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March 2017 Exam Guidance for ACCA Paper P2 Abibu Dumbuya SEKOYEN ACCOUNTING SOLUTIONS

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March 2017

Exam Guidance for ACCA Paper P2

Abibu DumbuyaSekoyen accounting solutions

March 2017 Exam Guidance

Standard/AreaStudy guideExaminable documentsIASB Work plan

NEW ADDITIONS(items that are less than a

week old will be highlighted here)

Qn. No Core assessment requirements & priorities for the upcoming exam

Read September 2016 Examiner’s report (annotated)Read June 2016 Examiner’s report (annotated)Read March 2016 Examiner’s report (annotated)Read December 2015 Examiners report (annotated)Read September 2015 Examiner’s report (annotated)

“…it is important to note that only a portion of the marks is allocated to knowledge of the standard itself and the rest to application. It then becomes obvious why candidates do not score well as many simply set out the requirements of the IFRS without application to the scenario.” Examiner’s report, June 2013

Anticipated question features and practice suggestions Questions are set at the Level 3 synthesis and evaluation intellectual level. This entails critical analysis and application of knowledge to business contexts with technical and commercial insights. Therefore practise thinking at the appropriate intellectual level. Rote learning will not be rewarded.

Effective writing skillsEffective writing skills are not acquired by accident; they are not a default human condition either. You need to work at developing them. The lack of effective writing skills is what underlies exam failure in this and other professional papers. Here you can find an assortment of practice examples as stimulus. You are encouraged to work at these methodically to improve this essential component of your professional skillset.

How to use P2 terms and techniques (P2TT) This document is being developed as a study and exam dictionary to support in-depth learning required at P2 cognitive level (Level 3 – synthesis and evaluation). Just by reading the dictionary alone you can answer some of the questions in recent exams; or, at least, it can help you think about the issues in an exam focused way. E.g. part of “Deem” relates to December 2015 q3aiii (irrecoverable gas is PPE as it is an integral part of the plant); “Impairment” relates to March 2016 q4aii. You don’t get these exam insights by simply googling the item.

AnnotationsAnnotations are provided to some of the questions and answers to help you focus on the salient features which you might otherwise miss. Use the P2- colour codes to annotations.

Question selection and exam time management: please go to the last few pages of this document for guidance on question selection on exam day!

Please go to the last page for more ideas about the expected uses of this document

A.1 Professional behaviour and compliance with accounting standards

1c Update links to past questions and exam guidance (still showing September 2015)

Review the study text:- Buy into should be accept or embrace-

See Aca, p35, q22.2

A.2 Ethical requirements of corporate reporting and the consequences of unethical behaviour

1c DECEMBER 2016 q1c – what do we learn?Where there is an opportunity for classification malpractice the examiner will set questions to focus students’ attention on the inherent/contingent risk of ethical breaches.

The examiner tests understanding of the difference between defined benefit and defined contribution pension schemes and their differing financial accounting and financial reporting implications. Therefore compare the two.

CONCEPTUAL UNDERSTANDINGThe examiner also tests understanding of the differences between

- “gains and losses” on the one hand (recognised in profit or loss and OCI) e.g. gain on disposal of PPE

- “profit or loss” on the other (recognised in profit or loss).

Design similar questions around similar sensitive areas:- Exchange gains and losses- Pension- Cash- Revenue- Leases (removed)- Revaluation- Capitalisation: interest on borrowing, PPE, constructed assets,

R&D, repairs and maintenance, etc.

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March 2017 Exam Guidance

DICTIONARY WORKExplain certain language features to help students understand the examiner’s intentions relative to the aims of the syllabus, rationale and approach. Examples:

- “…they believe that” referring to the directors (or management): this is an unsupported claim; challenge it! Reasonable and supportable (evidence quality). What evidence will suffice to back-up the proposed change in accounting practice? i) IFRS principle: quote the relevant IFRS (IAS 19); economic substance: what is the nature of the transaction, condition, event?

- Explain the difference between concept and principle in relation to “business model”.

- Explain the nuances of “deem” in relation to the CF and principles of IFRS.

A.3 Social responsibility (Also see H.1)

1c,4 Update Social responsibility links – embed guidelines on reporting A.3.2

B.1 Conceptual Framework (CF) ED 2015/3

4 THE LOGIC OF FINANCIAL REPORTING – MEASUREMENT

What is a valuation model?Framework for measuring values of assets and liabilitiesExamples: DCF, Fair value, NRV, NRC, FV (compound interest)

What are the requirements?- Cash flow estimates for fair value, VIU

What are the outcomes in terms of the qualitative characteristics

What are the cost benefit trade-offs?- How doe organisations in practice manage these trade-offs?

Why is a valuation model required? What determines the measurement basis for assets and liabilities?Determine basis of measurement of assets and liabilities e.g. fair valueMeasure changes in prices of assets and liabilitiesRecognise changes as income or equity

What determines how gains and losses get presented in the financial statements?The capital maintenance concept e.g. maintain money capital implies measure assets at historical cost (updated prices not required). When the value of closing

Question styleThe questions are usually framed as enquiries into the meaning of financial statements measures as in June 2014 q1b – fair value.

Other possibilities include:- Can be misleading- Can be misinterpreted- Accounting for the impact of changes in the value of liabilities on

PPE i) at cost ii) at revaluation model- VIU v Fair value- How do valuation models enhance or undermine the qualitative

characteristics of the conceptual framework? E.g. historical cost, by using different prices for the identical or similar assets can impair comparability.

December 2016 Q1b – review the question and examiner’s report. - Equity- Principle

B.1a Question about measurement bases; mixed measurement model; see ACA, p6, q2.2, 2.3; See Aca, p14, q7.3See Aca, p18, q9.3See Aca, p20, q10.3See Aca, p30, q17.3

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March 2017 Exam Guidance

net assets exceeds the value of opening net assets for reasons other than the contribution of capital from owners, profit is recognised. This means that profit is recognised when income exceeds the historical cost of goods sold. Logically, holding gains are not recognised as asset prices are not remeasured. However, gains or losses arising from disposal of noncurrent assets are recognised in profit or loss as the gains arise from a transaction similar to the sale of goods – as such it is not a re-measurement gain or loss.

Capital at the end is maintained at an amount equal to or more than the capital at the beginning both stated in nominal terms. Check accounting theory; why inventory at historic cost. Reconcile with P2TT.

What determines the capital maintenance concept?The business model e.g. manufacturing v retail; aircraft manufacturer (maintain physical capital or operating capability) v airline operator (retailer maintains money capital or operating capability).

How to evaluate a valuation model: consider the requirements of the Conceptual Framework for financial reporting. If the valuation model is effective what would be effects on financial performance and financial position? The objectives of general purpose financial reporting will be achieved. Providers of capital (investors and creditors) can i) identify the cash provided by operations; ii) the performance (operating profit, net profit); iii) returns on capital, iv) effect of performance and other factors on the statement of financial position; - What factors should be taken into account? E.g. the requirements of faithful

representation of transactions, conditions and other events: i) identify an economic phenomenon that users would be interested to know about e.g. changes in the value of different assets; ii) determine the type of information that would be most relevant to users were it to be available and can be faithfully represented (this requires valuation models; iii) produce the information

- How do you know which valuation model to use? Relate to capital maintenance – see CF ch8

- The limitations of the model and its advantages compared with others.

- Present simple calculations to demonstrate the effect of using different valuation models. See The maths of B1

- Relate evaluation to practical situations at work. E.g. business model may not require re-measurement; gains and losses arising from valuations may not be recognised in profit or loss under certain capital maintenance concepts but may be recognised as capital maintenance adjustments in equity.

Business models becoming topical: - Practical problem solving scenarios involving choice of valuation

model, accounting policy, - Evaluating impact on profit or loss: capital maintenance affects

measurement and recognition of assets and liabilities. Assess the information content and quality.

- Evaluating impact on financial position- Evaluating impact on statement of cash flow- Integrating IFRS 13- Integrating IFRS 15- Integrated reporting - Better communication.

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March 2017 Exam Guidance

- Evaluate the significance of information produced e.g. examine the usefulness of the statement of changes in equity (SOCE) to the investor.

- The integrated reporting framework identifies the need to consider various capitals. Discuss how the conceptual framework for financial reporting can be useful in achieving that goal. Answer: i) the CF identifies various capitals: Money capital, financial capital

(Constant purchasing power) physical capital; intellectual capital, natural capital

ii) various measurement bases: HC CC (entry): transaction based (updated cost price): e.g. Current replacement cost. What is it useful for? Operating capability – maintain operating capital CV (exit): cash-based (updated for price changes): i) NRV, ii) FV, iii) NRC, iv) VIU

- Practical

Presentation and disclosure objectives and principles, 7.16E.g. IFRS 15 - clarifies the objective of the disclosure requirements. To enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

- specifies the key items to be disclosedi) contracts with customersii) significant judgements and changesiii) assets capitalised out of costs to obtain and fulfill contracts.

- sets out the principles of disclosureaggregation and disaggregation criteria focused on the objectives of disclosure

1a

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March 2017 Exam Guidance

1b

Capital maintenance Definition ProfitMoney capital Nominal capital (nominal

monetary units)Increase in nominal monetary capital

Financial capital (money capital adjusted for inflation)Physical capital

TRANSACTION RECOGNITION LOGICTransaction recognition is about recording the substance of an economic decision so as to communicate its effects to users. The "logic of that situation" is that the entity should:- Identify the transaction’s distinctive features to match it to a specific IFRS- Identify context: facts and circumstances that enable judgement to be applied in achieving faithful representation- Determine a unit of account: the lowest level at which the transaction can be recorded, measured and monitored.- Determine basis of aggregation to higher categories- Determine presentation objectives; decide whether objective or subjective.- Determine disclosure objectives.

Levels of classification- Transaction level (unit of account)- Category level (presentation class)- Report level (Profit or loss or OCI)

See Aca, p28, q15.2a,b

STEPS IN ANSWERING THE QUESTIONSTEP 1: IDENTIFY THE CONTEXT?The context is the preparation of general purpose financial statements.

“Explain how” requires justification of the use of the measurement base in achieving the objectives of general purpose financial statements.

STEP 2: EXPLAIN THE NATURE OF A NONCURRENT ASSETNoncurrent assets are by definition not consumed in the current period and are expected to provide future economic benefits. Hence they must be measured and presented in the statement of financial position at amounts that reflect their economic substance. A key factor in determining economic substance is the business model – the way in which the asset is used to create and deliver value to the customer in terms of goods and services.

STEP 3: DISCUSS THE MEASUREMENT CONCEPTS APPLICABLE TO DIFFERENT TYPES OF NONCURRENT ASSET

Operating assets such as Property, plant and Equipment, Intangibles

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March 2017 Exam Guidance

TRANSACTION MEASUREMENT LOGIC

and goodwillA manufacturer’s business model is making and selling goods; therefore the entity will recognise and classify a noncurrent asset as Property, plant and equipment.

Investment property and investments

1c

B.2 Critical evaluation of principles and practices

1b Logic: the ordered relationship of particulars. Framework; structure of ideas and the relationships between them; model: prototypical relationships e.g. accounting model incorporates the elements of the accounting framework. Context:

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March 2017 Exam Guidance

IAS 1 Presentation of financial statements

1b,c,4 See Aca, p25, q13.2

IAS 7 Statement of cash flows (part of D.1 of the study guide)

1,1b,2

IAS 8 Accounting policies, changes in accounting estimates and errors (Also relevant to G.1 The creation of suitable accounting policies)

1,a,b,2,3,4

IAS 10 Events after the reporting period

1a,b,c,2,4

IAS 12 Income taxes

1,2,3

IAS 16 Property, Plant and Equipment

1a,2,3 Capitalise & depreciate (PWC old: 16020)- Obligations arising from new legislation- Not error as legislation has introduced “new information and development”

that did not exist previously.

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March 2017 Exam Guidance

- Not change in accounting policy as not previously accounted for as the condition did not exist.

Allocate to products- Costs (e.g. compensation) incurred as a result of damage to 3rd parties-

Expense- Cost of wear and tear: e.g. obligations to repair leased property; this may be

expensed or allocated to product costs but not capitalised as the cost does not generate or enhance resources needed for production or distribution.

- Onerous contract: IAS 37 measured obligation (lower of: exit costs and fulfilment costs). Exit costs: penalties, etc. Fulfillment costs: whatever it takes to satisfy the obligations to the leaseholder, etc.

CHANGES IN ESTIMATE: pp16021-22- Impact of changes in decommissioning liabilities- Increase in liability- Decrease in liability

IAS 16 COST MODEL

IAS 16 REVALUATION MODEL pwc (old) pp16021-22

IAS 17 Leases to be replaced by IFRS 16 Leases

1 b, c 2, 3

-

IAS 19 Employee benefits

1a,2 Update exam guidance to include more strategically helpful notes providing insights into the examiners’ overall assessment objectives (seeking evidence of specific competences). This is distilled from a close examination of the assessment objectives over the past few years.- Conceptual understanding: definition of terms; explanation of the

accounting for charges, gains and losses: SOCI, SOCE, SOCF, SOFP for DfdC and DfdB schemes.

- Current period service cost; scheme changes (past service cost, curtailments, settlements).

- Deferred tax asset on outstanding obligations if tax relief is only obtained on actual contributions to the scheme;

- Deferred tax liabilities on actuarial gains - reported in OCI

Where is the examiner most likely to go next?- The examiner can turn a q2 (June 2012 q2b - answer) to a q1c

(December 2016 q1c). - Long-term benefits: last examined q1a June 2011 & answer.

REVIEW- Review all q1a since June 2012. Prepare for standard calculations:

vested and unvested benefits, finance charge- Workbook update: include all examples.Deferred tax calculations.

A BALANCED PAPER©2015-2016 Sekoyen Accounting Solutions Ltd. All rights reserved

March 2017 Exam Guidance

- Presentation- Funded and unfunded- Scheme surplus- Application of principles to specific scenarios: core principles identified,

explained and illustrated.- Calculation of finance cost/credit on net asset or obligation- Calculation of pension obligations and finance cost – projected unit credit

method- Ethical discussion involving allocation of gains and losses; service cost

(past and current).STUDY TEXT WORK

Update the study textDICTIONARY WORK

Update for all the definitions

Develop practice questions forLEAVE PAYLONG-TERM BONUS

IAS 20 Accounting for Government grants and Disclosure of Government Assistance

1a, 2 See Aca, p33, 20

IAS 21 Effects of changes in foreign exchange rates

1a -

IAS 23 Borrowing costs

1a, c,2,3,4

Succinct orientation notes;Review past questions

INTEREST-FREE LOAN (INTRA-GROUP BORROWING)- Initially recognised at fair value- Subsequently measured at amortised cost- Gain recognised in profit or loss: FV-Cost- Not deducted from borrowing cost- Effective interest on amortised cost is borrowing cost which must be

capitalised.

ISSUES AND CRITICAL ACCOUNTING FACTORS- Management’s intention e.g. acquire 4G licence to operate a wireless

network

ISSUE COSTS ARE PART OF BORROWING COSTS- Which issue costs?- Preference shares as liabilities- Preference shares irredeemable (equity)- Equity (no imputed costs – IAS 23 not consider these). What is the

Orient towards Exam practicePossible practice questionsSee ACA, p9, q4.3Jun 2016 q3Dec 2013 q4 (answer)

PRIORITISATION- What is prioritisation?- Sequencing?

IDENTIFY THE PRIORITIES- Borrowing cost added to the cost of the asset- Results in impairment- Carry out impairment assessment- Write down asset (IAS 36)

IDENTIFY THE PRIORITIES- Asset impaired- Add borrowing cost calculated on costs incurred (not on recoverable

amount)

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March 2017 Exam Guidance

rationale for this omission?- Loan issue costs- Share premium.

RATIONALE FOR NOT CAPITALISING THE COST OF EQUITY- Profit should exclude charge for cost of equity capital in order to measure

ROCE correctly.-

RATIONALE FOR NOT CAPIALISING THE COST OF GRANTS, GIFTS, DONATIONS- The grant reduces the entity’s investment in the qualifying asset. Hence it

would be illogical and not reflective of economic substance to capitalise the cost of the grant or any other donations. IAS 20 makes it abundantly clear that a grant is not capital.

RATIONALE FOR ONLY CAPITALISING THE COST OF PAYMENTS, ASSETS TRANSFERRED AND INTEREST BEARING LIABILITIES ASSUMED- The external cost of financing the qualifying asset measures the input that

contributes to developing an asset for intended use or sale.- Hence cost of financing to be capitalized should not be based on payment

as payment can be financed by equity. Hence the payment should be adjusted for the capitalization period in order to calculate the expenditure capitalized as in p192, Wiley IFRS 2016.

- Carry out impairment assessment- Write down asset (IAS 36)

ETHICAL DIMENSIONAs capitalisation of borrowing costs effectively defers expenses and thereby increase profits, there is an inherent opportunity for exploitation where the entity’s management may be rewarded for performance based on operating profit.

Hence IAS 23 may be assessed as an ethics question at q1c.

For example, the management of Y have decided that borrowing costs should be capitalised. Classification issues may be a part of the scenario:- Short-term v long-term cost of borrowing- Misallocation of expenditure to qualifying assets- Post construction period borrowing costs- Pre-construction period borrowing costs- Internally funded development expenditure- Capital structure: equity/liability (see PWc example 2, p16033)

Calculations at q1a- Annualised rates from borrowing rates for a period of say 4 months

Example 1, p16034.- WACR- WACR: analysis of expenditure Example , p16035

Discursive/calculation q2a- Subsidiary uses interest-free loan from parent for the construction of

a qualifying asset PWC Example 2, p16035

IAS 24 Related- party disclosures

1b,c, 2a -

IAS 36 Impairment of assets

1a,2 ,3

-

IAS 37 1a,2,3 Restructuring provisionContingent liability in acquisitionsConstructive obligations

- See Aca, p12, q6.3

IAS 38 Intangible assets

1a,3

IAS 40 Investment properties

1,2,3 Link F7 question about the difference between the cost model and the valuation model.

-

IAS 41 Agriculture

Link Jun 2010 – derivativesReview E&Y – illustrations commitments

- The maths of IAS 41- Emission trading schemes relating to agricultural activities such as

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March 2017 Exam Guidance

Review Pwc – illustrations about commitments forestry (PWc 33006). No detailed guidance: see Dec 2012 q2a (answer)

- Onerous contract: PWC, ch 16, para 71; p33018 (understand the issues: contracts i) to sell an asset; ii) IAS 37 liability for an onerous contract

- Contract within IAS 39’s scope, p33017- Fair value of bearer produce, p33019- Impact of transaction and transport cost, p5059

IFRS 2 Share-based payment

1,2, 3

IFRS 3 Business combinations (part of D.1)

1a,2,3 -

IFRS 5 Noncurrent assets held for sale and discontinued operations (part of D.2)

1a,3

IFRS 7 Financial instruments disclosures

- - See Aca, p18, q9.2

IFRS 8 1b,2,3 - -

IAS 32, 39, IFRS 9 1, 2,3 CONTRACTS TO BUY OR SELL NON-FINANCIAL ITEMS

HEDGING

LIABILITIES- Loan commitments

IFRS 9 IMPAIRMENT REQUIREMENTS

WHAT YOU SHOULD EXPECTA question that requires candidates to determine whether the contract is a derivative to be accounted for under IAS 39

THE SCENARIOProducer and counterparty buyer (speculator, manufacturer, retailer, consumer).

Usually comes with options: i) settled net (custom and practice); ii) own use purchase or sale exception (where contract was entered into and continue to be held for the purpose of receipt or delivery of nonfinancial items to meet the entity’s expected purchase, sale or usage requirements)

REQUIREDDiscuss how the transaction should be accounted for in accordance with IFRS

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March 2017 Exam Guidance

DE-RECOGNITION PROVISIONS - Loan commitments

GUARANTEES HELD/ISSUED

COMPLEXITIES

STEPS IN ANSWERING QUESTIONSYour task i) Knowledge of a derivative financial instrument: a contract that

allows speculation because of its inherent characteristics: a) value varies with the value of the underlying; b) acquired for zero or relatively low price compared with the host; c)

ii) Clarify the issue: is the contract a derivative financial instrument or not? Contracts for the sale of nonfinancial items can be classified as derivative financial instruments and accounted for under IAS 39 if they are “settled net” in: i) cash, ii) another financial instrument, or iii) by exchange of financial instruments.

iii) Clarify the terms for a derivative: “settled net is key”. Explain what this means. A contract is settled net in cash (or equivalent value in other financial assets) if the entity receives from, or pays cash, to the counterparty equal to the net gain or loss that will arise from the settlement or exercise of the contract.

iv) Assess the scenario to determine if the criteria of settled net apply: a) look at the explicit terms (does the contract permit either party to settle net in cash?; b) custom and practice (does the entity have a practice of settling similar contracts net in cash, whether with the counterparty, by offsetting or by selling the contract before it lapses or is exercised) ); c) taking delivery of the underlying and selling within a short time after taking delivery for the purpose of making a profit from short-term fluctuations in prices or dealers margins; d) market available to readily convert the non-financial item into cash

v) Assess the intentions of the entity and the counterparty. These are usually explicit but they may be implied by practice that is unlikely to change (e.g. the entity has regularly sold commodity shortly after taking delivery)

vi) Draw a conclusion

IFRS 10, IAS 28, (part of D.1)

1a, b,2 Analyse past papers to identify variations from standard consolidations- Reverse acquisition- Acquisition of controlling interest in sub-sub (exclude sub’s NCI share of

consideration; calculate the group’s interest in the target e.g. 70% x 80% = 56%; determine the NCI interest 44% where Parent owns 70% of sub and sub acquires 80% of sub-sub) e.g. December 2016 q1a.

-

ACCOUNTING FOR GAINS IN EQUITY INSTRUMENTSIEI IFRS 9- Classified FVTOCI- Classified FVTPL

AVS- Acquisition

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March 2017 Exam Guidance

- Disposal (transfer of OCE balance to P&L unlike FVTOCI?)- Re-measurement

IFRS 11 (D.1) 1a, 2, 3 -

IFRS 12 1b,c2,3,4

-

IFRS 13 Fair value measurement

1a,2,3, -

IFRS 15 Revenue from contracts with customers (effective 1 January 2018)

1a,c, 2,3

Both- A collaboration and a sale? Assessing the existence or nonexistence of a

contract with a customer- Assessing the existence of a significant financing component (both the

interest rate and the period between performance and payment must be considered)

Distinct goods and services

Estimatedi) Estimating variable consideration (paras: 50-54);ii) Constraining estimates of variable consideration (paras: 56-58);

Expected value: probability weighted average revenue.

High probability (probability in accounting)

Implementation issues:Why systems might need to changeTHE INTRODUCTION OF THE SERVICE TYPE WARRANTY AS OPPOSED TO THE ASSURANCE-TYPE WARRANTY REQUIRES SEPARATION TO MEET THE DIFFEREING ACCOUNTING REQUIREMENTS

Assurance type warranty claims- accrued at point of sale (IAS 37)- match claim to plan- estimated and accrued based on expected values as before IFRS 15.- similar to sale on a right-of-return

Service type warranty claims- expense when incurred (not as before when the warranty price was spread during the period of the warranty)- allocation of contract price to service being a separate performance obligation- credited to profit or loss when obligation fulfilled.

- What should be considered in choosing new systems? Flexibility,

IDENITIFICATION OF ISSUES

REASONING, PROBLEM SOLVING AND PRESENTATION

IFRS 15 has introduced significant professional judgement into the measurement of revenue (measurement uncertainty)

In order to exercise professional judgement the facts and circumstances must be analysed; the issues must be identified and appraised from a commercial and financial reporting perspective to depict faithfully what the transaction purports to represent; the principles of IFRS 15 must be applied; a conclusion (synthesis of the arguments) must be reached; an evaluation must be done then judgement must be exercised.

Kinds of deductive reasoning you must master.Reasoning to justify- Single performance obligation: series of distinct services over time

that are substantially the same; pattern of delivery the same; coherent method of monitoring progress (time-based for financial services)

- Not including variable element in the transaction price- To assert the existence of a significant financing component in the

contract- Assessing variable component Example 24- Determine the “point in time” that transfer of risks and rewards of

ownership takes place. E.g. Wiley p482- Retaining “continuing managerial involvement in” and “effective

control” of the goods of a kind normally associated with ownership e.g. installation of oil refinery; “layaway sales” (under terms of which the goods are stored on the supplier’s premises and delivered upon receipt of the final payment of a series of instalments.)

IMPLEMENTATION OF IFRS 15Implementation of a significant IFRS e.g. September 2015 (IFRS 9)

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March 2017 Exam Guidance

scalability, etc.- What was examined in December 2015 q4: i) the examiner’s report; ii) - What was examined in respect of systems? Nothing specific.- Update Exam guidance F.1

Travel, leisure and hospitality (Deloitte)In depth (pwc)

Material right

Measurement uncertainty

Negative revenue: where payments to customers exceed expected revenue

Noncash consideration- Directly: fair value of noncash consideration at contract inception.- Indirectly: fair value of inbound asset e.g. PPE, goods and services,

financial instruments- “Most likely amount method”: constraint on variable consideration.- Contract asset: clarify the difference between account receivable and

contract asset. -

Obligations- Contract liability- Consideration payable to a customer- Refunds- Returns (not replacements as these are dealt with under warranties)- Warranties

OptionMeasuring an option

Payment to customers- Is variable consideration- Refund liability under sale with a right of return- Payment or refund e.g. vouchers, coupons to customers even if conditional

on a future event (must be recognized when promised or at contract inception whichever is later )

Percentage of completion method

Practical expedients- To be applied to contracts with similar characteristics and in similar

circumstances.- Retrospective application with practical expedients (BC437) – B1591

ANALYSIS OF THE EFFECTS OF IFRS 15

EXPLAINING IFRS 15Explain how IFRS 15 implements the conceptual framework e.g. requirements for recognition of revenue (the five criteria: - when the significant risks and rewards of ownership are

transferred to the buyer- it is probable that future economic benefits will flow to the entity

as a result of the transfer of goods and services.- The amount of revenue can be measured reliability- The costs incurred or to be incurred, including post-shipment costs,

such as warranties can be estimated reliably.- No continuing managerial involvement in the goods of a kind

normally associated with ownership; no effective control of the goods

The fundamental principle of CF that underpins IFRS 15:- Recognition: revenue should be recognized when it is probable that

future economic benefits will flow to the entity.- Accrual: revenue should be recognized when earned for a period

and matched against costs incurred or to be incurred to transfer goods and services

- Risk: no significant uncertainty exists regarding the collectibility of the revenue to which the entity is entitled and regarding the costs incurred, or to be incurred, to procure, produce, transfer goods and services and maintain after-sales obligations.

IFRS 15 is principle-based: instead of making prescriptive rules IFRS 15 specifies objectives and provides application guidance leaving it to the management to determine the best method that will provide meaningful information for users. This is sensible and practical because the diverse business models of revenue streams cannot be adequately addressed by a one-size-fits-all prescriptive approach. IFRS 15’s overall philosophy is based on the efficiency perspective which posits that the interests of an entity are best served when it chooses a method of accounting that reflects the substance of its underlying performance.

Give clear illustrative examples of this claim- Allocation objective:- Disaggregation objective: enables disclosure of meaningful

information to users for better understanding of underlying performance by disaggregating revenue in accordance with entity or industry-specific factors; to understand the composition of the goods and services and types of customers. Neither too aggregated nor too detailed.

How has IFRS 15 improved the measurement of performance? Justify

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March 2017 Exam Guidance

Professional judgement- Examine measurement uncertainty in published financial statements such

as Debenhams plc and other retailers, Financial services such as Barclays plc,

- Prepare annotated extracts for students

Relative standalone selling price method- Allocation of discount-

Significant financing component- Which discount rate? Post tax discount rate?

Significant revenue reversal

Transaction price- Measurement date (at contract inception) not dependent on the nature of the

non-cash consideration.- Includes noncash consideration- Includes financing component- Determined by reference to standalone prices- Affected by variable consideration e.g. bonus, volume discount

Understanding the relationship with other IFRSIAS 37- Regarding sale with a right of return IFRS 15 recognizes a refund

liability at contract inception being part of the consideration the entity expects to refund to the customer for goods that might be returned. Whether the amount is paid to the customer or not depends on the occurrence or non-occurrence of future events, namely, whether goods are returned or not. Under IAS 37 the refund liability would be treated as a contingent liability and noted, if material, but not recognized in the financial statements. Question: is IFRS 15 in conflict with IAS 37? Answer: No - the refund liability is correctly recognized under IFRS 15 because the obligating event is the sale that took place before the reporting date, not the possible return of goods after the sale. This basis will also result in recognition of the refund liability under IAS 37 because at contract inception no significant uncertainty exists as to the costs incurred or to be incurred in order to complete the contract

- Further, under IAS 37 a contingent liability arises when the liability is possible because of a past event but it is not recognized because its existence can only be confirmed by the occurrence or non-occurrence of one or more uncertain future events, not wholly under the control of the entity. Under IFRS 15 the promise of a refund confirms the existence of an obligation even if its settlement is conditional on future events. The refund is a financial liability and as such the entity incurs an obligation once it becomes party to its contract obligations. It is similar to deposit liability.

- Under IAS 37 a contingent liability can also relate to a present obligation

the assertion that revenue measures are more reliable under IFRS 15.- Providing a robust and comprehensive framework for addressing

revenue recognition issues for both goods and services that is easily applied to all revenue contracts with customers. Application guidance provides reasoned justification for practice together with insightful illustrative examples to explain the intention, objective and application.

- The framework also fills a gap by providing requirements for the recognition of revenue for certain transactions that had not previously been comprehensively addressed. Examples: i) provision of services; ii) licences for intellectual property. By focusing on the attributes of goods and services together with the contract terms, rather than only on the contract type, IFRS 15 provides a coherent basis for revenue recognition across all industry types removing the diversity caused by weaknesses in the previous IFRS’s minimal guidance and USGAAP narrow and industry specific requirements. Thus revenue is recognized on the same basis for industries as diverse as franchisors, software vendors entertainment and media.

- Provides requirements for contract modifications to apply more widely than before.

- Specific guidance on important topics such as revenue recognition of multiple-element arrangements.

- Ensures faithful representation of economic substance by requiring this as part of complying with step 1 of the five-step model. The framework thus applies to the “attributes of the goods and services transferred” as well as the “terms of the contract”.

- Simplify revenue recognition by reducing the amount of guidance to which reference is made.

- Improving comparability of financial statements across entities, industries, jurisdictions and capital markets through: i) common IFRS instead of US GAAP and IFRS; ii) comprehensive revenue framework eliminates diversity; iii) requiring reconciliation with IFRS 8 where disaggregation of revenue from goods and services and from different types of customers is required for meaningful information to be presented to users.

- Enhanced disclosures: enable users to sufficiently understand revenue arising from contracts with customers because they have clear information about the nature, timing, amount and uncertainty.

- Rigour - definition of revenue: precise and concise- Financial soundness is expected as there is a requirement to assess

all costs including post-shipment costs such as warranty before revenue can be recognized: (revenue cover costs; at least all costs are estimated reliably)

- Operational practicality assured (how) e.g. practical expedients: i) disregard the time value of money if the period between satisfying a performance obligation and receiving payment is less than a year;

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March 2017 Exam Guidance

where it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation, or the amount of the obligation cannot be estimated with sufficient reliability.

- Regarding a sale on right of return the entity also recognizes an asset being the amount (at cost less incidental expenses of return) of the inventory expected to be returned based on experience. This is not a contingent asset under IAS 37 because under the contract the entity has a legitimate claim to inventory to be returned. Therefore, unlike a contingent asset (IAS 37) the entity has control over the flow of future economic benefits.

IFRS 2- Noncash consideration offered to the entity as consideration for the

transfer of distinct goods and services can take the form of shares (equity instruments)

- The requirement to constrain variable consideration applies to noncash consideration

IAS 16 PPE IAS 36Amortisation and impairment

IFRS 15 and IFRS 8- Reconcile disclosed information so that users can understand the

information and the underlying performance it depicts; reconciliation to IFRS 8 provides a check, ensures consistency and presentation quality: neither too detailed, nor too aggregated.

-

IFRS 9- Assessing and disclosing counterparty credit risk

Understanding the maths of IFRS 15The maths of IFRS 15- Linked to P2TT- Webpage under relevant section e.g. C, D…- Worked examples with self-explanations - Additional practice exercises (by key topic e.g. sale and repurchase

transactions, volume discount, sale on right of return, noncash consideration with constraint on variable consideration; measurement of variable consideration)

- Practice programme.

Understanding key issuesUnderstanding the key issue e.g. B1673 example 25 – Management fees subject

- Risks are addressed e.g. the requirement to assess collectability as part of the revenue recognition process; the inclusion of a variable consideration and the requirement to assess all facts and circumstances in order to depict accurately what the transaction purports to represent.

- Precludes recognition of income that is not revenue e.g. holding gains by requiring performance obligations to be satisfied as a precondition for the recognition of revenue

- At the same time it precludes anticipation of gains (recognition of unrealised gains)

- Consistency: i) Comprehensive five-step model eliminates diversity in

practice hence IASB and FASB can come together and form converged standard. The effect is a coherent standard that applies across most industries and situations.

ii) Rationale: acceptable and applicable across most jurisdictions

iii)iv) Warranties: consistent with the general principles for

identify performance obligations economically similar warranties are accounted for in a similar manner regardless of whether the warranties are separately priced or negotiated; BC372a

v) Constraining estimates of variable consideration: vi)

PRIORITY APPLICATION ISSUES- The significant improvements introduced: what, why and how.

Implications including wide implications (knock-on effects). For example, need for systems, audit fee, performance measurements and bonus calculations for incentive schemes.

- Employee remuneration related e.g. bonus- Materiality of measurement uncertainty is a consideration e.g.

percentage completion method requires the reporting entity to assess at the reporting the date the likelihood that the transaction (or performance obligation) will be completed.

- Linkage to financing: why is this important? Revenue is what the reporting entity is entitled to receive if it fulfils its obligation to transfer goods and services under the contract. Financing is not inherent to that. Hence it should be excluded from the transaction price. This is a favourite topic for exams.

- Significant judgements required due to uncertainty over i) timing of transfer of the significant risks and rewards of ownership; ii) basis for calculating variable consideration; iii) to assess the factors that warrant constraining the variable element.

- Any assets recognised from the costs to obtain or fulfil a contract in accordance with paragraphs 91 or 95 (see 127-128)

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March 2017 Exam Guidance

to constraint. KEY ISSUE: the entity observed that the incentive fee (promised consideration) is dependent on the market and this is highly susceptible to factors outside the entity’s influence. This issue is key because it determines recognition of the incentive fee. Note how its implications e.g. “variability of the fee” features in all stages of the argument culminating in the final conclusion (“that the entity cannot conclude that it is highly probable that a significant reversal of cumulative revenue recognized will not occur if the entity includes its estimate of the incentive fee in the transaction price”) as a reason not to recognize the entity’s estimate of the incentive fee.

HOW YOU SHOULD LEARNTrace the development of the argument carefully. It will repay careful study.

Therefore what do we learn about how to identify key issues in corporate reporting?1. Key issues relate to key aspects of corporate reporting such as

identification, recognition, measurement, presentation, disclosure2. What do we learn about the implications of key issues in corporate

reporting case study? We should learn all the rules about identification, recognition, measurement, presentation, disclosure.

Unbundling

Valid expectation (inferred from custom and practice e.g. warranty)

Variable consideration (component of transaction price that varies)

Warranty- Assurance type (does not give rise to a separate performance obligation;

hence not allocated revenue. Recognise a liability when transfer takes place in accordance with IAS 37.

- Service type (purchased separately or part of product offering: gives rise to performance obligation hence allocate revenue.)

- Product liability (do not give rise to performance obligation: covered by insurance e.g. public liability, employers liability)

Examples of reasoning in IFRS 15 e.g.- Assessing variable components – see Deloitte volume discount example.

WHAT YOU SHOULD LEARN- Learn the principles, concepts and methods- Learn the language of IFRS 15- Don’t be satisfied with imprecise language as this might result in loss of

marks

- Payment to customers; may exceed consideration received – difference should be expensed (as cost of sale?).

- Similarities and contrasts to IAS 37: i) probable; ii) payment to customers (even if conditional); iii) sale with a right of return.

- Linkage to other IFRS e.g. share-based payment IFRS 2 through noncash consideration. Other issues raised by noncash consideration: i) constraint on estimates of variable consideration; ii) only variability for reasons other than form is eligible for constraint.; iii) measurement date should not depend on the nature of the noncash consideration; changes in fair value after contract inception due to form are not revenue but can be recognised as other type of income depending on the nature of the noncash consideration. This would be attractive to the examiner as it would provide an opportunity to assess students’ ability to a) if the noncash consideration is in the form of shares (IFRS 2) or PPE (IAS 16) how to deal with changes in the fair value of the consideration since contract inception; b) to deal with variability due to performance (exercise or strike price) and market forces. Variability due to market forces is variability due to form and is not revenue; variability unrelated to form is due to performance and is revenue (included in the transaction price). WORK THROUGH EXAMPLES.

YOUR PRACTICE PROGRAMMEQ1a frequently examined adjustments: principles, applicationQ1b frequently examined financial reporting practice issues: principles, applicationQ1c frequently examined financial reporting professional and ethical issues: principles, application, skills.

Q2a frequently examined IFRS application issues Q2b frequently examined IFRS application issues Q2c frequently examined IFRS application issues Professional marks

Q3a frequently examined IFRS application issues Q3b frequently examined IFRS application issues Q3c frequently examined IFRS application issues Professional marks

Q4a frequently examined IFRS development, implementation and application issues Q4bi frequently IFRS development, implementation and application examined issues Q4bii frequently examined IFRS development, implementation and application issues Professional marks

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March 2017 Exam Guidance

- Learn to think coherently making clearly reasoned statements and practise scoring professional marks.

- Don’t settle for vagueness or incomplete understanding.- Apply the methods (techniques) of IFRS 15 including computation.- Trace the link between the method and the principles.- Connect the IFRS (15) with other related IFRS

DICTIONARY WORK

Collectibility thresholdIFRS 15 defines probable as “more likely than not” i.e. greater than 50%.

PRACTICE PROGRAMME

DICTIONARY WORK

D.3 Group reorganisations

2

E.1 Not-for-profits financial reporting

1,2,3,4 -

E.2 Entity Reconstruction, (Study guide reference E.2, p10

2,4 -

F.1 The effect of changes in accounting standards on accounting systems

4,2,1b

F.2 Proposed changes to accounting standards. Refer also to H.3 Current reporting issues

4 IFRS Taxonomy- Update dictionary

Better communication theme

IAS 8 - proposed changes

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March 2017 Exam Guidance

- Revise the guide in the light of the notes.

MAINTENANCE OF IFRSAnnual improvements: 2015-2017

2015 Illustrative examples of XBRL

G.1 The creation of suitable accounting policies. Also refer to B.2 and IAS 8

1a,4 - Management of earnings e.g.q1- Accounting policies and ethics- Accounting policies and CSR

-

G.2 The appraisal of financial performance, position and cash flow

4, 2,1b,c

-

H.1 Environmental and social reporting

1b,c,4 REVIEW PWC AND UPDATE IAS 16/37 NOTES RE DECOMMISSIONING COSTSWhen cost should be capitalisedWhen costs should not be capitalised

- Notes- Practice questions

Ethics issue:Directors wish to capitalise as intangible assets, the significant expenditure incurred on environmental compliance, claiming that it enhances or generates resources that will fulfil certain expectations of stakeholders (not the same as performance obligations under IFRS 15).

Discuss the directors proposed treatment.

-

H.2 Convergence between national and international reporting standards

1c,b,4 H.2 International convergence

H.3 Current reporting issues. Refer to F.1, F.2, H.1, and H.2

4 Practice and regulatory issues.- FRC

AICPA backgrounder (issues from the US perspective)

Business model reporting- Possible questions from FRC lab statement

i) What is a business model?

ii) Explain the role that the business model plays in the recognition, measurement, presentation and disclosure of financial statement elements?

iii) The FRC has initiated a project about business model reporting. Discuss what potential contributions to financial reporting can be expected from this initiative.

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March 2017 Exam Guidance

1. One effect of the principle-based approach to standard setting is that accountants are increasingly required to exercise and disclose significant judgement within the application guidance to achieve the objectives of standards. Using examples from recent standards discuss the requirements, effects and implications of this growing trend in financial reporting practice. What tools are available to the accountant to aid in the exercise of judgement?

- Frameworks e.g. the five-part framework of IFRS 15- Definitions (the conceptual framework)- Measurement concepts (the conceptual framework)- Guidelines (application guidance) e.g. clarify objectives for

disclosure; commercial substance in terms of significant changes in cash flow; substance over form; whole transaction e.g. series, linked parts treated as a whole.

- The IAS 8 Hierarchy - Reasonable and supportable assumptions (the circumstances)- Probability: satisfying the probability criterion in IFRS 3 re IAS

37 contingent liability; satisfying the probability criterion re IAS 16 PPE (criterion met when developer commits to the building); . capitalisation of feasibility costs determined by applying the recognition criteria PWC p22034;

- Expected value - Substance over form (commercial substance)- Look at the whole (in a series of transactions) e.g. IAS 23

Borrowing costs the cumulative approach looks at the transaction as a whole, overcoming arbitrariness imposed by time periods, preferring instead to use the construction period as a natural accounting period; uses the project as a unit of account. Accounting takes account of business reality. IFRS 15: sale and repurchase transactions (substance over form). Separate contracts treated as combined contract where i) negotiated for a single commercial objective; or ii) amount paid in one contract depends on amount paid in the other. Need not be single contract: but sale contract undertaken with the expectation that repurchase will also be undertaken.

- Fundamental and enhancing qualitative characteristics e.g. the requirements of relevance, consistency

- Accounting policies (context based but user oriented)- Look through/beyond (e.g. measurement outcomes are also

considered alongside measurement uncertainty); amortised cost IFRS 9); FV option (prevent/minimise measurement mismatch).

- HOW TO STUDY IFRS 15- HOW TO STUDY IAS 23- HOW TO STUDY IAS 12- CORPORATE REPORTING CASES- Accounting theory e.g. the efficiency perspective; stakeholder

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March 2017 Exam Guidance

theory.

2. IFRS 15 is one of the IASB’s most high profile recent standards. Therefore it is expected to embody the IASB’s completed and ongoing initiatives for improving standard setting and financial reporting. Briefly explain how IFRS 15 reflects the requirements and guidance in

i) The disclosure initiativeii) Better communication

IFRS for SMEs 4 - Review and appraise for March 2017

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March 2017 Exam Guidance

Final preparation is tough. There is one aspect that students tend to leave till late – which questions to answer on exam day? Your final preparation should include deciding this matter and then applying it in practice sessions so that it becomes ingrained. I have provided a rationale for question selection and a suggested order of answering that puts you in control of your answers and the time it takes to produce them. I hope you agree and I hope it focusses your final preparation and guides your question selection on exam day.

Question What is assessed? Assess your core strengths against the core requirements

Rationale for selection, execution and completion

1a Ability to apply IFRS principles to calculate amounts to be included in published financial statements.

Structure and format of financial statements (IAS 1). Note the Disclosure initiative on structure of notes; OCI elements from equity accounted investments; IAS 7 presentation and disclosure of changes in debt financing.

HOT (higher order thinking) skills especially interpretive thinking about issues of accounting significance and related financial reporting practices. E.g. what is the implication of: Errors, changes in accounting estimates and policiesChanges in NCIChanges to presentation e.g. IAS 1Deferred taxDisclosure initiativeEmployee benefits – discount rateFair value adjustment, Foreign currency adjustments and attribution of gain or loss arising from the retranslation of goodwill?Group restructureImpairment adjustment and deferred tax consequences

Review the P2 question strategy to identify the core strengths required. Verify that you have these strengths by attempting timed mocks. Never base your assessment solely on how you feel – always verify it. Studies show that students as well as experts often overestimate themselves. If you do you will struggle in the exam.

“I would tend to approach answering this question by starting with Parts (b) and (c)”, Corporate reporting case studies Martin Jones, Lecturer, London School of Business and Finance (LSBF)

The examiner always observes that students run out of time because they spend too long on this question. This guide aims to help you take control through strategic preparation: set clear practice goals, harness relevant resources to the task, practise, reflect and articulate what you learn and decide the order in which you are going to attempt the questions on the day of the exam. Are you struggling to complete q1a? The particular challenge of this section is to carry out many calculations at an average speed of 1.5mins/mark. It is essential that your practice average is within this target otherwise you are going to struggle in the exam. You will likely overrun on this question and consequently mess up the entire exam time allocation if you are not averaging 1.5 mins/mark. If you are struggling as most students are here is the solution. Do you remember the learning curve effect? The average time required per mark declines with the number of repeated attempts at a question. Apply this principle to the problem of lack of speed:Select and practise by IFRSs repeatedly e.g. IAS 8,12, 16, 17, 19, 21, 28, 36,38,40; IFRS 2,3,9,10,11. These are the most commonly examined – see relevant section in Exam guide above.Review and reflect after each session to properly encode the articulated IFRS principles and mental models you have learnt. When students fail to do this due to “lack of time?” they pay for it because they quickly forget what they have learnt through practice. CONSEQUENTLY, THEY STRUGGLE IN THE EXAM EVEN THOUGH THEY MAY HAVE PRACTISED SOMEWHAT. Therefore, REPEAT many times so that the mental model of the solution is well formed AND REFLECT always to achieve speed.If you are now feeling confident about this question because you are averaging 1.5 mins/mark then DO THIS QUESTION FIRST ON EXAM DAY BUT DO NOT EXCEED THE TIME ALLOWED. Otherwise, DO THIS QUESTION LAST because the other questions are less challenging and you can score marks on them more quickly than on this question.

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March 2017 Exam Guidance

Inventory (w/down) e.g. q1a March 2016Negative goodwill, Onerous contract e.g. q1a March 2016Partial goodwill method, Property (operating IAS 16/investment IAS 40): purchase, disposal, impairment, revaluationProvisions e.g. warranty, restructuring, decommissioningRecognition of revaluation gain at acquisition dateReclassification adjustmentRetained earningsRevaluation adjustmentRevenue recognitionAbility to raise journal entries to record the effects of the above transactions, conditions and other events.

1b Ability to carry out critical evaluation of IFRS using HOT skills. This is the hallmark of a professional – being able to ask and answer questions about practice (as indicated in the syllabus aim,p4): “does it work”, “how does it work”, “ to what extent”, “under what conditions”, “what are the alternatives?”

Writing structured arguments is an absolute must. To this end it is essential to pay attention to the following in P2TT:Accounting argumentationContinuing involvementGroup structureKey words & termsManagement intentionMark schemeNuancedPointSubstance

Review the P2 question strategy to identify the core strengths required for this type of question. Also see exam guidance above. Verify that you have these strengths by attempting timed mocks. Refer to the Past question analysis to identify the type of questions that have been asked in the past.

The discursive skills that are examined require clear understanding of core accounting concepts, principles and practices explained in P2TT and the ability to write accounting essays. Examples:Accounting context and situationAccounting scenariosAccounting policiesAccounting questionAccounting policies, changes in accounting estimates and errors.Accounting theoryApplicationCapital, equity and net assetsConceptual framework

Heed the warning about overconfidence above.

Read: How to write for P2

Practice should be aimed at clarifying what the financial reporting practice is based on, what it is designed to achieve, and whether it actually achieves it in practice.

The analysis and evaluation are qualitative. The principles of practice apply equally as above. Make sure you know the conceptual framework of financial reporting and how it applies to specific financial transactions. There is a lot of work being done at the moment (IASB CF webcast) and you should be aware of it and be able to respond and present a critical evaluation.

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March 2017 Exam Guidance

WaffleWords“What-if” questionsWide and Deep discussionWriting

Also, use the P2- colour codes to annotations that explains how to respond to and use scenario details.

DO THIS QUESTION NEXT IF YOU DECIDE TO DO QUESTION 1A FIRST. SOMETIMES THIS QUESTION IS A FOLLOW-UP ON Q1A. THEN FOLLOW THE QUESTION LOGIC.

MAKE SURE YOU ATTEMPT THIS QUESTION. YOU HAVE SOMETHING TO WRITE. JUST FOCUS ON THE KEY ISSUES. FEAR NOT, FAIL NOT. FORTUNE FAVOURS THE BRAVE. HAVE A GO.

Think about: Recognition (the time, the conditions, the amount); the elements (income, expenses, assets, liabilities, equity)Measurement (concepts: fair value FVTPL initial recognition of assets and liabilities; amortised cost subsequently, depending on the business model), NRV for stocks, FVLCTS if an asset is classified as held for sale IFRS 5)Re-measurement (changes recognised in OCI, profit or loss)Reclassifications (on sale, transfer or disposal)Presentation (P&L or OCI – topical IASB CF ongoing work)Disclosure (topical: focus on transparency, risk management, investment decisions, control, materiality and the enhancing characteristics of the CF).

Group structuresControl lost or gained (joint operation, associate, joint venture, reconstruction) – significant economic event warrants fair value to recognise profits immediately in profit or loss. What are the implications for goodwill, amounts deferred in equity, interest retained in terms of measurement, recognition and presentation?Significant influence.

1c Awareness of, and ability to, apply ethical and professional principles and deal with ethical challenges.

Pay attention to the following in P2TTEthics, ethical issues & dilemmaCorporate social responsibilityInterpretation

Review the P2 question strategy to identify the core strengths required for this type of question. Also see exam guide above. Verify that you have these strengths by attempting timed mocks. Refer to the Past question analysis to identify the type of questions that have been asked in the past.

Practice should be aimed at assessing the ethical implications of the practice being proposed.

The principles of practice apply equally as above.

DO THIS QUESTION AFTER QUESTION 1b. DON’T BE TEMPTED TO SKIP IT. Analyse the scenario to understand what has happened or is about to happen. Underline the key words (that depict managerial decisions and intentions in response to commercial needs and pressures) and consider if they (actually or potentially) transgress ethical principles. If they do then say so; also explain the consequences and how and why the accountant should respond by applying professional principles to those tasks that impact his role. For example, if he is asked to prepare a fraudulent

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March 2017 Exam Guidance

cash projection to secure a bank loan for the business he should resist because that is dishonest and in conflict with the profession’s standards of integrity.

Make sure you know the ethical and professional principles (see relevant section of Exam guidance above). The examiner has previously reported his alarm and disappointment at candidates’ lack of knowledge about ethical principles. Make sure this does not apply to you. Study the exemplar

2 Knowledge and understanding of IFRS principles and the issues they relate to.

Review the P2 question strategy to identify the core strengths required for this type of question. Also see exam guide above. Verify that you have these strengths by attempting timed mocks.

Exam practice should be aimed at i) identifying issues, ii) assessing the accounting and financial reporting merits of the practice being proposed to deal with the transaction, condition or other event; iii) recommending the best treatment through the exercise of critical thinking and professional judgement. This can also involve raising journal entries. So know your journal entries very well.

This might involve agreeing or disagreeing with the proposed treatment. Don’t be tempted to automatically think that there is something wrong with the proposed treatment and therefore feel compelled to disagree with it. Many students fall into this trap by default. The examiner is testing your understanding; so you can’t simply guess that the treatment is wrong just because it appears as a scenario. You must make good judgements based on an analysis of the issues and sound IFRS insight combined with commercial awareness.

Ability to assess how IFRS applies to transactions, conditions and other events. This would involve assessing the applicability of two or more IFRSs to obtain convergent or divergent support.

Professional marks are available.

Pay attention to the following in P2TTAccounting context and situationAccounting scenariosAccounting policiesAccounting questionAccounting policies, changes in accounting estimates and errors.Accounting theoryApplicationBusinessCapital, equity and net assetsCash and cash equivalentConceptual frameworkContingent considerationCraftCreditsConvergent and divergent thinking compared.DebitsDualityIAS 8 Hierarchy

As you may have noticed q1b and q2 require the same skill set and cover the same scope of topics. As q1b is compulsory it makes sense to answer q2 also because then you can transfer the skills across.

See P2- colour codes to annotations for help with identifying issues in scenarios. Also refer to “issues” in P2TT

The principles of practice apply equally as above. The standards that are examined here are the ones that are well established already. From the Exam Guidance above you should know them by now. For further interest check Mark scheme (for interacting IFRS) and Core IFRS in P2TT.

ANSWER THIS QUESTION FIRST IF YOU ARE GOOD WITH THIS TYPE OF QUESTON BUT YOU ARE NOT MEETING THE SCORE TARGET FOR Q1A. IN THIS TYPE OF QUESTION YOU ARE LESS LIKELY TO OVERRUN THE ALLOWED TIME. THE COMPUTATIONS ARE LIKELY TO BE VERY BASIC AND FEWER THAN FOR Q1A. IT IS MORE

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IssuesJournal entriesMark scheme

ABOUT EXPLANATIONS THAN COMPUTATIONS OR PREPARATION.

3 Knowledge and understanding of IFRS principles and the issues they relate to.

Review the P2 question strategy to identify the core strengths required for this type of question. Also see exam guide above. Verify that you have these strengths by attempting timed mocks.

Same practice requirements as for q2.

Ability to assess how an IFRS applies to transactions, conditions and other events. This would involve assessing the applicability of two or more IFRSs to obtain convergent or divergent support.

For example, the question may be exclusively focused on one topic such as noncurrent assets but the various issues assessed may include leases, investment property, transfers, agriculture, revaluations, etc.

Professional marks are available.

Pay attention to the following in P2TT to the same issues as in 2 above.

IF YOU DECIDE TO START AT SECTION B ANSWER THIS QUESTION second AFTER Q2 IF YOU ARE GOOD WITH THIS TYPE OF QUESTON AND YOU ARE NOT MEETING THE SCORE TARGET FOR Q1A. IN THIS TYPE OF QUESTION YOU ARE LESS LIKELY TO OVERRUN THE ALLOWED TIME. THE COMPUTATIONS ARE LIKELY TO BE VERY BASIC AND FEWER THAN FOR Q1A. IT IS MORE ABOUT EXPLANATIONS THAN COMPUTATIONS OR PREPARATION.

Q3 can be slightly more challenging than Q2 because the examiner might focus on a type such as noncurrent asset to the exclusion of others, and set all the questions on it. That is why students find this question tougher than q2. Assess your strengths and decide between q3 and q4. But answer q2 for the reasons given above.

4 Knowledge and understanding of “current issues”. Gain an understanding of the nature, scope and assessment requirements of “current issues”

Professional marks are available.

Review the P2 question strategy to identify the core strengths required for this type of question. Also see exam guide above. Verify that you have these strengths by attempting timed mocks.

Recently q4 has been an assortment of computational and textual questions about current issues. Expect this trend to continue.

Refer to the examiner’s report June 2016. The examiner has written a lot about judgement, conceptual framework, learning in-depth. Be prepared for a questions based on ED 2015/3.

Refer to G-H above.

IAS 1 Presentation of financial statements is topical because of the Disclosure initiative. This standard has wide application and it must be studied with many other standards.

The overall theme of the question could be flexibility in disclosure to allow more relevant information to be cost effectively produced for users who increasingly require rich information.

This would mean addressing contingent factors such as i) the context of transactions and the accounting policies applied; ii) materiality in disclosure to aid understandability (aggregating activities, sequencing disclosure notes to match the sequence of primary statements, highlighting items most relevant to an

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March 2017 Exam Guidance

understanding of financial performance and position and avoiding obscurity through the inclusion of immaterial and irrelevant items); iii) ethical considerations such as financial reporting fraud; iv) addressing corporate social responsibility priorities; v) management’s intention.

The skill set for this question is the same as for q1b, q2, and q3.Ability to identify, assess and evaluate how current issues affect financial reporting including current IFRS, new IFRS and proposed IFRS.

Pay attention to the following in P2TT to the same issues as in 1b, 2, and 3 above.

Please refer to:P2 question strategyIASB work plan - annotatedExaminable documents - annotated

To sum up I would suggest the following order: q2, q1b (unless q1b is clearly a follow-up to q1a in which case do q1a and then q1b), q1c, q3 (or q4 only if you have studied the IFRS), q1a (answer the parts of this question in reverse order because the later questions are less challenging than the earlier ones).

Even if you are good at doing calculations speedily (and this could be a reason you overrun as you persevere to get everything right) you are encouraged to follow this order because by the time you get to q1a you will have gained all the marks available from the other questions. You will have only this question to deal with now and chances are you will have more than enough time for it because of the time you might have saved on the other questions. Even if you run out of time on this question you will not do so at the expense of other marks you could otherwise have earned – you already have those in the bag!

Before you start answering the paper for each question mark the start and finish times and stick to it.

Read each question carefully; always underline key words and ponder their meaning in context. Think about the whole answer before you start writing. After you start writing read the question again to make sure you are on track. One way to check your understanding is accurate is to always challenge yourself with a “what-if” question. So, if you initially think the transaction is a grant (IAS 20) ask yourself: what if it is not? What else can it be? This forces you to read the question again closely. It could have been a transfer of property by a customer in which case it is not a grant but a transfer accounted for under IAS 16, 37, IFRS 15 (see above under IAS 16). Likewise, you should be able to distinguish between a “transfer” and an “exchange” of PPE.

The examiner always tests understanding of concepts by requiring you to identify the distinguishing features of similar transactions.

If you follow this advice you will be in control: that is a good frame of mind in which to approach the exam. You might need a bit of luck; so I wish you luck but your success will not depend on it because luck is random whereas you will be in control. That is what is required for success.

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March 2017 Exam Guidance

©2015-2016 Sekoyen Accounting Solutions Ltd. All rights reserved

March 2017 Exam Guidance

PLEASE DO OTHERS A FAVOURIf this document has been useful to you please let others know directly or you can leave a message for them in the Guestbook or send us an email: [email protected]. We intend to cover more subjects in future. Please let them know how you have benefited. Please let us know how we can improve. What would you like us to add or remove?

Did it help you to understand how the examiner approaches the exam?Did it help you to understand the priorities of the exam?Did it help you to prioritise?Did it point to holes in your memory?Did it help you to understand a topic better?Did it help you to develop specific skills?Did it help you to organise your thoughts about the answer?Did it help you to understand that each question has distinctive characteristics and purposes?Did it help you to select the type of question to prepare for and answer? How?Did it help you to ask more questions about topics?Did it help you to think in a clear and structured way? How?Did it introduce new ideas? Which ones?Did it help you to learn more efficiently?Did it help you to manage your time for revision and practice?Did it help you to manage your time in the exam?Did it help you to read the questions more carefully and accurately?Did it help you to feel in control? How and why did you feel in control?Did it help you to develop appropriate exam psychology – the mental attitude that is focused, confident and resilient?

©2015-2016 Sekoyen Accounting Solutions Ltd. All rights reserved