March 2017

Exam Guidance for ACCA Paper P2

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March 2017 Exam Guidance

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

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

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

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

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

A.1 Professional behaviour and compliance with accounting standards

1c “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.

Students invariably perform abysmally because they fail to recognize and develop the required competences. The discursive type questions are determined by the syllabus requirements which include the verbs “appraise”, “assess” and “discuss”. The learning

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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March 2017 Exam Guidance

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

Students invariably perform abysmally 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 approachList 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.

- 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

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

- 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

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March 2017 Exam Guidance

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

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 changeThe drivers for change include:- 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

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

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

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March 2017 Exam Guidance

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 raisedBecause 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 responseThe 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.

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.

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- Innovation in corporate reporting- Integrated reporting- Legitimacy theory- Restructuring provisions- Social benefits- Social costs- Stakeholder theory- Sustainability- Transparency- Value-added

Exam practice questions1. 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.

Required2.1 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 ©2015-2017 Sekoyen Accounting Solutions Ltd. All rights reserved

March 2017 Exam Guidance

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 standardsSocial 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 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

not be able to reflect the social and environmental impact of organizations. See G.1 below

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discuss from the perspectives of the business and its stakeholders at least one CSR report. Examples:

ACCA and sustainabilityVodafone: 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.

- 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

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 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

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March 2017 Exam Guidance

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)- 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

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 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

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- 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?

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 practice11. 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 Board IASB and preparers of financial reports strive.” Paragraph 1.11, 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.

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

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March 2017 Exam Guidance

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.

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

Exam practice suggestionTo 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

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

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March 2017 Exam Guidance

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)

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

- 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).

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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 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

-

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

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.

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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 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).

- 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 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

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- 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 15Dividends received (from an associate) 5Net 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 1.5.42015 Tesco plc reconciliation of profit before tax to cash generated from operations 1.5.52015 Tesco plc statement of changes in equity 1.5.62015 Tesco plc Note 31 Business combinations and acquisitions 1.5.7

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)

You may buy essential revision and practice resources from leading expertsThe Expert Accounting Student by Kieran MaguireACCA P2 topic 6 group cash flows

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

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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 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

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. Theweighting of the marks was heavily towards the discursive aspect of the question and many candidates failed togain these marks, particularly as regards the examples as very few practical examples were given. This questiondemonstrates 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 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

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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 POLICYIt 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 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

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

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

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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.

ReadStudy text

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 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

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.

- 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.

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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.

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.

- 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.

- 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);- 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

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- 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 15Note 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- 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

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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 recognitionDR 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 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.

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?

- 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

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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 objectivesThese 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- 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)

Suggested exam practice approachStart 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).

- 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.

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- 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 knownRead 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 articleThere 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.

- 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

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

IAS 20 Accounting for Government

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

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.

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grants and Disclosure of Government Assistance

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- 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.

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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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 transactionsIt 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.

TranslationThe 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.

- 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).

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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- 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.

- 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

WHAT YOU SHOULD EXPECTAs 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.

- 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.

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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 issuesWhich 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 activitiesNecessary 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 issuesBorrowing 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 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

- 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 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.

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March 2017 Exam Guidance

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.

- 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 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

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 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

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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.

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 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

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 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

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(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.

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: i) 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.

Read:The technical article: Provisions by Martin Jones, Lecturer, London School of Business and Finance.The study text: Provisions, contingent liabilities and assets,

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

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

Further practice questions:- December 2016 q2b (answer): application of basic

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March 2017 Exam Guidance

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

- 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

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

- 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”

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 grant 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.

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)

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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 COVERSThe 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 COVERThe 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)- 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.

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 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

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THE MAIN ISSUES YOU MUST ADDRESSAgricultural 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.

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

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.

ADDITIONAL PRACTICE QUESTIONS

The maths of IAS 41

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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 grantsThere 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.

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 basisBiological 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

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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 basisIn 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)

- 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).

- 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)- 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

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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 paymentTechnical article

- 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 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

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 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

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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 impaired in accordance with IAS 36.

- 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. 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

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.

- 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

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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 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 - 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,2,3 - 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 examiner’s central concern for candidates to be able to apply basic principles to scenario given in the question. Under what circumstances can separate operating segments be combined? 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

Past questions for practice:- Jun 2015 q3a & answers dissimilar operating segments

based on qualitative characteristics.- 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.

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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 is more useful. So professional judgement must be exercised: see June 2013 q2a & answer for an illustration of the intellectual level at which questions should be answered.

- 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).

- 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.

- Dec 2011 q1b & answer (issues in the allocation of common costs to operating segments)

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 PRACTICEHow 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 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 standardThe 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.- 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

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.- Mar 2016 q1b (answer); q3a (answer)- Dec 2015 q3b (answer): financial and executory contracts

(what is the difference; what are the differing accounting

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March 2017 Exam Guidance

- 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

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

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 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.

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)

- 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” &

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March 2017 Exam Guidance

- 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.

“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.

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

Past ACCA P2 questions for practice:- December 2015 q3a (answer)- September 2015 NOT EXAMINED- Dec 2014 q1a & answer - Dec 2012 q1a.5; q1a.9 & answer- Dec 2012 q2c & answer

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March 2017 Exam Guidance

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.

- Jun 2012 q1a & answer

WHAT TYPE OF QUESTION SHOULD YOU EXPECT?1. Acquirer: expect basic questions along the lines of IFRS 32. 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 transferiii) 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, c2,3,4

- 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.

- 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:

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

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March 2017 Exam Guidance

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 endless application issues to be addressed 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”;

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 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.

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March 2017 Exam Guidance

- 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- 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

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

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

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March 2017 Exam Guidance

(effective 1 January 2018)

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 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

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 financingcomponent 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

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.

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March 2017 Exam Guidance

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)- 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.

- 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 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

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March 2017 Exam Guidance

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).

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- 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

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March 2017 Exam Guidance

- 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 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 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 Past questions for practice

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financial reporting 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.

- 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

- 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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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 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

Questions for practice

MAINTAIN EXISTING COMPANYa) Evaluation of options to i) liquidate or ii) to continueb) 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

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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. 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).

value).

TRANSFER OF ASSETS TO A NEW COMPANYWORKBOOKSee worked example – reconstruction new companyExam 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):

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:

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 EXPECTYou 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

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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).

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 15Revenue-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

(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 ISSUESAccounting control for effective: - Recognition- Measurement- Presentation- Disclosure

CROSS CUTTING ISSUESBetter communicationCorporate social responsibilityCost constraintIntegrated reporting Performance measurementProfessional competence e.g. judgement and commercial awareness

TECHNOLOGYEnabling implementation, facilitating integrated reportingPromoting efficiency and reducing human errorProviding access to information for transparency

RELATIONSHIP MAINTENANCECovenant arrangementsInvestor and creditor protection

INTERPRETATIONSAlways 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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March 2017 Exam Guidance

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- 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

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March 2017 Exam Guidance

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.

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 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 reportsAs 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.

WHAT YOU SHOULD EXPECTA 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.

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

March 2017 Exam Guidance

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.”

“The lesson which should be learned by candidates is that the scenario is important as it helps answer the question”

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

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

WHAT YOU SHOULD EXPECTQuestions 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.

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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 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 ofcorporate 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

The multifaceted thematic approachThe 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)- 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 that explains and guides 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

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March 2017 Exam Guidance

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 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

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 treatmentsYet 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 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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March 2017 Exam Guidance

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 errorsIAS 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.

“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)

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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 mechanised 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?

- 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

- 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.

- 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

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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 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

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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 reportingPurpose 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 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 reportIn 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 basisAccording 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 acceptabilityThe scope of CSR reports tends to cover financial and nonfinancial, quantitative and

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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 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.

- 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.

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

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Additional readingH.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?

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

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 4 The examiner has advised that this is not a rote learned area. You can take from this that WHAT YOU SHOULD EXPECT©2015-2017 Sekoyen Accounting Solutions Ltd. All rights reserved

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

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

“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 operationii) 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

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).

- 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). The profit or loss is structured around these components; this underscores the fact that “performance” is about cash – how it is used and how it is obtained. 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 “cash basis” is the fundamental measurement and reporting basis (think about IFRS 13 Fair value measurement, IAS 38 Impairment of assets). The accrual basis is simply there to enhance the cash basis. Hence the

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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 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 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).

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

statement of cash flow (IAS 7) adjusts the operating profit for items that are noncash and changes in working capital to obtain the cash from operating activities.

- 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 effect 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 QUESTIONS1. 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

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This presentation improves the communication of financial information and the predictive quality of financial statements.

This paper is very practical in nature; you are encouraged to look at real-life applications of these concepts and principles in action. ExamplesTesco 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

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 mismatchii) Measurement uncertaintyiii) Measurement inconsistencyiv) Commercial substancev) Management’s intentionvi) Reasonable and supportablevii) Fair value optionviii) 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 of financial information. Give specific examples from recent IFRS.

iii) The Financial reporting council (FRC) has initiated a project about financial 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.

Questions will be in the nature of a critique of the usefulness of this standard. - Has it compromised too much? Does it adequately reflect

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March 2017 Exam Guidance

- 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.

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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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

requirementsRationale 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 NCIAnalysis of profit and OCI: owners and NCIChanges in NCIChanges to presentation e.g. IAS 1Deferred taxDisclosure initiativeEmployee benefits – discount rateEmployee benefits – past service cost adjustmentEmployee benefits – re-measurement of pension obligationErrors, changes in accounting estimates and policiesFair value adjustment, Foreign currency adjustments and attribution of gain or loss arising from the retranslation of goodwill?Goodwill on acquisitionGroup restructureImpairment adjustment and deferred

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

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

The examiner always observes that students run out of time because they spend too long on this question. This guide aims to help you take control through strategic preparation: set clear practice goals, harness relevant resources to the task, practise, reflect and articulate what you learn and decide the order in which you are going to attempt the questions on the day of the exam. Are you struggling to complete q1a? The particular challenge of this section is to carry out many calculations at an average speed of 1.5mins/mark. It is essential that your practice average is within this target otherwise you are going to struggle in the exam. You will likely overrun on this question and consequently mess up the entire exam time allocation if you are not averaging 1.5 mins/mark. If you are struggling, as most students are, here is the solution. Do you remember the learning curve effect? The average time required per mark declines with the number of repeated attempts at a question. Apply this principle to the problem of lack of speed:Select and practise by IFRSs repeatedly e.g. IAS 8,12, 16, 17, 19, 21, 28, 36,38,40; IFRS 2,3,5,9,10,11. 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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tax consequencesInventory (w/down) e.g. q1a March 2016Loss on disposal of a subsidiaryNegative goodwill, Onerous contract e.g. q1a March 2016Partial goodwill method, Property (operating IAS 16/investment IAS 40): purchase, disposal, impairment, revaluationProvisions e.g. warranty, restructuring, 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 adjustmentRetained earningsRevaluation adjustmentRevenue recognitionTime apportionmentAbility to raise journal entries to record the effects of the above transactions, conditions and other events.

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

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

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

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

Heed the warning about overconfidence above.

Read: How to write for P2

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

The analysis and evaluation are qualitative. The principles of practice apply equally as above. Make sure you know the conceptual framework of financial reporting and how it applies to specific financial transactions. There is a lot of work being done at

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SubstanceWaffleWords“What-if” questionsWide and Deep discussionWriting

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

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

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

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

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

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

The principles of practice apply equally as above.

DO THIS QUESTION AFTER QUESTION 1b. DON’T BE TEMPTED TO SKIP IT. Analyse the scenario to understand what has happened or is about to happen. Underline the key words (that depict managerial decisions and intentions in response to commercial needs and pressures) and consider if they (actually or potentially) transgress ethical principles. If they do then say so; also explain the consequences and how and why the accountant should

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March 2017 Exam Guidance

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 P2TTAccounting context and situationAccounting scenariosAccounting policiesAccounting questionAccounting policies, changes in accounting estimates and errors.Accounting theoryApplicationBusinessCapital, equity and net assetsCash and cash equivalentConceptual frameworkContingent considerationCraftCreditsConvergent and divergent thinking compared.DebitsDuality

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

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

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

ANSWER THIS QUESTION FIRST IF YOU ARE GOOD WITH THIS TYPE OF QUESTON BUT YOU ARE NOT MEETING THE SCORE TARGET FOR Q1A. IN THIS TYPE OF QUESTION YOU ARE LESS LIKELY TO OVERRUN THE ALLOWED TIME. THE COMPUTATIONS ARE LIKELY TO

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IAS 8 HierarchyIssuesJournal entriesMark scheme

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.

IAS 1 Presentation of financial statements is topical because of the Disclosure initiative. This standard has wide application and it

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March 2017 Exam Guidance

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 strategyIASB work plan - annotatedExaminable documents - annotated

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

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

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

Read each question carefully; always underline key words and ponder their meaning in context. Think about the whole answer before you start writing. After you start writing read the question again to make sure you are on track. One way to check your understanding is accurate is to always challenge yourself with a “what-if” question. So, if you initially think the transaction is a grant (IAS 20) ask yourself: what if it is not? What else can it be? This forces you to read the question again closely. It could have been a

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March 2017 Exam Guidance

transfer of property by a customer in which case it is not a grant but a transfer accounted for under IAS 16, 37, IFRS 15 (see above under IAS 16). Likewise, you should be able to distinguish between a “transfer” and an “exchange” of PPE.

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

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

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March 2017 Exam Guidance

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