounted

In a sale financed by the seller, anydifference between the fair value of theitem and the nominal sales value shouldbe accounted for as interest revenue

MeasurementIncludes only those amounts receivable by the entity on itsown account. Not sales, goods and sales tax collected byagent to be passed to the principal.

Recent developmentsIAS 18 was amended to give guidance on whether an entityacts as principal or agent. In addition, an ED issued in 2010and re-issued in November 2011 proposes changes to theaccounting for revenue recognition in contracts withcustomers.


Revenuerecognition

Regulatoryframework

Conceptualframework

Recognition

When the following are met:1 Transfer of significant risks and rewards of

ownership (usually legal title)2 No more control over goods sold3 Amount of revenue can be reliably measured4 Probable that debt will be repaid5 Transaction costs can be reliably measured

Goods

Conditions 3 to 5 as for goods The stage of completion of the transaction at

the year end can be measured reliably and aproportion applied to the revenue

Interest time proportion basis (effective yield) Royalties accruals basis Dividends when the right to the dividend is

established

Services

DisclosureAccounting policy for each recognition; the amount of each significant category of revenue; amount of revenuefrom exchange of goods or services.


2: Professional and ethical dutyof the accountant

Topic List

Ethical theoriesIndividual influencesEthics in organisationsProfessional ethicsEthics in the exam

Ethics are an important part of the ACCA qualification.This chapter is concerned with the professional integrityof the accountant and director.


Ethical theories Individualinfluences

Ethics inthe exam

Professionalethics

Ethics inorganisations

Lack of objective standardsNon-cognitivism no possibility of acquiring objectiveknowledge of moral principles.Moral relativism right and wrong are culturallydetermined.

Objective standardsCognitivism objective, universal principles exist andcan be known, ethics can be regarded as absolute.

PluralismDifferent views may exist but it should be possible toreach a consensus; morality is a social phenomenon.

EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market).

Teleological Consequentalist ethicsDeontological ethics

Moral judgements based on outcomes orconsequences. Utilitarianism means acting for thegreatest good to the greatest number.

Kant stated that acts can be judged in advance bymoral criteria: Do what others should be doing Treat people as autonomous beings and not as

means to an end Act as if acting in accordance with universal laws



Ethics inthe exam

Professionalethics


2: Professional and ethical duty of the accountant Page 9

National and cultural beliefsDifferences lie in four main areas. Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (money/possessions v

people/relationships)

MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences.

Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong.

Moral developmentKohlbergs three levels ethics determined by:

Rewards/punishments (Pre-conventional)Others expectations (Conventional)

1

2

3 Individuals own decisions (Post-conventional)

Locus of control

Education and employmentPeoples education/work background seems to be moresignificant with globalisation.

Influence individuals believe they have over their ownlives. Internal individuals have significant influence External lives shaped by luck/circumstances



Ethics inthe exam

Professionalethics


EthicsNot necessarilyenforced by lawA code of moral principles that people follow with respect to what is right or wrong

Personal ethics eg deriving from upbringingor political or religious beliefs

Professional ethics eg medical ethics Organisation culture Organisation systems may be in a formal

code reinforced by the overall statement ofvalues

Ethical systems Two approaches Compliance based ensures that the company

acts within the letter of the law. Violations areprevented, detected and punished.

Integrity based combines a concern for thelaw with an emphasis on managerialresponsibility for ethical behaviours. Strives todefine companies guiding values, aspirationsand pattern of thought and conduct.



Ethics inthe exam

Professionalethics


2: Professional and ethical duty of the accountant Page 11

This lays out ACCAs rules stating the ethics and behaviour required by allmembers and students of the ACCA. Guidance is in the form of fundamentalprinciples (see below), specific guidance statements and explanatory notes.

Integrity Members should be straightforward and honest in all business and professional relationships.Objectivity Members should not allow bias, conflicts of interest or undue influence of others to override

professional or business judgements.Professionalcompetenceand due care

Members have a continuing duty to maintain professional knowledge and skill at a level required toensure that a client or employer receives competent professional service based on currentdevelopments in practice, legislation and techniques. Members should act diligently and in accordancewith applicable technical and professional standards when providing professional services.

Confidentiality Members should respect the confidentiality of information acquired as a result of professional andbusiness relationships and should not disclose any such information to third parties without proper orspecific authority or unless there is a legal or professional right or duty to disclose. Confidentialinformation acquired as a result of professional and business relationships should not be used for thepersonal advantage of members or third parties.

Professionalbehaviour

Members should comply with relevant laws and regulations and should avoid any action thatdiscredits the profession.

Code of ethics and conduct



Ethics inthe exam

Professionalethics


Ethics are most likely to be considered in the context of the accountants role as adviser to the directors.

Question 1, the case study, nearlyalways involves an ethical dilemmarelating to creative accounting.


3: Environmental and social reporting

Topic List

Environmental reportingSustainabilitySocial responsibilityHuman resource accounting

These soft issues deserve just as much attention as themore technical topics.Environmental issues came up under the previoussyllabus in connection with directors social responsibility.


Human resourceaccounting

Sustainability Socialresponsibility

Environmentalreporting

Environmental accountingEnvironmental issues are likely to have a growing impact on business in the future due to forthcominglegislation, consumer pressure and so on.

What is environmental accounting? Recognising and seeking to mitigate the negative environmental effects of conventional accounting practice Separately identifying environmentally related costs and revenues within the conventional accounting

systems Taking active steps to set up initiatives in order to ameliorate existing environmental effects of conventional

accounting practice Devising new forms of financial and non-financial accounting systems, information systems and control

systems to encourage more environmentally benign management decisions


3: Environmental and social reportingPage 15

What is environmental reporting? Developing new forms of performance

measurement, reporting and appraisal for bothinternal and external purposes

Identifying, examining and seeking to rectify areason which conventional (financial criteria) andenvironmental criteria are in conflict

Experimenting with ways in which sustainabilitymay be assessed and incorporated intoorganisational orthodoxy

Impact on financial statementsNo disclosure requirements relating to environmentalissues at present. Some companies adopt voluntarydisclosures (descriptive and unquantified) in thefollowing areas. Contingent liabilities Exceptional charges Management Commentary comments Profit and capital expenditure forecastsIAS 37 Provisions, contingent liabilities and contingentassets (see Chapter 9) addresses environmentalliabilities (including site restoration costs).

Questions on environmental accounting are a good bet you can always write something!





Pressure is mounting for companies to become more publicly accountable.

GRI guidelines1 Vision and strategy2 Profile3 Governance structure and

management systems4 GRI content index5 Performance indicators

Economic Environmental Social

Long-termMulti-stakeholder

International

Global Reporting Initiative

An increasing numberof companies follow

GRI guidelines eg Shell, BA






Few organisations would admit to being irresponsible. However, social responsibility as practised by businessis controversial. A socially responsible business engages in activities and incurs costs not very relevant to itsbusiness mission but which benefit society or groups within it.

Examples Charitable donations Secondment of staff to voluntary organisations Imposing stricter pollution limits than required

by law Refusing to deal with suppliers who employ

child labour

The stakeholder view of company objectives is that many groups of people have an interest in what the companydoes. Management must balance the profit objective with the pressures from the non-shareholder groups.





Should social responsibility come at the expense of profit?

Its shareholders money The business of business is making money; its

for governments to impose the law; raise taxes Society, not business, is the best judge of moral

priorities and social welfare Its patronising to a workforce, whose lives might

become controlled by the company

Against

Property rights are not the only rights Businesses get government support Externalities businesses often don't pay the

costs they impose on others Businesses are not just economic machines but

social institutions Shareholders rarely exercise power Society is not just a market place Social responsibility is good PR Social responsibility pre-empts legislation

For

There are no right or wrong answers to thiskind of question, but you must support yourviews with reasons.






Human asset accounting was developed, later broadened into intellectual assets.

Implications People are a resource Organisation must protect its investment Deterioration in attitudes is a cost to the

company

Basic principle Employees are assets Competitive advantage is gained by

effective use of people


Notes


4: Non-current assets

Topic List

Definition of an assetIASs 16, 20 and 23ImpairmentInvestment propertyIAS 38Goodwill

You should have met IAS 16 in your earlier studies. It is afairly uncontroversial standard, though detailed.IASs 20 and 23 are covered only very briefly, as theyshould be familiar to you.IAS 40 Investment property is fairly straightforward.The treatment of goodwill changed following the revisionof IFRS 3 Business combinations.


GoodwillIAS 38Investmentproperty

ImpairmentIASs 16,20 and 23

Definition of an asset

IASB Framework: an asset is a resource controlledby an entity as a result of past events and fromwhich future economic benefits are expected to flowto the entity

ASB (UK): assets are rights or other access tofuture economic benefits controlled by an entity asa result of past transactions or events

FASB (USA): assets are probable future economicbenefits obtained or controlled by a particular entityas a result of past transactions or events

Key points Future economic benefit Control Transaction to acquire control has taken place




4: Non-current assetsPage 23


Initial measurementOn initial recognition, property, plant and equipment(PPE) is measured at its cost.

Finance costs must be capitalised if they aredirectly attributable to the acquisition,construction or production of a qualifying assetas part of its cost

All other borrowing costs must be expensed

Costs of dismantling andremoving the asset andrestoring the site areincluded to the extent thatthey are recognised as aprovision under IAS 37.

Directly attributablecosts are included, egacquisition, sitepreparation, installation,delivery and professionalfees.

PPE must be written down where necessary to its recoverable amount following IAS 36.Subsequent expenditure (repairs and maintenance) must be recognised in profit or loss as it is incurred,unless: It enhances the economic benefits A component of an asset that is treated separately for depreciation purposes has been restored or replaced It relates to a major inspection/overhaul restoring economic benefits consumed and reflected in depreciation

IAS 16 Property, plant and equipment





Depreciation

Depreciable amount (cost residual value) of PPEshould be allocated on a systematic basis overuseful life

Depreciation should be recognised as anexpense unless included in carrying value ofanother asset (eg capitalising depreciation onassets used for development)

Main points

Useful life and depreciation method should bereviewed period at least annually and adjustedfor current and future periods where necessary

Investment properties are still exempt fromdepreciation

Other points

Subsequent measurement Cost model: is cost less accumulated depreciation and impairment losses. Revaluation model: carry at arevalued amount less subsequent accumulated depreciation/impairment losses.



Revaluations gains are credited to a revaluation surplus except to the extent that they reverse revaluationdecreases of the same assets in which case P/L for the year

Revaluation decreases are charged First against any revaluation surplus relating to the same asset Thereafter in profit or loss

RevaluationThere was a problem in the past with cherry pickingfor revaluation. Also, valuations became out of date.Under the allowed alternative of IAS 16, revaluingassets is still optional, but:

Where a policy of revaluation is adopted, it must beapplied to a whole class of assets.

The valuations must be kept up to date: annually forsignificant movements/volatile items, 3-5 years forother items.


IAS 20 Government grantsProblems: Conflict of accruals vs prudence.

Matching is difficult.

Accounting entriesRevenue grantsDebit CashCredit P/LIn expenditure period

Capital grantsDebit CashCredit Deferred income

Or Asset accountRelease to P/L overexpected useful life




Matched in P/L with related costs on asystematic basis

Grants not recognised until reasonably certainconditions of receipt complied with

Capital grants are presented either as deferredincome or by deducting grant in arriving atcarrying value of asset

Revenue grants are shown as other income ordeducted from the related expense

If repayable, accounted for as a change inaccounting estimate (IAS 8), ie in current period

Accounting treatment

IAS 23 Borrowing costsMust be capitalised if they are directly attributable Other borrowing costs must be expensed






IAS 36Only review assets for impairmentif there are indicators of it, eg: Decline in market value Adverse change in market,

technology, economics or law Increased interest rates Fall in value below carrying

value Obsolescence or physical

damage Change in use Poor performanceIf possible test individual assets,otherwise cash generating unit(CGU)

Impairment losses arerecognised: For non-revalued

assets arerecognised in P/L

For revalued assetsaccording to therelevant IFRS

May be reversed ifevents causing itreverse

An impairment lossrecognised forgoodwill is notreversed

Compare carrying value with recoverable amount An impairment loss for a CGU should be

allocated First to any goodwill of the CGU Then to other assets on a pro-rata basis,

but not below recoverable amount Under IAS 36, impairment losses are now

recognised for intangible assets with anindefinite useful life and goodwill acquired in abusiness combination

Allocation of loss with unallocated corporateassets or goodwillWhere not all assets or goodwill have beenallocated to an individual CGU then differentlevels of impairment tests are performed toensure the unallocated assets are tested.





Questions are likely to involve both calculation and discussion. Impairmenthas come up nearly every sitting of the current syllabus.

Test of group of CGUs Test the smallest group of CGUs that

includes the CGU under review and towhich the goodwill can be allocated/aportion of the carrying amount of corporateassets can be allocated on a reasonableand consistent basis.

Test of individual CGUs Then test the individual CGUs (including

allocated goodwill and any portion of thecarrying amount of corporate assets thatcan be allocated on a reasonable andconsistent basis) basis.






IAS 40

Accounting treatment Choice of fair value model or cost model Fair value model

Revalue to fair value at each accounting date Do not depreciate Gain or loss to P/L

Cost model Follow cost model of IAS 16

Note. Leasehold investment properties are accountedfor as finance leases.

ExceptionsOwner-occupied property or property held for sale to orbeing constructed for third parties are not investmentproperty (IAS 16, IAS 2, IAS 11 respectively).Disclosures Criteria for classification Assumptions in determining fair value Use of independent professional valuer Rental income and expenses Any restrictions or obligations

An investment property is property (land or building) held to earn rentals or for capital appreciation or both, ratherthan for: Use in the production or supply of goods or services or for administrative purposes

Sale in the ordinary course of business





IAS 38Intangible assets deals with research and development costs, as well as intangible assets.

Intangible asset: an identifiable non-monetary assetwithout physical substance held for use in theproduction or supply of goods or services, for rentalor others, or for administrative purposes.

Development: the application of research findings orother knowledge to a plan or design for theproduction of new/substantially improved materials,devices, products, processes, etc.

Internally generated brands, mastheads,publishing titles, customer lists and similar itemsshould not be recognised as intangible assets.Internally generated goodwill should not berecognised as an asset.

Research: original or planned investigationundertaken with the prospect of obtaining newscientific or technical knowledge and understanding.



For R & D, the problem is one of matching concept vs prudence concept.

Development: use of scientific/technical knowledge inorder to produce new/substantially improved materialsdevices, processes etc.

Initial measurement R&D, as above Purchased intangible

assets capitalised atcost

Circumstances Probable future economic benefits Intention to complete and use/sell Resources adequate to complete and

use/sell Ability to use/sell Technical feasibility Expenditure can be reliably measured

Write off as incurred Write off in year of expenditure except incertain circumstances when it can be

capitalised and amortisedMeasurementSubsequent measurement Cost model: cost less

accumulated depreciation andimpairment losses

Revaluation model: revaluationAmortisation Systematic over useful life At least annual review of UL and amortisation period Intangibles with indefinite useful life are not amortised but

reviewed at least annually for impairment

Research:original and planned investigation undertakenwith the prospect of gaining new scientific or technicalknowledge and understanding.





Goodwill can be purchased or be acquired as part of a business combination. In either case, the treatment iscapitalisation at cost or fair value under IFRS 3.

A bargain purchase arises when the fair value of theacquisition-date identifiable net assets acquired exceeds theconsideration transferred. Before recognising a gain on bargain purchase, the

acquirer must reassess whether it has correctly identifiedall the assets acquired and liabilities assumed

Then the acquirer must review the procedures used tomeasure the amounts recognised for: Identifiable net assets Non-controlling interest (if any) Interest previously held (if any) Consideration transferred

Bargain purchase

Future economic benefits arising from assetsthat are not capable of being individuallyidentified and separately recognised Recognise as an asset and measure at

cost/excess of purchase cost overacquired interest

Do not amortise Test at least annually for impairment

(IAS 36)

Definition

You may be asked for a complicatedcalculation of goodwill as part of a group

accounts question.


5: Employee benefits

Topic List

Short-term benefitsRetirement benefits

IAS 19 Employee benefits are likely to be tested as partof a longer question rather than as a full question.


Short-termbenefits

Retirementbenefits

IAS 19IAS 19 Employee benefits dealswith all employee benefits, not justpensions.

ObjectivesAn entity should recognise anexpense as it consumes theeconomic benefits of employeeservice in exchange for employeebenefits and a liability wherethese are to be paid in the future.

Recognise expense on an accruals basis (undiscounted) Short-term accumulating compensated absences (eg unused

holiday carried forward) are recognised when the employee rendersservice increasing entitlement to compensated absences

Short-term non-accumulating compensated absences (egmaternity pay) are recognised when the absences occur


Wages, salaries and social security contributions Paid annual/sick leave Profit sharing and bonuses (if payable within 12 months of year end) Non-monetary benefits (eg health care, accommodation etc)

Examples Short-term benefits


Retirementbenefits

Short-termbenefits

5: Employee benefitsPage 35

Retirement benefitsDefined contribution plans are post-employmentbenefit plans under which an entity pays fixedcontributions into a separate entity (a fund) and willhave no legal or constructive obligation to payfurther contributions if the fund does not holdsufficient assets to pay all employee benefitsrelating to employee service in current and priorperiods.Defined benefit plans are post-employment plansother than defined contribution plans.

Defined contribution plans The company's only obligation is to pay the

agreed amount (normally a percentage ofsalary) into a plan on behalf of its employee

Accounting treatment: charge contributionspayable in respect of the accounting period; ifamounts paid are different, then aprepayment/accrual will appear

Disclosure: expense recognised for period


Increase in present value of defined benefit obligation because benefits are one yearcloser to payment. The discount rate is determined by reference to market yields onhigh quality fixed-rate corporate bonds. It is applied to the net defined benefit at the startof the accounting period.Debit Interest cost (x% b/d obligation) (P/L)Credit PV defined benefit obligation (SOFP)

Retirementbenefits

Short-termbenefits

A suggested approachCost RecogniseInterest coston obligation

Defined benefit plans Role of actuary: calculates P/L charge for year; provides rate

of expected return on assets and discount rate for liabilities(interest cost); values the assets and liabilities of pensionfund, determines contributions required

Accounted for by actuary measuring the liability using theprojected unit credit method

Defined benefit plans The projected unit credit method

sees each period of service asgiving rise to an additional unit ofbenefit entitlement and measureseach unit separateey to build upthe final obligation



Currentservicecosts

Increase in the present value of defined benefit obligation as the result of employeeservice in the current period (provided by the actuary, but may need to be discountedback to period end).DEBIT Current service cost (P/L)CREDIT PV defined benefit obligation (SOFP)

Interest onplan assets

Long-term expected increase in assets based on discount rate (determined as for interestcost on obligation) and applied to b/d assets.DEBIT Plan assets (SOFP)CREDIT Expected return (x% b/d assets) (P/L)(Technically the expected return is also time apportioned on contributions less benefitspaid in year)

Gains andlosses onsettlement

Difference between the value of the obligation being settled and the settlement priceGainDEBIT PV defined benefit obligation (SOFP)CREDIT Service cost (P/L)LossDEBIT Service cost (P/L)CREDIT PV defined benefit obligation (SOFP)


Remeasurements:actuarial gainsand losses

Arising from annual valuations of obligation. On obligation, differences between actuarial assumptions and actual experience

during the period, or changes in actuarial assumptions.GainDEBIT PV defined benefit obligation (SOFP)CREDIT Other comprehensive income (SPLOCI)LossDEBIT Other comprehensive income (SPLOCI)CREDIT PV defined benefit obligation (SOFP)

Remeasurements:return on assets

Arising from annual valuations of plan assetsGainDEBIT FV plan assets (SOFP)CREDIT Other comprehensive income (SPLOCI)Loss DEBIT Other comprehensive income (SPLOCI)CREDIT FV plan assets (SOFP)

Retirementbenefits

Short-termbenefits



Treatment of remeasurements (actuarial gain/loss)IAS 19 requires actuarial gains and losses, now called remeasurements, tobe recognised in the period incurred.They are recognised in other comprehensive income and not reclassified(see Chapter 18) to profit or loss for the year.


Short-termbenefits

Retirementbenefits

Calculation of actuarial gain/lossMarket value of plan assets Present value of obligation

$m $mMarket value of plan assets b/d X PV of obligation at start of year XInterest on plan assets (x%) X Interest cost (x%) XContributions X Current service cost XBenefits paid (X) Past service cost XSettlements (X) Benefits paid (X)Return on plan assets: bal. figure X Settlements (X)

__

Market value of plan assets c/d X Actuarial (gain)/loss on obligation: bal. fig. X__

__

PV of obligation at end of year X


6: Income taxes

Topic List

IAS 12Deferred tax

IAS 12 on current tax is straightforward and shouldpresent no problems.IAS 12 on deferred tax deals with the method ofproviding for deferred tax.The December 2007, June 2010 and June 2012 paperhad questions on deferred taxation.


Deferred taxIAS 12

IAS 12 requires the following treatment ofcurrent tax.

Recognise a liability for amount unpaid,relating to current and prior periods

Recognise an asset for amountsoverpaid/tax losses

SPLOCI disclosureCurrent tax XUnder/(over) statement of prior periods XDeferred tax expense/(income) relating to Origination and reversal of temporary

differences X Reduction in tax rate (X)Share of tax of associates X

__

X__

__

SOFP disclosure Distinguish between current and deferred tax assets

and liabilities Deferred tax assets/liabilities are based as non-current


Deferred taxIAS 12

6: Income taxesPage 43

Deferred taxThe tax charge to P/L is often differentfrom tax rate times the profit before taxfigure because of the differences whichexist between tax rules and financialaccounting principles.

Permanent differences arise wherecertain items in the I/S are either nottaxable or not allowable.Temporary differences arise whereitems are taxable/allowable but are dealtwith in the tax computation in periodsdifferent from those in which they areincluded in the financial statements.

Basis of provision Nil provision no provision Full provision temporary differences provided for in full Partial provision accounted for only to the extent that it is

probable that a liability or asset will crystallise

Examples Accelerated tax depreciation Development costs Intragroup profits in inventory Unrelieved tax losses Pension liabilities Unremitted earnings Revaluations of subsidiaries

Deferred tax is the tax attributableto temporary differences.


Deferred taxIAS 12

Deferred tax is calculated by reference to the difference between the carrying value for accounts purposes andthe tax base (value attributed for tax purposes).Taxable temporary differencesTaxable temporary differences result in taxable profits in the future giving rise to a deferred tax liability Temporary differences where income or expense is included in accounting profit in one period and taxable

profit in another are called timing differences Interest revenue accrued for accounting purposes but taxed when received Accelerated tax depreciation where tax (or 'capital') allowances are received at a rate higher than the

accounting depreciation rate Development costs which are a deferred expense for accounting purposes, but receive a tax deduction

when paid Temporary differences also arise on:

Revaluations: the gain will be taxable in the future either on sale or if not sold by generating taxableincome in excess of tax depreciation; the temporary difference is the estimated chargeable gain

Fair value adjustments: similar to revaluation but often occurring on consolidation


6: Income taxesPage 45

Deductible temporary differencesDeductible temporary differences result intax deductible amounts in the futuregiving rise to a deferred tax asset. Examples are:

Accrued expenses/provisionswhich are not deducted for taxpurposes until paid

Downward revaluations where noadjustment is made for taxpurposes and hence the tax baseexceeds carrying value

Deferral method: tax effects of temporary differences arecalculated using tax rates current when differences arise

Liability method: deferred tax liabilities are calculated atthe rate at which it is estimated that tax will be paid (orrecovered) when the temporary differences reverse

Alternative methods


Deferred taxIAS 12

Deferred tax is provided for under thefull provision liability method but usingtax rate enacted or substantiallyenacted at the balance sheet date

Deferred tax assets and liabilities canonly be offset if: The entity has a legal right to set off

current tax assets and liabilities, and They relate to the same tax authority

A deferred tax asset is recognised forunused tax losses/credits when it isprobable that future taxable profit will beavailable to relieve them

Deferred tax assets and liabilitiesshould not be discounted

Accounting treatment Disclosure

Deferred tax asset/liability broken down by type oftemporary difference

Amount of current/deferred tax charged or crediteddirectly to equity (eg revaluation)

Statement of financial position

Major components of the tax expense or income (seebefore)

Explanation of relationship between tax expense andaccounting profit, eg reconciliation of accounting profit tax rate and tax expense identifying effect of temporarydifferences and/or changes in tax rate

SPLOCI


7: Financial instruments

Topic List

Financial instrumentsIAS 32IFRS 9/IAS 39IFRS 7Recent developmentsFair value measurement

This is a controversial and complex topic. It is also thesubject of ongoing change as IFRS 9 replaces IAS 39.The examiner is fond of this topic and has tested it atevery sitting.


IAS 32 Fair valuemeasurement

Financialinstruments

IFRS 7 Recentdevelopments

IFRS 9/IAS 39

Financial instrumentAny contract that gives rise to a financialasset of one entity and a financial liabilityor equity instrument of another.

Cash; equity instrument of another entity;contractual right to receive cash/otherfinancial assets; contract that can besettled in the entitys own equityinstruments and may be either a derivativeor a non-derivative.

Relevant standardsIAS 32 deals with the classification of instruments as debt orequity.IFRS 9 has replaced IAS 39 in respect of classification andmeasurement of financial assets and liabilities andderecognition and will eventually replace it all.IAS 39 dealt with the recognition and measurement of financialinstruments, however it is gradually being replaced by IFRS 9.IFRS 7 provides disclosure requirements for financialinstruments.

Financial asset





IFRS 9/IAS 39

7: Financial instrumentsPage 49

Equity instrument

Financial liabilityContractual obligation to deliver cash/otherfinancial asset; contractual obligation toexchange financial instruments underpotentially unfavourable conditions.

Contract that evidences a residual interestin the assets of an entity after deducting allits liabilities.

Financial instruments should be classified as either Liability (debt) or Equity

Compound instruments (exhibiting characteristics of both)must be split into their debt and equity components

Substance rather than legal form applies (egredeemable preference shares are a financial liability)

Interest, dividends, loss or gains relating to a financialinstrument classified as a liability are reported in theSPLOCI, while distributions to holders of equityinstruments are debited directly to equity (in the SOCE)

Offset of a financial asset and liability is only allowedwhere there is a legally enforceable right and the entityintends to settle net or simultaneously

IAS 32 presentation





IFRS 9/IAS 39

Recognise financial instruments in the SOFP when the entitybecomes a party to the contractual provisions of the instrument:

Derecognise when Contractual rights to cashflows expire, or Substantially all risks and rewards of ownership are

transferred to another party

Financial liabilities are classified as: FV through profit or loss (if held for

trading or designated as such), or Amortised cost. [IFRS 9]

Derecognise when financial liability isextinguished.

Financial assets are classified as: Fair value, or Amortised coston the basis of the business model for managing the assetand its contractual cashflow characteristics. [IFRS 9]

Reclassify debt instruments when an entity changes itsbusiness model for managing financial assets.

IFRS 9 prohibits the reclassification offinancial liabilities.



Initial measurement Subsequent measurement Related income/expense

Financial assets atamortised cost

FV of consideration given +transaction costs

Initial measurement - principalrepayments +/- cumulativeamortisation - impairments

Interest income (received +winding up) is recognised in profitor loss

Financial assets atfair value

FV of consideration given Remeasured to FV at eachperiod end

Changes in FV are recognised in Profit or loss OCI if asset is equity

instrument not held for trading and election made

Financial liabilities atamortised cost

FV of consideration received- transaction costs

Initial measurement - principalrepayments +/- cumulativeamortisation - impairments

Interest expense (paid + windingup) is recognised in profit or loss

Financial liabilities atFVTPL

FV of consideration received Remeasured to FV at eachperiod end

Changes in FV of financial liabilitiesheld for trading are recognised inprofit or loss

The change in FV of a financial liability DESIGNATED as FVTPL is split into two elements: Gain or loss from credit risk recognise in OCI Other gain or loss recognise in profit or loss





IFRS 9/IAS 39

Amortised cost ExampleThe method used in the following example applies to deep discount bonds and other similar instruments(including zero coupon bonds).

Debt issued for $400,000 (nominal) on1.1.20X1 for proceeds of $315,526;redeemed for $400,000 (ie par) on31.12.20X5Interest rate = 4%IRR = 9.5%

$Annual interest payments(4% $400,000 5) 80,000Deep discount $(400,000 315,526) 84,474

______

164,474______

______

At inception DEBIT Cash $315,526CREDIT Liability $315,526



Winding upP/L Actual interest interest charged Liability in

Year charge payable to P/L closing SOFP*$ $ $ $

20X1 29,975 16,000 13,975 329,50120X2 31,303 16,000 15,303 344,80420X3 32,756 16,000 16,756 361,56020X4 34,348 16,000 18,348 379,90820X5 36,092 16,000 20,092 400,000

______ ______ ______

164,474 80,000 84,474______ ______ ______

______ ______ ______

*9.5% opening liability in SOFP

Fair value is measured as quoted market price in an active market where possible.





IFRS 9/IAS 39

Impairment [IAS 39] Impairment review where evidence of

financial asset being impaired Original effective interest rate should

be used when discounting futurecash flows to calculate theimpairment

Impairment loss is charged to P/L Where financial asset suffers

impairment loss, cumulative losseson fair value adjustments previouslyrecognised in equity are recycled inP/L as well as impairment loss

Reversal: P/L

Embedded derivatives[IFRS 9]

= Derivatives embedded within a hostcontract, eg construction contract inforeign currencyHOST FINANCIAL ASSETSeparate derivative from host andaccount for as a derivative whenconditions are met.Account for host contract as normal,eg IAS 11HOST = IFRS 9 FINANCIAL ASSETAccount for hybrid contract inaccordance with IFRS 9

Hedging [IAS 39]Hedge accounting is mandatorywhere a transaction qualifies as ahedge (all three criteria met): Designated at inception as a

hedge Highly effective Hedge effectiveness can be

reliably measured



IAS 39 identifies three types of hedges which determines their accounting treatment.

*IAS 39 allows the hedge of a foreign currency firm commitment to be accounted for as a cash flow hedge.

Type Hedges against Accounting treatmentFair value hedge Changes in fair value of a recognised asset or

liability or an unrecognised firm commitment* (orportion of either) that could affect profit or loss

Gain or loss on instrument is recognised in theP/L

Gain or loss on hedged item also recognised inP/L (and adjusts the carrying value of hedgeditem)

Cash flow hedge Exposure to variability in cash flows attributable toa risk associated with a recognised asset or liabilitythat could affect profit or loss

Gain or loss on effective portion of instrument isrecognised in other comprehensive income (andrecognised in P/L when asset or liability affectsprofit or loss, eg by interest income)

Gain or loss on ineffective portion is recognisedin P/L

Hedge of netinvestment in aforeign operation

Variability in value of the net investment in aforeign operation or monetary items accounted foras part of that net investment

As for cash flow hedge





IFRS 9/IAS 39

The main disclosures required are:

Carrying amount of financial assets andliabilities by IFRS 9 category

Reasons for any reclassification between fairvalue and amortised cost

Details of assets and exposure to risk wheretransfers of assets have taken place

Carrying amount of financial assets pledged ascollateral

Allowance for credit losses Multiple embedded derivatives Defaults and breaches

Statement of financial position

Net gains/losses by IFRS 9 category Interest income/expense Impairment losses by class of financial asset

Statement of profit or loss and othercomprehensive income



Description of hedge

Description of financial instruments designatedas hedging instruments

Nature of risks being hedged

Cash flow hedges: when cash flows will occur

FV hedges: gains or losses on hedged itemand hedging instrument

Ineffectiveness recognised in profit or loss

Hedge accounting

By class Methods and assumptions

Fair value

Qualitative disclosure: managementsobjectives, policies and processes formanaging those risks

Quantitative disclosure: Extent of exposure to risk Credit risk Liquidity risk Market risk

Risk

In January 2011 a supplement was issued making a distinction between good book/bad book





IFRS 9/IAS 39

Exposure Draft: Amortised cost and impairmentIFRS currently uses an incurred loss model for the impairment of financial assets. This assumes all loanswill be repaid unless there is evidence to the contrary. The proposals in the ED are: Amortised costs objective is to provide information about the effective return on a financial asset or

liability by allocating interest revenue or expense over the expected life of the financial instrument More guidance on the amortised cost of a variable instrument (ie applies to spread) Impairment Effective interest rate to include an initial estimate of expected credit losses (therefore they are spread

over instruments life) Credit losses held in a separate allowance account (a reconciliation is disclosed) Losses due to changes in cash flow estimates disclosed as a separate line item Write-offs direct to Financial Asset account if considered uncollectible Disclosures to show effect of credit losses, reconciliation of non-performing financial assets and results of

any stress testing

In January 2011 a supplement was issued making a distinction between good book/bad book



IFRS 9 Chapter 6 Hedging Review DraftThis was issued in September 2012, taking account of comments on a 2010 ED.Under the proposals the 80%-125% 'bright line' test of whether a hedging relationship qualifies for hedgeaccounting would be replaced by an objective-based assessment: This allows genuine hedging relationships to be accounted for as such whereas the IAS 39 rules sometimes

prevented management from accounting for an actual hedging transaction as a hedge Fair value hedges: the IAS 39 treatment of recognising both changes in the fair value of the hedged item

and changes in value of the hedging instrument in profit or loss will be retained, but rules changed so thathedges of investments of equity instruments held at fair value through other comprehensive income can beaccounted for as hedges

Cash flow hedges: will continue to be accounted for as under IAS 39. Hedging gains and lossesrecognised in other comprehensive income will be recognised in a separate cash flow hedge reserve inequity





IFRS 9/IAS 39

The price that would be received to sell an asset orpaid to transfer a liability in an orderly transactionbetween market participants at the measurementrate.

Fair valueFair value measurementIn May 2011 the IASB published IFRS 13 Fair valuemeasurement. Its objective is to: Define fair value Set out in a single IFRS a framework for measuring

fair value Require disclosure about fair value measurements

The rules of fair value measurement have now been revised by IFRS 13 Fair value measurement.



IFRS 13IFRS 13 states that valuation techniques must be those which are appropriate and for which sufficient data areavailable. Entities should maximise the use of relevant observable inputs and minimise the use ofunobservable inputs.The standard establishes a three-level hierarchy for the inputs that valuation techniques use to measure fair value:Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity

can access at the measurement date.Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability,

either directly or indirectly, eg quoted prices for similar assets in active markets or for identical orsimilar assets in non active markets or use of quoted interest rates for valuation purposes.

Level 3 Unobservable inputs for the asset or liability, ie using the entity's own assumptions about market exitvalue.


Notes


8: Share-based payment

Topic List

The issueTypes of transaction

The examiner tests this topic regularly., usually as part ofa longer question. There was a full question on it inDecember 2010.


Types oftransaction

Theissue

Share-based paymentsShare-based payments are transactions whereby entities purchase goods and service from other parties, suchas suppliers and employees, by issuing shares or share options.

The issueThis is a good example of substance over form. In the past whena limited liability company gave employees share options asremuneration, no expense was recognised in P/L.This was believed to cause economic distortions and corporategovernance concerns.


Types oftransaction

Theissue

8: Share-based paymentPage 65

IFRS 2 deals with three types of share-based payment transactions.

Equity settled share-based payment transactions: the entityreceives goods or services as consideration for equityinstruments or the entity (including shares or share options).

Cash-settled share-based payment transactions: the entityacquires goods or services by incurring liabilities to the supplier ofthose goods and services for amounts that are based on the price(or value) of the entitys shares or other equity instruments.

Choice of equity/cash settled: entity or supplier can choose whether to settle the transaction in cash orequity instruments.

DEBIT Expense (P/L)CREDIT Equity (if equity-settled)CREDIT Liability (if cash-settled)

Recognition


Types oftransaction

Theissue

MeasurementChoice

Entity has the choice: if there is apresent obligation to settle in cash,treat as a cash-settled transaction.If not, treat as equity settled.Counterparty has the choice: theentity has issued a compoundfinancial instrument Treat debt component as cash

settled Treat equity component as

equity settled

Cash-settledEg share appreciation rights.Employees become entitled to afuture cash payment based onthe increase in the entitys shareprice.Company must recogniseservices received and relatedliability as services are rendered.Liability must be recognised at fairvalue using an option pricingmodel.This fair value must be updated ateach year end.

Equity-settledUse the fair value of goodsreceived ORIf these cannot be measuredreliably, measure indirectly byreference to the fair value of theequity instruments granted.Estimating fair value of equityinstruments: Shares: market price at grant

date Share options: use option

pricing model to estimate fairvalue at grant date


9: Provisions, contingencies and EARP

Topic List

IAS 10IAS 37

IASs 10 and 37 should both be familiar to you from yourearlier studies. IAS 37 is particularly topical in the light ofincreasing environmental awareness. You may get askedabout environmental liabilities as part of a disclosurequestion on the environmental report.


IAS 37IAS 10

Events after the reporting period (EARPs)Events, both favourable and unfavourable, which occur between the end of the reporting period and the dateon which the financial statements are approved by the board of directors.

Adjusting events are EARPs which provideadditional evidence of conditions existing atthe reporting date, and therefore need to beincorporated into the financial statements. Nongoing-concern indicators after the reportingdate are adjusting.

Non adjusting events are EARPs which concernconditions which did not exist at the reporting date. Donot adjust, but disclose if non-disclosure would affect theuser's ability to make proper evaluations and decisions.Dividends proposed after reporting date: do notrecognise as a liability.

Disclosure for significant non-adjusting events: nature of the event, estimate of financial effect (or statementthat estimate cannot be made).


IAS 37

9: Provisions, contingencies and EARPPage 69

IAS 10

Contingent liabilityShould be disclosed unless the possibility of anyoutflow of economic benefits to settle it is remote.

Contingent assetShould be disclosed where an inflow of economicbenefits is probable.

IAS 37IAS 37 Provisions, contingent liabilities and contingent assets was published in 1998 to remedy some abuses ofprovisions. Entities should not provide for costs that need to be incurred to

operate in the future, if those costs could be avoided by theentitys future actions

Costs of restructuring are to be recognised as a provision onlywhen the entity has an obligation to carry out the restructuring

The full amount of any decommissioning costs or environmentalliabilities should be recognised from the date on which they arise

ProvisionA liability of uncertain timing oramount. Liabilities are obligations totransfer economic benefits as aresult of past transactions or events.


IAS 37IAS 10

Yes

Start

Provide Disclose contingentliability Do nothing

Present obligationas a result of anobligation event?

Possibleobligation?

Probable outflow? Remote?

Reliable estimate?

Yes

No

No

No

No (rare)

Yes

Yes

Yes

No


10: Related parties

Topic List

Related party disclosures

This topic is new to you at P2, and so could well betested, either as a full question or part of a question.


Related partydisclosures

Key elements: control, joint control, significant influenceA person is related to an entity if:(1) They control or jointly control the entity (Mr A & B)(2) They have significant influence over the entity (Mr

A & C)(3) They are key management personnel of the entity

or its parent(4) They are a close family member of any individual

in (1)-(3)

PLUS where an individual controls/jointly controls/hassignificant influence over two entities, they are related

Mr A

40%

B C80%

V

40%

X80%

An entity is related to another entity if:(1) They are members of the same group (Z & Y)(2) One is an associate or JV of the other (Z & X)(3) Both are JVs of a third party (W & U)(4) One is an associate and the other a JV of a third

party (X & W)(5) One is a pension plan for employees of the other

TZ

W UY

50%50%

50%50%

KEY FACTOR: SUBSTANCE OF RELATIONSHIP


10: Related partiesPage 73

Always(1) Name of parent + ultimate controlling party(2) Key management personnel compensationWhere RP transactions have occurred disclose foreach category of related party(1) Nature of relationship(2) Amount of transactions(3) Amount of outstanding balances(4) Provision for doubtful debts(5) Bad debt expense re related parties

Two entities simply because they have a directorin common

Two venturers simply because they share jointcontrol of a joint venture

Providers of finance, trade unions, publicutilities, government departments and agenciesin the course of their normal dealings with anentity by virtue only of those dealings

A single customer, supplier, franchisor,distributor or general agent with whom an entitytransacts a significant volume of businessmerely by virtue of the resulting economicdependence

DisclosureNot necessarily related parties


Notes


11: Leases

Topic List

Forms of leaseLesseesLessorsOther issuesCriticism of IAS 17

Leasing transactions are common in practice. Theexaminer is likely to test IAS 17 in conjunction with saleand leaseback transactions or revenue recognitionaspects rather than the mechanics.


Finance lease Transfers substantially all the risks and

rewards of ownership of an asset to thelessee; title may or may not betransferred

Comparison of present value of minimumlease payments and fair value of leasedasset is commonly used to judge whetherrisks and rewards have been transferred(no numerical guidance in IFRS)

PV: calculate using the interest rateimplicit in the lease

Forms of lease Criticism ofIAS 17

Other issuesLessorsLessees

Minimum lease payments are the payments over the leaseterm that the lessee is, or can be required to make(excluding contingent rent, costs for services and taxes tobe paid by and reimbursed to the lessor), and Lessee any amounts guaranteed by him or a party

related to him Lessor any residual value guaranteed to lessor by

lessee, party related to lessee or independent thirdparty

Lease term: the period for which the lessee hascontracted to lease the asset (primary and secondaryperiods)

You should know this from your earlier studies.Operating leaseA lease other than a finance lease


11: Leases Page 77



Finance lease: record as an asset andobligation at the lower of present value of theminimum lease payments and fair value

The asset should be depreciated over theshorter of the lease term and its useful life

A finance charge is made to produce a constantperiodic rate of charge on the outstanding leaseobligation (use actuarial method before tax andsum of the digits method)

Operating lease: rentals charged on a straight-line basis over the lease term unless anothersystematic basis is representative of usersbenefit


Leased assets: net carrying amount at year end date Finance lease liabilities

2 disclosure notes Reconciliation of minimum lease payments and PV Breakdown of PV For both, give maturity analysis

(< 1 yr; 2-5 yrs; >5 yrs) Operating leases: future minimum lease payments

under non-cancellable operating leases split < 1 yr, 2-5 yrs, > 5 yrs

P/L (typical disclosures): depreciation charge onassets under finance leases, finance charge onfinance leases, operating lease rentals, accountingpolicy

Disclosure




Lessors accounting treatmentFinance lease Recognise receivable equal to net investment in the lease as a finance lease asset Mirror image of lessee's liability plus unguaranteed residual value Unguaranteed residual value is portion of residual value of asset not guaranteed by lessee or guaranteed

only by party related to lessor Finance income recognised reflecting constant periodic rate of return on net investment outstanding

Operating lease Assets held for use under operating leases, are recorded as an asset on the SOFP and income in P/L on a

straight line basis unless another systematic basis is more representative

You are unlikely to be asked for the disclosures for lessors.


11: Leases Page 79



Sales and leaseback transactions If leaseback is a finance lease, defer book

profit/ loss and amortise over lease term Double entry is:DEBIT CashCREDIT Finance lease liabilityand then as any other finance lease

If leaseback transaction is an operating lease;where SP = sales proceeds; FV = fair value: If SP = FV (see IFRS 13), recognise any

profit/loss immediately If SP < FV, recognise profit/loss immediately

unless the apparent loss is compensated byfuture rentals at below market price, in whichcase defer and amortise

If SP > FV, defer the excess over FV andamortise over lease term (ie recognise FVminus Book Value)

Sale and leaseback transactions are a favourite with this examiner.




IAS 17s key usefulness is theenforcing of application ofeconomic substance over legalform

Without such enforcementleasing would be an example ofoff balance sheet financing

No numerical guidance on what% of fair value constitutes adefinite transfer of risks andrewards

Criticisms of IAS 17

Issued in May 2013 (original ED in 2010) The current IAS 17 model of classification of leases would cease to

exist Lessees would no longer be permitted to treat leases as 'off-

balance sheet' financing, but instead would be required to recognisean asset and liability for all leases within the scope of the proposedstandard

Options to extend a lease only included if there is a 'significantincentive' to exercise them

Dual approach: For most real estate leases, report straight-line expense (like

operating leases) For other leases, approach similar to current finance leases

ED leases

A leasing question may be connected to off balance sheet finance in general. In particular, you may beasked to discuss the links between IAS 17 and substance over form.


12: Revision of basic groups

Topic List

Group accountsIFRS 10 Consolidated financialstatementsIFRS 3 (Revised)Summary of techniqueAssociates and joint venturesIFRS 12 Disclosure of interests inother entities

Some of this chapter should be very familiar to you.However, IFRS 10, 11 and 12 are new, and IAS 27 andIFRS 3 have recently been revised.You will always get a compulsory groups question in theexam. It will be part of a longer case study for 50 marks.You have met associates but not joint arrangements inyour earlier studies.


IFRS 10 Summary oftechnique

Associates andjoint ventures

IFRS 12Groupaccounts

IFRS 3(Revised)

Group accounts are prepared which show the group as a single economic entity.SIGNIFICANT INFLUENCE = power to participate in but not controlthe financial & operating policy decisions of an investee 2050% votes

Consolidate

SUBSIDIARY: An entity thatis controlled by another entity

IFRS 9 rules

INVESTMENT: Asset heldfor accretion of wealth

Equity account

ASSOCIATE: An entity in whichthe parent has significantinfluence

PARENT: An entity thathas one or moresubsidiaries


12: Revision of basic groups Page 83

ControlAn investor controls an investee if it has:

Power over the investee Exposure or rights to variable returns from involvement with the investee The ability to use its power over the investee to affect the amount of returns it receives

Power ReturnsExisting rights that give the current ability todirect the relevant activities of the investee.Power may be achieved through holding amajority of voting rights or by other means.

May include:

Dividends Remuneration for servicing investees

assets and liabilties Fees and exposure to loss from the

provision of credit support





IFRS 3(Revised)

Different reporting dates adjustments shouldbe made

Uniform accounting policies if not, disclosewhy. Adjustments should be made onconsolidation

Intra-group transactions are eliminated

Preparation

A parent need not prepare group accounts if: It is itself a wholly owned subsidiary It is partially owned and the other owners do not

object Its securities are not publicly traded The ultimate or intermediate parent publishes

IFRS-compliant consolidated accounts Disclosures apply

Exemption

Consolidated financial statementsConsolidated financial statements include all subsidiaries other than those held for sale or those which operateunder long term restrictions and so are not controlled.

Parents accountsSubsidiaries are accounted for at cost or inaccordance with IFRS 9





IFRS 3(Revised)


Acquisition method1 Identify the acquirer One entity acquires another in all business combinations2 Determine acquisition date Date on which control is gained3 Recognise and measure

Assets and liabilities of acquiree At fair value Non-controlling interest At fair value or as a proportion of net assets

4 Recognise and measure goodwill Consideration transferred XNon-controlling interest X

XFV of net assets of acquiree (X)Goodwill X





IFRS 3(Revised)

CONSIDERATION TRANSFERRED

Cash/other assets Shares Debt instruments

Record contingentconsideration at fair value

Exclude considerationrelating to pre-existingrelationships

Exclude acquisition costs(which are expensed)

FV OF NET ASSETS ACQUIREDAll assets and liabilities areincluded at fair value inaccordance with IFRS 13 (Ch 7) Exclude liabilities for future

losses Include identifiable intangible

assets Include contingent liabilities if

fair value can be measuredreliably

Include reacquired rights &indemnification assets

Use relevant standards tomeasure deferred tax,pensions, share-basedpayments & assets held for sale

NON-CONTROLLING INTERESTMeasure at: Fair value, or As proportion of net assetsFair value should be determinedbased on market value of sharesor valuation techniques. It is notextrapolated from considerationtransferred for controlling interest.If the NCI is not entitled to aproportionate share of net assetson a winding up, the NCI must bemeasured at FV.

When fair value is used to measurethe NCI, goodwill represents all ofthe goodwill of the business, notjust the parents share.



Disclosures Name and description of acquiree and date of acquisition Share of voting rights acquired and reason for combination Description of factors making up goodwill Consideration transferred by type and details of contingent consideration Details of assets and liabilities acquired The gain in a bargain purchase and a description of why it arose The NCI and measurement basis applied plus details of techniques to determine fair value where relevant

Fair valuesOn consolidation, the fair value of the consideration paid for a subsidiary is compared with the fair value of theidentifiable assets and liabilities acquired. Fair value is determined in accordance with IFRS 13, which wascovered in Chapter 7.





IFRS 3(Revised)

1

2

Read the question and draw up the groupstructure, highlighting

Prepare necessary proforma required byquestion

The % owned Acquisition date Pre-acquisition reserves

4Read through additional notes and attemptadjustments (show workings)Do the double entry for the adjustments onto yourproforma answer and onto your group workings

Cancel any intragroup items eg current a/c balances,loans

Adjust for unrealised profits Make fair value adjustments

Leave out cost of investment Put in a line for goodwill Put in a line for investment in associate Include a line for non-controlling interests Leave spaces for any extra items

3 Work methodically down the SOFP, transferringfigures to proforma or workings

100% of all assets/liabilities in brackets on face ofproforma, ready for adjustments

Cost of subsidiary/associate and reserves to workings Search capital & share premium (parent only) to face

of proforma answer Open up a (blank) working for NCI



Complete goodwill calculationConsideration transferred XNon-controlling interest XNet assets acquired as represented by

Share capital XShare premium XOther reserves at acquisition XRetained earnings at acquisition XFair value adjustments X

____ (X)_____

Goodwill XLess impairment losses to date (X)

X

The NCI at acquisitionwill be either at % FVof net assets or at fullFV

Note A similarworking is used forany other reserves

5

Complete retained earnings calculationP S A

Per question X X XAdjustments X/(X) X/(X) X/(X)

______ ______ _____

X Y Z______ ___________ _____

Share of subsidiary post acquisition (Y %) XShare of associate post acquisition (Z %) X

______

XAny impairment of goodwill (X)

______

X____________

6





IFRS 3(Revised)

8 Complete non-controlling interest calculationNCI at acquisition XNCI share of post acqn reserves XLoss: NCI share of impairment losses(only if NCI at full FV at acqn) (X)

______

X______

______

7 Complete Investment in associate (if appropriate):Cost of associate XShare of post-acquisition retained reserves (from reserves working) XLess group impairment losses on associate to date (X)

______

X______

______



Workings for common adjustmentsCalculation of provision for unrealised profit

Unrealised profit on intragroup sales X% held @ y/e %= Provision for unrealised profit (PUP) X DR Retained earnings

(adjust in company selling goods) CR Group inventories

Calculation of fair value adjustmentsAcqn date Movement Year end

Inventories X (X) XDepreciable non-current assets X (X) XNon-depreciable non-current assets X (X) XOther fair value adjustments X/(X) X/(X) X/(X)

X X X

Goodwill Retd earnings

Adjustfiguresin SOFP





IFRS 3(Revised)

IAS 28 Associates and joint venturesSignificant influence Presumed when 20%50% voting shares are held

Evidenced by: Board representation Participation in policy making Material transactions between investor and investee Interchange of management personnel Provision of essential technical information

Equity method Method of accounting for an associate or joint venture. Applied where consolidatedaccounts are prepared, ie the parent also has a subsidiary. Also, where an investorhas an associate but no subsidiaries, then the investor does not prepare consolidatedaccounts, but includes the associate in its own accounts using the equity method.

An ED Equity method: share of other net asset changes (November 2012) provides additional guidance on howinvestors should recognise their share of changes in the net assets of an investee that are not recognised in P/Lor OCI and are not distributions. Investors should recognise their share of such changes in the investors' equity.

The criteria that exist to identify a joint venture are covered in Chapter 13.



Consolidated statement of financial position equity methodInvestment in associate

Consolidated statement of profit or loss andother comprehensive income Share of profit after tax Share of other comprehensive income

Adjustments Transactions between the group and the associate

are not eliminated Group share of unrealised profits is eliminated

Against inventories (where associate is seller) Against investment (where parent is seller)

Excess depreciation on FV adjustments

Cost of investmentAdd share of post-acquisition reservesLess impairment losses to date

$XX

(X) _____

X_____

_____

Exception: use IFRS 5 if investment acquired and held for sale.





IFRS 3(Revised)

IFRS 12 Disclosure of interests in other entitiesDisclose:

Significant judgements and assumptions made in determining the nature of an interest in another entity Information about subsidiaries, associates, joint arrangements and structures entities that are not controlled

by an entity

Disclosure of subsidiaries Disclosure of associates / joint arrangements Interests of NCI in group activities and cash flows The nature and extent of restrictions of investors

ability to use group assets and liabilities The nature of risks associated with interests in

consolidated structured entities Consequences of changes in ownership interest

The nature, extent and financial effects of anentitys interests in associates or joint arrangements

Risks associated with an interest in an associate orjoint arrangement


13: Complex groups and joint arrangements

Topic List

Complex groupsSub-subsidiariesD shaped groupsJoint arrangements

This chapter covers one of the more complicatedconsolidation topics that you meet for the first time atPaper P2.It is always helpful to sketch a diagram of the groupstructure.


Jointarrangements

D shaped groups

Sub-subsidiariesComplex groups

P

S1 S2

Several subsidiary entitiesIn the consolidated statement of financial position: A single figure is given for non-controlling

interest Separate totals for goodwill and gain on a

bargain purchase arising


Jointarrangements

D shaped groups


13: Complex groups and joint arrangementsPage 97

P controls S P P P controls S80% 60%

S controls SS S S S controls SS80% 60%

Therefore P controls SS SS SS Therefore P controls SSP effectively owns (80% 80%) 64% of SS P effectively owns (60% 60%) 36% of SS

Consolidation method:Net assets: show what group controls.Capital and reserves: based on effective holdings eg80% 80% = 64% therefore NCI = 100% 64% = 36%.

Date of effective control:SS comes under Ps control: Date S acquired, if S already holds shares in SS. If S acquired SS later, that later date.

Exam focus pointYou must identify subsidiaries based on control. Then most of the consolidation is the same as for a simple group.


Jointarrangements

D shaped groups


A complex group structure has an impact on two of the basic workings you need for a consolidated statement of financial position

Calculation of goodwillGoodwill in S1 Goodwill in S2

Consideration transferred X X 80%Non-controlling interests (at % FVNA or at full FV) X XLess: Net FV of identifiable assets acquired

& liabilities assumed:Share capital and share premium X XPre-acqn reserves at date P obtains control X XFV adjustments X X

(X) (X)X X

Total X



Calculation of non-controlling interestsS1 S2

NCI at acquisition X XNCI share of post acqn reserves X/(X) X/(X)Less NCI share (20%) of S1s investment in S2 (X)Less NCI share of impairment losses (if NCI at full FV) (X) (X)

X XTotal NCI

Notice thetreatment ofcost of thesubsidiarysinvestment inthe sub-subsidiary


Jointarrangements

D shaped groups


You can check that you have worked out thecorrect NCI by assuming a dividenddistribution of $100 from SS.S will receive $75

P will receive 80% $75 60P will receive 10% $100 10

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70___

___

Leaving for NCI in SS 30___

___

Having ascertained the structure and workedout the non-controlling interests, proceed as fora typical sub-subsidiary situation.

P80%

10% S NCI (direct) 20%75%

SS NCI (direct) 15%

In this structure there is A direct NCI in S of 20%

__

__

A direct NCI in SS of 15% An indirect NCI in SS of 20% 75% 15%

__

30%__

__


Jointarrangements

D shaped groups



IFRS 11 Joint arrangements

Joint arrangementAn arrangement in which two or more parties have joint control.

Joint operationsParties with joint control have rights to the assets andobligations for the liabilities of the joint arrangement.Includes all joint arrangements not structured through aseparate entity.

Joint controlThe contractually agreed sharing of control which exists when decisions about relevant activities requireunanimous consent of the parties sharing control.

Joint venturesParties with joint control have rights to the net assetsof the arrangement.

IFRS 11 was published in 2011. It defines a joint arrangement and provides criteria for distinguishing betweenjoint ventures and joint operations.

2015 bpp p2 passcards

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