March 2017

Exam Guidance for ACCA Paper P2

Abibu Dumbuya SEKOYEN ACCOUNTING SOLUTIONS

March 2017 Exam Guidance

©2015-2017 Sekoyen Accounting Solutions Ltd. All rights reserved

Standard/Area/guide

Study guide

Examinable

documents

IASB Work plan

Prepare to pass

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 December 2016 Examiner’s report (annotated)

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

“The Corporate Reporting examination requires a deep understanding and knowledge

of the Conceptual Framework, IFRSs and Code of Ethics. Questions at professional

level will challenge the candidate to show this knowledge and then to apply it to a

particular scenario, and this requires extensive preparation.” Examiners report,

September 2016

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 skills

Effective 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.

Annotations

Annotations 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.

Understanding the examiner’s craft Understanding the examiner’s distinctive craft is an advantage

in learning and answering questions. Working through these

examples diligently can be rewarding.

Real-time Exam technique

Question selection, exam time management and suggested final practice programme:

please go to the section before the last on this document for guidance on question

selection on exam day!

The transition guide

Success in studying P2 requires an effective transition from F7.

The transition guide provides assistance in this connection

A.1 Professional behaviour

and compliance with

accounting standards

1c “The syllabus …examines professional competences within the corporate reporting

environment.” Approach to examining the syllabus, p7

The examiner’s central concerns are that candidates can discuss professional problems

and attitudes in a professional manner and reach conclusions that reflect their

commitment to professional principles. Because professional ethics are inherent to

professional conduct it is inevitable that ethics would be considered in the application

and evaluation of financial principles and practices. Refer to The professional and

ethical duties of the accountant.

Please refer to question strategy particularly q1c strategy table for a review of the

types of questions that have been asked and the learning approach that is entailed by

these requirements.

For March 2017, the following areas are prioritised:

Suggested approach:

- Learn the concept of ethics in P2 Terms and techniques.

- Pay particular attention to the reasoning employed e.g. see

“Understanding” in P2 terms and techniques.

Additional practice questions:

See below under professional ethics A.2

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Unfortunately, candidates often perform below expectation because they fail to

recognize and develop the required competences. The discursive questions are

determined by the syllabus requirements which include the verbs “appraise”, “assess”

and “discuss”. The learning that is entailed by these verbs is explained and the practice

exercises are prescribed to support effective learning and preparation. You are

encouraged to work through the exercises carefully and extensively over a period of

time to ensure that the skills are honed.

A.2 Ethical requirements of

corporate reporting and the

consequences of unethical

behaviour

1c The examiner’s central concerns are that candidates can discuss ethical problems and

attitudes in a professional manner and reach conclusions that reflect their understanding

and commitment to ethical principles. But remember that this is not a P1 Governance,

Risk and Ethics paper (assessing the ethics of business conduct) but a P2 paper

addressing the financial effects of business conduct through the ethics and standards of

the profession. Therefore, all ethical questions must be viewed through a financial

reporting prism e.g. you should always ask: i) does the attitude or behaviour comply

with professional ethics? ii) is the accounting treatment proposed or adopted supported

by the conceptual framework? iii) if not can it be justified by the general principles of

financial reporting and the guidelines of IAS 8 Hierarchy?

Please refer to question strategy particularly q1c strategy table for a review of the

types of questions that have been asked and the learning approach that is entailed by

these requirements.

“As previously reported, many candidates focus on the reporting issues to the detriment

of the ethical issues. The marks in this part of the question are often split equally and

therefore not to discuss the ethical or accounting issues is a serious omission by

candidates.” Examiner’s report, December 2016 q1c

Unfortunately, candidates often perform below expectation because they fail to

recognize and develop the required competences. Guidance is provided on the

competences the examiner assesses and how to go about developing them. Refer to The

professional and ethical duties of the accountant.

A suggested approach

List all the key areas for professional judgement in the financial reporting process and

think about the opportunities for manipulation driven by the pressures described in “The

professional duties of the accountant.

Examples:

- IAS 2 Inventory valuation (optimistic valuation that boosts earnings and inflate

rewards linked to earnings)

- IAS 7 masking borrowing/lending as operating cash flow to boost performance and

gain performance rewards as in bonus linked to level of operating cash flows.

- IAS 16 changes in depreciation policies, asset transfers (without commercial

substance), etc. that avoid eligible costs impacting earnings.

For March 2017, the following areas are priority:

Additional practice questions:

Attempt the past question and study the model answer.

Make sure you cover all the past questions and focus on the

core themes:

- December 2016 q1c (answer): Operating profit-based

bonus motivates a change in accounting policy for

recognising all pension scheme gains and losses in other

comprehensive income ostensibly to achieve consistency

and fair presentation. The question requires an analysis and

evaluation of the financial reporting and ethical

implications of the proposed change.

- September 2016 q1c (answer): Should the holding

company of a special purpose vehicle (SPV) consolidate

it? The terms are: the holding company owns only small

interest in the SPV, participates in board and guarantees

SPV’s debt. What are the ethical issues if not consolidated?

- June 2016 q1c (answer): loan misclassified as accounts

payable to improve gearing ratio and evade severe penalty

that would otherwise be incurred for breach of covenant

terms regarding gearing.

- Mar 2016 q1c (answer): ethical and professional issues

arising from the treatment of a 30% interest in an associate

where the other shareholder is a company

- Dec 2015 q1c (answer): financial reporting fraud risk

involving the possible misuse of exchange differences to

boost earnings

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- IAS 19 changes in accounting policy that misallocates current and past service cost

to OCI (or allow actuarial gains to be recognised in profit or loss) to allow a

favourable operating profit on which management bonus is based (December 2016

q1c - answer)

- IAS 21 making decisions to defer exchange differences in equity to stave off

losses, or to include deferrable exchange gains in profit or loss to boost

performance.

- IAS 38 classification of items as goodwill to defer impact of related expenditure on

earnings

- Sep 2015 q1c (answer): financial reporting fraud

(impairment overstated and incorrectly netted off revenue

to depress profits and understate employee share options)

- June 2015 principles-based v rules-based approaches to

standard setting and their differing implications for ethical

conduct

- Ethical dilemma (Dec 2014 q1c & answer; June 2014 q1c

& answer; June 2010 q1c & answer management of

earnings)

- Ethics denial (Dec 2013 q1c & answer; June 2013 q1c &

answer)

- Ethical critique of management decisions or intentions (Dec 2012 q1c & answer; June 2012 q1c & answer; Dec

2010 q1c & answer: the ethics of loan proceeds

presentation; June 2009 q1c & answer: the ethics of cash &

cash equivalents presentation)

- Ethics affirmation

- Ethics misunderstanding Dec 2009 q1c & Answer should

the Finance Director consider ethics in offering credit rating

for a customer he knows is having financial difficulties?

A.3 Social

responsibility (Also see

G.1 and H.1)

1c,4 What is social responsibility?

This syllabus area addresses the “growing demand for transparency in corporate

reports” and how the profession is responding to it. Part of this is fulfilling the role of

accounting as a social function (underpinned by the social contract with the community

- the legitimacy theory) providing information to all stakeholders not just to investors

and creditors. From the perspective of the business social responsibility (or corporate

social responsibility - CSR) is

“…a commitment to behave ethically and contribute to economic development; to

improve the lives of its workforce and their families and to contribute to its community

and society at large.” World Business Council for Sustainable Development.

To prepare effectively for the exams it is essential to understand the drivers for change,

the issues they raise and the profession’s ongoing response.

The drivers for change

The drivers for change include:

In answering CSR type questions it is easy to waffle. Don’t be

tempted. Be rigorous in your preparation and practise producing

clear and concise answers to challenging discursive questions.

Be precise about the benefits of CSR reporting to the business

and its stakeholders. But be prepared to evaluate the financial

implications for the business of its CSR commitments.

Also, recognize that the IASB’s Conceptual Framework may

not be adequate for certain items. Be prepared to discuss the

merits and deficiencies of the Integrated reporting

framework examined in June 2015 q4aiii (answer). According

to the examiner

“…the IIRC’s Framework, which is a recent addition to the

syllabus, was often confused with the IASB’s Framework, with

the result that some candidates scored poorly on this part of the

question.” Examiner’s report, June 2015 q4aiii

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- Legislation e.g. the strategic report (explain strategies and progress towards goals)

to enable stakeholders to assess the businesses’ prospects and sustainability

credentials.

- Increased statutory prescriptions e.g. inclusion of Directors’ Remuneration Report

in response to calls for more transparency about excessive directors’ remuneration.

- Activist investors seeking additional disclosures about the business model,

environmental compliance policy and programmes in order to better understand the

business’ environmental impact and assess the risk to earnings and financial

position. The better these risks are known the better the assurance of sustainability,

the lower the cost of capital and the more stable the share price is expected to be.

- Environmental and social activists seeking greater disclosures about company

practices such as pollution and waste that affect the environment; supply chain e.g.

disclose illegitimate practices such as the use of slave or child labour or

discriminatory practices that adversely affect minorities and other vulnerable

groups.

Issues raised

Because of the significance of the drivers for change there is increasing recognition that

CSR is a core business priority and that the issues for corporate reporting are integral to

the corporate reporting process itself. Therefore, there is a need for integrated reporting

about how the organisation is creating value from its capital resources, its impact on the

environment and its relationships to all stakeholders.

This raises the following key issues to be considered at the transaction processing and

report production levels which should be the focus of your exam preparation:

- What is material to recognize and classify separately, involving unit of account

considerations?

- What is relevant to report?

- What is material to present and disclose?

- How can the need for comparability be satisfied?

- What measurement basis is appropriate for “value creation” and certain items such

as environmental costs and the value of human capital?

- How can trade-offs be achieved between confidentiality and useful disclosures?

- How can existing report contents and structures be modified to achieve clear and

concise reporting while avoiding clutter?

- How can the benefit and costs balance be maintained?

- What form and level of assurance is required and where is it most desired?

The profession’s response

The profession’s response is evolving; it is very much a follower rather than a leader as

other organisations such as the International Integrated Reporting Council (IIRC)

are leading the way towards a more comprehensive and coherent reporting system that is

focused on sustainability in the long term. Evidence for this is the publication in

December 2013 of the Integrated Reporting Framework which the ACCA has now

included as an examinable topic.

The risk of information overload is a current issue being

addressed by the disclosure initiative e.g. materiality

considerations.

The link between employee incentives and CSR must also be

considered as there is always a potential ethical conflict which

may result in financial reporting fraud. For example,

expenditure on social responsibility may be delayed or deferred

to preserve profit profit-related bonus.

Evaluate whether expenditure to comply with environmental

regulations is capital (e.g. IAS 38 Intangible assets) or revenue.

Be prepared to discuss the social implications of a corporate

restructuring plan.

Be clear about relevant concepts such as

- Accountability

- Assurance

- Benchmarking

- Decommissioning costs

- Environmental costs

- Externalities

- Innovation in corporate reporting

- Integrated reporting

- Legitimacy theory

- Restructuring provisions

- Social benefits

- Social costs

- Stakeholder theory

- Sustainability

- Transparency

- Value-added

Exam practice questions

1. Discuss the view that social responsibility is integral to the

accountant’s role in society. Hint: What are the fundamental

principles of accounting practice? Link these fundamentals to

the requirements for a company to act responsibly in accordance

with corporate ethics.

2. The “emergence of nonfinancial reporting standards” presents

challenges to accountants while promoting sustainability

reporting. The Global Reporting Initiative (GRI) Guidelines are

generally accepted as current best practice in sustainability

reporting.

Required

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This topic and the issues it raises will be frequently examined at q1b, q1c and q2

having already been examined at q4a in June 2015, q4ai September 2016 (with

materiality). The questions will stretch and challenge you to think deeply about the

ethical, accounting and reporting issues raised by the need to report more transparently

and coherently.

For example, financial sustainability may conflict with environmental sustainability

unless management makes integration of the two a central goal of strategic management.

Then there is the question of incentivising staff to achieve both, without creating ethical

issues that result in financial reporting fraud. So, you should expect q1c to include

sustainability dilemma - a corporate opportunity and threat stemming from the same

events or conditions.

Work on the conceptual framework will naturally take account of emerging

requirements for defining concepts and measurement principles.

The profession also works in partnership with other leading organisations to develop

strategies and introduce incentives for innovation and compliance with voluntary best

practice codes in the absence of legislation.

Examples:

ACCA awards for best practice in sustainability reporting.

ICAEW

The emergence of non-financial reporting standards

Social reporting (including environmental and sustainability reporting) includes non-

financial aspects not addressed by IFRS. Various organisations are developing

standards for reporting meaningful and comparable information to all stakeholders that

provides a context and perspective on the state of current performance and prospects for

the future.

Examples include:

Global reporting initiative

Discussion of the ethics of corporate social responsibility (CSR) - last examined

December 2011 q1c & answer. But integrated reporting examined in June 2015 q4aiii

expresses aspects of CSR.

Suggested approach

- Learn the concept of CSR in P2 Terms and techniques.

- What is the relevance of the Conceptual Framework (CF) to CSR?

- Pay attention to the reasoning employed in the December 2011 answer.

- Focus on the benefits of CSR to the entity. Satisfying the needs of the socially

responsible investor by providing information about beneficial involvement in the

community can improve the company’s image and attract key stakeholders such as

investors, customers, employees and strategic partners.

- What can financial reporting contribute to CSR? i) financial reporting has

established a culture and framework for reporting reliable and relevant information;

this can be influential in setting up a similar culture for CSR; ii) the CF’s enhancing

2.1 Describe the principles of the guidelines and discuss the

practical challenges of applying the principles.

2.2 Discuss whether sustainability reporting should have the

same attributes as financial reporting.

3. Discuss the reasons why traditional financial accounting may

not be able to reflect the social and environmental impact of

organizations. See G.1 below

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characteristics e.g. comparability, verifiability, timeliness, etc. are standards that can

be applied in benchmarking. This will enable organisations to assess their CSR

performance relative to regulatory standards. iii) Published financial information

and segmentation (IFRS 8) enhances transparency necessary to allow monitoring

and evaluation.

The ACCA awards for sustainability – an initiative that reflects CSR is at the

forefront of innovation in transparency and accountability reporting. Read and critically

discuss from the perspectives of the business and its stakeholders at least one CSR

report. Examples:

ACCA and sustainability

Vodafone: Sustainable business report 2015-16

B.1 Conceptual

Framework (CF) ED

2015/3

4

- New Conceptual Framework (CF) is required to underpin IFRS (e.g. September

2016 q4ai, aii on materiality and understandability) and to promote international

convergence.

- The assessment of the examiner’s priorities for June 2015 and the rationale

given below for those priorities are reproduced because they were accurate and

remain relevant - see June 2015 q4a and q4b. In addition, as the CF is still

undergoing significant review, some of the core issues are still relevant and

interlinked with the issues that were examined in June – see Examiner’s report

December 2015 (general comments section) & The Conceptual Framework webcast

series. Also, see Examiner’s report June 2016.

- Be prepared for questions involving the use of the CF to: evaluate current practices

using specific transactions involving recognition of income, expenses, liabilities,

assets and equity. Example, December 2016 q1b (answer): discuss accounting and

reporting practice for pension gains and losses.

- Be prepared also to discuss the meaning and requirements of “performance”. What

is performance and does the profit or loss adequately measure the entity’s

performance? What principles should govern the classification of items between

profit or loss and OCI? Should OCI items be subsequently reclassified to profit or

loss – see June 2014 q1a & answer? Under what circumstances? Also see IAS 1 and

read the technical article What differentiates profit or loss from OCI

- What is the most appropriate measurement basis for assets and liabilities? Does

IFRS 13 fair value measurement (measure of exit values) adequately address all the

measurement requirements? Can the business model be justifiably used to

determine appropriate measures? You are encouraged to review June 2014 q1b and

Sekoyen’s critique (and suggested answer) of the examiner’s answer to this

excellent question.

- According to EFRAG (European Financial Reporting Advisory Group) the mixed

measurement model, rather than a one-size fits all ideal model that would be

applied to all circumstances, seems more promising. Discuss. Also be prepared to

discuss the standard valuation or measurement models and the applications of each

to the financial reporting of specific transactions. Refer to The maths of valuation

models.

1. Explain with examples, why a Framework would be useful

for convergence (of international standard setting)

2. Address current issues around Framework: e.g.

“management commentary” (guidance published Dec 2010)

3. Address current challenges around the Framework: e.g.

“measurement”, “reporting entity”, “cost constraint”,

conflict between needs of “users” and “preparers” of

financial statements.

4. How can the Framework be used to address criticisms

about the lack of focus and the volume of disclosure in the

standards? E.g. “…to develop principles for presentation

and disclosure” (principles-based approach) and materiality

in disclosure e.g. the disclosure initiative.

5. The quest by some for a re-introduction of the concept of

prudence can be countered by the following argument.

Prudence means caution; faithful representation based on

comprehensive information inherently reflects all

conditions, including impairment. There being no

permission to anticipate income on operating assets (rules

for reflecting changes in asset values resulting from market

and operating conditions embedded in IAS 2, IAS 38, 36,

IFRS 5, IAS 16 effectively preclude this by requiring that

asset accretions must not be recognised in profit or loss but

must be reflected in equity, as these are not performance

related) and expenditure (IAS 37 requires all provisions to

be based on “past” events and conditions that are

independent of the entity’s future actions) the scope for

prudence to influence judgement in terms of “anticipating

no profits” and “providing for all expenses” is removed,

rendering the concept of prudence redundant.

6. Similarly, “reliability” is redundant because faithful

representation achieves that end by requiring that

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- Should the primary purpose of financial reporting be to evaluate stewardship

(looking back) or to provide decision-useful information to potential investors and

other providers of capital such as financial institutions (looking forward)?

- Are there comprehensive underpinning concepts such as relevance, verifiability,

prudence, reliability and faithful representation to engender confidence in the

integrity of the financial statements? Are the concepts in harmony with each other?

E.g. the current conceptual framework excludes prudence because it conflicts with

neutrality which is a requirement of faithful representation.

- The reporting entity: the aggregation (consolidated income statement) and

disaggregation (single entity e.g. parent’s income statement).

- The reporting entity is an entity that is required or volunteers to produce general

purpose financial statements.

- Be able to discuss relevant information in relation to consolidated and single

entity. Identify the relevant information for each: user perspectives. E.g. dividends,

performance, earnings, etc.

Be prepared to competently discuss the strengths (e.g. explain how the CF fosters

production of rigorous and consistent standards of financial reporting) and weaknesses

(e.g. explain and illustrate inconsistencies allowed by optional presentations e.g. IAS 7

direct and indirect method; subjectivity of standards such as IFRS 13, IAS 16, IAS 40

produces relevant information at the expense of objectivity; the cost of implementation),

of the CF with specific examples. Read the IASB work on CF and be prepared to

evaluate to what extent the CF proposals overcome inherent deficiencies in accounting

standards and practices, particularly in relation to measurement and recognition

including goodwill and deferred tax assets.

Also, in the June 2016 Examiner’s report the examiner makes these significant

comments that you should pay attention to as you prepare for the next exam:

“…the application of the cost constraint has resulted in some IFRS being

inconsistent with the Framework. For example, there are certain underlying

definitions that are currently used in IFRS but not dealt with by the Framework. It is

important that candidates appreciate this problem with the Framework and can

identify those standards that are inconsistent with the Framework. This knowledge

is relevant to all questions in the examination.” June 2016 Examiner’s report

Examples of definitions of significant concepts you should be prepared to discuss:

- Goodwill (IFRS 3)

- Deferred tax assets or liabilities (IAS 12)

- Revaluation gain (not recognised in profit or loss but gain on disposal is recognised

in profit or loss when the asset to which they relate is disposed of)

- Gains and losses in a cash flow hedge (IFRS 9)

- Transaction costs: issue of shares (set against equity e.g. share premium); IFRS 3

(set against profit or loss); IFRS 9 (set against profit or loss or if FVTPL or defer if

FVTOCI)

- Transparency

- Substance over form (alternatives to legal form)

transactions, conditions and other events are reflected

completely, neutrally and error-free so that their

commercial substance, financial effects and risk potential

can be discerned and reliably assessed.

7. New definitions of assets and liabilities are being

proposed. Make sure you can discuss the advantages of the

revised definitions over the current ones using specific

examples and criteria.

8. The new definition of an asset is: a present economic

resource controlled by the entity as a result of past events.

This definition emphasizes the present resource potential

of an asset (to which the entity has current exclusive

access) whereas the current definition emphasizes future

economic resource potential. This links to the measure of

that potential. Whatever the basis of measurement the

present is more reliable than the future measure due to

uncertainty over future estimates. Another problem with the

current definition is that the concept of control is not

entirely compatible with the future which is uncertain: e.g.

how can the entity control future asset prices subject to

market forces? IFRS 13 deals with this problem by basing

asset values on exit prices at the measurement date (the

entity’s reporting date) under current market conditions.

Moreover, one is not clear when “…future economic

benefits are expected to flow to the entity.” Having a

definition that makes it clear the economic resource exists

at the reporting date is an improvement.

9. The proposed definition of a liability is: “A present

obligation of the entity to transfer an economic resource as

a result of past events.” In what specific ways is this an

improvement over the current definition? This definition

removes “expected” which in the current definition of a

liability is problematic as it leads some users to not

recognize liabilities which in their judgement are not

expected to result in an outflow of economic resources

when in fact they will. This provides more relevant

information especially over unrecorded liabilities such as

claims against the entity for injury, warranty and

consequential loss. As with asset the proposed definition of

a liability conveys certainty about the existing obligation

at the reporting date rather than emphasize the transfer of

future economic resources as a criterion of the existence of

an obligation (at the reporting date). The adoption of this

definition will result in the recognition of certain liabilities

that are currently only noted as contingent liabilities in the

financial statements simply because in the judgement of

management it is not certain that a transfer of economic

resources would be required for their settlement. The

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- Commercial substance (indicated by significant differential cash flows arising from

the transition)

“Further, candidates should realise that some decisions on accounting issues have been

based more on expediency than on concepts. Often, candidates’ answers appear quite

naïve in terms of the practical application of the standards.” June 2016 Examiner’s

report

- Development costs capitalised (IAS 38) but an asset does not exist at the reporting

date.

- Capital grants (IAS 20) not recognised as capital as one would expect, instead

treated as a deferred credit to be released to profit or loss over the economic life of

the asset (IAS 20).

- Revenue (IFRS 15): the interest element may be ignored as a practical expedient

where the period of finance (between payment and performance) is twelve months

or less.

The implications of the examiner’s comment are that you should always approach

corporate reporting practice critically. This requires in-depth understanding - not basic

knowledge as this would be inadequate (“quite naïve”):

- Consider the accounting policy choice and be prepared to evaluate its suitability in

context

- Consider always the overall criteria of the conceptual framework: “faithful

representation” and “relevance”. Does the specific application outcome satisfy these

criteria?

- Consider the enhancing characteristics: does the application outcome satisfy the

criteria? E.g. in relation to Corporate Social Responsibility (CSR) does the report

clearly identify expenditure on sustainability programmes to allow users to assess

how the organisation is doing?

shorter definition is more compatible with the principles-

based approach to IFRS in that the emphasis is on

determining whether an obligation exists at the reporting

date rather than seeking confirmation of this through the

evidence of transactions, and thereby risk failing to

recognise legitimate non-transaction based obligations that

may exist. For example, obligations under a financial

guarantee contract issued by the entity could be

understated if the debtor’s credit risk has deteriorated and

this condition has not been fully assessed as a basis for

recognising an obligation at the reporting date.

10. Overall the guidance provided by the definition will result

in a more rigorous search for liabilities (especially

liabilities that are not transaction-based) and therefore more

complete statement of the financial position. Consequently,

this is an improvement.

Questions for exam practice 11. Explain how IFRS 15 applies the Conceptual framework for

financial reporting ED2015/3. Give specific examples of

recognition, measurement and disclosure to illustrate the

qualitative characteristics of relevance, faithful representation,

comparability and understandability.

12. “…introducing rigorous and consistent accounting standards” is

the objective of the conceptual framework. Discuss how IFRS 15

is a prime example of this. Give specific examples and provide

clearly reasoned explanations illustrating how IFRS 15 dovetails

with other key standards (such as IAS 2, IAS 8, IAS 16, IAS 36,

IAS 37, IFRS 2, IFRS 8, IFRS 9) over recognition, measurement,

presentation and disclosure.

13. The Conceptual Framework for financial reporting adopts a

principle-based approach to financial standard setting. Explain

how the principle-based approach to IFRS enabled the FASB and

IASB to converge towards a common revenue standard.

14. “To a large extent, financial reports are based on estimates,

judgements and models rather than exact depictions. The

Conceptual Framework establishes the concepts that underlie

those estimates, judgements and models. The concepts are the

goal towards which the IASB and preparers of financial reports

strive.” Paragraph 1.11, p24 Conceptual framework for financial

reporting, ED2015/3

i) Describe the key concepts of revenue recognition,

measurement and presentation

ii) Discuss how those concepts can be used by entities as goals

of accounting and financial reporting of IFRS 15 Revenue

from contracts customers.

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iii) Discuss how the concepts can enable international

convergence.

15. Accountants are increasingly required to exercise and

disclose significant judgement within the application

guidance to achieve the objectives of 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

professional judgement? Refer in your discussion to

examples from recent standards such as IFRS 9, IFRS 13

and IFRS 15.

16. “Evaluate the valuation models adopted by standard setters”

Study guide B.1.a Refer to Conceptual Framework chapter 6:

Measurement

17.

B.2 Critical evaluation of

principles and practices 1b This section addresses the part of the syllabus aims which requires candidates to

“…exercise professional judgement in the application and evaluation of financial

reporting principles and practices…” Please refer to question strategy particularly q1b

& q4 strategy table for a review of the types of questions that have been asked and the

learning approach that is entailed by these requirements.

The examiners central concerns are that candidates i) recognise that financial reporting

practices are contingent on context because the context sets the conditions (e.g.

performance conditions as in revenue recognition where the stage of completion is a

critical factor in what revenue gets recognised in a reporting period, use conditions as in

PPE or investment property, etc.) that determine which practice is appropriate for a

given reporting scenario; ii) are clear about the steps necessary to conduct critical

evaluation competently in any business context; iii) develop the necessary skills for

problem analysis, evaluation and resolution of financial reporting issues; iv) inculcate a

lifelong learning attitude to financial reporting; v) understand the core principles of

financial reporting standards and be proficient in applying them flexibly.

- In assessing these competences, the examiner ranges over all the standards and

prioritises the common but most contentious ones as can be seen on the

accompanying spreadsheet schedule – tab q1b, c (Past question analysis).

- The aspects of the standards most commonly examined are to do with recognition

and measurement.

- As the issues are contentious it would be necessary to refer to the Conceptual

Framework, IAS 1 and IAS 8 as foundations to build arguments upon. However,

arguments must always refer to the circumstances because of the contingency nature

of practice as explained above. Otherwise, answers would be incomplete, however

sound the reasoning given.

Exam practice suggestion

To be adequately prepared to answer this question you should

be able to address all of the examiner’s central concerns by

attempting case study that involves the honing of the relevant

skills. In addition, you should be familiar with issues addressed

in published financial statements. Therefore, it is a good idea to

read at least one example of a model published financial

statements from the big accountancy firms and one actual

(latest) published financial statements. Read and think about

how the entities justify the following

- Accounting policies (for topics under presentation below)

- Disclosure notes (for topics under presentation below)

- Presentation of gains and losses: pensions, share-based

payments, PPE, effects of exchange rate movements,

investments, reclassifications from equity, financial

liabilities

- Operating segments

- Guarantees

Examples of model financial statements

- Deloitte

- Ernst & Young

- Grant Thornton

Examples of published financial statements.

- Tesco plc

- Balfour Beatty

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Crafting cogent arguments would be essential as much of the answers to this type of

question entail making a claim and proving it i) as a way of countering adopted practice

that deviates from IFRS, or ii) to prove that IFRS compliant recommended practice is

best suited to the business model of the entity.

Read

How to Write for P2

For March 2017, the following areas should be mastered

Financial guarantee contracts (IFRS 9).

- Be able to discuss whether a particular contract is a

financial guarantee (protecting against financial risk) or a

provision (recognition of an obligation that arises from

operations IAS 37) or insurance (protecting against

operating risks IFRS 4). This is a high priority area because

the examiner was very disappointed at candidates’ inability

to apply financial principles to identify and analyse the

critical distinguishing features between a financial

guarantee and a provision in December 2014. Given the

crucial (for fair statement and disclosure of material

liabilities the lack of which could mask going concern

problems) importance of this area he is very likely to return

to re-examine this area soon and several times until he is

satisfied that the required knowledge and skills have been

acquired by candidates. Examined September 2016 q1c

but still examiner not happy because answers tend to be

“boiler plate”: lacking in analysis and reference to the

scenario. Therefore, it remains priority for all future exams.

- Be able to discuss the issue of a financial guarantee at a

premium from the issuer’s perspective as a holding

company and from the debtor’s (not the holder) perspective

being a subsidiary whose debt is guaranteed and the

group’s perspective. Recognise that where the fair value of

the guarantee (premium) exceeds the reimbursement

received from the subsidiary (or if no reimbursement is

received at all) then the net premium incurred by the parent

is in effect a contribution of capital from the parent. Make

sure you are able to raise the journal entries for each

perspective: parent, subsidiary, group. This is similar to

q1b December 2014 & Answer. Also, study “what I learnt

from studying exemplars”

- How is the issue of a guarantee reflected in the fair value of

the underlying liability of the debtor? Refer to IFRS 13 - be

prepared to discuss this.

- Be prepared to give advice regarding the treatment of

guarantees given under various terms: i) overcompensate

for incurred loss arising from default of a specified debtor;

ii) no preconditions required for payment of incurred loss

because of the debtor not making payment on the

guaranteed asset; iii) performance guarantee.

Questions for further practice are given under the relevant IFRS

(q1b)

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IAS 1 Presentation

of financial

statements

1b, c,4 - Performance reporting is topical due to the drive to determine what performance

really is, how it should be measured and reported.

- Naturally, in seeking answers to the above the structure and content of the profit or

loss and OCI would be reviewed. Key issues are definitions of the elements:

income, expenses; what gets included in which part of the comprehensive income

statement?

- Re-measured items such as actuarial gains and losses, holding gains on PPE,

exchange differences on re-translating investment in foreign operations are

recognised in OCI and presented in other components of equity in the SOFP. There

is a presumption that information included in OCI is relevant. Be prepared to

evaluate this presumption in unfamiliar business contexts and situations.

- The corollary is that gains and losses that do not arise from re-measurement are

recognised in profit or loss. For example, gains on disposal of noncurrent operating

assets (PPE).

- When do OCI items get into profit or loss after being previously recognised in

equity? What are the CF principles that govern the movement (reclassification from

equity to profit or loss or reclassification between equity accounts as in DR

Revaluation reserve, CR Retained earnings on the disposal of a related noncurrent

asset?) How relevant would the profit or loss be if the previous OCI items come

back into profit or loss on the occurrence of the trigger event? Give many varied

examples of trigger events e.g. disposal of the foreign subsidiary, and disposal of

the available-for-sale investment. Why is the treatment of these two different from

the treatment of disposal of the noncurrent operating asset (PPE)? Read P2TT.

- Be prepared to study the performance reporting and presentation issues in

conjunction with CF and measurement standards such as IFRS 13.

- ED 2015/1 Classification of liabilities proposes a more general approach to

classification of liabilities between current and noncurrent reflecting the

principles-based approach. For example, it proposes that classification should be

based on the entity’s substantive rights at the reporting date e.g. the “right to defer

settlement of the liability by rolling over the borrowing under the terms of an

existing facility”. It clarifies the term settlement to include transfer to the

counterparty of cash, equity, other assets and services. For the September 2016

exam be prepared to answer q4 or q1b type questions (similar to December 2013

q1b (answer)) requiring you to discuss and advise how certain obligations should be

classified, citing principles and demonstrating the effects of classification on the

SOFP. The effects of classification may be assessed: this would entail evaluating

key financial indicators such as working capital, solvency, liquidity, financial

gearing and returns on capital employed. The effect of classification on, and rights

under, existing financing arrangements such as loan facilities and covenants should

be discussed. Keep in mind that as explained in P2TT overdrafts can be cash and

cash equivalent (current liability) or long term liability. Make sure you are clear

about the definitions of these terms in ED2015/1 (e.g. paragraph 69) so that you can

apply them to the details in the scenario.

- Be able to deal with discursive questions.

- Get familiar with the structure of the comprehensive

income statement. E.g. read and analyse Tesco plc p69-70

(After opening the page go to financial statements and

select Group statement of comprehensive income).

- Be able to discuss the CF in relation to the SOCI in terms

of relevance, understandability, verifiability and

comparability.

- Relevance has two key components: confirmatory value

(contains feedback information that confirms assessments

and expectations e.g. actual equals forecast sales and

earnings beat predicted EPS for the quarter – key

performance data for listed companies) and predictive

value (having information that can enable future outcomes

to forecast e.g. qtr1 earnings can be used to revise and

rebase predictions for qtr2 earnings).

- Notice and be able to explain how the CF principle of

relevance (specifically predictability) underpins the

requirement under IFRS 5 to separately disclose

discontinued operations and to identify elements of a

disposal group on the face of the SOFP and in the notes.

- Explain how principles-based approach underpins specific

IFRS e.g. IFRS 13, IAS 8, IFRS 10, IAS 18, IAS 12, IAS

28 and how those standards achieve understandability,

verifiability, comparability and timeliness.

- For example, how does IFRS 13 prioritise relevance,

verifiability, comparability, understandability and

timeliness in the measurement of fair values?

Questions for practice

- September 2015 q3b: extraordinary items not permitted

- June 2015 q3b & answer: “nonrecurring” measurement

basis for a portion of inventory acquired as part of a

business combination under IFRS 3. The issue is the

recognition of an “extraordinary item” is prohibited under

IAS 1.

- June 2013 q2d & answer

- June 2011 q3a & answer

-

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IAS 7 Statement of

cash flows (part of

D.1 of the study

guide)

1,1b,2 - It is essential to recognize that the statement of cash flows is presented as an

integral part of the financial statements for each reporting period. Accordingly, they

must understand the relationships between the five statements and reflect this

understanding by providing integrated interpretations of financial performance and

financial position. The interpretations must be meaningful. Understanding how

value has been created (or destroyed) and the implications for the entity must be the

focal point of all analysis. Thus, the effects of the interaction of the key value

drivers must be identified, evaluated and communicated in their strategic and

environmental contexts. Therefore, while ratios may be used to provide stimulus

(for leading questions), to achieve the deeper understanding required for meaningful

interpretation candidates must consider and refer to all the key documents that

provide full understanding of the operating, strategic and financial performance of

the entity in its environment. Examples of documents include strategic report e.g.

Tesco plc. Candidates are encouraged to get familiar with the terms, techniques and

data for interpretation by reading, analysing and comparing published financial

statements.

- The pattern of examination has been: Dec 2013, Dec 2010 and Dec 2008. So, on

this basis June 2016 is a high probability. This prediction was accurate hence the

preparation of SOCF is not expected at q1a in March 2017. However, the

principles of SOCF are expected at other questions e.g. q2 e.g. interpretation.

- The examiner can combine consolidated income statement and cash flows June

2016 q1a (answer).

- The examiner can test interpretation and evaluation skills directly, involving ratio

analysis, EPS. These have not been tested since December 2007. This infrequency

indicates that the more direct and straightforward aspects of interpretation are

examinable at F7 Financial reporting. At P2 interpretation will be at a deeper

application level involving the evaluation of the effects of strategic decisions such

as acquisitions, reconstructions and disposals.

- The examiner is concerned about classification e.g. Dec 2013 q1b & answer. This

was a very challenging question requiring technical knowledge of cash and cash

equivalent to be used in determining how “term deposits” should be classified.

According to the examiner “classification is not always clear-cut and the principles

have to be used to classify these items.” The examiner was disappointed that

students often did not engage in the type of discussion prompted by the question.

- The examiner is also concerned about the usefulness of financial statements. In the

context of the drive towards improving the usefulness of financial statements (as

evidenced by integrated reporting proposals examined in June 2015 q4 & answer)

candidates should expect the statement of cash flows to be examined at q4. This

expectation was accurate for September 2016; a similar question is therefore not

expected for March 2017.

- Candidates may be asked to provide critical evaluation of the statement of cash

flows. This may focus on i) an appraisal of the direct and indirect presentational

options including the practical and ethical issues they raise; ii) the usefulness of the

contents, formats and classifications to users – strengths and weaknesses e.g.

aggregation for simplicity and understandability impairs meaningful interpretation

and risk assessment; however, IFRS 8 Operating segments and IFRS 5NCA hfs

and Discontinued operations may provide opportunities to overcome this

presentation weakness of the SOCF; iii) lack of information to allow evaluation of

What type of transactions and issues are examined under

statement of cash flow and why? E.g. deferred tax, disposal of

assets, investments, issue and redemption of shares, etc.

- Assess the likely impact of leasing (and the impact of IFRS

16 Leases). This is not essential for March 2017 but is

desirable for understanding how cash flows are likely to

change. See IAS 8.

- Assess the impact of the conversion of preference shares

and convertible bonds.

- The effect of group transactions and balances: Dec 2013

q1a (answer) acquisition of a (foreign) subsidiary; disposal

of a subsidiary (discontinued operation); adjustment of

the purchase price for obligations (e.g. pension,

contingent liability, share-based payment, etc.). Practise

answering this question repeatedly until you are confident.

Also, read the examiner’s report December 2013 paying

careful attention to comments relating to q1a.

- Evaluate cash flows in particular sections e.g. investing,

financing, etc., in terms of the overall financial health of the

entity and of the usefulness of the information.

- Interpretation of pattern of cash flows See Dec 2010 q1b

(& Answer) and Dec 2008 q1b (& Answer).

- What are the weaknesses of the statement of cash flow?

Refer to IAS 7 Evaluation of the SOCF.

- Relate cash flows to ethics e.g. management of earnings

(June 2010 q1c and answer) and assess whether features of

the SOCF allow or prevent ethical misconduct and

manipulation e.g. i) the indirect method is more

susceptible to manipulation than the direct method because

it has lines that are entirely subjective or discretionary and

management can use them to mislead (December 2010

q1bi, ii & answer); ii) an abundance of free cash flows

(disclosed using the indirect method) could induce wasteful

investment; on the other hand the indirect method provides

relevant information in terms of negative free cash flows.

This highlights company financial problems, warranting

remedial action.

- Statement of changes in equity (SOCE) items e.g.

dividends to equity holders of the parent (financing); issue

of shares (not share-based payment) including rights issue

(financing); equity transactions (financing if control is not

lost or investing if control is lost); purchase of NCI interests

(financing).

- Share-based payment: in the SOCE this is presented as a

transaction with owners. It is not shown as a financing cash

flow as resources don’t enter or leave the group - being

equity-settled. However, the net amount is shown as an

adjustment (amount added back) in the reconciliation

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financing policies e.g. how sound is internal control over financial assets and

working capital?; iv) lack of information for risk assessment; v) suggestions for

improvement with clear reasoning; vi) voluntary disclosures e.g. conversion of debt

to equity (noncash effects) needing to be disclosed.

- In short, be prepared to answer a substantial discursive question, not just the

traditional computational ones. Refer to IAS 7 Evaluation of the SOCF. September

2016 q4 aiii, b (answer).

- Group cash flow considerations must of course be addressed: the impact of

acquisitions of subsidiaries on the group’s balances. Adjustments to the purchase

price for outstanding obligations e.g. pension obligations, share-based payment,

contingent liability, etc. according to the terms of acquisition. Refer to the

spreadsheet worked example 1.5.3 pay attention to the annotations in column I.

- According to the examiner some candidates put the wrong sign in front of the right

amount. Make sure the sign as well as the amount is correct. Don’t throw marks

away. Below is a clear example of how to present investing cash flows correctly:

money going out (negative); money coming in (positive). The same rules apply to

“Financing activities.”

Investing activities

Investment in the shares of an associate (500)

Loans to associate (150)

Loans repaid by associate 15

Dividends received (from an associate) 5

Net investing cash outflow (630)

- Make sure you are completely familiar with the entire format and contents of the

statement of cash flows – the “indirect method” tends to be required but you

should also be familiar with the “direct method” format as well. Make sure you

define correctly what goes into each section. Operating cash flows section: make

sure you can describe the subtotals correctly: “cash flow from operating activities”;

“net cash flow from operating activities”. Study the answers to past questions to

ascertain the correct structure and contents.

- Make sure you are clear about foreign currency cash flows and any related

adjustments. Refer to the spreadsheet worked example.1.5.1. Pay attention to the

notes in column F of “Non-operating cash flows.”

- Make sure you understand financial instruments cash flows. Refer to worked

examples in spreadsheet.1.5.2.

Read extracts from published financial statements:

2015 Tesco plc Group Statement of cash flow 1.5.4

2015 Tesco plc reconciliation of profit before tax to cash generated from operations

1.5.5

2015 Tesco plc statement of changes in equity 1.5.6

2015 Tesco plc Note 31 Business combinations and acquisitions 1.5.7

between “profit” and “cash generated from operations”

being the amount debited to profit or loss in respect of the

award of share options in the year to be settled in the

entity’s equity instruments. (Refer to the SOCE for Tesco

plc and the related documents given at the end of the

adjacent column.) The entries to account for the annual

charge for equity-settled share-based payment are: DR

Profit or loss; DR Treasury shares, CR Share-based

payment.

- Interest paid: capitalised interest under IAS 23 must be

shown as financing cash flow; total interest paid must be

shown including operating interest cash flow. Other interest

paid, including finance charges under a deferred payment

scheme may be classified as operating or financing.

- Interest received may be classified as operating or

investing. The choice is the entity’s but once made must be

applied consistently

- Factoring cash flow receipts: i) debt derecognised

(operating cash flows); ii) debt not derecognised due to

continuing involvement e.g. invoice discounting. (financing

cash flows) June 2012 q1aii & answer

- Cash flows on derivative contracts: i) investing; ii)

operating if held for trading; iii) mirror the cash flows of

the hedged item if using as a hedging instrument.

- Treasury shares: cash flows classified in financing activities

even where acquired as part of an-equity settled share-

based payment transaction. However, payments by a

subsidiary to its parent or a trust that holds treasury shares

as part of an equity-settled share-based payment transaction

is deemed to be a distribution of reserves and is deducted

from equity. Consequently, such payments are classified as

operating or financing depending on the entity’s policy on

dividends.

- Pension has two adjustments: noncash and cash. The

noncash element is first added back as a reconciling item in

the “operating activities”. Therefore, the cash element

(amount paid) should be deducted to match the movement

in the bank and provide the net cash generated from

“operating activities”. Refer to the extracts opposite to see

how this works in the published financial statements of

Tesco plc. Also refer to December 2013 q1aiii (answer)

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You should aim to score full marks by practising applying the

above principles assiduously. You are probably best advised to

listen less to lectures and to practise more! Practise repeatedly

and make use of the mark scheme and examiner’s report to

identify and improve weaknesses fast!

If you are running out of time prioritise finishing the workings

over preparing the statement. Marks are not awarded for writing

out the statement of cash flow as the format is a given at this

level.

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

Fundamental to financial reporting are accounting policies – the key subject of this

standard. The standard provides a hierarchy of accounting guidance for selecting

accounting policies in accordance with IFRS. The accounting policy sets the basis for

measuring the amounts (carrying values) at which the elements of financial reporting

(income, expenses, assets, liabilities and equity) are carried (reported) in the financial

statements. The adoption of a new accounting policy is not a change in accounting

policy because there was no existing policy to be replaced by the new one.

To meet the Conceptual Framework requirement for comparability IAS 8 provides that

a change in accounting policy should be reflected in the financial statements for all prior

periods presented as if the policy had always been applied unless it is not practical to do

so. Mandatory changes to accounting policies because of the impact of a new IFRS

must be accounted for in compliance with applicable transitional arrangements.

The application of accounting policies may be affected by, or may result in, “errors”. It

is essential to be clear about the standard’s definition of “errors” which can be

paraphrased as: “omissions from”, and “misstatements in”, financial statements that

should not have occurred had the preparers been sufficiently knowledgeable and

diligent. “Errors” range from arithmetical errors through mistakes in applying IFRS to

financial reporting fraud. Errors, as with changes in accounting policies, must be

accounted for retrospectively to remove their effects on prior periods presented and

make the financial statements comparable.

The application of accounting policies requires frequent use of estimates as in the

measurement of income, provisions, expected losses, fair values and depreciation. As

these estimates are based on assumptions and judgements about the outcomes of certain

variables depending on future conditions and events, there is always an inherent risk that

the estimates would need revising when new information is obtained or when new

developments occur. Given that financial statements are prepared on the basis of

conditions prevailing at the end of the reporting period retrospective restatement of

prior periods would not be appropriate. Hence changes in accounting estimates are

accounted for prospectively in the current, and where appropriate, in future periods.

Understand and apply the requirements of IAS 8 to disclose the future impact of new

IFRS e.g. IFRS 9, 15 and 16. IFRS 16 Leases is particularly important for entities most

significantly affected - operating lessees. Even though IFRS 16 is not an examinable

This standard addresses changes that are prevalent in any

accounting system; it should be expected in every exam.

Therefore revise thoroughly and practise extensively both the

computational and discursive aspects which were poorly

addressed the last time the standard was examined (as a “current

issue” – December 2013 q4a,b (answer)):

“The question asked for “discussion” and examples and the

marking scheme reflected these requirements. The

weighting of the marks was heavily towards the discursive

aspect of the question and many candidates failed to

gain these marks, particularly as regards the examples as very

few practical examples were given. This question

demonstrates the difference in knowledge and application

between paper F7 and P2” Examiner’s report December 2013,

q4a

It is essential to be clear about the critical requirements for and

effects of

- change in accounting policy (mandatory, voluntary)

- change in accounting estimates (new information, new

development)

- errors (discovery of errors in previous periods) June 2013

q2b & Answer

Address the issues of materiality, judgement and earnings

management as these are appropriately at the forefront of the

examiner’s mind:

“Any professional accountant should understand how critical

the use of judgement and materiality are. In selecting an entity’s

accounting policies many issues arise in practice over the use of

extant standards and IAS 8 is no different. Understanding how a

change in accounting policy or an accounting error is dealt with

and the difficulties therein is again fundamental. Similarly, if

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document (for March 2017) nevertheless it is relevant under the requirements of IAS 8

for entities to disclose the effect of standards in issue but not yet effective. Pending full

adoption of IFRS 16 an entity that has material operating leases should now (in

compliance with IAS 8.30) disclose in the notes to its financial statements its total

obligations under operating leases previously treated as off-balance sheet finance,

together with the amount of leased assets. When the standard is fully adopted it would

involve a major change in accounting policy the financial effects of which are known

and can be estimated reliably.

- Read 2016 Deloitte’s Model financial statements, p40

- Read examples from published financial statements: Balfour Beatty; British

Airways.

CHANGES THAT ARE NOT CHANGES IN ACCOUNTING POLICY

It is essential to be clear about those changes which IAS 8 does not regard as changes in

accounting policies: the substance over form principle is the guide. Substance in this

case is the determinative nature of the change i.e. whether the change alone can

determine how carrying amounts are measured (the basis of estimating) e.g. under IFRS

13 “fair value basis” is determinative of “exit price” whereas a “cost basis” is not, as the

latter simply implements a (modified) version of the former by determining a method for

calculating fair values in certain limited situations? Hence, a change to fair value basis is

a change in accounting policy whereas a change between valuation techniques is a

change in accounting estimates.

Examples:

- If an entity changes its valuation technique or approach for measuring fair value

(IFRS 13), the change (e.g. from market to cost basis) is accounted for as a change

in accounting estimate and treated on a prospective basis.

- When the entity initially adopts the revaluation model to value noncurrent assets

having previously applied the cost model the change is not a change in accounting

policy under IAS 8. Instead, the change is treated as a change in accounting

estimate and accounted for prospectively in accordance with IAS 16 and IAS

38. However, applying the above rationale it can be argued that a change from “cost

model” to “revaluation model” is a change in accounting policy. So why is it not

recognized as such by IAS 8? Suggested answer: Current prices, the basis of the

revaluation model, do not necessarily apply to prior periods. A change in

accounting policy would mean restating prior periods to incorporate current asset

prices, which is clearly not valid. Using asset prices prevailing in prior periods

would not be valid either, as using those outdated prices would be in contravention

of IFRS 13 “exit prices” which reflect “current market conditions” at the

“measurement date”. Thus, as far as revaluation is concerned it is not feasible to go

back in time. The apparent inconsistency within IAS 8 has a basis in the conceptual

framework in that as retrospective restatement of asset values would not produce

relevant information for users (in this case) it is precluded. This is an example of

why theory (and a conceptual framework) is required to inform practice. In this case

accountants cannot recognise the potential earnings

management issues in this context, then there is a major issue

for the profession.” Examiner’s report December 2013, q4a

Examined as q4a &b (answer) in December 2013 . As the

above extract suggests the examiner was not happy. Usually

when the examiner is not happy with candidates’ answers to

questions on critical areas such as this one he re-examines that

area again, sometimes in the next diet. As expected this area has

since been examined

- Dec 2016 q1b, c: proposed accounting policy change to

recognise all pension gains and losses in other

comprehensive income for consistency

- Jun 2016

- Dec 2015 q1b, c:

However, this key area has not been examined at question 4

since December 2013; you should therefore be prepared for

another similar question for the March 2017 exams as the big

topical issues of judgement and risk of earnings management

are increasing in importance.

Also, expect questions involving

- Retrospective restatement,

- Application of the IAS 8 hierarchy as in a deemed disposal

of a controlling interest in a subsidiary, June 2010 q2c

(answer)

- Retrospective adjustment of contingent consideration

recognised at the acquisition date in the previous period.

- Adjustment of current tax in respect of prior period

December 2012 q2d & ans. Study the answer carefully and

practise answering this question.

Practise extensively with discursive and computational aspects

of

- Examples of changes in accounting policies

- How to account for a change in accounting policy including

its effect on retained earnings.

- How to distinguish between changes in accounting policy

and changes in accounting estimates

- How to account for changes in accounting estimates

- Correction of errors

- What determines different accounting policies for groups

and their constituents (e.g. subsidiaries) and what are the

effects of such differences on their respective users?

- Disclosure requirements

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the requirement of “relevance” (an essential characteristic of the conceptual

framework) has overridden the internal logic of a standard (IAS 8) resulting in a

desirable outcome (precluding the production of useless information while

safeguarding best practice in financial reporting).

- A change in the depreciation method e.g. from straight line to reducing balance is

not a change in accounting policy. However, a change to component depreciation

is a change in accounting policy as it affects the basis for (separate components)

determining depreciation amounts. This change must be accounted for

retrospectively; where this is not practical prospective application must be done

from the earliest period.

- A change in the use of an asset e.g. from PPE to investment property implies a

change in the way that re-measurement gains and losses are accounted for. This

change is accounted for prospectively because the business model for the asset has

changed. Restating previous year’s amounts to reflect investment property would be

inconsistent as the asset was managed under a different business model.

- Reclassification of a noncurrent asset as current e.g. when a fleet of vehicles is

regularly replaced and the existing fleet is classified as a current asset prior to being

sold. This is like ceasing depreciation on noncurrent assets classified as held for sale

under IFRS 5.

Apply IAS 8 hierarchical guidance in determining accounting treatment of items for

which an accounting standard does not exist. See P2 terms and techniques.

Read

Study text

Question for practice Prospective application of a change in accounting policy when retrospective application is not practicable

IAS 10 Events

after the reporting

period

1a, b, c,2,4

- This standard is frequently examined in connection with transactions accounted for

using another standard; it requires events after the reporting period to be considered

to determine if there are grounds for reflecting their effects in the financial

statements for the period that has ended.

- The authorization date is the date the financial statements are considered to be

legally authorized for issuance to the public. This date marks the cut-off point up

to which events after the reporting period are to be assessed against IAS 10 criteria

to determine if they are adjusting or non-adjusting.

- Adjusting events must be reflected in the financial statements by raising journal

entries to record their effects and alter the financial statements. This is because

these events provide evidence of conditions existing at the balance sheet (or

reporting date - IAS 10 criterion). An example is a customer that is declared

bankrupt after the reporting period but before the authorization date.

- Non-adjusting events are reflected only by way of a note to the financial

statements; they remain the same in terms of the numbers. This is because non-

adjusting events do not provide evidence of conditions existing at the balance sheet

Exam technique for IAS 10 Events after the reporting period.

Keep in mind the premise of IAS 10 is that financial statements

are prepared based on conditions existing at the reporting date.

- Justify your treatment (to adjust or not to adjust) by

reference to this overarching condition.

Keep in mind the authorization date being the cut-off point:

- Events after this date are out of scope and cannot be

considered for IAS 10 treatment.

- A notable example of an out of scope event is the approval

of the declared dividend at the shareholders annual general

meeting (agm) which occurs after the authorization date.

The financial statements are not altered to include the

amount of the dividend approved based on the profits for

the reporting period.

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date. An example is the loss of a building by force majeure after the reporting

period but before the authorization date. Even though the building has been lost its

carrying value at the reporting date will remain in the financial statements.

However, a note will be inserted to inform users about the loss and its

consequences.

- It is essential to identify secondary adjustments - associated adjustments that must

be made as a result of the primary adjusting journal entries. For example, if an

impairment is recognised there must also be a deferred tax adjustment as the tax

base now exceeds the carrying value of the asset resulting in a deductible

temporary difference.

- Instead, the dividend is treated as a transaction of the

period in which it is approved.

- When the dividend is initially declared by the management

(board) an obligation does not arise under IAS 37 as

management does not have the authority to commit the

company in respect of dividends.

In this type of question you should be able to score full marks

just by being methodical. Practise with at least three examples

of each of adjusting and non-adjusting events. Make sure you

use the dates and give reasons.

Past questions for practice

- September 2016 q1b (answer): restructuring ceased after

the “reporting date” due to cost pressures. Assess the

accounting implications on current and future financial

statements. Interacts with IAS 37: reassess the restructuring

provision.

- Dec 2015 q3c (answer)

-

IAS 12 Income

taxes

1,2,3 - A key standard that is involved in every transaction including revaluation,

impairment, business combinations and share-based payments. Therefore examined

in every diet.

- Practise all the questions that have been examined.

Questions for further practice

- Mar 2016

- Dec 2015

- Sep 2015 q3b & answer: accounting treatment of deferred

tax recognised on the back of unreliable evidence of future

stream of profits. Does it work?

- Jun 2015

- Jun 2014 q2b & answer

- Dec 2012 q2d & answer

- Jun 2012 q3aiii & answer

- Dec 2010 q1a & answer

- Jun 2010 q2a & answer

IAS 16 Property,

Plant and

Equipment

1a,2,3 This is a key standard: examined frequently because the importance of noncurrent

operating assets as a key factor of production in the business. The key issues examined:

- Initial recognition basis including decommissioning and other incidental costs

- Initial recognition of self-constructed assets

- The determination of the capitalised cost, including borrowing costs capitalised

under IAS 23 Borrowing costs; admin costs; deferred payment terms; revenue

generated prior to, during and after construction or development of the asset. Make

sure you can account for these correctly.

- See separate spreadsheet analysis of past questions

- Could be combined with IAS 40, IAS 17 as in the “industry

question.”

Past questions for practice

- Dec 2016 q1a.5 (answer)

- Sep 2016

- Jun 2016

- Mar 2016 q3a (answer): treatment of costs incurred on the

acquisition of a new business

- Dec 2015 q3a (answer): gas required permanently as part of

plant is PPE (not inventory);

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- The need to retain the asset for more than one year has specific accounting

implications that are frequently examined including depreciation, revaluation,

changes in residual value, useful life, depreciation method and enhancement costs

(component accounting). These can cause interaction with other standards including

IAS 36, IAS 37 (e.g. provision for decommissioning costs) and IFRS 5 (disposal

group).

- Assets may be exchanged, transferred or reclassified. Gains and losses may arise as

a result. Recognition in profit or loss and OCI; reclassification of deferred gain from

equity on de-recognition as PPE upon reclassification to investment property.

- Be prepared to explain why expenditure on environmental assets may be classified

as PPE e.g. because they enable other associated assets to become fully operational.

KEY CHANGES IN ESTIMATES

Changes in estimates of decommissioning and similar liabilities DURING THE LIFE

OF AN ASSET

ASSETS AT COST Increase in liabilities DR Asset

CR Liability

Decrease in liability DR Liability

CR Asset (up to the limit of carrying value)

CR Profit or loss (excess of the decrease over the carrying value)

EFFECT ON DEPRECIATION

The adjusted depreciable amount (including the adjustment for the increase in liabilities)

is depreciated over the assets adjusted UEL in accordance with the chosen policy.

CHANGES IN ESTIMATES AFTER THE END OF THE UEL

Changes after the end of the UEL are charged to profit or loss as there is no further basis

for deferral (or capitalisation).

DEPRECIATION CANNOT RESULT IN A NEGATIVE ASSET

ASSETS AT VALUATION

Issues to consider:

- Dec 2015 q3c (answer): cost of overhauling a refinery is

PPE

- Sep 2015 q2a: components; change in depreciation method;

impairment of CGUs (onerous contracts) IAS 36 & IAS 37

interaction

- June 2015

- Dec 2014 q3b & answer Component accounting

- Jun 2014 q3a & answer

- Jun 2014 q3d & answer

- Jun 2014 q1a.6 & answer

- Jun 2013 q2d & answer

- Dec 2012 q3a & answer

- Jun 2012 q1a.6 & answer

- Dec 2011 q1a.5 & answer

- Jun 2011 q2a & answer

- Dec 2010 q1a.vi & answer

What to look out for:

EXCHANGE OF ASSETS (NONMONETARY)

The entity exchanges an asset (the asset given up) with another

asset (the asset acquired) from another entity with or without a

cash settle-up (or boot) to equalise the difference in exchange

values. The essential condition is that the exchange has

commercial substance – as a result of the exchange the timing,

amount and riskiness of the entity’s cash flows changed

significantly from what would have been expected without it.

Where the exchange has commercial substance, the asset

acquired in the exchange is accounted for at fair value; the

carrying amount of the asset given up is derecognised and a

gain or loss is recognised in income immediately. This is in

contrast to a sale-and-leaseback where the gain is amortised

over the period of the leaseback. The difference in treatment is

due to the fact that in this case the entity relinquishes control

over the asset exchanged; in the case of the leaseback the entity

retains control over the asset.

Compared with IFRS 15

Note that whereas the exchange of PPE is accounted for under

IAS 16, the gain or loss being recognised as income (excluded

from revenue), the exchange of goods and services is accounted

for under IFRS 15 (previously IAS 18) as revenue. Note also

that IAS 16 gives no indication regarding the classification of

the gain or loss other than that it is an operating item.

REVALUATION

- Initial and subsequent

- Adjusting accumulated depreciation after revaluation

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THE REVALUATION SURPLUS CANNOT EXCEED THE VALUE OF THE

ASSET

Increase in liabilities HOW DOES THE CHANGE INTERACT WITH A SURPLUS ON THE

REVALUATION ACCOUNT?

DR Profit or loss (an increase in a liability or a decrease in an asset is an expense unless

offset by a surplus on revaluation.)

DR OCI (if there is a revaluation surplus on the asset: present in OCI to reduce surplus

in revaluation account at the end of the year.)

CR Liabilities (to reflect the increase in whole)

So, unlike the cost basis the asset is unaffected by the increase in the liability.

Decrease in liability CAN THE CREDIT (reduction in the LIABILITY) REVERSE A PREVIOUS

REVALUATION LOSS?

Yes.

DR Liability (to reflect the reduction in whole)

CR Profit or loss (to reverse previous revaluation loss)

CR OCI (income is increase in asset or decrease in liability; but this income is deferred

in equity not being realized – backed by the immediate receipt of cash, or the

expectation of receipt of cash in the future, from a transaction.) Thus, existing

revaluation surplus is increased by the excess of the decrease in liability over the amount

credited to profit or loss to reverse a previous revaluation loss.

CHANGES IN ESTIMATES AFTER THE END OF THE UEL

Changes after the end of the UEL are charged to profit or loss as there is no further basis

for deferral.

- Deferred tax effects of revaluation

DERECOGNITION

- Asset cost/value and related accumulated depreciation

eliminated

- Revaluation surplus transferred to Retained earnings (direct

to equity)

- Gain/loss on disposal recognised in profit or loss

HELD FOR SALE

- Held-for-sale classification (IFRS 5) principle

- Measurement basis if carrying value principally recovered

through sale rather than through continuing use.

TRANSFERS

- Nonreciprocal transfers: recognize the transfer at fair value

and recognize a gain or loss. An example is the distribution

of property as dividend. Another example is the donation of

PPE to a charity.

- Transfers of PPE (or cash to buy PPE) from customers

(IFRIC 18) – this is not a government grant (IAS 20) as the

transferor is not a government; it is not infrastructure used

in service concession arrangement (IFRIC 12). Such assets

are received by the entity for the purpose of i) connecting

the customer to a network; ii) providing goods and services.

Initial recognition

DR Asset (at fair value if an “asset” according to CF definition)

(IAS 16)

CR Obligations to customer (IAS 37)

Discharge obligations over a period of time:

DR Obligations (IFRS 9)

CR Revenue (IFRS 15)

RESIDUAL VALUES

USEFUL LIVES

DISCLOSURES

IAS 17 Leases

to be replaced by

IFRS 16 Leases

1 b, c

2, 3 - Sale and lease-back e.g. June 2012 q2a. Attempt this question paying attention to

the explanations given for de-recognition (at carrying amount) and recognition (at

fair value) of the building; deferral of the gain and its amortisation over the new

lease period. This is an example of a linked transaction: faithful representation

requires that all the transactions in a series should be looked at as one transaction to

For 2017

- How does the setting of the new standard illustrate the new

principles-based approach? And how does this justify the

need for a conceptual framework?

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determine their commercial substance. In this case, it was determined that the whole

of the series of transactions was in fact not a sale but raising a loan. Therefore, the

asset was not lost to the entity. Nevertheless, as there was an exchange for a

consideration this fact has to be recorded necessitating de-recognition and

immediate recognition of the asset in the entity’s books to reflect the offer of

consideration which in substance was a loan (not revenue) attracting a finance cost.

- How does the setting of the new standard illustrate the need

for a conceptual framework?

- How does the setting of the new standard address the

current issues in financial reporting? Convergence,

consistency, cost, visibility (risk, finance, investment).

- A question on the conceptual Framework could be linked to

leases as an illustration of how having a Framework leads

to efficient standard setting using leases, IFRS 13 and

IFRS 15 as examples.

Further practice questions:

- Dec 2015 q2c (answer): determine nature and classification

of lease

- Jun 2015

- December 2014

- June 2014 q3c & answer lessee obligations for repair under

a lease; landlord repair

- Dec 2013 q2c & answer

- Jun 2013 q2a & answer

- Dec 2012 q3b & answer

- Jun 2012 q2a & answer

IAS 19 Employee

benefits

1a,2 A key standard frequently examined due to the importance of employee costs - a major

factor of production and significant in determining operating profit (a key managerial

performance measure). As this standard has been long established the examiner’s

overall assessment objectives are well known.

Overall assessment objectives

These are distilled from a close examination of the assessment objectives since the

standard was revised in June 2011. However, these objectives must be reviewed in the

light of changes or improvements in financial reporting practice. As can be seen in

(December 2016 q1b) the treatment of pension gains and losses has been examined in

the context of the conceptual framework’s fundamental characteristics of faithful

representation and relevance. Critical thinking is being assessed – the ability to

evaluate reporting practice using approved criteria. This is anticipated in the Exam

guidance for B.1 Conceptual Framework and B.2 Critical evaluation of reporting

practice above.

The examiner is looking for evidence of the learning outcomes around:

- Conceptual understanding: definition of terms; explanation of the accounting for

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

- Funded and unfunded

- Short-term and long-term benefits

- Vested and unvested benefits

Suggested exam practice approach

Start with June 2013 q1a.7 to get comprehensive practice with

the calculations. Then attempt June 2012 q2b. Attempt all past

questions. Only use the linked study text if you need more

information about the learning outcomes.

It is not obvious why leave pay and long-term bonus have not

been examined since June 2011. It is worth reviewing the

calculations in the study text and in the past papers below.

Further practice questions

- December 2016 q1a.6 (answer): finance cost, re-

measurement gains, current service cost, discount rate.

- December 2016 q1b (answer): the impact of pension gains

and losses on performance measurement for the period.

Justify the presentation of re-measurement gains and losses

in OCI and then in retained earnings. Can deferral in

equity be justified? Evaluate the soundness of the practice:

how does it meet the conceptual framework characteristics?

- December 2016 q1c (answer): discuss ethical and financial

reporting implications of a proposed change in accounting

policy to report all defined benefit pension scheme gains

and losses in other comprehensive income (OCI).

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- 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

- Presentation of pension expense in profit or loss: finance charge in finance cost

(funded schemes); other charges (current service cost and scheme changes) in

operating cost (administration cost)

- Presentation of actuarial gains and losses in other comprehensive income - OCI

- Discount rate: good quality corporate bond (in deep market) or government bond.

- Plan assets and liabilities

- Calculation of finance cost/credit on net asset or obligation

- Calculation of pension obligations and finance cost – projected unit credit method

- Discussion of ethical and financial reporting consequences of proposed or adopted

practice

- Business combinations

- Involving allocation of gains and losses; service cost (past and current).

- Leave pay and bonus

- Injury compensation and insurance

The study text: Employee benefits addresses the salient features.

The common mistakes are also well known

Read the examiner’s reports and address common mistakes.

Examples:

“Candidates seemed to be able to show a statement reconciling the opening and closing

liability for the defined benefit scheme but then found the detailed accounting

problematical. Also, candidates often calculated the net interest cost on the defined

benefit liability using the closing instead of opening rate of interest.” Examiner’s

report, December 2015.

Technical article

There is no published technical article on the ACCA website. The requirements are quite

straightforward. If you practise the past questions under timed conditions (not more than

1.5 minute/mark) you should be ready to score full marks.

- September 2016 NOT EXAMINED

- June 2016 q1a.iv) (answer): deferred tax on pension

obligations; deferred tax on actuarial gains; deferred tax in

the calculation of the tax charge. Calculation of amount of

tax paid. SOCF adjustments for non-cash and cash items.

- March 2016 NOT EXAMINED

- December 2015 q1a.5 (answer): purchase of an overseas

subsidiary with defined benefit pension scheme; actuarial

loss, curtailment, finance cost, current service cost.

- September 2015 q2c defined pension benefits v defined

contribution. Distinguishing features and implications for

accounting, financial reporting and disclosures. Application

of knowledge to appraise key factors such as risks.

- June 2015 q1a.4 & answer: effect of restructuring on

defined benefit and defined contribution plans; accounting

for curtailment, settlement and past service cost.

Interaction with IAS 37 – constructive obligation as

implementation underway at the reporting date. Elimination

of pension obligations.

- December 2014 NOT EXAMINED

- June 2014 q1a.5 (answer): measurement and accounting

for finance cost of funded scheme, current and past service

cost and re-measurement loss.

- December 2013 q1a.iii (answer): IAS 7 adjustment for non-

cash current service cost of defined benefit pension

obligation (funded scheme).

- June 2013 q1a.7 & answer: comprehensive pension plan

calculations including separate re-measurements for plan

assets and liabilities, net asset/obligation presented in

SOFP.

- December 2012 NOT EXAMINED

- June 2012 q2b & answer: financial accounting,

measurement and presentation of current period service

cost and scheme changes of a funded scheme.

- June 2011 q1a & answer: long-term bonus scheme

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- June 2010 q1a.7 & answer: accrued leave pay

IAS 20

Accounting for

Government

grants and

Disclosure of

Government

Assistance

1a, 2 Transfer of resources (monetary and nonmonetary e.g. technical assistance and advisory

services) from the government (including agencies such as European Union, local

authorities, etc.) to an entity with conditions (about delivery to stakeholders and

completion dates) attached. This raises questions of recognition (IFRS 15 is not relevant

as the grant is not income received as consideration for services rendered), classification

(revenue or capital), presentation in SOFP & SOCI, disclosures, contingencies (if

conditions are breached), cash flow presentations (operating or financing IAS 7; no cash

flow implications for nonmonetary grants such as the grant of a building or land).

Contract income is recognised by applying the principles of IFRS 15. A government

can be the source of both contract income and grant income (revenue and capital).

Unlike grant income contract income is revenue – consideration received in exchange

for delivering goods and services to the government under contract.

There is also the possibility of interaction with IAS 10 when the grant is awarded after

the end of the reporting period but the eligibility conditions were satisfied during the

reporting period. This would be the case where the grant is awarded as compensation for

expenses and losses already incurred by the end of the reporting period.

Be able to apply the conceptual framework principles e.g. accrual to the treatment of

grants received as subsidy for costs incurred and for acquisition of assets. The basic

principle is that the period that bears the cost of fulfilling the conditions and

requirements of the grant must be allocated a fair portion of the grant. This applies

equally to revenue and capital grants (that finance depreciable and non-depreciable

assets). State this principle in your answer: it will earn you marks and set you thinking

clearly about the scenario.

Be prepared also for a “current issues” question where Research and development

expenditure credit (RDEC) (a current issue) may trigger IAS 8 prior year adjustment

to correct a classification error made when the entity treated RDEC received under

election (during the transition period for RDEC: 1 April 2013 to 31 March 2016) as a tax

credit instead of as a grant to be matched against specific R&D expenditure.

Repayment of grants is treated as prospective adjustment because it does not constitute

an error, and it is not a change in accounting policy.

Standards involved: these must be applied in priority order. The priority is dictated by

the logic of the financial reporting process and the degree of relative importance of the

particular issues addressed by the standard within the reporting process: recognition,

measurement, presentation, disclosure.

- IAS 8

- IAS 10

- IAS 20

- IAS 38

- IAS 41

The questions are usually of a discursive nature requiring the

application of principles of IAS 20. However, computations

may also be required but these tend to be straightforward.

Read the case details very carefully especially the conditions for

the grants and the dates on which the entity becomes eligible for

the grant. Apply basic principles with logical method.

Know your IAS 1 formats: i) where should revenue and capital

grants be presented in the SOCI, SOCF, SOFP; ii) where should

capital expenditure be presented in the SOCF, SOFP?

When a case study requires multiple IFRS it is essential that you

assess how each IFRS applies in priority order. An example is

Dec 2012 q2a & answer

Questions for practice

- Dec 2013 q1a.1 & answer & Examiner’s report

- Jun 2013 q2d & answer

- Dec 2012 q2a & answer

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- IFRS 9 e.g. below market interest loan by the government

The examiner frequently sets case study that requires application of multiple IFRS

involving critical and divergent thinking. The opportunity for this exists in this area.

IAS 21 The effects

of changes in

foreign exchange

rates

1a This standard is frequently examined because increasingly, business is being conducted

across borders, generating foreign transactions - transactions denominated in foreign

currencies, or requiring settlement in foreign currencies.

The objective of this standard is to set the rules for accounting for foreign transactions

and to ensure the economic effects of foreign transactions are fairly represented in the

reporting entity’s financial statements.

For the exam, it is essential to be clear

about the following principles and issues:

Recognition of foreign transactions

It is essential that recognition of transactions is consistent with the applicable IFRS.

Liability for goods arises when the risks and rewards of ownership transfer to the buyer.

However, obligations for financial instruments arise when the entity becomes a party to

the contractual provisions of the contract (IAS 39 Financial instruments: recognition

and measurement). The timing of these events relative to gaining ownership are not

coincident.

Settled and unsettled transactions: cash flow best reflects the economic effects of

foreign transactions.

- Exchange differences on settled transactions (actual cash flows) are realised and

reported in profit or loss.

- Exchange differences arising on outstanding monetary balances are unrealised but

must be accounted for in profit or loss.

- Exchange differences arising on outstanding nonmonetary balances are unrealised

and must be accounted for in other comprehensive income (OCI).

- Exchange differences previously deferred in OCI are accounted for in profit or loss

when the underlying transaction is settled or when disposal occurs. For example,

exchange differences arising on monetary items that form part of the reporting

entity’s net investment in a foreign operation are reclassified from equity and

reported in profit on disposal of the net investment in the foreign operation when

the gain or loss on disposal is recognised.

Translation

The reporting entity and the foreign operation: the functional currency and the

presentation currency.

Any exchange difference arising on translation has not been realised and is reported as

other comprehensive income.

Further practice questions:

- December 2016 q2a (answer): application of the principle

for determining the functional currency

- September 2016 q2a (answer): purchase of a foreign retail

operation with a local currency loan. Translation and

treatment of asset and liability.

- Dec 2015 q1a,b,c (answer)

- Jun 2014 q2b & answer: functional currency; deferred tax,

goodwill, disposal of foreign subsidiary. Examiner was not

happy – read his report to get a good steer for the likely

questions to follow.

The Expert Accounting Student by Kieran Maguire

- ACCA P2 topic 5 currencies

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- Practise discussion type questions involving deferred tax, goodwill, impairment &

reversal of impairment and disposal.

- Consolidation: q1a 6/11 & Answer; practise this question repeatedly until you are

thorough with the calculations and the principles that underpin the calculations.

- You should be able to undertake a critical evaluation of the IAS 21 principles and

practices e.g. Dec 2015 q1b (answer).

- Also, be able to discuss the ethical issues in the treatment of exchange differences

arising on translation of specific transactions e.g. Dec 2015 q1c (answer).

IAS 23 Borrowing

costs (Effective date

after latest revision

1 January 2009)

1a,2,3 This standard applies the definition of an asset as defined by the conceptual

framework by setting the conditions for the recognition of borrowing costs as an asset.

At the same time it is essential to be clear what constitutes an expense or finance cost to

be recognised in profit or loss. The enhancing and fundamental characteristics of the

conceptual framework are also relevant. It is essential to bear this in mind when

answering questions.

For the exams, it is essential to adopt an analytical approach along the themes suggested:

Asset issues

- What is a qualifying asset? Assets that take a substantial period of time to get ready

for their intended use or sale. Examples: i) infrastructure assets: construction of an

oil refinery, hydroelectric dam; toll bridge, nuclear power plant; ii) Other property

plant and equipment: shopping mall, property estates, stadiums. An acquired asset

can be a qualifying asset depending on how management intends to use it. For

example, where an acquired asset can only be used with a larger group of fixed

assets under construction, or was acquired as input into the construction of one

specific qualifying asset. The assessment of whether the acquired asset is a

qualifying asset is made on a combined basis.

- Which assets are not eligible? Assets that are ready on acquisition for their intended

use or sale. Examples: completed and ready for use or occupation luxury flats,

networks and installations, fleet of cars or aeroplanes, computers or furniture

however expensive the cost of finance.

Financing issues

- What finance is eligible? Only external borrowings including bank borrowings and

bonds. Borrowings can be specific or general but must be incremental i.e. could

have been avoided if the qualifying asset construction had not occurred.

- What finance is not eligible? Internal finance – equity.

- Adjustments for investment income: any investment income from short term

investment of temporarily idle funds is deducted from borrowing costs.

- Adjustments for capital grant: any grant of a capital nature that reduces the cost of

the qualifying asset is deducted from the total expenditure for the purpose of

calculating the borrowing cost.

WHAT YOU SHOULD EXPECT

As can be seen from the pattern of questions this has not been a

high priority standard. However, the examiner can examine

IAS 23 issues in so many ways:

- IAS 12 tax on capitalised cost: borrowing costs are

capitalised gross, the tax relief is not deducted as required

by the accrual concept. Instead, in accordance with the

consistency concept, eligible borrowing costs are

capitalised gross as all other costs are. A deferred tax

liability should be set up where the entity’s circumstances

comply with the requirements of IAS 12. This is similar to

IAS 38 capitalisation of development costs. The taxable

temporary difference (deferred tax) is then released to

profit or loss on a systematic basis to match the

depreciation of the capitalised expenditure of the

qualifying asset.

- IAS 16 assets completed in parts: if construction of a

qualifying asset is carried out in parts (or phases) the

borrowing relating to completed parts can be capitalised

provided those parts can be fully and independently used as

intended or sold.

- IAS 16 prepayments: borrowing costs may be capitalised

on amounts paid in advance if expenditures on the asset

start when the prepayments are made and the other

conditions are satisfied (borrowing costs are being incurred

and construction activities are being carried out).

- IAS 21 exchange differences on foreign currency

borrowings to the extent they are regarded as an adjustment

to interest costs.. See worked example in The maths of IAS

23.

- IAS 24 related party: interest cost must be at arm’s length.

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- Working capital borrowings: the cost of amounts (including amounts of syndicated

loans from various sources) allocated to working capital are not eligible for

capitalisation as working capital expenditure is not necessarily incurred for the

creation or acquisition of a qualifying asset. See The maths of IAS 23 [General

Borrowings] tab

- Progress payments: should be deducted from the cost incurred

- Permanent overdrafts: the cost of long-term overdrafts used in financing

expenditure on qualifying assets is eligible for capitalisation.

Cost issues

Which costs are eligible for capitalisation? External borrowing costs directly

attributable to the acquisition, construction or production of assets that necessarily

take a substantial period of time to get ready for their intended use or sale. Includes

finance costs on preferred shares that are classified as liabilities under IAS 32.

- What do external borrowing costs include? Interest, debt issue costs, amortisation

of debt discounts and premiums (through effective interest method), finance charges

on finance leases, lenders fees, exchange differences that affect interest cost

attributable to a qualifying asset.

- Which costs are not eligible? Cost of equity: share capital (including issue cost) and

other equity elements. Imputed cost of equity is not allowed. Accrued costs – only

paid costs, assets transferred and interest bearing liabilities assumed are eligible.

Type of activities

Necessary activities are interpreted broadly and span the period from planning until the

qualifying asset is substantially complete. They include

- Obtaining planning permits

- Planning

- Construction

- Production

- Acquisition

Capitalisation issues

Borrowing costs are capitalised when it is probable that the costs will result in future

economic benefits to the entity and the costs can be measured reliably.

- When to start capitalising: i) when expenditures directly attributable to the asset

start to be incurred by acquisition, production or construction activities necessary to

prepare the asset for its intended use; ii) when borrowing costs are being incurred to

finance the expenditures in whole or in part. All these conditions must be present

before capitalisation can start.

- When to suspend: during extended periods in which active development is

unexpectedly or unavoidably interrupted as when floods affect the construction of a

- IAS 39/(IFRS 9): gains and losses on derivative financial

instruments (interest rate swap and foreign currency swap)

not designated in a hedging relationship are not considered

a borrowing cost. As they are classified as at fair value to

profit or loss (FVTPL) such gains and losses are recognised

in profit or loss when they arise.

- IAS 39/(IFRS 9): the effect of cash flow or fair value

hedging relationship on interest for a specific project is

considered a borrowing cost eligible for capitalisation after

taking into account the effects of hedge accounting.

- IAS 36 impairment of assets: interest must be charged on

the costs incurred even if costs exceed the recoverable

amount as in impairment condition; interest added can

cause further impairment.

- IAS 31 joint venture: a joint venture is normally equity

financed but it may hold qualifying assets financed by joint

venturers who may have financed their equity contributions

with borrowings. In this situation, the joint venture (jointly

controlled entity) cannot capitalise interest because it has

financed the asset with equity; the joint venturers cannot

capitalise interest either because they have not constructed

the asset. However, if the individual joint venturer is using

proportionate consolidation then it can capitalise the

interest that relates to its share of the constructed asset in its

consolidated accounts.

- IFRS 10 consolidated financial statements: i) one

company borrows externally, another develops the asset:

capitalise borrowing costs in the group financial statements

at arm’s length on borrowings from third parties; ii) cost of

intra-group borrowings at arm’s length to be capitalised in

the group’s financial statements. An interest-free loan

obtained by a subsidiary from a parent to construct a

qualifying asset is initially accounted for at fair value and

subsequently measured at amortised cost with interest

accrued using the effective interest method. The interest is

an element of borrowing costs eligible for capitalisation.

This can be assessed at q1a.

The past questions so far have been relatively straightforward.

Future questions are expected to be more challenging given that

the standard has been effective (after the last revision) since

2009. You should expect questions that require critical thinking

to identify a qualifying asset based on management’s

intention. Impairment, foreign exchange differences and group

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bridge or when the extended rainy season prevents road construction. However,

capitalisation is not suspended for periods of temporary delay that are a necessary

part of preparing the asset for its intended purpose.

- When to stop: capitalisation of borrowing costs shall cease when substantially all

the activities necessary to prepare the asset for its intended use or sale are complete.

Apply critical thinking to judge “substantially all” in terms of whether the

expenditure enhances or extends the productive capacity of the asset. If more

capacity is being added, then capitalisation should continue; if capacity is only

being enhanced further through cosmetic modifications then capitalisation should

cease before modifications start and after construction is substantially complete.

- How should capitalised borrowing costs be treated? Included in the cost of the asset

and presented as a noncurrent asset. DR Asset, CR Borrowing costs (may consist

of several accounts).

- How should the amount of borrowing costs be determined if borrowing is from

different sources and for different purposes e.g. working capital and long-term

construction of assets? Weighted average capitalisation rate. See worked example

in The maths of IAS 23.

accounts are always highly examinable topics. So you should

not be surprised to find borrowing costs as part of the mix.

Calculation of weighted average capitalisation rate may also

be required. See worked examples in The Maths of IAS 23.

Past questions for practice

- Jun 2016 q3a (answer): application to general borrowing

scenario requiring determination of capitalisation costs by

applying a weighted average capitalisation rate to the

weighted average capital expenditure.

- Dec 2013 q1a.(iv) (answer): interest to be capitalised

- Dec 2013 q4b (answer): error of omission to capitalise

borrowing costs

IAS 24 Related-

party disclosures

1b, c, 2a

Though not frequently examined (last examined June 2014 q2a & answer) this standard

is always likely to be examined because it is integral to transparency and faithful

representation - key pillars of financial reporting, accountability and corporate

governance.

What are the key issues you should address?

- Definition of the “reporting entity”

- Definition of a related party; explain the importance of disclosure of related

parties in the context of satisfying the qualitative characteristics of the

conceptual framework e.g. completeness required for faithful representation of

transactions may necessitate disclosure of related parties as in an equity settled

share-based payment transaction between the parent and its subsidiary

(December 2014 q1b & answer) non-arm’s length transactions such as interest-

free loans. - Definition of related party transactions, balances and commitments: includes

transfer of goods, services and obligations regardless of whether a price is charged

or not.

- The potential impact of related party relationships on transfer prices

(intercompany transactions) and company performance e.g. F7 June 2013 q1a, b

(answer), financial position and cash flow.

- Wherever there is a source of significant influence (e.g. associate) power and

control there is a related party issue but that does not mean that transactions are not

at arm’s length. It should not be presumed that accounting malpractice exists just

because related party relationships exist. It is normal for transactions to be

You can score full marks by applying basic knowledge to a

scenario to identify related parties and determine what should

be disclosed (December 2016 q2c – answer). But this is not a

“list and describe” exercise.

Be prepared to explain the consequences of non-disclosure and

be able to analyse and discuss the impact of related party

transactions on financial performance and financial position.

Also, be prepared to draft a related party note to the financial

statements. Therefore, it would be a good idea to look at some

examples in published financial statements Tesco plc 2016

related party note 24; Balfour Beatty.

Some of the questions tend to be discursive in nature as some of

the key issues are not straightforward. For example,

determining what is a “commitment”, the existence of “control”

and “significant influence” would require the exercise of critical

thinking about the evidence and judgement about its disclosure

implications. Refer to IAS 8 study text – What is an acceptable

accounting policy para no.12?

Jumping to conclusions will be an inappropriate response.

Practising analysing case study critically can prove

advantageous in terms of quality of exam response e.g. your

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conducted at arm’s length between related parties and any presumption to the

contrary can be rebutted.

- This standard is focused on disclosure but at the same time it is essential to consider

the potential effects of related parties on measurement, presentation and non-

disclosure of information. For example, how would a parent relationship to its

subsidiary affect the valuation of NCI interest in a private company?

- Employees earning significant amounts of share-based payments may be investors

who are able to exercise significant influence.

- May also be relevant in the ethics question 1c as related party transactions may

raise ethics questions.

- Be aware of scope exclusions and exemptions.

- Certain transactions between entities only occur because of the existence of related

party relationships between them. For example, a firm sells its entire output at cost

to its subsidiary. These terms enable the producing entity to survive despite not

having customers to sell to at arm’s length.

- Certain transactions may not occur because of the existence of a related party

relationship. Disclose the lack of expected transactions due to the existence of

related party relationships. IAS 24 is unique in that the lack of an actual transaction

where one is expected could be deemed a material disclosure matter. For example,

where a subsidiary does not refund amounts owed to the parent in respect of an

equity-settled share-based payment made to its employees for services rendered to

the subsidiary. In effect, there is a capital contribution from the parent to the

subsidiary. This fact must be disclosed.

- There are no exceptions for the nature of transactions, their sensitivity or

confidentiality.

- In assessing related party relationships consideration should be given to the

substance of the relationship and not merely to its legal form (principles-based).

Substance in this case means the ability of one party to exercise significant

influence on another, and for that party to be susceptible to similar influence from

the other.

claims, arguments and conclusions would be based on evidence

from the case study – not on conjecture!

As a minimum practise critical thinking about IAS 24 disclosure

requirements in relation to the following

- Relationships: parent, subsidiary, joint control, joint

venture and associate.

- Group disclosures and separate financial statements of the

parent disclosures. Focus on the disclosure requirements of

a parent that enters into a contract with a subsidiary

company.

- Transactions with directors

- Compensation issues:

- Arm’s length transaction price assertions: substantiating

such assertions can be difficult.

- Commitments: where the reporting entity has obtained or

given guarantee or collateral over the discharge of debts,

capital and other commitments. (Balfour Beatty contingent

liability note 35 in 2015 financial statements: guarantees

are contingent liabilities that may crystallise into actual

obligations)

- Substance over form (“principles-based” approach) e.g.

when a subsidiary leaves the group what is the disclosure

implication? When a company is commercially dependent

on another (e.g. single major customer). Does that mean

they are related?

- Scope exclusions and exemptions: you may be given two

scenarios where one is a related party and the other is not.

Analyse, explain and conclude.

- Government-related entities

IAS 36 Impairment

of assets

1a,

2 ,3

This standard is critical to measurement and is frequently examined. The examiner’s

central concerns are that candidates i) know when an impairment assessment should be

carried out (at least annually; or sooner if warranted by factors indicating that an

impairment may have occurred but not on an indefinite-lived asset; immediately prior to

the disposal group being classified as held for sale; on the recognition of negative

goodwill by an associate, increasing the carrying value of the investment to an amount

that could possibly exceed its market price; on the write-off of goodwill impairment loss

by the investee. Although the investee’s existing goodwill at the time of acquiring an

associate interest does not form part of the carrying value of the investment nevertheless

a write-off of that goodwill can trigger an impairment assessment under IAS 39) ; ii)

understand IAS 36 method for determining impairment of assets including goodwill

and investment in associates; iii) understand which discount rate to use – must reflect

current market assessment of the time value of money (risk free) and the risks specific to

the asset (or the rate of return to be earned on similar risk asset); iv) understand basis of

assessment of cash flows: using reasonable and supportable assumptions consistent with

Sources of practice questions:

- December 2016 q3c (answer): cash flow projections used

in impairment assessment of value-in-use should be

reasonable and supportable. The question required

candidates to discuss the quality of the evidence and

management’s use of it (or failure to use it) to support the

estimate of VIU.

- September 2016 – NOT EXAMINED

- June 2016 q3b (answer): impairment of players’

registration rights

- Past q1a questions

- Refer also to IFRS 5, IAS 38

- Mar 2016 q4a (qualitative indicators of impairment e.g.

slow economic growth; discuss changes i) of intangible

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the latest forecasts and budgets that have been subjected to sensitivity analysis to

evaluate their robustness.

- For March 2017 this may be examined as part of q1a goodwill impairment testing

or q2 or 3 impairment recognition and reversal on PPE (IAS 16), intangible assets

(IAS 38) and noncurrent assets classified as held for sale and discontinued

operations (IFRS 5). This type of question is frequently examined e.g. June 2014

q3d (6marks);

- Be clear about the order of allocation of reversals;

- Be aware of the IAS 36 prohibition on impaired goodwill being reinstated.

Multiple standards in the same question e.g. IAS 16, IFRS 13, IFRS 3, and IAS 40.

asset to “indefinite life”; ii) CGU reset at product level

from retail branch level)

- Mar 2016 q3b (answer): business acquired in the year is

impaired; management intends to sell it. Is it eligible to be

classified as “held for sale”?

- Dec 2015q2a (answer): Inaccurate allocation of goodwill on

the disposal of a business segment that is not a major line

of business

- Sep 2015

- June 2015

- June 2014 – q3d (answer) after property recovered

impairment loss it was sold after the end of the year of

acquisition.

- Dec 2014 q4 & answer (qualitatively evaluate impairment

determinants; quantitatively evaluate impairment)

- December 2013 – not examined

- June 2013 q1a.3 & answer

- Dec 2012 q3d & answer (Application of knowledge

including calculations)

- June 2012 q3aii & answer (Incorrect method for

determining whether goodwill is impaired and the amount

by which it is impaired)

- Dec 2011 q3aii, q3b & answer (Value in use VIU

estimate does not comply with IAS 36; IAS 36 basis of

estimating cash flows not complied with; inappropriate

discount rate)

- June 2011 - not examined

- Dec 2010 – not examined

- June 2010 q2b & answer (use of non IAS 36 method to

measure fair value of an interest in shares as a basis for

evaluating impairment )

IAS 37 1a,2,3 - Key standard has wide applications. The accent is on application of principles.

- Make sure you know the critical criteria for a provision to be recognised under this

standard. Don’t be vague.

- Evaluate its strengths and weaknesses e.g. June 2012 q4a, b & answer.

- Distinguish from financial guarantee contracts e.g. Dec2014 q2b & answer

- Make sure you know the discount rate to use if provisioning for more than one year.

- Effects of changes in decommissioning provisions during the life of an asset:

prospective or retrospective? Effect on asset carrying values if i) cost model, ii)

valuation. This can be part of a CSR question at q1c or q4.

EFFECTS OF CHANGES IN ESTIMATES OF DECOMMISSIONING AND

SIMILAR LIABILITIES

IF COST MODEL

Questions for practice:

- September 2016 q1b (answer): reassess restructuring

provision.

- Dec 2015 q3a (answer): contingent liability to the party in a

joint arrangement re decommissioning

- Jun 2015

- Dec 2014

- Jun 2014

- Jun 2013 q2c & answer

- Dec 2012 q3c & answer

- Dec 2012 q1a.8 & answer

- Jun 2011 q2d & answer

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IF VALUATION MODEL

Read:

The technical article: Provisions by Martin Jones, Lecturer, London School of Business

and Finance.

The study text: Provisions, contingent liabilities and assets,

IAS 38 Intangible

assets

1a,3 - Very frequently examined topic – always expect a question covering the issues

identified below. The examiner is usually concerned with recognition, revaluation

and impairment issues. Revaluation of an intangible asset is only allowed where

there is an active market for it.

- Remember the principles for recognising impairment and its reversal: i) recognise

impairment loss immediately in profit or loss to the extent it exceeds any previous

revaluation surplus on the impaired asset; ii) reverse previous impairment losses in

profit or loss up to the cumulative amount previously recognised. Any excess gain

must be recognised in revaluation surplus via OCI.

- Recognition issues arise in relation to business combinations (e.g. q1b June 2011 &

answers). In order to be recognised intangible assets must be separately identifiable.

This condition is satisfied when a business combination takes place as the

“probability” and “reliable measurement” criteria are satisfied when a price (the

fair value offered as consideration) is set for the interest in the net assets acquired.

- Recognition issues also arise in relation to broadcasting rights, footballer’s

contracts, franchises, fishing rights, etc. (e.g. q3c December 2011 & Answer). Study

this question carefully and practise reproducing it because it is an exemplar of how

to answer questions on this standard.

- In June 2015, the question was about recognition in relation to development costs.

Refer to “Development” in P2TT for a comprehensive discussion of the nature,

requirements and accounting implications of development issues. Other related

terms in P2TT include: Accounting policies, Application, Deferral, Future

expenditure, Intangible assets and Management’s intention.

- In preparing for this area also consider the interaction of IAS 38 with IAS 20 in

respect of RDEC (see IAS 20) guidance.

- Be prepared to discuss why expenditure on sustainability may not be recognised as

an intangible asset under IAS 38

Further practice questions:

- December 2016 q2b (answer): application of basic

principles about amortisation and impairment.

- June 2016 q3b (answer)

- Mar 2016

- Dec 2015 q4b (answer)

- Sep 2015

- June 2015 q3c & answer

- June 2014 q3b & answer

- June 2014 q1a – examiner not happy because IAS 38

prohibits recognition of internally generated goodwill.

After purchased goodwill had been eliminated recoverable

amounts increased subsequently, reversing a previous

impairment loss. However, this increase cannot restore

purchased goodwill previously written off as it represents

internally generated goodwill. Candidates did not know

this. This is likely to be re-examined in March 2017

because of the critical importance of goodwill.

- Dec 2012 q2a & answer Sequential interaction

- Dec 2012 q1a.2 Computation

- Dec 2011 q3ai & answer Discuss

- Dec 2011 q3c & answer Discuss

- Jun 2011 q1b & answer Discuss

- Jun 2010 q3b & answer Discuss

IAS 40 Investment

properties

1,2,3 A very frequently examined area of the syllabus. Make sure you practise all the

questions addressing the following issues.

- Cost v Fair value model accounting implications especially changes in carrying values

- Interaction with leases IAS 17 (sale and lease back)

- Interaction with IFRS 5 e.g. (M Jones article)

- Fair value hierarchy (discuss how it applies to real estate)

- Adjustments to observable and unobservable data

- Calculate gain or loss for part A

- Discuss treatment of sale and lease-back transaction and

recognition of gains or losses (revise)

- Discuss and account for treatment of compensation from 3rd

parties e.g. insurance

- Could be part of a medley with IAS 16, IAS 17 as in the

“industry question”

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Transfers to and from investment property when there is evidence of a change of use:

- Commencement of owner occupation: IAS 40 to IAS 16

- End of owner occupation: IAS 16 to IAS 40

- Commencement of development with a view to sale: IAS 40 to IAS 2

- Commencement of an operating lease: IAS 2/IAS 16 to IAS 40

Questions for practice

- Dec 2016 q1a.4 (answer)

- June 2013 q3b & answer

- Dec 2012 q3a & answer

- Jun 2012 q1a & answer

- Jun 2012 q3ai & answer

- Dec 2010 q1a & answer

IAS 41 Agriculture

This standard is concerned with recognition and measurement of agricultural activities;

it applies the principles of IFRS 13 Fair values, IAS 2 Inventories and IAS 20

Government grants received in respect of biological activities. A typical example of this

is question 2 a, b (March 2016). Therefore, revise the recognition and measurement

principles of the related standards before starting to study or revise IAS 41.

If you have mastered this standard the examiner would expect to see evidence that

- You understand what the standard covers and what it does not cover

- You can identify the recognition and measurement issues in a scenario

- You can apply IFRS principles to resolve the issues

WHAT THE STANDARD COVERS

The standard covers “agricultural activity”: the process of managing the transformation

of agricultural inputs to outputs (agricultural produce) akin to manufacturing activity.

The standard sets three criteria for agricultural activity: i) relevant plants or animals

must be alive and capable of transformation; ii) the transformation must be managed

through an active programme of development and care; iii) there must be a basis for the

measurement of change reflecting the development through distinct stages or

characteristics such as ripeness, weight and width of trees.

IAS 41 only covers assets that are unique to agriculture. They are of two basic types:

- Agricultural produce (harvested crops); governs initial measurement applying IFRS

13 (see below); subsequent to harvest IAS 2 governs accounting for produce

inventory. The initial carrying amount is the deemed cost being the IFRS 13 fair

value less estimated costs to sell. Beyond this point, IAS 41 ceases to apply.

- Consumable biological assets (plants and animals) that become produce themselves

such as livestock intended for meat production, annual crops and trees to be felled

for pulp.

WHAT THE STANDARD DOES NOT COVER

The standard specifically excludes the following because they are covered by other

standards:

- Farmland accounted for as PPE (IAS 16) or as investment property (IAS 40)

- Farmhouse accounted for as PPE (IAS 16) or as investment property (IAS 40)

- Farm vehicles and equipment accounted for as PPE (IAS 16)

As can be seen the infrequency of assessment indicates that this

is not a major standard as agricultural issues, the exclusive

focus of the standard, are not fundamental to financial reporting.

However, based on the pattern of past questions you should be

prepared for a question on agriculture in March (or June)

2017. The issues are limited and hence the questions don’t

vary much. Therefore, read the extracts of examiner’s reports

below and practise answering the practice questions repeatedly

until you are confident. Don’t be surprised if a question about

agricultural produce is combined with a question about

financial instruments: derivatives, fair value hedge, cash

flow hedge (effective and ineffective hedge) or as part of a

disposal group.

Past questions for practice:

- Dec 2016 NOT EXAMINED

- Sep 2016 NOT EXAMINED

- Jun 2016 NOT EXAMINED

- Mar 2016 q2 a, b (answer): application of IFRS 13

principles to measurement of farm land with alternative

use; application of IFRS 13 to determine fair value of farm

produce at harvest based on “the principal and most

advantageous market” criterion.

“Answers to the second issue on the fair value of farm produce

were quite mixed. The question provided information from three

markets for the produce, including sales volume, price and

costs.

Candidates who had practiced Q2 (a) from June 2015 would

have been familiar with the requirements of IFRS 13: the

relevance of the principal market and most advantageous

market, and what costs are included within a fair value

calculation.

Weaker candidates spent considerable time listing out workings

for each market with no accompanying explanation. The

question required a discussion, and answers without discussion

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- Intangible assets (IAS 38)

- Bearer plants reclassified to IAS 16 by IASB amendment since June 2014 effective

1 January 2016. Most firms are opting for the cost model in preference to the

valuation model also available under IAS 16.

- Produce after harvest awaiting sale (IAS 2 Inventories)

- Harvested logs used for the construction of a building (IAS 16)

- The use of produce in further processing as in agribusiness activities that are not

unique to agriculture.

For the exam, you should expect all assets and related liabilities to be examined within

an agricultural context regardless of which standard is applied to their recognition and

measurement. Your task is to apply the correct principles to the relevant issue.

THE MAIN ISSUES YOU MUST ADDRESS

Agricultural produce

- Ideally freshly harvested produce should be valued at fair value at the point of

harvest. Fair value in this instance means “farm gate” market prices. These are real

(not hypothetical prices) that reflect the assets as they exist, where they are located,

in the condition they are in, as of the measurement (statement of financial position

date).

- Where such “farm gate” market prices are not available the measurement of

agricultural produce should be based on fair values less point-of-sale costs. Point-

of-sale costs are different from cost-to-sell under IAS 2 and IFRS 5. Point-of–sale

costs are exclusively related to selling activity whereas costs-to-sell are all-inclusive

and include costs of activities that precede selling such as getting the asset ready to

be sold e.g. repairs, refitting, etc. Point-of-sale costs include commission, levies,

taxes and duties. Fair values would be market prices less transportation costs (IFRS

13). But IAS 41 does not require the use of the most advantageous price in

accessible markets as there may be good commercial reasons why the entity may

choose to sell in different markets. Hence there may be a variety of fair values for

the same produce.

- For the purpose of measurement distinguish between agricultural produce at

harvest (March 2016 q2 – measured on the basis of market prices in the principal

and most advantageous market) and agricultural crops growing prior to harvest

(June 2015 q2b – measured using a valuation technique as there is no active market

to generate reliable prices). There should always be a fair value for harvested

produce as there will be an active market. Active market conditions: i) same

product traded throughout the market; ii) available and willing buyers and sellers

participating in accordance with custom and practice; iii) price is set by market

forces based on ample information accessible to participants; iv) accessible and

efficient market.

or justification of calculations gained few marks.” Examiner’s

report, March 2016

- Dec 2015 NOT EXAMINED

- Sep 2015 NOT EXAMINED

- Jun 2015 q2a (answer) valuation of agricultural vehicles in

the principal and most advantageous market in

accordance with IFRS 13 principles.

“Part (a) of the question required the application of IFRS 13 to

agricultural vehicles. The main principles involved were the

application of principal and advantageous market definitions

to a set of data. Candidates were awarded marks based upon the

principles involved and the application of those principles.

Answers were quite disappointing considering the fact that the

market definitions are the cornerstone of IFRS 13. As

mentioned above, the principles involved in this part of the

question were quite basic and fundamental to the standard.”

Examiner’s report, June 2015

- Jun 2015 q2b (answer) measurement and accounting for

biological assets (short-lived crops grown on own land)

using a valuation technique in accordance with IFRS 13

where no active market exists for partly-grown crops.

“Part b of the question required candidates to apply a valuation

technique to the valuation of short-lived crops where there was

no active market for partly grown crops.

A discounted cash flow method was used to value the crops and

the entity wished to know how they should account for the

biological asset at various quarterly dates and when the crops

were sold.

Candidates needed to use discounted cash flow techniques to

value the crops. This part of the question was not well

answered.

Valuation techniques are used extensively in corporate

reporting and therefore candidates must become accustomed to

using such techniques in answering questions.” Examiner’s

report, June 2015

- Jun 2015 q2d (answer) “highest and best” use of

(unproductive) farmland; carrying value previously

measured on revaluation model basis.

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Commitments

- The commitments relating to agricultural produce e.g. forward contracts of sale and

their implications for measurement, especially where they may be onerous as

defined by IAS 37 (a contract is onerous when “the unavoidable costs of the

contract significantly exceed the economic benefits derived from the contract”; this

would be the case where the forward contracted delivery price is lower than the fair

value of the produce.) However, “the fair value of the produce is not adjusted

because of the existence of a contract”. [IAS 41.16]

- Keep in mind that a forward sales contract is scoped out of IAS 39/IFRS 9 if the

agricultural producer intends to settle the contract by physical delivery of the

produce as opposed to “settling net” as in the case of a derivative (accounted for

within IAS 39/IFRS 9). But remember it is also possible for the producer to settle

the contract net in cash or another financial instrument, or by exchanging financial

instruments on terms favourable to the producer. So, read the question carefully!

This examiner always explores duality where the opportunity exists. An example is

Jun 2010 q3a (answer) which also includes hedge accounting. See also How to

answer questions about derivatives.

- When the producer chooses to settle the contract by physical delivery of the produce

the contract is an executory contract. When the producer chooses to settle the

contract net the forward sales contract is a financial instrument.

- An executory contract is one in which no obligation arises until the producer has

delivered the goods; thus this type of contract is excluded from IAS 37 unless it is

onerous as defined above.

- A financial instrument is a contract where an obligation arises at the inception of the

contract.

Part-grown consumable biological assets

- The measurement of biological assets reflects the accretion (increase in value) of

the biological asset as they are transformed into mature plants and animals that yield

marketable produce such as milk, coffee beans, meat and oil palm fruit. During this

time, there is no active market hence reliable IFRS 13 Level 1 market prices are not

available for use as inputs for valuation.

- The measurement objective is the fair value of the asset is based on its present

location and condition. IFRS 13 Level 3 valuation techniques as in Jun 2015 q2b

(answer) may be used. Estimates of cash flows should reflect what a “market

participant would expect the asset to generate in its most relevant market”.

Government grants

There are two types of government grants: revenue and capital. Revenue grants

contribute to revenue expenditure as explained under IAS 20. Similarly, capital grants

contribute to capital expenditure.

ADDITIONAL PRACTICE QUESTIONS

The maths of IAS 41

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For IAS 41 the basis of measurement (cost model or fair value model) of biological

assets is a key determinant of how grants are accounted for.

Fair value basis

Biological assets measured at fair value less cost to sell. Fair value is the “exit price”

determined from the perspective of a market participant (e.g. consumer or

manufacturer using the produce as inputs). This has significant implications for how

a grant is accounted for because the entity, not the market participant, receives the grant.

The fair value is the price that will be received to sell the produce (or crop) irrespective

of a grant. Hence

- Where an unconditional grant e.g. a subsidy is available, the grant should be

accounted for separately in profit or loss when receivable, and not deducted from

the fair value of the biological asset (produce or crop). In the case of a subsidy

apply IFRS 15 to account for the revenue and IAS 20 to account for the grant.

- A grant to compensate farmers for actual loss of fair valued produce e.g. due to the

outbreak of crop disease is an unconditional grant to be accounted for as a grant

under IAS 20.

Cost basis

In contrast to fair value the cost of an asset is the “entry price” – the amount sacrificed

by the entity in order to acquire the biological asset. Where a grant is received as a

contribution to the cost of acquiring an asset, in substance, the amount sacrificed by the

entity is reduced by the amount of the grant. Hence

- Where the biological asset is measured at cost less accumulated depreciation less

impairment (to obtain the carrying value) the grant should be deducted from its

carrying value.

IFRS 2 Share-

based payment

1,2, 3 Key standard that prescribes the accounting practice for transactions, including

employee remuneration and compensation, that are measured based on the value of the

entity’s shares. Settlement options: i) equity-settled; ii) cash-settled; iii) hybrid (part

equity and part cash)

In this area, as in many others the examiner is assessing understanding of basic

principles of classification, recognition and measurement and the ability to apply basic

principles to typical transactions including deciding whether transactions are within the

scope of IFRS 2. The examiner’s favourite technique is exemplified in Dec 2010 q2c, &

answer. Two similar transactions are presented both involving shares. One is a share-

based payment (IFRS 2) transaction and the other is not. The surface features are similar

but the core features are different requiring critical thinking to distinguish the two.

Be prepared to explain and advise:

- Whether IFRS 2, IFRS 3, IFRS 10 or IFRS 13 (or a combination e.g. IFRS 2

interacts with IFRS 3 Dec 2010 q2b) applies to the transactions in the case study

e.g. June 2015 q2c; Dec 2010 q2 (answer)

- All the calculations including deferred tax

- Distinguish between share based and normal types of

payments

Attempt all the past questions noting the examiner’s approach.

Questions for further practice

- June 2016

- March 2016

- December 2015

- September 2015 not directly examined; effect of financial

reporting fraud on share options (q1c)

- June 2015 q2c (answer) valuation of share appreciation

rights (SARs)

- June 2015 q3b (answer) share-based transactions

(acquisition of patent, royalties).

- Dec 2014 q1b (answer)

- June 2014 q1a (answer)

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- Whether a financial liability or equity or both should be recognised where either the

entity or the supplier has the choice of settlement of the obligation.

- When an obligation arises for a cash-settled share-based payment (e.g. SARs) it is

recognised as a financial liability (classified as at FVTPL). Why not as at FVTOCI

given the obligation does not crystallize until the vesting period is over?

- Why the obligation is not accounted for as a provision under IAS 37.

- Why the obligation is not a contingent liability under IAS 37 given that the

obligation is contingent on performance criteria being satisfied during the vesting

period.

- The deferred tax consequences of share based payments

- The purchase by an entity of shares from its employees above the fair value of the

shares (the excess being treated as a share-based payment)

- Why the obligation is not discounted to present value at the reporting date (as for

contingent consideration IFRS 3; long-term benefits IAS 19).

Be prepared to compare share-based payment with share appreciation rights. For

example, June 2015 q2c: what if the award was of share options instead of SARs? How

would the amounts (measurement) and classification (recognition) have been different?

- Interacts with deferred tax (IAS 12), Financial liabilities and equity (IFRS 9)

This area is ripe for examination in 2017 because recent significant amendments are

effective from 1 January 2018 Read Deloitte 2016 model financial statements, p9,41

Read the text:

IFRS 2 Share-based payment

Technical article

- June 2012 q2c & answer

- Dec 2010 q2a,b,c,d & answer

Terminology you should be clear about

- Cash settled

- Deferred tax

- Equity

- Equity settled

- Exercise price

- Financial liability

- Grant date

- Intrinsic value

- Non-vesting

- Settlement options

- Share appreciation rights (SAR)

- Share-based payment

- Share options

- Striking price

- Vesting

- Vesting period (or service period)

Measurement & settlement issues: basis for estimating

carrying amounts

- Time apportionment of costs of awards (accrual

accounting)

- Estimates of leavers prior to vesting (e.g. 5% of initially

eligible employees)

- Re-measurement of obligations at the reporting date: i)

equity-settled (cost at grant date); ii) cash-settled (e.g.

SARs based on fair values at the reporting date)

- The impact of cash payments

- The impact of modifications and cancellations.

IFRS 3 Business

combinations (part

of D.1)

1a,2,3 This core standard is frequently examined – just look at the pattern of past questions in

the box on the right. You should therefore expect IFRS 3 in every exam. This means that

you should learn and practise all the key IFRS 3 issues. The key issues are:

- The application of acquisition accounting principles to the recognition of the

business combination transaction. E.g. determining the acquirer in a merger Dec

2013 q3c. - Non-acquisition costs must be separated from and separately accounted for.

Examples: transaction costs, costs of post-acquisition services, etc.

- How should post acquisition errors and transactions be treated?

- What is a business combination as opposed to an acquisition of assets? Dec 2014

q3a. This topic is on the IASB’s work plan. ED2016/1 is not an examinable

document but it is prudent to get familiar with its objectives. - Fair value measurements – satisfaction of the “probability” and “reliable

measurement” criteria for the recognition of intangible assets. For intangible assets

Past ACCA P2 questions for practice:

- December 2016 q3b (answer): fair value measurement and

bargain purchase gain

- Sep 2016 q3c (answer): bargain purchase of a business

with investment property as its only asset; includes tax

payment as part of the property value.

- Sep 2016 Q2b (answer): deferred tax due to fair value and

the tax base of the acquired assets of the subsidiary being

different.

- Jun 2016

- Mar 2016

- Dec 2015

- September 2015 q3a: acquisition of “shell company”,

intangibles, inventory valuation (interesting point given that

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acquired in a business combination the “probability” criterion is always regarded as

satisfied. This is because the purchase price is determined prior to the acquisition.

June 2011 q1b - Alternative measurements – exceptions to IFRS 13 that are essential e.g. share-

option plans acquired.

- Goodwill: full, partial and the implications of the method adopted. June 2015 q1a

- Goodwill: impairment basis for recognition and measurement.

- Contingent consideration: a clear understanding of the concept as a financial

liability (June 2015 q1b & answer) and its application in the post-acquisition period.

Questions may require candidates to: i) demonstrate understanding of the principles

of recognition of financial liabilities at the inception of the contract; ii) deal with re-

measurement gains and losses; iii) distinguish between contingent consideration and

employment benefits where previous owner managers have a continuing

involvement with the acquired entity.

- The presentation of an acquisition in the statement of cash flows - IAS 7 Cash flow

statements

- IAS 10 Events after the reporting period: twelve-month post acquisition

measurement period

- IAS 8: errors

- Treatment of negative goodwill – what is the rationale for recognising “negative

goodwill” immediately in profit or loss whereas its binary opposite, positive

goodwill, is deferred and is only recognised in profit or loss when it is assessed as

impaired in accordance with IAS 36.

IFRS 13 does not apply to inventory whereas acquisition

date fair values apply – implications for other exceptions

such as IFRS 2 Share based payment could they be next?).

Nonrecurring item: IAS 1. Pay attention to this ubiquitous

standard. ED 2015/1 is an examinable document

- Jun 2015 q1a & Answer partial and full goodwill; NCI

valued separately on the basis of market prices and PE ratio

- Dec 2014 q1a & Answer

- Dec 2014 q3a & Answer what is a “business”?

- Dec 2013 q3c & Answer determine the acquirer

- Jun 2013 NOT EXAMINED

- Dec 2012 NOT EXAMINED

- Jun 2012 q3ai & Answer basis of recognition of

impairment of goodwill

- Dec 2011 q1a & Answer: partial and full; impairment

testing on both.

- Jun 2011 q1b & Answer transition to IFRS

- Jun 2011 q2b “probability” and “reliable measurement”

- Dec 2010 q2b & Answer IFRS 2 Share-based payment –

business combination resulted in a replacement award.

IFRS 5

Noncurrent assets

held for sale and

discontinued

operations (part of

D.2)

1a,3 The Examiner’s central concerns in this frequently examined topic are that

- The conditions for classification as held for sale are satisfied.

- The disposal group or subsidiary is impairment tested (in accordance with IAS 36)

immediately prior to it being classified as held for sale as the decision to sell is

deemed to be an impairment trigger; is assessed for impairment while classified as

held for sale in accordance with applicable IFRS; is measured at the lower of

carrying value and fair value less cost to sell at each reporting date.

- The measurement of fair value takes into account any contingent liability not

previously recognised under IAS 37 because a transfer of resources embodying

economic benefits was not expected to be incurred to settle the obligation.

- Any impairment loss is recognised immediately in profit or loss to the extent that it

exceeds any revaluation gain previously held on the asset. Any subsequent

revaluation gain is recognised in profit or loss to the extent it is required to offset

previous impairment losses.

- Any disposal group or discontinued operation is properly presented and disclosed

(read examiner’s report and perform q1a, b December 2012 & ans.)

- The allocation of the impairment loss is only to the operating assets (IFRS 5 assets:

goodwill, intangibles, PPE). Apply the rules: eliminate goodwill entirely; then

apportion the rest to the remaining operating assets pro-rata to their carrying values.

Practice questions:

Read the annotated examiner’s reports. Attempt these questions

and make sure you are thorough with the discursive aspects.

- Dec 2016 NOT EXAMINED

- September 2016 q3b (answer): uncertainties regarding

“binding offer”.

- June 2016 q3b (answer): disposal of players’ registration

rights

- Mar 2016 q3b (answer): business acquired in the year could be

impaired; management intends to sell it. But there is insufficient

evidence of active marketing: is it eligible to be classified as “held

for sale”?

- Dec 2015 q2a (answer): sale of non-major line of business;

goodwill incorrectly allocated to CGU on disposal - Sep 2015 NOT EXAMINED

- Jun 2015 NOT EXAMINED

- Dec 2014 q1a.6 (answer): comprehensive IFRS regarding

sale of property involving revaluation surplus (deferred in

equity) and impairment loss recognised in profit or loss.

- Jun 2014 q3d (answer); after property recovered impairment

loss it was sold after the end of the year of acquisition.

- Dec 2013 q2b (answer): measurement of disposal group;

classification of expenses between continuing and

discontinued operations.

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Refer to examples in spreadsheet. The impairment loss is not allocated against any

other assets (e.g. available-for-sale investments, current assets, deferred tax assets,

etc.) in the disposal group, and it is not allocated against related liabilities.

- That depreciation is not charged on assets “held for sale” as the asset’s carrying

value will be recovered through sale. Depreciation is only justified where the

carrying value of the asset will be recovered principally through continuing use.

“Continuing use” implies that the asset is classified as operating (IAS 16) – not

investing (IAS 40). Note that IAS 38 intangible assets which are also operating

assets are “amortised” – not “depreciated”. Refer to P2TT for an explanation of the

differences.

- Candidates understand, and can determine, the two types of losses that can occur

with respect to assets classified as held for sale: i) IFRS 5 measured loss and ii)

non-IFRS 5 measured loss (arises when non-IFRS 5 rules are applied to the relevant

items in the disposal group e.g. re-measured inventory, provisions and available for

sale investments): Refer to examples in spreadsheet. “…the identification and

prioritisation of issues will be a key element of the paper.” Approach to

examining the syllabus, P2-study guide, p7. This is an example of how this

approach applies. In particular, note the prioritisation of losses in the worked

example.

- Interaction with other standards is a key feature of IFRS 5 questions e.g. IAS 36,

IFRS 10, IAS 16, IAS 40

- Interpretation of performance e.g. EPS calculation following disposal

- Pay attention to the dates so that the correct amounts for depreciation (prior to being

classified as held for sale), impairment loss and subsequent gains when the fair

value increases are calculated and recognised appropriately.

- Reversals of impairment of goodwill are prohibited.

Make sure you can raise the journal entries for all the adjustments correctly: see worked

example. An impairment loss is an expense (debit) presented in the profit or loss

(income statement); the expense is set against the carrying value of the related asset

(credit) to reduce it to the recoverable amount which is presented in the statement of

financial position.

- Jun 2013 q3c & answer: the authorised sale of the entire

holding of shares in a subsidiary did not take place within twelve

months of 1 January 2012 (date of authorisation); subsidiary

classified as held for sale year ended 31 May 2012; management

still intends to sell but subsidiary receives more activities from the

parent as part of the restructure. No concrete evidence of active

marketing of shares exists at 31 May 2013 but still classified as

held for sale. Is this correct? Advise the correct treatment. - Dec 2012

- Jun 2012

- Dec 2011

- Jun 2011

- Dec 2010

- Jun 2010

See The maths of IFRS 5

IFRS 7 Financial

instruments

disclosures

(effective since 1

January 2007)

1b,4 The objective of this standard is to provide adequate transparency of information on

financial instruments so that users could better assess

- The significance of financial instruments for the entity’s financial position and

performance

- The nature and extent of the risks that an entity was exposed to

- How the entity manages those risks

Even though this standard has not been examined in previous

exams you should expect it to be examined in every diet

because of the continuing efforts to improve the quality of

information and disclosures is a key part of every initiative:

- Conceptual framework for financial reporting

- Integrated reporting

- Better communication

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- Disclosure initiative

Read Deloitte 2016 model financial statements, pp58-63

- Get familiar with the key practical issues that the examiner

is concerned with.

- Think about possible future questions – coming soon!

IFRS 8 Operating

segments (effective

since 1 January

2009)

1b,c,2,

3,4 Core principle The core principle is that the entity should disclose information to enable users of its

financial statements to evaluate the nature and financial effects of the types of business

activities and the economic environments in which it operates.

Always topical because of its potential impact on performance measurement and

reporting, potential abuse of transfer pricing between segments and allocation of

common costs. The requirements of integrated reporting for strategic reporting about

resource allocation and value creation has further enhanced the relevance and

significance of this standard. In particular, this standard supports IR’s objective of clear

performance analysis as a basis for attractiveness and accountability to investors.

Segment classification and implications - The examiner’s central concern is for candidates to be able to apply basic principles

to scenario given in the question to i) identify an operating segment (qualitative

criteria), ii) identify a reportable segment (quantitative criteria), iii) assess whether

one or more reportable segments can be combined and reported as one (economic

criteria) and iv) where appropriate comply with the requirements of the 75% test

(external revenue test). Discuss the issues while examining how the principles apply

to the scenario details. Economic characteristics are central to the decision to

combine and report operating segments as a single reportable segment.

- The key exam technique is to apply the salient economic features of risk, return and

control in the analysis of the commercial context, taking into account all the facts

and circumstances, and to interpret the segment information accurately. The

decision to combine or not to combine should come down to deciding which

configuration of operating segments provides users the best opportunity to assess

economic performance quickly, accurately and completely.

- Streamlining financial statements by combining operating segments is efficient and

can foster understandability but relevant information reflecting the interaction

between economic factors can be more useful at the operating segment level. So

professional judgement must be exercised through the overall rationale for

segment reporting: see June 2013 q2a & answer for an illustration of the

intellectual level at which questions should be answered.

- Consider also that identification, classification, recognition, measurement and

presentation decisions are particular to the entity. Hence the application of the

principles of this standard can be inimical to the requirements of comparability

Past questions for practice:

- Jun 2015 q3a & answers two operating segments: one

funded entirely internally with no direct report to CODM;

the other primarily externally financed, has a head of

segment who reports directly to the CODM. Advise

whether the segments should report separately, or as one

reportable segment.

- June 2013 q2a & answer analysis of segment economic

characteristics to assess which operating segments can be

combined as a single operating segment. The assessment

of economic characteristics of operating segments is based

on the different levels of revenue risk exposure to

different types of customer: i) local train authority (who

contracts directly with the operating segment for fixed price

tickets in the local train market) and ii) passengers in the

intercity train market where the operating segment sells

tickets directly to customers subject to demand and supply.

- Dec 2011 q1b & answer (issues in the allocation of

common costs to operating segments)

- June 2008 q2a & answer: apply the principles of IFRS 8 to

determine whether operating segments exist in the scenario

and whether they should be reported separately, or as one

reportable segment.

Read Deloitte 2016 model financial statements, pp67-72

- Get familiar with the key practical issues that the examiner

is concerned with.

- Relate these issues to past questions and answers

- Think about possible future questions – coming soon!

QUESTIONS AND ISSUES FOR EXAM PRACTICE

How economic characteristics may affect decisions about

combining operating segments

- Segments operating in different currencies may not be

combined because of the differing underlying currency risk

indicating different economic characteristics.

- Segments operating in different economies e.g. German

segment operating in a vastly superior economic

environment cannot be combined with say a segment

operating in Greece (a relatively weaker economy), even

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between different entities. However, it can be argued that the standard’s principles

potentially enhance inter period comparability of segments within entities and are

perceived as adding value when segment information is corroborated by external

auditors, analysts and management commentary.

Accounting policies and ethics - Allocation of common costs. This area has not been examined since December

2011. Be prepared to answer a question linking this with accounting policies and

ethics as it can lend itself to financial reporting fraud. See December 2011 q1c

(answer).

- Consider also that as segmentation is based on the perspective of management e.g.

Tesco plc 2015 Annual report and financial statements, p94: “The Group’s

reporting segments are based on the Group’s internal reporting to the Chief

Operating Decision Maker (CODM)”, there is a risk that certain business critical

information might be concealed or segments might be aggregated inappropriately to

conceal loss making segments within profit making ones.

- Moreover, as IFRS 8 requires that the amounts reported for each segment should be

the measures reported to the CODM for the purposes of allocating resources and

evaluating performance, there is a risk that corporate social responsibility issues

may not be addressed within segments as discussed under syllabus Section G.1

below.

Reconciliation and presentation - IFRS 15 requires disclosed information to be reconciled to IFRS 8 segments 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. Given the importance of IFRS 15

this requirement increases the likelihood of this standard being examined again soon

(possibly in 2017). See How IFRS 15 interacts with IFRS 8.

- As this standard is primarily concerned with the presentation and disclosure of

reported information it is a good strategy to consider how it is impacted by all other

standards dealing with presentation e.g. IFRS 5 discontinued operations and

disposal groups.

though they are both operating in the Eurozone. The

economic characteristics are in stark contrast.

How the basis of measurement of profits may affect decisions

to combine operating segments into single reportable segment

- Profitability measured on different basis may need to be

restated to a common basis.

- Asset test may be based on a single common asset type e.g.

account receivable.

See The maths of IFRS 8 for an illustration.

The significance of other information required by the standard

The standard requires inter-segment revenue, and the basis of

intersegment pricing, to be reported. See The maths of IFRS 8

for an illustration. See also Deloitte 2016 model financial

statements, pp67-72

IAS 32, 39, IFRS 9 1, 2,3 This area is very frequently examined and the knowledge requirements are quite thin –

knowledge of basic concepts and principles and how they apply to basic transactions is

assessed. Try and practise as many questions as you can repeatedly around the areas

mentioned below. As well as calculations practise writing discussion answers

intensively.

Questions for further practice

- December 2016 q4 (answer): discuss principles for

recognition, measurement and review of expected credit

losses (general approach and simplified approach) –

impairment of financial instruments.

- September 2016 q3a (answer): scrip issue with put option.

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- Classification of financial assets based on the business model and cash flow

characteristics e.g. March 2016 q1b. Describe the alternative accounting

treatments under IAS 27. The question was not answered well.

- Impairment of financial instruments - measurement of expected credit losses

March 2016 q3a

- Fair value option June 2012 q3b (answer)

- Financial guarantee & loan commitments: q2b 12/14 (answer); the examiner was

not happy. There may be a question about the financial guarantee of a related party

e.g. parent guarantees the subsidiary’s loan for a fee that is in excess of the

compensation from the subsidiary. What is the position?

- De-recognition: examined June 2012 q1b & (answer); last examined March 2016

q3a

- Restructuring, impairment, basis of measurement and recognition e.g. December

2011 qa.4 & answer

- IFRS 9 on hedge accounting: q2c 12/14 & answer; q1a 6/14 & answer; hedge

accounting is normally answered poorly. Expect this question again in March 2017.

Read the technical article

- IFRS 9 financial liabilities: q2d 12/14 & answer; September 2015 q4b & answer.

FVTOCI debt: bifurcation of re-measurement losses; reclassification on disposal;

reclassification between amortised cost and FVTPL

- With-and-without method of measurement (not examined since June 2009) to

determine fair values for the initial recognition of the separate components of

equity and financial liabilities of a convertible bond. Refer to ACCA q2bi 2009.

The examiner’s central concerns are that candidates are able to: i) identify the

nature of a convertible bond and apply the principles of IAS 32 to account for it

from the inception of the contract to redemption or conversion; ii) apply the with-

and-without method to measure the liability and calculate the equity amount as

residual of the fair value of the bond; iii) apply split accounting to account for the

separate components in accordance with the principles of IAS 32; iv) account for

the transaction costs; v) prepare the amortisation schedule; vi) use the schedule to

account for the discount represented by the equity conversion option; vi) use the

fixed-for-fixed principle to account for the conversion to equity (there should be no

gain no loss); vii) early repurchase of convertible bond

- Mar 2016 q1b (answer); q3a (answer)

- Dec 2015 q3b (answer): financial and executory contracts

(what is the difference; what are the differing accounting

implications?) Examiner: “…not answered well”

- Sep 2015 q4a & answer: implementation of a significant

IFRS

- Sep 2015 q4b & answer: impairment loss bifurcation &

reclassification on disposal; reclassification between

amortised cost and FVTPL

- Jun 2015 q1b & answer: debt or equity re classification of

a call option and payments to acquire further NCI following

an acquisition. Interesting variation to a recurring theme.

- Jun 2015 q4bi (answer): cash flow hedge; accounting for

gain or loss (IFRS 9) at period end (IAS 2) and on disposal

of inventory.

- Dec 2014 q2d 12/14 & answer

- Jun 2014 q1a.2, q3b & answer signing bonus, annual

payment for continuous service, performance bonus.

- Jun 2014 q4 (answer): debt or equity - general principles,

share types (rights and obligations)

- Dec 2013 q3a (answer): debt or equity – share types (rights

and obligations involving put option to buy NCI B-shares);

assesses substance-over-form where “B” shares have a

determinable maturity date rendering them a financial

liability (in substance) over their legal form (equity).

- Dec 2013 q3b & answer: cash flow hedge

- Dec 2012 q1a.4 & answer

- Jun 2012 q1bi, 3c & answer debt or equity: entity obliged

to pay cumulative dividend on “B” shares and has no

discretion to avoid doing so.

- Dec 2011 q11a.4 & answer

- Jun 2011 q3a & answer

- Jun 2010 q3a & answer

How to answer case study questions about derivatives

IFRS 10, IAS 28,

(part of D.1)

1a, b, 2 Because consolidation is compulsory this standard is always examined at q1a. Aspects

of the standard are also examined elsewhere in the paper. Its complexities include

changes to a critical matter such as control and related issues such as “business” that

determines whether an investor should consolidate an investee. Hence the style of

question is varied:

- Case study type question (involving control and consolidation): Last examined q3a

12/14 & answer; q2c 12/12 & answer.

- Given recent trends there is an expectation that control involving case study and

assessing whether a “business” has been acquired will be examined again soon

(possibly in September 2016 – it was, but again not answered well so expect it

again in March 2017) not least because i) students have struggled to answer

previous questions on this issue; ii) the matter of what is a “business” is still being

Past ACCA questions for practice:

- December 2016 q1a (answer): Consolidated SOCI with loss

on disposal of subsidiary; frequently examined adjustments

- September 2016 q1a (answer)

- June 2016 q1a (answer):

- Mar 2016 q1c (answer): associate’s ethical accounting and

professional issues

- Dec 2015 q1 (answer): Consol SOFP with o/seas sub (IAS

21) involving impairment of goodwill (IAS 36), purchase

of foreign property (IAS 16) and defined benefit pension

(IAS 19)

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discussed ED 2016/1 Definition of a business and accounting for previously held

interests and iii) control is ever more complex to determine. Read the code

annotations which will guide you to learn how to analyse, interpret and respond to

scenarios.

- Of course, the mechanics of consolidation are always examinable.

IAS28

- This is a very important standard. The examiner’s central concerns are that

candidates i) understand how to include the results of an associate and the

investment in the consolidated financial statements of the investor in accordance

with the equity method; ii) can identify, explain and account for a “deemed

disposal” of a subsidiary that results in an associate as in June 2010 q2c (answer to

q2c); iii) can account correctly for the downstream sale of an asset by an investor to

an associate together with its tax implications; iv) can account for cessation of the

equity method of accounting; v) can account for restructure involving a) subsidiary

transforms into associate, b) associate becomes a subsidiary, c) joint venture

becomes an associate, etc. September 2015 q1a;

- Associate issues equity conversion option where the option is likely to be

exercised. What are the implications for the investor? Likely to lose associate

status? Students invited to show that share ownership is not the sole determinant of

associate status. Discursive question similar to control assessment questions (see

opposite). The fact that it is in q1b underscores the above sign posted rating of

associate as a very important topic.

- An investment or a portion of an investment in an associate (or joint venture) that

meets the criteria to be classified as held for sale in accordance with IFRS 5 is

initially measured according to applicable standards (IAS 28 for an associate).

Therefore, the share of profits and re-measurement of carrying amounts should be

done in accordance with normal associate and joint venture rules up to the point of

classification as held for sale. The associate (or joint venture) or the relevant portion

to be disposed of, must then be measured in accordance with IFRS 5 rules: at the

lower of carrying amount and fair value less cost to sell.

- September 2015: consolidated P&L, OCI; associate: step-

acquisition to subsidiary, step-down to associate from

subsidiary in a partial disposal.

- June 2015:

- December 2014: q3a & answer complex “business” &

“control assessment”: IFRS 3 interacts with IFRS 10; q1a

(answer): consolidated SOFP, goodwill – positive (not

impaired) and negative, property held for sale (IFRS 5),

Joint operation (IFRS 11) becomes joint venture equity

accounted (IAS 28) within the year (recognition and

accounting).

- June 2014:

- December 2013: q3c & answer complex “control”

assessment; merger and possible reverse acquisition.

- June 2013 q1a (answer): on 1 June 2011 Trailer acquired

14% Investment in equity instruments (IFRS 9) and Park

acquired a 70% controlling interest in Caller. As both these

investments occur on the same day, only one goodwill

should be calculated on 1 June 2012 when Trailer acquires

a 60% controlling interest in Park and effectively upgrades

its IEI in Caller to a 56% controlling interest (14% + 70% x

60%). NCI valued at proportionate share of sub’s net assets.

- December 2012 q2c & answer complex “control”

assessment; q1a (answer): consolidated SOFP, acquisition

of sub-sub, restriction of sub’s consideration to determine

goodwill on acquisition of sub-sub, impairment loss

(goodwill and intangible asset), parent’s disposal group

(impairment loss), Investment in equity instrument (IFRS

9: classified FVTOCI) upgraded to associate to be equity

accounted IAS 28 (recognise gain on previous IEI in OCI

and transfer direct to retained earnings on upgrade to

associate status), account for share of profits and dividend

from associate (equity method), intangible asset

(development costs to capitalise and operating costs to

expense).

- June 2012

- December 2011

- June 2011

- December 2010

- June 2010

Discussion (case study) involving deciding whether control

exists and the implications for consolidation.

The maths of IFRS 10

IFRS 11 (D.1) 1a, 2, 3 The previous questions were answered poorly. There has been a narrow scope

amendment recently.

Past ACCA P2 questions for practice:

- December 2015 q3a (answer)

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The narrow scope amendment requires an entity that acquires an initial and additional

interest in a joint operation that is a business as defined by IFRS 3 to apply all the

principles of IFRS 3. The amendment applies prospectively, precluding restatement of

transactions that have already taken place before the effective date of 1 January 2016.

The main consequences of the application of IFRS 3 to future transactions are: i)

premiums would be recognised as goodwill; ii) expenses (with a few exceptions) will be

charged to profit or loss in the year in which they are incurred regardless of the

acquisition date. Those expenses that will not be expensed are those that are eligible to

be deducted or capitalised under applicable standards such as IAS 32 (share issue costs)

or IAS 16 PPE (costs incurred in getting the asset to a condition or location for its

intended use); iii) deferred taxes will be recognised on initial recognition of assets and

liabilities except for goodwill. Do you understand why goodwill is not subject to

deferred tax? Answer: deferred tax arises from a difference between the tax base and

the carrying value of an asset or liability. As goodwill is not identifiable (cannot be

separated from its host assets) it cannot be sold independently of its host assets from

which it derives its value. Consequently, recognition of goodwill cannot have deferred

tax effects.

Other factors that merit examination:

- Case study involving giving advice about rights and obligations arising from change

of structure.

- Examined December 2014 q1a & answer – examiner not happy. Practise this

question until you are fully confident. Given that the examiner has recently included

a discursive question about change of structure it is prudent to practise answering

this type of question.

- September 2015 NOT EXAMINED

- Dec 2014 q1a & answer

- Dec 2012 q1a.5; q1a.9 & answer

- Dec 2012 q2c & answer

- Jun 2012 q1a & answer

WHAT TYPE OF QUESTION SHOULD YOU EXPECT?

1. Acquirer: expect basic questions along the lines of IFRS 3

2. Investor in the new jointly controlled business (or group of

businesses): expect a discursive q2 or 3 type question that

is rather more complex requiring you to i) identify whether

a business has been transferred to be eligible to apply the

amendments; ii) how the investor should account for the

transfer. This is challenging because i) both the amendment

and IFRS 11 are silent about it; ii) you will need to evoke

IAS 8 hierarchy to explain how the investor should treat the

transaction. Here is an example:

Use IAS 8 hierarchy: where there is no IFRS that deals

specifically with a particular transaction refer to and consider

requirements and guidance in an IFRS or interpretation that

deals with similar or related items to develop and apply an

accounting policy that provides relevant and reliable

information.

Treat the transfer as a "disposal" of a (subsidiary) business; the

examiner is most likely to include a subsidiary because it is

more complex than the others.

i)apply the rules of IFRS 10 to deconsolidate if the transferred

business was previously part of a group;

ii) recognise gain/loss being the difference between the fair

value of the interest acquired in the new jointly controlled

business and its carrying value prior to transfer

iii) recognise the investment in the transferee’s books at the fair

value of the interest acquired in the joint operation.

DR Investment (fair value)

CR Business (carrying value of net assets)

CR Gain (recognised immediately in profit or loss)

IFRS 12 Disclosure

of interests in other

entities (effective

since 1 January

2013)

1b, c

2,3,4 This standard brings off-balance-sheet finance items onto the entity’s financial

statements to enable users to evaluate

a) the nature of, and risks associated with, its interests in other entities

b) the effects of those interests on its financial position, financial performance and

cash flows.

Generally, the standard requires disclosure of the significant judgements and

assumptions an entity makes in determining

- Explain the benefits of the additional disclosure generally

and specifically.

- Examples of critical disclosures beneficial to investors

Answers to questions on IFRS 12 will require grounding on

Conceptual framework enhancing characteristics. For example:

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a) whether and how one entity controls another (IFRS 10)

b) significant influence (IAS 28)

c) the classification of joint arrangements under IFRS 11 into i) joint operations

and ii) joint venture

Specifically, in relation to an entity’s interests in subsidiaries, associates and joint

arrangements there are specific disclosure requirements.

Interests in subsidiaries An entity shall disclose information that enables users of its consolidated financial

statements to understand

a) the composition of the group and the Non-controlling interest in the group’s

activities, net assets and cash flows

b) the nature and extent of significant restrictions on its ability to use assets, and

to settle liabilities of the group;

c) the nature of, and changes in, the risks associated with its interests in

consolidated structured entities;

d) the consequences of changes in its ownership interest in a subsidiary that do not

result in a loss of control; and

e) the consequences of losing control of a subsidiary during the reporting period.

Interests in associates and joint arrangements An entity shall disclose information that enables users of its financial statements to

evaluate:

a) the nature, extent and financial effects of its interest in joint arrangements and

associates;

b) the nature of, and changes in, the risks associated with its interests in joint

ventures and associates.

- All entities are affected by the new standard

- Its benefits are linked into the requirements to improve transparency,

- It enhances the ethical position of the accountant

- It expresses IAS 1 requirement for financial statements to present information that

is relevant and useful to its users

- Reflects IFRS 13 principles on disclosure requirements and objectives.

Understandability

- Aggregation achieves simplicity but this is at the expense

of transparency which is achieved by disaggregation.

- Structure and sequence logically so that users can engage

readily, understand easily and action speedily.

- Consistency of reporting and disclosure between primary

statements and disclosure notes foster linking and

understandability of the effects of related issues that have a

common cause.

- Flexibility should allow the innovation necessary to

produce relevant information.

Comparability

- Consistent disclosure of policies and their impacts on the

financial statements can have beneficial effects on users’

ability to compare and evaluate financial performance and

position.

- International convergence is facilitated by the adoption of

comparable disclosure policies and practices. But of course,

these should allow for flexibility.

IFRS 13 Fair value

measurement

1a,2,3, - Fundamental to and pervasive in measurement and disclosure. Has wide ranging

impact including role in international convergence and conceptual framework.

- Critical to the measurement of i) financial assets and liabilities and ii) nonfinancial

assets and liabilities

- Relevant to initial recognition under IFRS 3

- Critical to initial recognition and subsequent measurement of financial instruments:

IAS 32, IFRS 9

- Critical to measurement of non-financial assets (the new concepts of highest and

best use, valuation premise, fair value hierarchy, etc.)

- It is to be expected that the examiner will continue to examine IFRS 13 for a very

long time as the areas to be covered, the many application issues to be addressed

SECTION A part a calculation of fair value. Part b discussion

of fair valuation issues in a case study involving the issues

below.

Items expected:

This is a very important standard. It will be examined at the

highest level of application to the measurement of the

Conceptual Framework elements of financial reporting: asset,

liability, income, expenses and equity.

- approach to measurement of fair value (discussion of all the

features of the definition of fair value and the requirements

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within each of the areas, and the style of questions to be asked are germane to the

study of financial reporting at the professional level. Examples of issues to be taken

into account: related party; highest and best use; holdings distortions; terms of sale

(when does compelling external evidence demonstrating executable exit price

exist?); market participants assumptions; valuation uncertainties (lack of secondary

market, long-dated nature, lack of observable loan spreads); threats to comparability

and verifiability where bespoke valuation methodology is used, combined with

assumptions about unobservable inputs (this would generate fair values that are

unique); as a wide range of valuation techniques are available, it may not be

appropriate to directly compare an entity’s fair value information to independent

market or other financial institutions”;

for fair value, including the effect of valuation premise,

non-performance risk, the concept of exit price and the

implications of its requirements for transfer and settlement

of liabilities and equity: analysis, synthesis and evaluation)

- initial recognition and day one gains and losses

- case study involving “highest and best use”

- case study involving determining fair value in an

advantageous or principal market

- calculation involving impact of IFRS 13 on liabilities e.g.

the measurement of liabilities using a valuation technique

where there is no quoted price for an identical or similar

liability or corresponding asset, involving the estimation of

future incidental costs of fulfilling the obligation, any

expected compensation, profits and premiums for bearing

the risk; the use of expected values. The estimate of fair

value would be from the perspective of the market

participant who owes the liability or has issued a claim for

the equity instrument.

- application of the fair value hierarchy on real estate (IAS

40), liabilities (IAS 39, IFRS 9)

- valuation technique issues (inputs to reflect market

participants assumptions, reflect characteristics of the

product, level of hierarchy, maximize observable, minimize

unobservable inputs) June 2013 q3b & answer

- ED 2014/4 Measuring quoted investments in subsidiaries,

joint ventures and associates at fair value

- individual unquoted equity instruments: measurement

issues using the market-based approach March 2016 q2c

(answer)

- Disclosures (benefits of additional disclosures;

classification of fair value measure is based on the lowest

level input that is significant to it. Why is this desirable?

What is the accounting principle in action?)

- Other application issues: i) Adjustments for level 2 inputs

e.g. to reflect in the observed price differences in the

operating capacities of the assets; reconditioning assets for

use in the location of their highest and best use; ii)

Restrictions

- Multiple valuation technique: evaluating valuation

options (market, income and cost) to determine the most

representative fair value. Refer to worked examples.

-

Past ACCA P2 questions for practice:

- December 2016 q3a (answer): fair value hierarchy

- September 2016

- June 2016 q2

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- March 2016 q2a,b,c (answer); valuation of farmland with

alternative use (IAS41); valuation of farm produce;

valuation of NCI interest in a private company

- December 2015 q2b (answer): valuation of a warranty

provision

- September 2015 NOT EXAMINED

- June 2015 q 2a,b,c & answers

- December 2014 q2b,c & answer financial guarantee &

financial liability

- June 2014 q1b & answer & Sekoyen’s suggested answer

- December 2013 NOT EXAMINED

- June 2013 q3b & answer

- December 2012 q4a,b & answer

IFRS 15 Revenue

from contracts with

customers (effective

1 January 2018)

1a,c,

2,3 This new standard which replaces IAS 18 and IAS 11 was issued in May 2014 effective

on or after 1 January 2018.

- This is a frequently examined topic because of the pervasive influence of revenue

on the business. Operations drive everything in the business and revenue is the lead

indicator of business performance. To get an idea of what this means in terms of

financial reporting have a quick look at Tesco plc’s SOCI and SOCF. You will find

that the reports are broadly structured into operating, investing and financing

activities. These activities are known as value drivers – generating and using cash in

the business.

- The questions tend to spread around the paper reflecting the variety of issues from

recognition to measurement, current issues, ethics and risk (e.g. accounts receivable

IFRS 9). The interaction with other IFRS is a salient feature of revenue accounting

and this is what is reflected in the complexity and variety of questions. For example,

the movement of inventory (IAS 2) relates to the timing of recognition of revenue;

non-cash consideration could intersect with IFRS 2 and IAS 16.

- Estimates are obviously a central issue given the production (or construction)

cycle does not necessarily match the accounting cycle and thus revenue may be

recognised based on estimates of the stage of completion at the reporting date.

For March 2017 exams, the following areas are critical as they would attract the

examiner’s attention because they are complex and can be controversial.

- Be prepared to appraise and apply the IFRS 15 scope criteria (the five criteria a

contract with a customer must possess to fall within the scope of IFRS 15): i) the

parties have approved the contract and are committed to their obligations under it;

ii) the entity can identify each party’s rights regarding the transfer of goods and

services or the use of assets; iii) the entity can identify the payment terms

regarding the goods or services to be transferred or the asset to be let; iv) that the

transfer has commercial substance; v) it is probable that the entity will receive the

consideration to which it is entitled.

Think about the following examiner’s comments and respond appropriately.

This critically important IFRS will be examined frequently –

computational (q1a) and discursive (q1b, c, q2,3 and even q4).

Your active learning and practice programme should therefore

reflect the diversity of the challenges mastery of the IFRS

presents. You need to be clear about the concepts and the

principles and to be able to construct deductive reasoning to

justify a treatment you recommend. It won’t suffice to

perform calculations without providing explanations. Extensive

preparation is therefore recommended. DO NOT

UNDERESTIMATE THIS AREA.

Read The Maths of IFRS 15

Past questions: - Dec 2016 q1a.7 (answer): variable consideration -

significant revenue reversal due to volume discount in a

single performance obligation

- Sep 2016 q2c (answer): uncertainty over collectability;

assess circumstances to inform accounting approach.

- June 2016 Not examined

- March 2016 not examined

- Dec 2015 q4 (answer) IFRS 15 scope criteria; five-step

model; finance and revenue mix; contract modifications.

Part (b) required the application of part (a) in terms of

determining the impact of a significant financing

component on a contract and contract modifications.

Candidates did not answer this part of the question very well.

It is difficult when new standards are issued but there is a

wealth of information available to tutors and students on such

topics as IFRS 15, so it is important that candidates read widely

on such a topic. Examiner’s report December 2015 q4b

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“This question required a reasonable knowledge of IFRS 15 but many candidates could

only recite the 5 steps to revenue recognition without being able to elaborate on them. It

is important that students read Student Accountant as articles on such topics as IFRS 15

appear regularly.” Examiner’s report December 2015 q4a

Read the technical article Part 1

Read the technical article Part 2

- Understand and apply the principles of the other four of the five-step model for

revenue recognition. The underlying principle is that the entity will recognize

revenue to depict the transfer of goods or services to customers at an amount that

the entity expects to be entitled to in exchange for those goods and services.

Prioritise the timing of transfer and the measurement of revenue when transfer

occurs.

- What criteria are used to identify a performance obligation? Critical thinking is

required to assess whether goods or services are “distinct” depending on how

benefits are derived from the separate promises to transfer goods and services to the

entity. Study the example in step 2 (IFRS 15 summary) and paras 24-28.

- Make sure you understand the definition of revenue and its accounting

implications. This is critical when accounting for revenue separately from finance

income from a sale with a significant financing component (e.g. December 2015

q4b). Payment for revenue received in advance incurs an expense at the incremental

borrowing rate (December 2015 q4bi); payment deferred accrues interest at the

implicit contract rate of interest. See worked examples.

- Revenue (consideration) may be different from the contract price due to (variable

consideration e.g. discounts and bonuses). This is a critical measurement issue

which you should be prepared to deal with as part of case study or as part of q1a

calculations. See worked example. Also, see worked example for an illustration of

the relationship between revenue, consideration, transaction price, contract price.

Study the example in step 3 (IFRS 15 summary)

- Be prepared to do PV calculations using appropriate discount rates to calculate

accounts receivable and revenue where payment is deferred. See worked

examples. - Understand and apply the detailed requirements for contract modification

December 2015 q4b.

- Costs to obtain and fulfil a contract: study the worked example.

- Errors due to estimation and valuation are frequent and can be material. Make sure

you can deal with IAS 8 requirements.

- Providing for anticipated losses incurred under onerous contracts (IAS 37). The

examiner would require you to recognise an onerous contract and to be able to make

an appropriate provision for anticipated losses. Onerous contracts have been poorly

dealt with in the recent past with candidates unable to recognise their existence

because they don’t understand their features and the IAS 37 requirement to provide

for anticipated losses at the reporting date including costs yet to be incurred.

- Recognising impairments of accounts receivable - financial losses (expected and

incurred) (IFRS 9)

- Licences (Also relevant to IAS 38)

- Allocating a discount (see The maths of IFRS 15)

As this standard is nearing its effective date it is reasonable to

expect questions (at least one for 25 marks) to appear in 2017

exams. As can be seen in the above extract from the examiner’s

report previous current issue question 4 was not answered well.

It is likely that another question will be set before the effective

date. Key areas for assessment include:

- Implementation issues reporting entities must attend to

when a major standard is introduced. You may take a cue

from IFRS 9 which has been reassessed at q4 (see IFRS 9

past questions above). Also, see syllabus section F.1

below.

- Analysis of the effects of IFRS 15: how has IFRS

improved the measurement of performance? Justify the

assertion that revenue measures are more reliable under

IFRS 15.

- Explain how IFRS 15 applies the conceptual framework e.g. requirements for recognition of revenue address the

qualitative characteristics of financial reports: the five-step

framework enables entities to identify, measure, present

and disclose the nature, amount, timing and uncertainty of

revenue from contracts with customers.

- Discuss the interaction of IFRS 15 with other standards

through specific transactions e.g. where noncash

consideration is in the form of shares (IFRS 2 Share-based

payment) or property (IAS 16 PPE); IAS 36 impairment

and amortisation of capitalised costs; IFRS 9 impairment of

contract asset or accounts receivable; IAS 37 warranties,

refund liability, etc.

- Reasoning and problem solving. This paper assesses

higher order thinking (HOT) skills and awards extra marks

for “clarity and quality of presentation”. IFRS 15 provides

ample opportunities for the examiner to assess these

capabilities. Examples are given in the document linked to

deductive reasoning.

“The P2 syllabus clearly states its aims and the capabilities expected

of candidates; rather than merely listing the topics of which knowledge

is required, these capabilities outline the level of understanding

required. The verbs used in the syllabus include discuss, evaluate,

advise and appraise. The higher the level of verbs, the higher the level

of attainment required. All of these verbs require a degree of

understanding and application and so rote learning the subject is

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- Warranty: assurance type to comply with agreed-upon specifications: (accrue a

liability at point of sale IAS 37 to replace or repair) and, as a significant component

of the contract requiring, where appropriate, a split of the transaction price, to

reflect the warranty as a separate performance obligation, Service type – allocate

the price to separate promises to deliver distinct goods and services). Study

Illustrations 9-1 and 9-2, pp271-2. Don’t just look at the numbers: think about the

concepts, the principles and the business model. Also, think about the presentation

in the financial statements. Why is the contract liability not a financial

instrument under IFRS 9 but account receivable is? Is the contract liability a

current liability or a noncurrent liability or both? Why is there a contract

liability but not a contract asset? - Fines and penalties (cash paid to customers as compensation for the supply of

defective goods) are variable consideration – not assurance-type warranties.

Like returns for compensation these are equivalent to sale with a right-of-return.

However, where the entity pays cash to a customer to reimburse third party costs

incurred (to rectify product defects), such payments are in effect assurance-type

warranties and should not be treated as variable consideration.

- Sale with a right-of-return (also relevant to IAS 37)

- Sale and repurchase agreements (put option) e.g. involving leases and securities.

When is a series of transactions combined into one with a common objective? What

are the accounting implications for recognition of revenue; de-recognition of assets;

recognition of liabilities and financing costs?

- Options to acquire additional goods or services

- Customer loyalty programmes

- Disclosures: what should be disclosed (qualitative and quantitative) and for what

purpose? Study the examples

The effective date has been postponed by one year to 1 January 2018 to allow more

time to make improvements on core issues such as i) how to identify the performance

obligations in a contract; ii) how to determine whether a party involved in a transaction

is the principal (responsible for providing goods and services) or the agent (responsible

for arranging for the goods and services to be provided to the customer) and iii) how to

determine whether a licence provides the customer with a right to access or a right to use

the entity’s intellectual property. In addition, the IASB intends to introduce more

illustrative examples to clarify the embedded guidance.

The issues over which further clarification is sought become examinable. Therefore,

think critically about how you may answer the questions posed.

The above issues have now been clarified by the IASB’s amendments (April 2016).

insufficient. The capabilities should be at the centre of the teaching and

learning activities.” Examiner’s report December 2016

Terms and techniques to learn “In order to perform well in this paper candidates need to develop an

understanding of the important corporate reporting concepts so that

they can then apply their understanding of these concepts to the

scenarios presented in the examination.” Examiner’s report December

2016

As IFRS 15 is a new standard you are encouraged to follow the

examiner’s advice.

The best way to learn a term or technique is to try and apply its

parts with a real example. Ask yourself: where are the key

words; why is this term significant; can I apply it in practice?

What issues arise when I try to apply the term or technique?

What principles govern how the issues are resolved. Can I trace

the effect of the terms application in the financial statements?

Can I raise double entries if applicable? What does this term

link to? How? Write out and explain examples.

“… the method of examining this paper emphasises and rewards

the application of personal understanding and so

candidates who adopt a surface approach are unlikely to

succeed.” Examiner’s report, December 2016

- Contract

- Contract costs

- Contract asset

- Contract liability

- Consideration

- Customer

- Customer loyalty programmes

- Distinct goods or services

- Economic or commercial substance

- Enforceable rights and obligations

- Highest quality information

- Highest ranked approach

- Material right

- Onerous contract (see also IAS 41)

- Payment to customers

- Percentage of completion method

- Performance obligation

- Refund liability

- Residual approach

- Revenue

- Significant economic incentive

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- Standalone selling price

- Transaction price

- Unbundling of multiple performance obligations

- Valid expectation

- Warranty

The legacy papers below are preserved because the

mechanics of computation are broadly similar to IFRS 15

for many industries. Besides they give ideas about the type

of issues that the examiner is concerned with.

Past papers (IAS 18 related)

- June 2014 q3a & ans IAS18/IAS16

- June 2013 q2b & ans IAS 18

- Dec 2013 q2a & ans IAS 18

- Dec 2012 q2a & ans IAS 18/IAS 2/IAS 20/ IAS 38

- Jun 2011 q3b & ans IAS 8/IAS 18

- Dec 2008 q3 (answer) handsets, network, licences, etc.

D.3 Group

reorganisations

2 This was last examined in December 2011 q2 & answer as a separate and full question.

However, the effects of restructuring are frequently examined under IAS 19 (curtailment

and termination of pension benefits plan) and IAS 37 (restructuring provisions). The

computational aspects are straightforward.

A group reorganisation is in essence changing where control of the group exists by any

of the available means including

i) Creating a new parent company to improve coordination and control

within the group or for the purpose of listing under a new integrated

identity.

ii) Operating under divisions rather than subsidiaries (divisionalization) by

transferring the assets, liabilities and equity of subsidiaries into one

operating entity and eliminating the subsidiaries. This can be the result of

an efficiency drive to save costs or to promote products more aggressively.

iii) Demergers: splitting off parts of the group to improve the value of the

separate components. This can be driven by the need to segregate the loss-

making parts from the profitable parts to ensure the stock market values

the components more fairly.

iv) Reverse acquisitions where an unlisted entity A issues shares to buy a

listed entity B resulting in B’s shareholders owning more of the combined

entity than A’s shareholders. Hence the acquired entity B controls the

combined entity A+B.

GROUP REORGANISATION

- December 2011 q2 & answer limited reorganisation

involving IAS 27 Separate financial statements. A key

issue is determining the cost of acquisition of an investment

in a subsidiary (subject to conditions). This is based on the

carrying amount of the parent’s share of the equity items

shown in the separate financial statements of the original

parent at the reorganisation date, rather than the fair value

of the subsidiary (as one would expect in an acquisition).

This is known as the “carry-over” basis.

- In the December 2011 question the parent reorganises the

structure of its group by establishing a new parent under the

following conditions: i) the new parent obtains control of

the original parent by issuing its own equity instruments in

the new company to replace their existing equity

instruments; ii) the owners of the original parent maintain

the same absolute and relative interest in the net assets of

the group before and after the reconstruction; iii) the assets

and liabilities of the new group and the original group are

the same.

- The examiner may assess your ability to deal with

situations where the above conditions are varied. Key

things to look out for in the scenario: i) additional voting

rights – these alter the absolute and relative interest

therefore the above conditions are not met, rendering the

transaction out of scope; in that eventuality, the investment

in the new company cannot be recognised at cost and must

be fair valued instead, resulting in the recognition of

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goodwill (positive or negative). What if the rights are

nonvoting? Then the relative interests are unaffected and if

the other conditions are satisfied then the investment can be

recognised at cost. ii) Intermediate company – this is

equivalent to a new parent company; iii) acquisition of

another subsidiary – this alters the composition of the group

rendering the investment transaction out of scope; iv) assets

such as goodwill, intangibles, PPE, etc. may be impaired

resulting in a write-down which alters the net asset position

breaching the conditions and making the cost recognition

basis inapplicable.

September 2016 q1b (answer): entity ceases restructuring after

the year end due to cost pressures. Discuss the current and

future financial implications.

E.1 Not-for-profits

financial reporting

1,2,3,4 IFRS are produced for commercial application i.e. to enable organisations to measure

profits, the value of associated assets and liabilities and to reliably determine returns on

capital employed. The context is the key as there are various business models.

In this syllabus area the examiner is assessing your ability to recognize that context is

the driver of accounting practice. It is a test of your ability to think and solve

problems by transferring knowledge about IFRS to not-for-profit contexts that are

different from the commercial contexts in which the knowledge was initially gained. A

clear illustration of this is given in Accounting scenarios of P2TT

Types of not-for-profits

- Charities, the NHS, the Police, the Armed forces

- Clubs & Cooperatives

- Housing associations

- Local authorities (or local government) e.g. Southwark Council

- Schools, colleges and universities

Typical areas you should expect the examiner to prioritise include:

- Income recognition: how does a charity (and other not-for-profits) recognize and

report on a variety of income sources including social rents (as opposed to market

rents), donations, contracts, grants, legacies, endowments, gifts in kind and shop

sales? The principles of IFRS 15 and IAS 20 apply. The objectives of both

standards are the same in that the entity only recognizes what it is entitled to expect,

can measure reliably and uncertainty of collectability is assessed – the certainty of

entitlement principle. However, as observed under IAS 20 above, whereas revenue

is recognized as consideration for the transfer of goods and services to a customer

(and therefore requires the satisfaction of “performance obligations”), grant

income is recognized not as consideration for the transfer of goods and services but

as entitlement, based on fulfilling eligibility criteria such as readiness (ability and

willingness) to provide employment to apprentices in certain deprived areas e.g.

June 2013 q2d (answer). An eclectic approach is inevitable.

Past questions for practice

- Dec 2012 q2 (answer) local authority as a social landlord

accounts for property rented to tenants as PPE (IAS 16) not

as investment property (IAS 40)

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- Asset recognition: for example, how does a local authority (government

organization) or housing association (social landlord) recognize expenditure on

property acquired for rent given its mission is to provide a social service to its

tenants?

- Expenditure: how does a charity recognize, measure and report on volunteering

resources and the sale of donated goods such as used clothing and furniture?

Moreover, expenditure by a charity is often recognized in accordance with the

accrual or matching principle when it is incurred whereas, the related income may

be generated in the future or not at all, as in the case of activities to generate

legacies and other fundraising activities. Accounting for grant financed revenue and

capital expenditure is dealt with under IAS 20.

- Liabilities: How does the charity (not-for-profit) recognize liabilities if cash is

received in advance of fulfilling obligations or obligations for which cash has been

received are unfulfilled at the end of the reporting period (IAS 20)? Valid

expectations created by not-for-profit actions e.g. promising grants. The

expectation is valid because it is logical, reasonable and achievable. This is the case

with the Student Loans Company (SLC) of the UK where the company has an

obligation to pay grants to eligible students without receiving consideration in

exchange. Such constructive obligations are recognised as provisions under IAS

37 once the not-for-profit has set up a valid expectation that it will pay grants to

eligible grantees. A valid expectation is set up when a letter or form is issued to the

grantee specifying the amount of the grant the terms and conditions of payment.

- Surplus/ (deficit) determination: through the application of IFRS principles backed

by the conceptual framework principles e.g. faithful representation and relevant

information.

- Reserve accounting: essential to facilitate transparency and accountability for funds

e.g. restricted funds donated for specific uses. Demonstrating that this has been the

case. The accounting classification, control and reporting process facilitate this e.g.

IAS 1 allows flexibility in presentation and disclosure.

- Performance Effectiveness indicators based on financial measures

In all these considerations, it is essential to refer to and apply the principles of the

Conceptual Framework.

For example, faithful representation requires that all aspects of the context in which a

transaction takes place are reflected in the way that the transaction is represented. Thus,

property of a social landlord such as a housing association or a local government

organisation on which rent is collected is classified as PPE in accordance with IAS 16

because its mission is a social one, being responsible for providing social housing at

affordable rents. By contrast a private landlord such as an estate agent or freehold or

leasehold landlord would classify an identical property as investment property in

accordance with IAS 40 because its mission is to maximize profits by charging

maximum rent to its tenants. This is an example of why the business model matters.

In addition, benchmarking, a key performance evaluation technique prominent in the

not-for-profit sector necessitates comparability. Accordingly, not-for-profits should

apply IFRS principles in ways that allow comparisons to be made between comparable

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charities, housing associations and local government institutions especially where

accountability for the use of public funds is central to demonstrating their legitimacy.

Critical thinking like this and versatility in application are the hallmark of a professional.

It requires applied understanding and efficient learning techniques.

E.2 Entity

Reconstruction, (Study guide reference

E.2, p10

2,4 A reconstruction is a process of rebuilding an organisation to improve its operating

performance and financial position.

A reconstruction is often triggered by financial information about an entity in financial

difficulty indicating going concern problems - doubts about the entity’s ability to

continue in operational existence for the foreseeable future. According to the Conceptual

Framework for financial reporting (May 2015) relevant information is information that

allows this assessment to be made in a timely manner. An organisation in this situation

has two options: i) liquidate (terminate the business, sell its assets and pay creditors); ii)

reconstruct if there is a reasonable chance of rescuing the business (e.g. because it has

viable products or services) and satisfying creditors and other parties.

A reconstruction is a problem-solving exercise that encompasses all aspects of the

business. Therefore, a wide range of IFRS would be relevant to accounting for the

effects of the proposals: i) IFRS 9 new investments in subsidiaries and financial

guarantees to improve the financial position and provide security to creditors; ii) IAS 37

restructuring provisions are always inevitable; iii) IAS 19 there is always an impact on

the pension; iv) IAS 16 PPE would be revalued, transferred, sold, etc.; v) IAS 2 stocks

would be revalued; vi) IFRS 5 a business may be put on sale; vii) IAS 36 impairment

may be recognised as result of persistent operating losses; this would affect intangibles

(IAS 38), PPE (IAS 16) and current assets; viii) sale of investment issues (realised

profit/loss if control lost; reclassifications from equity); ix) distributions and their cash

flow implications; x) old business liquidated voluntarily and its assets sold to another

business (IFRS 3?): acquisition date fair values may not apply given distress business

condition; goodwill is unlikely to be recognised; purchase consideration unlikely to be

fair valued. IFRS 3 is not applicable. What difference does it make? This is a case of a

business acquiring assets – not another business. You may be required to discuss this.

You would be required to evaluate the potential impact of the proposals on the

financial position and performance (interpretation: Study guide G.2, p11): i)

primarily on cash flow IAS 7(reflect deferred or reduced dividend, interest, debt

repayment, new equity, etc.); ii) impact of capital restructure on returns to investors e.g.

EPS (reflect effect on numerator and denominator); iii) gearing (e.g. reflecting the effect

of converting loans to equity); iv) earnings (reflecting the effect of restructuring

provisions, redundancy provisions, pension benefit changes, reduced interest, reduced

tax due to deferred tax effects of asset impairments, etc.). In essence you would be

extrapolating as explained in the P2 - codes to annotations (see “making use of the

scenario”).

You are strongly encouraged to answer this question whenever it is examined, as it is

likely to be within your reach consisting of many parts you will have studied separately.

Questions for practice

MAINTAIN EXISTING COMPANY

a) Evaluation of options to i) liquidate or ii) to continue

b) Reconstruction accounting: can you prepare a

reconstruction account? See worked example.

c) Impact assessment: i) prepare projected financial statements

ii) and comment on specific effects; this requires explaining

critical accounting effects e.g. gains and losses including

reclassification of amounts deferred in equity; iii) deferred

tax arising or cancellation; iv) cancellation of capital

redemption reserve making it distributable; v) additional

contributed capital (the excess over par or stated value).

TRANSFER OF ASSETS TO A NEW COMPANY

WORKBOOK

See worked example – reconstruction new company

Exam practice – fair values

A key feature of such a reconstruction is i) distribution to

existing shareholders out of the available cash and or the

proceeds of the consideration offered by the new company; ii)

existing shareholders take up shares in the new company.

September 2016 q1b (answer):

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Don’t forget about: i) ethics; ii) presentation (professional marks would be available);

iii) clarifying the purpose of the reconstruction (this would be explicit in the question

and implicit in the scenario).

F.1 The effect of

changes in

accounting

standards on

accounting systems

4,2,1b The purpose of accounting systems is to record and analyse the substance of business

transactions intelligibly and thereby facilitate reports to be produced that enable

stewardship and other managerial duties to be discharged to meet the legitimate

expectations of stakeholders.

Requirements and guidance in IFRS are core determinants of what accounting systems

recognize, measure, present and disclose to reflect the economic substance of business

transactions. For example, the unit of account and the unit of valuation are central to

IFRS 13 Fair value measurement. Consequently, the introduction of IFRS 13 directly

impacts the accounts structure of an entity which must be reorganized to align with its

requirements as part of the implementation of the standard. Thus, the accounting control

system, the procedures and policies of an entity that ensures full but adaptive

compliance with IFRS requirements and guidance must be responsive to the introduction

of new IFRS.

Examples of recent IFRS that have had major impacts on accounting systems:

IAS 1

- The requirement to classify (and reclassify) income items between profit or loss

and other comprehensive income.

- Amendments introduced as part of the disclosure initiative to improve the quality

of published information e.g. guidance on the bases of aggregating and

disaggregating information have a direct impact on the accounts structure.

IAS 38

- The requirements to segregate development expenditure from expenditure on pure

research

IFRS 8

- The requirements to identify, segregate and report on operating segments

- The treatment of common costs December 2011 q1b (answer)

IFRS 9

- The requirements of hedge accounting; assessing hedge effectiveness

- The requirements of valuation unquoted financial instruments e.g. Level 3

unobservable inputs.

- Impairment requirement: to recognise always and to annually review expected

credit losses to reflect changes in credit risk

- Impact on financial reporting and covenant compliance of classification of

instruments as debt or equity

- Resource requirements including accounting systems required for implementation

- The requirement to exercise professional judgement over expected losses

(subjective) as opposed to incurred losses (objective).

Past questions for practice

- Mar 2016 q4ai (answer): general practical considerations

of implementing a new IFRS

- Sep 2015 q4 (answer): IFRS 9 implementation

requirements

- Dec 2012 q4 (answer): IFRS 13 implementation

- Jun 2008 q4 (answer): a) inconsistencies between financial

statements stemming from changes in accounting practice

and choice in the application of IFRS; b) effect of

judgement and infrastructure on IFRS compliant financial

statements.

WHAT YOU SHOULD EXPECT

You should expect this area to be examined regularly at

question 4 (and possibly at q1b) because of its generic

importance in the implementation of new high profile IFRS (IFRS 9, IFRS 15, IFRS 16) and the related cross cutting issues

of corporate reporting significance. The requirements are broad

and you should think widely about the objectives, requirements

and implications of the IFRS. Consider this extract:

“…it was surprising to see some candidates writing much less

on the implementation issues: comments such as (and not

limited to) judgement issues, new processes and resource

requirements, and covenant requirement issues would have

earned marks.” Examiner’s report September 2015 q4a

CORE ISSUES

Accounting control for effective:

- Recognition

- Measurement

- Presentation

- Disclosure

CROSS CUTTING ISSUES

Better communication

Corporate social responsibility

Cost constraint

Integrated reporting

Performance measurement

Professional competence e.g. judgement and commercial

awareness

TECHNOLOGY

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IFRS 13

- The unit of account that enables identification of asset or liability to be measured;

impact on accounts structure.

- The valuation premise that maximises the value of the asset in its “highest and best

use”.

- Accounting information is required to support the assessment of the most

appropriate valuation technique (market, income or cost method)

- Accounting input to valuation techniques e.g. published financial information

IFRS 15

Revenue-dependent billing, accounting, taxation and financial reporting systems will

need to change to cater to significant requirements including

- Performance obligations as unit of account

- The requirements to keep track of services delivered over a period of time in order

to recognize revenue when performance obligations are satisfied.

- Keeping track of contract costs; the requirement to recognise an asset from the costs

of obtaining and fulfilling a contract with a customer and to disclose the relevant

details and accounting policies.

- The requirement to distinguish between contract assets and accounts receivable

conceptually and operationally, and to monitor the associated credit and

performance risks. Processes to enable reclassifications from contract asset to

account receivable, from contract liability to revenue.

- The requirement to analyse the deferred payment consideration for the sale of goods

and services into financing and operating elements and to account for them

separately.

- Applying the requirements of non-cash consideration e.g. non-cash consideration

in the form of shares involves IFRS 2; remeasured and any impairment (the

difference between the fair value of the consideration due and the fair value of the

shares or other forms of non-cash consideration) accounted for as a loss in

accordance with IFRS 9. The requirement to disclose such impairment separately

from impairment from other contracts.

- The requirement to analyse revenue into meaningful categories in order to present

relevant information to users about the different goods and services transferred to

different types of customers.

- Warranties: the requirement to distinguish between assurance-type and service-

type warranties to reflect their differing accounting implications. Assurance-type

warranties are accrued at the point of sale in accordance with IAS 37 and the

expense charged to profit or loss immediately. Systems would need to be upgraded

or introduced to handle the matching process between claims and individual plans.

Service-type warranties by contrast are separate performance obligations and are

therefore allocated a portion of the contract price. When the performance obligation

is discharged to the customer, revenue is credited to profit or loss to match the cost

incurred. So enhanced processes and controls would be required to keep track of,

and allocate, performance obligations and to account accurately and completely for

the associated revenue and costs as those obligations are satisfied over time.

- Impact on tax compliance processes and determination of taxable income

Enabling implementation, facilitating integrated reporting

Promoting efficiency and reducing human error

Providing access to information for transparency

RELATIONSHIP MAINTENANCE

Covenant arrangements

Investor and creditor protection

INTERPRETATIONS

Always consider how the structure and content of financial

reports (IAS 1) are impacted and consequently, the financial

performance indicators depicting the relationships between

them. Consider in particular the classification between

- Operating, financing and investing activities.

- Profit or loss and other comprehensive income

- Current and noncurrent assets

- Current and noncurrent liabilities

- Equity and liabilities

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- Impact on HR systems for measuring and tracking incentive payments such as

bonuses dependent on revenue performance.

Thus, an integrated approach involving finance, IT, HR, taxation and sales functions is

essential for an adequate implementation and ongoing improvement of the application

requirements. The resource implications are significant and should be planned and

managed effectively.

IFRS 16

- The requirement to disclose off-balance sheet finance of transactions previously

classified as operating leases and the recognition of related noncurrent operating

assets previously excluded from the balance sheet.

- The replacement of operating lease expense with depreciation expense. Both

these items are operating expenses but are subject to different accounting policies.

Management’s judgement about their impact on performance measurement is

different. For example, key measures of performance such as EBIT and EBITDA

are indifferent to rent but, whereas EBIT is sensitive to depreciation EBITDA is

not, as it excludes it.

As the implementation of IFRS often involves a change in accounting policy or a change

in accounting estimate you should consider studying this section in relation to IAS 8

Accounting Policies, changes in accounting estimates and errors.

Also, consider reading the accounting policy sections of published financial statements.

“Adoption of new and amended IFRS” explains the effects of new IFRS and the

“Standards issued but not yet effective” explains the potential effects of new IFRS on

the entity’s financial statements.

These learning activities will help you to develop in-depth understanding and to pick up

marks available for commercial awareness of real-life applications of IFRS

implementation issues. Read the examiner’s report above June 2016 (general

comments).

F.2 Proposed

changes to

accounting

standards. Refer

also to H.3 Current

reporting issues

4

“Students will be examined on concepts, theories, and principles, and on their ability to

question and comment on proposed accounting treatments.” Approach to examining

the syllabus, p7

As discussed under B.2 Critical evaluation of principles and practices you are

required to apply critical thinking to determine the suitability and acceptability of

current practices underpinned by theory, IFRS and conceptual framework. This should

lead you to make suggested changes to improve practice in specific areas. The ability to

contribute to improvements in practice is a key differentiator from F7 where the

expectation is to apply acquired knowledge. See Transition guide on the top page.

The IASB’s work plan and its supplements embodies its due diligence procedures in

guiding the profession to identify, analyse, evaluate and resolve issues that warrant

WHAT YOU SHOULD EXPECT

A question that requires critical thinking to be exercised in a

structured way to provide full answers that are anchored in the

core corporate reporting principles and objectives. Therefore,

address the issues using a framework you have used to study

IFRS.

“It is important that candidates keep abreast of recent

developments as the paper frequently examines recent

pronouncements.” Examiner’s report, June 2010

Read Deloitte’s 2016 model financial statements, (note 2.1,

p33) to acquaint yourself with the amendments of IFRS that are

mandatorily effective for the current year.

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amendments to current IFRS and the introduction of new ones by building consensus

over what is best practice generically and specifically in certain areas.

The Exposure drafts included as examinable documents are the main evidence of this

process. They invite you to make and justify your recommendations for proposed

improvements to IFRS.

The examinable exposure drafts have been included in the relevant IFRS. However,

due to the cyclicality of financial reporting maintenance do not be limited to the EDs –

review and action the work plan as suggested in the opposite box.

Read the examiner’s reports

As can be seen these reports give general guidance about what the examiner is looking

for and indicates how you should approach learning to develop the in-depth

understanding required to answer EDs effectively. Think about this:

ED 2013/6 Leases (examined June 2016 after issue of IFRS 16 in January 2016)

“The effects of new standards on business reporting would be considered a current issue

and this topic formed the basis of question 4 in the sample paper as did the focus of

regulators upon problems of impairment and deferred tax. There are certain general

problems that most standards face. Consistency with the Framework is one.

Other problems would include assumptions used in estimates, judgements used by

directors, valuation issues, the use of discount rates, the age of the standard and its

current application, the nature of the evidence needed to apply the standard and lack of

clarity in the standard.

A useful source of information about a standard is the Project Summary and Feedback

statement issued by the IASB after a standard is issued. Thus, in order to answer this

question, candidates should be prepared to read around the subject and gain an

understanding of the issues involved. It is not a rote-learned area of the syllabus.”

ED IAS 37 Non-financial liabilities examined June 2012

“…candidates were required to describe the new proposals that the IASB has outlined

in an exposure draft in the area and describe the accounting treatment of certain events

under IAS 37 and the possible outcomes of those events under the proposed

amendments in the Exposure Draft…”

“…candidates could have answered this part of the question with basic general

knowledge of the standard setting process.”

“…the level of knowledge required of the new proposals was in the nature of summary

knowledge and not detailed knowledge and a reading of part b of the question would

have given candidates an insight into the nature of those proposals.”

Review the IASB work plan relevant to March 2017 exams and

make sure you address

ACTIVE PROJECTS

- Research projects: goodwill and impairment, share-based

payment IFRS 2 (ED2014/5) and discount rates are projects

about core subject matter and are likely to be examined.

The others are unlikely to be examined as they are awaiting

the publication of discussion papers (DP) to engage the

profession and other contributors.

- Standard setting and related projects: conceptual

framework (ED 2015/3) and disclosure initiative (ED

2014/6) are very topical and you should prepare for them.

MAINTENANCE OF IFRS

- Narrow scope amendments and IFRIC interpretations:

these all relate to frequently examined topics and are hence

high priority for March 2017.

- IFRS Taxonomy

No examinable updates

- Post implementation reviews: there are no completed

PIRs. Hence it is unlikely that any of the subject matter to

which they relate would be examined in March 2017.

COMPLETED IFRS

- Standard setting and completed projects: examinable

completed IFRS are listed in the Examinable documents.

Amendments to SMEs are not particularly exam significant

as the SME is not high priority for the reasons given below

under IFRS for SMEs. However, as this area is examinable

make sure you are clear about the SME as described below.

- Narrow scope amendments. These are usually examined

in the exams prior to the effective dates e.g. IAS 16 PPE

(issued May 2014, examined September 2015 q2a effective

1 January 2016). Priority areas are highlighted.

- Post implementation reviews (PIR): all PIRs are

examinable.

Past questions for practice:

- Jun 2016 q4 (answer): ED 2013/6 Leases

- Mar 2016 q4 (answer): general practical considerations of

implementing a new IFRS

- Jun 2012 q4 (answer): ED IAS 37 Non-financial liabilities

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“The lesson which should be learned by candidates is that the scenario is important as it

helps answer the question”

G.1 The creation of

suitable accounting

policies. Also, refer

to B.2 and IAS 8

1b,

c,3,4 WHAT IS THE SUBSTANTIVE FOCUS OF THIS SECTION?

Accounting policies enable the entity to meet its reporting requirements. This section is

about understanding the critical factors that influence the entity’s accounting policy

choices and to determine if the adopted policies are suitable (fit for purpose) and

efficient (acceptable to all stakeholders).

Accounting policies are suitable (fit for purpose) if they enable the entity to achieve the

qualitative characteristics in its financial statements (B.1). Accounting policies are

acceptable if they satisfy user needs (e.g. present relevant information that can be

understood readily and applied effectively) and the benefits exceed the cost of their

application.

How this section relates to A.1 Professional behaviour and compliance with accounting

standards

Ethical issues (e.g. management of earnings) may arise when management makes

accounting policy choices because their rewards may be based on the financial

performance and financial position which are significantly affected by the entity’s

accounting policies. These issues, their implications and the accountant’s expected

professional and ethical stance are discussed in the linked document under A.1. This is a

frequently examined area. Refer to the past questions of A.1 and IAS 8 above.

How this section relates to A.3 Social responsibility, B.2.a and H.1 Environmental and

social reporting

Accounting policies are at the core of producing general purpose financial statements

that meet the needs of different stakeholders. Therefore, it is essential to consider if the

policies of the reporting entity are “suitable” and “acceptable” from the perspective of

all stakeholders. What are the criteria of “suitability” and “acceptability”?

For the purposes of corporate social responsibility reporting stakeholder theory is

an appropriate source of criteria of suitability and acceptability. “Identify the

relationship between accounting theory and practice.” Study guide B.2.a

Stakeholder theory is a branch of legitimacy theory which posits that the entity is under

a social contract with the community in which it operates and strives continuously to do

the things the community approves of. This means that the community will receive

information about the entity which satisfies its legitimate needs for social, financial and

environmental accountability and sustainability. Thus, an accounting policy is

acceptable if it enables information to be produced which meets the needs of the

investors as well as other stakeholders.

There is potential for conflict: an accounting policy may be suitable for a stakeholder

group such as investors but unacceptable for others such as environmentalists. Indeed

some commentators question the suitability of financial accounting for assisting in the

WHAT YOU SHOULD EXPECT

Questions in this section are assessed at intellectual level 3 -

synthesis and evaluation building on the preceding intellectual

levels 2 (F7 - analysis and application) and level 1 (F3 -

knowledge and understanding). This fact is reflected in the

following extract from the syllabus rationale:

“The Paper P2 syllabus takes the subject into greater depth and

contextualises the role of the accountant as a professional

steward and adviser/analyst by initially exploring the wider

professional duties and responsibilities of the accountant to the

stakeholders of an organisation.”

Thus, the questions are multifaceted, challenging and stretching,

reflecting the complexities of creating policies that produce

general purpose financial statements to meet the needs of

diverse stakeholders while addressing the entity’s regulatory

and ethical requirements.

The multifaceted thematic approach

The multifaceted thematic approach is a recent trend in the

examiner’s approach to assessing this area. For example

- Dec 2016 q1b, c (answer): the theme was pensions

- Jun 2016 q1a, b, c: the theme was statement of cash flow

- Dec 2015 q1a,b, c (answer): the theme was foreign

exchange

The examiner has plenty of opportunities to continue this trend

with common themes including:

- Classification of gains and losses between profit or loss and

other comprehensive income (OCI).

- Corporate social responsibility (CSR) reporting (A.3, H.1)

- Goodwill (classification between goodwill and intangible

assets; full and partial goodwill)

- Intangible assets (classification of research and

development expenditure)

- Inventory valuation (cost or NRV; FIFO or AVCO)

- Liabilities (classification between current and non-current;

financial and non-financial; recognition of measurement

gains and losses between profit or loss and OCI; accounting

for changes in estimates of decommissioning liabilities in

respect of assets measured at cost or valuation)

- Taxation (deferred tax asset recognition assessment)

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disclosure of social and environmental costs caused by the reporting entity as these costs

are in principle not recognized by the entity unless they are explicitly required by

legislation. For example, the conceptual framework defines an expense as

“Expenses are decreases in assets or increases in liabilities that result in decreases in

equity, other than those relating to distributions to holders of equity claims.”

On this basis, for the purposes of CSR, the entity may only recognize an expense it

incurs as a result of a specific statutory obligation such as a penalty for pollution but

may not recognize an expense when it consumes naturally occurring assets such as land,

trees, water, fish and air. These assets are not under the control of the entity and are

therefore not within the conceptual framework’s definition of an asset. Whereas the

entity may be increasing profits and shareholder wealth it may be doing so by depleting

certain natural assets and the accounting system is rightly criticized for ignoring this

situation (known as externalities). This is a serious limitation of financial information

and it should be considered in a question about CSR reporting because according to the

examiner

“Candidates need to come to the examination with an understanding of the limitations of

corporate reporting as well as the nature of it.” Examiner’s report, June 2016

Read the P2TT (Accounting, Financial & Corporate reporting) to understand the

nature of corporate reporting and how it differs from related branches such as

financial reporting and financial accounting. Read the conceptual framework for

financial reporting 6.17 on the limitations of historical cost basis of measurement.

The other limitations of financial accounting that impair its usefulness for CSR reporting

are related to:

- The relative power of stakeholders: in the production of financial information the

interests of capital providers are paramount. The information produced tends to

reflect this dominance as discussed below under “financial materiality”. However,

there is a growing trend towards widening the quality and range of information to

encompass the requirements of the sustainability agenda. The implications for

financial reporting and accounting policy design are significant. In questions about

the implications of new IFRS implementation CSR requirements must be

considered as they can be significant.

- The concept of financial materiality: an item is material if it can affect a decision

and is therefore relevant. Materiality has a quantitative focus: an item’s materiality

is assessed in relative terms by reference to the entity’s turnover, profits or net

assets. If an item is not judged to be material it is not reported in the financial

statements because an accounting policy is not developed for it. This tends to

preclude the reporting of sustainability information which may be difficult to

quantify, or which may be immaterial in financial terms.

- The effect of discounting long-term liabilities: because statutory environmental and

decommissioning liabilities are discounted to their present value for the purposes of

- Property (classification between PPE and investment as in

the case of hotel and property portfolio to let; to capitalise

or to charge as expenses to profit or loss, certain costs e.g.

borrowing costs, inventory, repairs and maintenance,

changes in the carrying amounts of liabilities e.g.

decommissioning provisions; classification of gains and

losses relating to disposal, revaluation, insurance)

- Revenue (recognition, classification, measurement)

The implications are that the examiner expects you to engage

with the subject matter from a diverse perspective. That means

every standard must be studied in-depth as if it can be examined

as an ethics (q1c), critical evaluation (q1b), computational (q1a)

and discursive question (2,3,4). This guide embeds question

strategy to explain and guide you through the requirements of

each type of question. You are encouraged to read it carefully

and to apply it to the study of subject matter for best results.

Active learning is divergent thinking in action.

Current issues

Another approach is the current issues approach. Here the

examiner requires candidates to focus on the technical

requirements of implementing a new standard or applying an

existing one. The scope of the question is usually broad

encompassing impact on the entity’s internal and external

environments and relationships with primary users of financial

statements (investors and creditors). A typical question is

December 2013 q4 (answer). This question will repay diligent

study and effective repeated practice at answering it.

Discuss accounting treatments

Yet another (more common) approach is to present a case study

of a proposed accounting treatment (syllabus reference G.1.b)

that does not fully comply with the requirements of IFRS.

Candidates are required to discuss its suitability and

acceptability by reference to IFRS. A typical example of this is

June 2012 q3 (answer)

As well as the above you may also be advised to:

- Be prepared to discuss how to set an accounting policy to

implement the requirements of a new standard such as

IFRS 15. See Deloitte’s 2016 model financial statements

pages 39-40. Also see F.1, IFRS 15.

- Also, be prepared to draft notes to satisfy the core

disclosure requirements of a new standard such as IFRS

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evaluating their commercial effects and financial reporting implications, the

obligation (in terms of present value) may be relatively insignificant compared to

their future value because they will not be settled for many years. Hence there is a

risk that the obligation may be ignored, inducing further environmentally unfriendly

behaviour which is at odds with the sustainability agenda.

- The entity assumption: under the current accounting model transactions that are not

explicitly for the benefit of the entity are ignored because the corporate entity has a

separate legal personality and only recognises costs associated with those risks

that it has specifically underwritten. This situation can preclude admission of

liability arising from the consumption or use of assets produced or manufactured by

the entity. An extreme example is the arms industry. However, IFRS 15 (paragraph

B33) requires the entity to make a provision in accordance with IAS 37 for any

damage to the customer caused by using a product for its intended purpose if the

laws of the country requires it. Moreover, the entity assumption may conflict with

and restrict the scope of the legitimacy theory under which the entity promises to

do only those things which the community approves of. For example, if the entity

makes redundancies or pays low wages it only bears some of the social costs (if at

all).

- The treatment of tradeable pollution permits (examined: Dec 2012 q2a (answer): i)

permits provide a perverse incentive to pollute albeit up to an approved limit; ii)

unused permits can be sold or transferred, further incentivising holders to be active

agents of pollution; iii) unsold or unused permits are recognised as “assets” (in

accordance with the conceptual framework for financial reporting) but in terms of

social responsibility permits are a threat (or liability) to the environment whether

used or not.

The above may be directly or indirectly related to the creation of accounting policies.

The incentive to resolve the conflicts or ameliorate their effects is increasing due to

growing influences on Corporate entities to improve their image, manage reputational

risks, keep customers happy, attract new ones, offset the competitive advantage of

socially responsible competitors and pre-empt substantial fines. H.1 Environmental and

social reporting below discusses the financial reporting implications of these initiatives.

How this section relates to B.2 Critical evaluation of accounting principles and practices

“…exercise professional judgement in the application and evaluation of financial

reporting principles and practices…”

How this section relates to IAS 8 Accounting policies, changes in accounting estimates

and errors

IAS 8 provides the guidance and methods for selecting and applying accounting policies

and for dealing with the effects of changes in accounting policies, estimates and errors.

IAS 8 has the hierarchy that guides the creation of an accounting policy for the

production of relevant and reliable information where no IFRS exists for the

transaction, condition or other events.

15 to show the effect of accounting policies and the

disclosure initiative amendments to IAS 1. See Deloitte’s

2016 model financial statements pages 39-40.

- Keep in mind the word “suitable”. You need to justify the

policy by showing how it enables the entity to reflect the

substance of its performance and financial position. You

are the judge: decide how the transaction should be

recorded, disclosed and presented and cite the relevant

principles of the standard or the conceptual framework to

justify your decision in the light of the evidence from the

scenario.

- Which accounting policies should be disclosed? What

determines the choice? Read Deloitte’s 2016 model

financial statements, p43

- Discuss the creation of accounting policies in relation to the

objectives of the IASB’s Better communication initiative.

PAST QUESTIONS FOR PRACTICE

- Refer to IAS 8 and other related sections opposite.

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“Standard” does not mean “uniform”. International convergence enables the creation of

accounting policies based on common converged standards that are applicable in

different countries. As a utility financial statements need to be fit for purpose (suitable

and acceptable). Hence IFRS allow options for flexibility.

The centrality of accounting policies to corporate reporting is reflected in the

prominence given to accounting policies in the published financial statements, being

Note 1 Disclosure of significant accounting policies.

Other salient considerations:

- Refer to P2TT for a detailed discussion of accounting bases, assumptions and

accounting policies

- Address the conceptual framework qualitative characteristics requirements for

- Links to reporting financial performance: references to the conceptual framework

for financial reporting.

- Implications for financial reporting of current developments

- Specialized entities: examples of policies

- Better communication

- Practical expedient (accounting policies are for the determination of all amounts –

no materiality threshold). However, disclosure is more complex: i) generally only

summary of significant accounting policies are required to be disclosed; ii)

however, certain policies are significant by nature of business (not amount) and

must be disclosed.

G.2 The appraisal of

financial

performance,

position and cash

flow

4, 2,1b,

c - Appraisal is of critical importance, being based on the final output from the

accounting information systems and it is intended for users for whom the preparers

are acting as agents.

- Assessing fitness for purpose focuses attention on the entire process of producing

the information: recognition, measurement, presentation and disclosure. Hence the

importance of considering the qualitative characteristics which are substantially

influenced by the choice of accounting policies and significant judgements and

assumptions of the management (IAS 8 – q4a &b in December 2013 & answer.)

- Interpretation of the information is an essential function of the accountant. This

should not be treated as a mechanical routine. It is communicating insightfully, the

key information about the results, the position of the entity’s finances and of its cash

flows. It must be approached as a creative exercise that aims to add value to users of

financial information. Therefore, it is essential to relate the analysis and

interpretation to the objectives of the users.

- Gaining insight entails understanding the relationships between all the financial

statements and what underlies those relationships: i) How does profit or loss relate

to cash flow? ii) What determines the financing needs of the business (long term

and short term)? iii) What determines how the business is financed? iv) How

soundly is the business being financed? v) Is the business achieving its objectives

for stakeholders? vi) What financial and nonfinancial indicators best depict the

performance of the entity to satisfy the needs of users?

- Management commentary (how is the business executing

its strategy and is it succeeding or not?)

- Presentation skills (particularly in advice questions:

attention to structure, clarity of arguments based on quality

of insights evidenced by accurate knowledge of principles,

business performance and appraisal issues)

- Demonstrate awareness of the context in which the entity

operates and the impact on performance of such contextual

factors as i) the economic outlook, ii) factors affecting the

sector, iii) factors specific to the business e.g. growth,

decline, competition

- Demonstrate awareness of the risk of “management of

earnings” June 2010 q1c & answer motivated by i) market

pressures, ii) contractual performance pressures, iii)

personal motivation e.g. bonus incentives linked to earnings

- The context determines the priority: what would you say is

the priority of the entity given the context? How do the

financial statements figures and narrative commentaries

reflect that?

- If there is no alignment then you should bring that out in

the analysis and interpretation.

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- The prevailing economic climate means that appraisal becomes topical as risks

move front and centre in the management of the entity: business risk (inherent in

the way that the business model delivers value), operational risks (inherent in the

way that the value delivery is being supported e.g. through logistics), financial

risks (inherent in the way that the business is financed e.g. forex risk hedged by

fwd. exchange contracts)

- Convergence imposes a need to reassess and define performance indicators that are

acceptable and suitable for use in international capital markets for evaluation of

alternative investment options based on predictions of future earnings and past

performance. Universal definitions of concepts, terminology and norms used in

ratio analysis would be helpful in interpretation of performance.

- Opportunity to test a variety of standards and adjustments e.g. share options,

new pension recognition rules under IAS 19, deferred tax, provisions, etc. and to

assess their impact on EPS, ROCE

- In execution, whether in growth, crisis management or

steady state management, speed is of the essence. How

does the speed of management action come through in the

figures? E.g. is cash flowing in as quickly as required to

meet obligations? Are (fixed) costs being reduced quickly

enough to stem losses? How much time has the entity got?

- Adjusting the earnings and number of shares used in the

diluted EPS

Sources of practice

- December 2011 q2 & answer

H.1 Environmental

and social reporting

1b,c,4 What are the unique requirements of environmental and social reporting?

- The legal obligations: there can be severe financial penalties for breaches of

environmental protection legislation. As such these costs are not discretionary but

mandatory. Therefore they are material and must be disclosed. This has implications

for the accounts structure and accounting policy. Obligations may be recognised

under IAS 37 as in environmental provisions and decommissioning costs. In

addition, contingent environmental liabilities may be disclosed in accordance with

IAS 37 if the entity’s circumstances warrant it. Changes in decommissioning

liabilities may change over time. The effect of increases or decreases on related

assets can be significant and must be accounted for prospectively in accordance

with IAS 8. The impact on profit or loss depends on whether the asset is measured

on cost basis or on revaluation basis.

- The ethical obligations to demonstrate corporate social responsibility (CSR) can be

financially significant, necessitating separate presentation and disclosure. For

example, the cost of embedding sustainable supply chain practices that satisfy

growing public interest in sourcing can be substantial and require disclosure

alongside the outcomes of sustainability practices.

- Financial sustainability, growing while maintaining sound finance, is a

precondition of environmental sustainability. Reconciling the two is a core

challenge of the entity’s board: December 2011 q1c & answer

- Assessments must be made to determine whether the drivers of environmental and

social reporting are operational or investing activities. The associated expenditure

and income must be classified accordingly.

- Financial and nonfinancial data would be required to demonstrate the progress

being made in environmental and social dimensions.

How do these requirements affect performance measurement and why?

- The board as agents need to protect the organisation against environmental and

social risks and satisfy stakeholders that they are doing so. This means being

proactive by anticipating obligations, investing in preventative measures and

carrying out obligatory activities such as decommissioning and cleaning up polluted

waters, land and air. These additional cost drivers impose pressure on the entity to

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manage profitability and maintain its competitive position. KPI must be expanded

to meet additional monitoring needs.

- Should these costs be capitalised or expensed? Being substantial expenditure

including acquisition of noncurrent assets, capitalisation assessment should be made

using IAS 16 and IAS 38 criteria. This assessment also includes consideration of

the eligibility of borrowing costs for capitalisation (IAS 23).

- IAS 16 PPE allows the capitalisation of expenditure necessarily incurred in

connection with acquiring, delivering and installing assets in a location and

condition fit for intended use. This includes expenditure on acquiring assets to

comply with environmental legislation without which the other related assets would

not be fully operational and therefore the expected economic benefits would not be

derived. Certain additional costs e.g. decommissioning costs, may be capitalised

later in the asset’s life if these costs are IAS 37 compliant (e.g. incurred to comply

with legislation in respect of environmental damage) and related to the asset’s

acquisition, installation or construction. The recognition of these costs (as a result of

new information and development) is not a correction of an error or a change in

accounting policy (under IAS 8) and should be accounted for prospectively in

accordance with depreciation policy. Obligatory contractual costs of using the

asset e.g. cost of damage caused by using the asset which must be rectified under

the terms of a lease, or damage or injury to third parties requiring compensation

(under the law) are expenses to be charged to profit or loss as they do not generate

or enhance an asset and are therefore not recoverable. However, under an

absorption costing system it is possible that these costs are absorbed in product

costs such as inventories (IAS 2) or constructed assets (IAS 16).

- IAS 38 criteria may be applied to assess whether other expenditure is eligible for

classification as intangible assets on account of the investment and potential

benefits over the long term e.g. in terms of reputational enhancement and brand

development. It is essential to determine if as a minimum the expenditure and the

benefits associated with it are i) identifiable, ii) controllable and iii) measurable.

Apply the principles of IAS 38

- As these costs are mandatory they may well be product costs recoverable from the

customer but not at the expense of pricing the product or service out of the market.

- Thus the classification and recoverability of environmental and social expenditure

can affect performance measurement and product pricing in the short-term. Hence

these matters must be addressed at the corporate level as they have implications for

how the business competes and adds value. The entity’s strategic report should

reflect these concerns.

Evaluate current reporting requirements for CSR including integrated reporting

Purpose and status

Corporate social reports are discretionary – not mandatory except in some jurisdictions

such as Denmark, Norway, Sweden and the Netherlands where specific environmental

statements are required from environmentally sensitive industries. Their purpose is to

provide information about how the entity is discharging its environmental and social

responsibilities. Unlike published statutory financial reports subject to mandatory

auditing the current CSR reporting requirements are contained in a variety of Voluntary

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codes and frameworks such as the GRI, and IIRC and do not include statutory

requirements to audit. Consequently, a CSR report may be significantly deficient in

certain respects such that its usefulness may be called into question. Some of the key

aspects are:

Responsibility for the report

In the Integrated reporting framework published by the International Integrated

Reporting Council (IIRC) there is no requirement for a report from “those charged with

governance” to acknowledge their responsibility for the report. This lack of assurance

undermines confidence in the report: on what basis should readers rely on the report?

Uncertainty over measurement basis

According to the IIRC prescription of measurement basis is out of scope. This reduces

the reliability and usefulness of the reports as there is a risk that measurements can be

entirely subjective. This might be the case where the CSR report is issued as a

standalone report. However, where the CSR report is an adjunct of the corporate report

it would be consistent with the audited management information system because

auditors would be required to attest to this. Thus despite measurement not being

specifically addressed by IIRC nevertheless corporate governance and management

systems that are being developed to assure the integrity and sustainability of the

organisation should produce CSR data that are consistent, reliable and independently

verifiable.

Coverage, suitability and acceptability

The scope of CSR reports tends to cover financial and nonfinancial, quantitative and

qualitative aspects of environmental and social factors. These are suitable features of a

CSR report. However, it is acknowledged that the expertise required to deliver suitable

quality may not be available to all entities due to lack of commitment by the board, there

being no pressure to comply with legislation compelling reporting. The acceptability of

the reports may also be doubtful given the lack of generally accepted standards of

CSR reporting to drive consistency, understandability, rigour and comparability.

However, the growth in benchmarking, e.g. the London Benchmarking Group, driven

by the need to demonstrate results from community involvement should contribute to

identifying best practices in allocating resources, measuring effectiveness and

establishing credibility for performance indicators.

These all point to the need for the profession to do more work to supplement various

initiatives and harmonise their recommendations. Accordingly, the ACCA, the ICAEW

have been involved in various award and other initiatives to try to influence the

development of appropriate standards of recording and reporting environmental and

social issues.

Discuss why entities might include disclosures relating to the environment and

society

- Useful for communicating with stakeholders to address their environmental

concerns. This provides an opportunity to demonstrate the impact on performance

of environmental and social compliance costs. However, the effectiveness of the

reports can be hampered by the shortcomings highlighted above.

- Demonstrating accounting for sustainability as the key to creating an innovative

business model. The accountant can play a pivotal role in demonstrating how CSR

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is integrated into business strategy and operations. This can be done through

integrated information whereby performance narratives contain fully integrated

financial and nonfinancial data to complement the narrative as in the strategic

report.

- Disclosure of outstanding environmental obligations as in IAS 37 disclosure of

contingent liabilities provides useful information to potential investors and other

users. Such disclosures may adversely affect the share price but such transparency

would be welcome to shareholders. Disclosure of changes in decommissioning

liabilities during the life of a related asset and the effects of those changes on asset

values, performance and equity are relevant information for users. See also IAS 16

PPE.

- Providing a basis for comparison (and benchmarking) with other firms that can be

beneficial in terms of rating stakeholder perception and brand quality.

H.2 Convergence

between national

and international

reporting standards

1c,b,4 “Global issues will be addressed via the current issues questions on the paper.”

Approach to examining the syllabus, p7

This area has not been examined since December 2007. This is probably because work

on the Conceptual framework was suspended for a long time. Now that ED 2015/3 has

been issued (May 2015) it is advisable to prepare for a question about the benefits of a

CF, one of which is converging international standard setting. How? By providing a

uniform set of concepts and principles to standard setters. What issues arise from this?

The requirements of the study guide are addressed fully in Convergence Final Revision

checklist.

Additional reading

H.2 International convergence

- Process ideas from q4 June 2008 (what do these issues mean for

convergence? how can they be overcome?) i) Think about reasons why

despite IFRS adoption and improvements in IFRS financial statements

would still fall short of the expected qualities of transparency, consistency

and comparability. ii) What is a financial reporting infrastructure? iii)

Why would management judgement play a greater role when IFRS are

adopted?

- Integrate green issues: how does convergence promote the green agenda?

And how does the green agenda promote convergence?

Questions for practice

- Jun 2008 q4 (answer)

- Dec 2007 q4 (answer)

Reasons why IFRS underpinned by CF may fail to

produce consistent, comparable and transparent FS

- Financial reporting fraud. This can be facilitated by

alternative forms of presentation (as in IAS 7- indirect

method susceptible to exploitation, IAS 1); different

acceptable methods of accounting (as in IAS 16, IFRS

9); lack of adequate guidance in IFRS that are open to

interpretation especially under the principle-based

IFRS.

- IFRS 1 exemptions can have ongoing effect on

financial statements e.g.

- Lack of training and motivation to switch from

national GAAP, especially where no CPD

(unintended inconsistencies)

- Lack of experience e.g. in carrying out valuations for

IFRS 13 compliance could lead to inconsistent

valuations

- Lack of market information for IFRS 13 compliance

could lead to innovative methods (hypothetical

markets) acceptable under IFRS 13

- Early adoption by some and failure by others to

disclose potential impact of new IFRS on initial

adoption

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Ways to overcome divergence from the expected

outcomes through the effective operation of the other

elements of the financial reporting infrastructure

- National regulators e.g. FRC (check website), PRA to

provide effective enforcement and oversight

mechanism

- Quality of corporate governance (quality information

needed to address the agency question.)

- Audit quality underpinned by ISA

Why greater management judgement may be required to

implement IFRS

- IFRS use fair values extensively; significant

management judgement is required to determine the

measure that is most representative of fair value; also

required is a level of expertise in valuation

techniques and significant knowledge about the

nature and characteristics of the asset.

- Management have to use their judgement in selecting

valuation techniques (e.g. mathematical modelling)

and in formulating assumptions about specific areas

including onerous contracts, share-based payments,

pensions, intangible assets acquired in business

combinations and impairment of assets. (See IFRS 13

workbook exercises)

H.3 Current

reporting issues.

Refer to F.1, F.2,

H.1, and H.2

4 The examiner has advised that this is not a rote learned area. You can take from this that

i) you are not required to tank up large amounts of data that you don’t know how to use;

ii) the emphasis is on problem solving therefore prioritise core areas that have wide

impact on financial reporting e.g. performance measurement, de-recognition and

applying the fundamental and enhancing characteristics; iii) think critically about what

the proposals aim to achieve, the methods it recommends and practise writing

discursively to evaluate whether the proposals achieve what they set out to achieve; iv)

plan and manage your time so that you read actively and write regularly in a focused

way. Use the examples provided above under effective writing skills.

- Current issues are mainly examined at q4.

- Make sure you are clear about the nature and scope of current issues. Refer to P2TT

for a detailed explanation of the exam techniques and study approaches.

- Refer also to F.1, F.2, H.1 and H.2

- The December 2015 examiners report is also very informative.

- The June 2015 preamble to q4 is a useful stimulant. You will probably benefit

from reviewing this question, the answer and the examiner’s report in the light

of ED2015/3. In particular, consider this extract from the examiner’s report

WHAT YOU SHOULD EXPECT

You should expect a current reporting issue question focused

on the proposals of the conceptual framework ED2015/3 and

their potential to improve the quality of financial reporting.

This will require you to discuss specific ways in which the ED’s

proposals will improve recognition, measurement, presentation

and disclosure of business decisions, transactions and

conditions.

You should expect CF based questions about problem areas.

This will assess your ability to think critically and evaluate how

effectively the ED proposals address those problems in seeking

to achieve “fair presentation of the entity’s financial position,

financial performance and cash flows.” in accordance with IAS

1 Presentation of financial statements.

- An example is de-recognition (ch5): affects several IFRS

including IFRS 9 various transfers of assets with varying

degrees of continuing involvement; IFRS 15 (sale and

repurchase agreements).

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“Historical financial statements are essential in corporate reporting, particularly for

compliance purposes, but it can be argued that they do not provide meaningful

information. Preparers of financial statements seem to be unclear about the interaction

between profit or loss and other comprehensive income (OCI) especially regarding the

notion of reclassification,” Examiner’s report, June 2015 q4aiii

Reclassification of items deferred in equity to profit or loss is governed by the relevant

IFRS underpinned by the accrual or matching concept (which requires all income arising

in the period to be matched to expenses incurred for that period and presented in the

profit or loss). The objective of accrual is to faithfully present relevant information for

the period in profit or loss. For example, in IAS 21 two events trigger reclassification of

amounts previously recognised in OCI and deferred in other components of equity:

i) A disposal of a foreign operation

ii) When a parent loses control of a subsidiary that was classified as a foreign

operation but retains an investment in that foreign operation

When these events occur a gain or loss on disposal is recognized immediately in the

consolidated profit or loss triggering a classification adjustment of the related

exchange component from equity.

DR Equity (other components of equity – debit assumes a credit balance: this debit is

presented in OCI in the current year and then cleared down to the equity balance sheet

account).

CR Profit or loss

Refer to the maths of IAS 21 for an illustration of this.

The practice of not reclassifying items deferred in equity to profit or loss is governed by

the principles of financial performance measurement which aim to determine the

amount of profit or loss that reflects the management’s direct impact on the assets and

liabilities of the organisation and the net income and cash flows that result from that

impact. Accordingly, the measurement of the results (performance) depend on correct

classification and measurement of income based on the capital maintenance concept and

the measurement basis adopted in the operating environment.

The clarity achieved by this practice is best illustrated by the accounting treatment of the

disposal of revalued PPE. A revaluation surplus is deferred in equity via recognition in

OCI in the year of revaluation. The surplus is never reclassified to profit or loss except

to offset an impairment loss on the same asset. The disposal of the asset triggers the

following

i) Recognition of a gain or loss arising on disposal in profit or loss. Rationale: the

disposal is deemed to be a management decision about how the remaining

carrying value is to be recovered. If management’s judgement is to recover the

carrying value through continuing use then if the asset is obsolete (or becoming

so), they might incur a cost in terms of loss of competitive edge manifesting

itself in reduced sales or higher costs relative to competitors. The decision to

- Be prepared to explain the role of capital and capital

maintenance concepts; be prepared to perform simple

calculations to compare the effects of adopting different

capital maintenance concepts on reported profits. Refer to

examples in The maths of B.1. What is a suitable capital

maintenance concept? (Ch8)

- Another significant issue is financial performance? What

is it and how should it be measured and presented? What is

the relationship between profit or loss and other

comprehensive income? Refer to paragraphs 7.92 to 7.27

and BC7.24 to BC 7.57. Use the structure of the profit or

loss to organise your evaluation of its usefulness. Justify

the use of a separate statement for other comprehensive

income in terms of enhancing the relevance of the profit or

loss.

- Should profit or loss be defined? It is only an aggregation

of disparate components: operating, investing and financing

(the value drivers – the drivers of cash in and out of the

business). The profit or loss is structured around these

components; this underscores the fact that “performance”

is about cash generation – how it is used and how it is

obtained. Profit or loss is not an independent performance

marker in that it cannot be “observed” and evaluated as

correct – hence the precision of a definition would be

inappropriate to its function and interpretation. There is no

benchmark for gauging what the profit of an entity should

be. A definition of “profit or loss” can do little to rectify

that; hence it would have limited significance in terms of

helping users understand the financial performance of the

business.

- In its present formulation the concept of profit or loss

fulfils, within the requirements of the accounting model, the

role of indicator of whether financial capital is maintained.

It reflects the application of IFRS-compliant accounting

policies which have in-built safeguards against the erosion

of capital – an essential condition of profit recognition. For

example, gains (and losses) arising from assets held for sale

are market-tested as a condition of their recognition in

profit or loss (IFRS 9 derivatives classified as held for

sale); IFRS 5 requires assets classified as held for sale to be

measured at the lower of cost (or carrying value) and fair

value less cost to sell; IAS 2 requires inventory to be

measured at the lower of cost and net realisable value

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retain or to replace is therefore critical to improving or maintaining operating

performance and its effects must form part of the results upon which the

management’s performance is measured and evaluated.

ii) Transfer of any balance of surplus in equity direct to retained earnings

(movement due to form i.e. gain arose from property prices alone, without

management intervention, hence it should be excluded from profit or loss being

a performance measure or the basis for performance measurement).

Performance measures such as EBIT, EBITDA, ROCE, etc. depend on the results of the

entity as depicted in the profit or loss. Hence the conceptual framework for financial

reporting provides extensive guidance on this.

“The principles behind the use of OCI have not been fully determined by the IASB and

they are currently discussing them as part of the Conceptual Framework project.”

Examiner’s report, June 2015 q4aiii

Classification of items between profit or loss and OCI improves the measurement of

performance for the current period. Thus, the concept of "comprehensive income"

results in an income reporting format that is functional in that it enables better

communication to be made to users about the various gains and losses. The bifurcation

of recognised income into “profits” (presented in profit or loss) and “gains” (presented

in OCI) resolves the issue of completeness by providing separately, information about

performance, and other gains to be deferred in equity (as capital maintenance

adjustments), Conceptual Framework for Financial reporting, paragraph 8.7, p79.

The OCI presentation requires separate grouping of

i) items that are expected to be subsequently reclassified to profit or loss.

ii) items such as gains and losses on re-measurement of pension plans that

will never be reclassified to profit or loss

This presentation improves the communication of financial information and the

predictive quality of financial statements.

This paper is very practical; you are encouraged to look at real-life applications of these

concepts and principles in action. Examples

Tesco plc 2013 statement of changes in equity (SOCE):

- reclassification of exchange differences on disposal of a subsidiary

- actuarial losses on defined benefit pension schemes

E&Y 2015 example statement of changes in equity (SOCE)

- presentation of re-measurement gains and losses and rationale for treatment

- equity transaction

- exercise of options: share based-payment and treasury shares, share premium

- equity transactions

- Allocation of additional depreciation on revalued assets

(NRV); IAS 16 requires (market tested) revaluation gains

on assets held for continuing use to be deferred in equity.

- The goal of business activity is to obtain, use, invest and

conserve cash; it is only through cash that other rights and

benefits can be obtained. Therefore, it can be argued that

“cash basis” is the fundamental measurement and reporting

basis (think about IFRS 13 Fair value measurement, IAS

38 Impairment of assets). The accrual basis (which

produces profit or loss) is simply there to enhance the cash

basis. Hence the statement of cash flow (IAS 7) adjusts the

profit or loss (before tax) for items that are noncash, and

changes in working capital, to obtain the cash from

operating activities. This is a more reliable measure of

performance as it will show whether the business is able to

meet its obligations and invest for renewal and growth, and

whether it has significant free cash flow.

- The business model is becoming prominent in corporate

reporting. The Financial reporting Council (FRC) has

published Business model reporting (July 2015) to

encourage the development of business model reporting

and related issues. Sustainability requires integration of the

business model to address financial, environmental and

social concerns. Read PWc’s “Reporting your business

model”. Measurement uncertainty (when the carrying

amounts of assets and liabilities are not directly observed

e.g. through market prices and therefore estimates have to

be used) can be reduced if measures reflect the business

model i.e. the economic substance of transactions depict

how the entity creates value as in IFRS 15 (the entity

recognises revenue when performance obligations are

satisfied), IFRS 9 (measurement of financial liabilities at

amortised cost). To comply with the conceptual framework

“the estimate needs to be properly described and disclosed

(see paragraph 2.20)”. The entity’s business model and its

operating environment provide the necessary information to

achieve that objective. The variety of business models

(reflecting the diversity of business types) requires a mixed-

measurement model to faithfully represent the effects of the

entity’s management of its assets and liabilities in its

statement of financial performance and financial

position. See Concepts of capital, 8.1, Business activities,

p18 of The Conceptual framework for financial reporting

(May 2015)

EXAM PRACTICE QUESTIONS

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1. Describe the structure of the statement of changes in

equity (SOCE).

2. Discuss how the structure and content of the SOCE reflects

the definitions, measurement concepts and classification

guidelines of the conceptual framework for financial

reporting.

3. Explain how the structure and content of the SOCE meets

the qualitative characteristics of the conceptual

framework for financial reporting.

4. Explain why the total amount of the reserves and share

capital in the statement of changes in equity (SOCE) is

not a measure of the value of the entity’s equity (or market

capitalisation).

5. If the mixed-measurement model is an outcome of the

application of capital maintenance concepts to reflect

diverse business models to what extent are general

purpose financial statements useful?

6. According to ED2015/3 Conceptual Framework for

financial reporting (May 2015) “…financial statements are

prepared from the perspective of the entity as a whole…”

This means that the scope of the conceptual framework

overlaps with that of Integrated reporting. Discuss.

7. The following terms are significant in standards issued by

the IASB. Explain what they mean and the principles that

underpin each of them giving examples of their application

in contexts

i) Accounting mismatch

ii) Measurement uncertainty

iii) Measurement inconsistency

iv) Commercial substance

v) Management’s intention

vi) Reasonable and supportable

vii) Fair value option

viii) Substance over form

8. The business model is becoming a central feature of

financial reporting practice.

i) What does business model mean? Use examples from

IFRS 9 or IFRS 15 to clarify your understanding.

ii) Explain the role the business model plays in the

recognition, measurement, presentation and disclosure

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of financial information. Give specific examples from

recent IFRS.

iii) The Financial reporting council (FRC) has initiated a

project about business model reporting. Discuss what

potential contributions to financial reporting practice

can be expected from this initiative.

IFRS for SMEs 4 - This standard has not been examined since December 2010 q4a, b & answer. The

approach to this question would be replicated in future exams. E.g. explain why this

standard has been issued.

- This standard will not be frequently examined because it is a watered down version

of the main IFRS which the major entities apply.

- There is a current IFRS for SMEs. However, the IFRS has recently been undergoing

review and the period has ended. A revised IFRS has been issued in September

2015

- It is essential to be clear about the general issues, problems and solutions addressed

in the study guide sections C.11 albic as these may be examined in relation to other

requirements e.g. ethics and corporate social responsibility. - Topics not relevant for SMEs are omitted. Examples: earnings per share, interim

financial reporting and segment reporting. - Where full IFRSs allow accounting policy choices, the IFRS for SMEs allows only the

easier option. Examples: requiring a cost model for investment property unless fair value is readily available without undue cost or effort.

- Many principles for recognising and measuring assets, liabilities, income and expenses in full IFRSs are simplified. For example, amortise goodwill; expense all borrowing and R&D costs; cost model for associates and jointly-controlled entities; and no available-for-sale or held-to-maturity classes of financial assets.

- Significantly fewer disclosures are required (roughly a 90 per cent reduction). - The Standard has been written in clear, easily translatable language.

- To further reduce the burden for SMEs, revisions to the IFRS are expected to be limited to once every three years.

Questions will be in the nature of a critique of the usefulness of

this standard.

- Has it compromised too much? Does it adequately reflect

the purpose of financial statements e.g. “fair

presentation”? Does it comply with the conceptual

framework principles of faithful representation and

relevance?

- You should be prepared to refer to specific aspects and to

discuss their suitability using the criteria of the conceptual

framework.

- Be prepared also to evaluate whether this standard reflects

the trend towards integrated reporting.

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March 2017 Exam Guidance

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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. You may find this supplementary practice programme useful. 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 method of calculation and

implication of:

Analysis of profit: owners and NCI

Analysis of profit and OCI: owners

and NCI

Changes in NCI

Changes to presentation e.g. IAS 1

Deferred tax

Disclosure initiative

Employee benefits – discount rate

Employee benefits – past service cost

adjustment

Employee benefits – re-measurement

of pension obligation

Errors, changes in accounting

estimates and policies

Fair value adjustment,

Foreign currency adjustments and

attribution of gain or loss arising from

the retranslation of goodwill?

Goodwill on acquisition

Group restructure

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 frequently 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 2,3,5,9,10,11. 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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Impairment adjustment and deferred

tax consequences

Inventory (w/down) e.g. q1a March

2016

Loss on disposal of a subsidiary

Negative goodwill,

Onerous contract e.g. q1a March 2016

Partial goodwill method,

Property (operating IAS

16/investment IAS 40): purchase,

disposal, impairment, revaluation

Provisions e.g. warranty,

restructuring, decommissioning (and

the effect of changes in estimates of

liabilities)

Recognition of revaluation gain at

acquisition date (e.g. of investment in

associate as in q1a note1.i December

2014)

Reclassification adjustment

Retained earnings

Revaluation adjustment

Revenue recognition

Time apportionment

Ability 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 argumentation

Continuing involvement

Group structure

Key words & terms

Management intention

Mark scheme

Nuanced

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 situation

Accounting scenarios

Accounting policies

Accounting question

Accounting policies, changes in accounting estimates and

errors.

Accounting theory

Application

Capital, equity and net assets

Conceptual framework

Heed the warning about overconfidence above.

Read:

How to write for P2

When you practise your aim should be to clarify 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

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Point

Substance

Waffle

Words

“What-if” questions

Wide and Deep discussion

Writing

Also, use the P2- colour codes to

annotations that explains how to respond

to and use scenario details.

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.

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 structures

Control 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 P2TT

Ethics, ethical issues & dilemma

Corporate social responsibility

Interpretation

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

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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

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 P2TT

Accounting context and situation

Accounting scenarios

Accounting policies

Accounting question

Accounting policies, changes in accounting estimates

and errors.

Accounting theory

Application

Business

Capital, equity and net assets

Cash and cash equivalent

Conceptual framework

Contingent consideration

Craft

Credits

Convergent and divergent thinking compared.

Debits

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

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Duality

IAS 8 Hierarchy

Issues

Journal entries

Mark scheme

ALLOWED TIME. THE COMPUTATIONS ARE LIKELY TO

BE VERY BASIC AND FEWER THAN FOR Q1A. IT IS MORE

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. pertaining to one

industry such as telecommunications.

Specialist industrial knowledge is not

required but the requirements of

relevance and faithful representation

dictate which IFRS is to applied or

which particular option of an IFRS is to

be selected.

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.

Refer to G-H above.

IFRS 15 is a strong current issue given its profile and its upcoming

effective date on 1 January 2018. Some possible areas are

identified under IFRS 15 above.

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 professional judgement, conceptual framework,

learning in-depth. Be prepared for a questions based on ED 2015/3.

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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

(business model); 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 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 strategy

IASB work plan - annotated

Examinable 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

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(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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PLEASE DO OTHERS A FAVOUR If 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:

Sekoyensolutions@gmail.com. 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?