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Notes
ACCA Paper P2
Corporate Reporting
To be used with the BPP Study Text for exams in 2012 (2011 edition)
ii
CONTENTS
chapter 1
FINANCIAL REPORTING FRAMEWORK
page 1
chapter 2
PROFESSIONAL AND ETHICAL DUTY OF THE
ACCOUNTANT
page 9
chapter 3
ENVIRONMENTAL AND SOCIAL REPORTING
page 21
chapter 4
NON-CURRENT ASSETS
page 31
chapter 5
EMPLOYEE BENEFITS
page 47
chapter 6
INCOME TAXES
page 59
chapter 7
FINANCIAL INSTRUMENTS
page 69
chapter 8
SHARE-BASED PAYMENT
page 83
chapter 9
PROVISIONS, CONTINGENCIES AND EARP
page 89
chapter 10
RELATED PARTIES
page 95
chapter 11
LEASES
page 99
chapter 12
REVISION OF BASIC GROUPS
page 111
chapter 13
COMPLEX GROUPS
page 131
chapter 14
CHANGES IN GROUP STRUCTURES
page 139
chapter 15
CONTINUING AND DISCONTINUED
INTERESTS
page 147
chapter 16
FOREIGN CURRENCY TRANSACTIONS
AND ENTITIES
page 155
chapter 17
GROUP STATEMENTS OF CASH FLOWS
page 169
chapter 18
PERFORMANCE REPORTING
page 177
chapter 19
CURRENT DEVELOPMENTS
page 201
chapter 20
REPORTING FOR SPECIALISED ENTITIES
page 209
chapter 21
REPORTING FOR SMALL AND MEDIUMSIZED ENTITIES
page 217
chapter 22
CHAPTER LEARNING EXAMPLES
page 221
chapter 23
ANSWERS TO CHAPTER LEARNING
EXAMPLES
page 241
Introduction
iii
iv
chapter 1
REGULATORY FRAMEWORK
CONCEPTUAL FRAMEWORK
REVENUE RECOGNITION
FINANCIAL
REPORTING
FRAMEWORK
REGULATORY FRAMEWORK
2
Regulatory
framework
Conceptual
framework
Regulatory framework
International Accounting Standards
European Union
IASC Foundation
Trustees
Stock Exchange
International
Standing
Standards
Accounting Interpretations Advisory
Standards
Committee
Council
Board
(SIC)
(SAC)
(IASB)
Revenue
recognition
Other
National laws
Take precedence over
IASs/IFRSs
OECD
Undertakes its own research
into accounting standards, via
ad hoc working groups,
issuing guidelines for
members
Context
The regulatory framework consists of the different entities responsible for standard setting that
report to the IASC Foundation. Additionally, other regulatory bodies include stock exchanges and
the European Union.
CONCEPTUAL FRAMEWORK
Regulatory
framework
Conceptual
framework
Conceptual framework a statement of generally accepted theoretical principles which form the
frame of reference for financial reporting.
Advantages
Avoids patchwork or firefighting approach
Less open to criticism of political/external
pressure
Some standards may concentrate on the
income statement, others on the SOFP
Disadvantages
Financial statements are intended for a variety
of users single framework may not suit all
May need different standards for different
purposes
Preparing and implementing standards is still
difficult with a framework
Revenue
recognition
Context
The conceptual framework is an essential part of effective financial reporting. It provides the
framework from which accounting standards can be developed and provides a basis for dealing with
transactions that are not covered by an accounting standard.
Solution 1.1
REVENUE RECOGNITION
Regulatory
framework
Conceptual
framework
Revenue
recognition
IAS 18
Revenue is that which arises in the course of ordinary activities such as that from sales, services provided,
interest, royalties and dividends.
Measurement
Includes only those amounts receivable by the entity on its
own account. Not sales, goods and sales tax collected by
agent to be passed to the principal.
Recent Developments
IAS 18 was amended to give guidance on whether an entity
acts as principal or agent. In addition, an ED issued in June
2010 proposes changes to the accounting for revenue
recognition in contracts with customers.
Recognition
Goods
Services
Disclosure
Accounting policy for each recognition; the amount of each significant category of revenue; amount of revenue
from exchange of goods or services.
Context
IAS 18 is a comprehensive accounting standard dealing with the recognition of revenue in specific
transactions.
Reinforcement
Study Text Chapter 1
Expand notes on the conceptual framework discussion paper (para 4.7) as this
is a key current issue and revenue recognition (section 5.2)
chapter 2
ETHICAL THEORIES
INDIVIDUAL INFLUENCES
ETHICS IN ORGANISATIONS
PROFESSIONAL ETHICS
PROFESSIONAL
AND ETHICAL
DUTY OF THE
ACCOUNTANT
9
ETHICAL THEORIES
Ethical theories
Individual
influences
Professional
ethics
Ethics in
the exam
Objective standards
Deontological ethics
Egoism
Act is ethically justified if decision-makers pursue
short-term desires or long-term interests (justification
for free market).
10
Ethics in
organisations
Pluralism
Different views may exist but it should be possible to
reach a consensus; morality is a social phenomenon.
Context
This section goes beyond the ethics of professions like accountancy to consider what makes a good
decision good. The practical value of this discussion to the Professional Accountant is:
A very important control is being able to trust staff to act ethically but do they understand
the same thing by ethical as management does?
What is regarded as ethical business around the world may vary and getting it wrong could
lose business or cause offence, even imprisonment.
We should agree to the payment because at least we will build the roads and bridges
properly which is more than can be said for the other bidders and they would certainly pay
the bribe.
(b)
We should not pay the money. Its a bribe and it means that our company would be helping
the minister abuse his position as an elected officer of the people.
(c)
We should not pay the money, despite it being a very good contract, because it breaks our
rules on not paying inducements that on the whole avoid our sales team from getting
involved in offering bribes all over the place.
(d)
We should agree to the payment because the winning of the contract will improve our share
price and our share options fall due soon.
(e)
We should not pay the money because we wouldnt like it if our government ministers took
bribes and left us paying too much for roads and bridges.
(f)
We should pay the money because in that part of the world it's how business is done and
everyone knows it. Not paying would look like an insult to the minister and his country.
Solution 2.1
11
INDIVIDUAL INFLUENCES
Ethical theories
Individual
influences
Professional
ethics
Ethics in
the exam
Psychological factors
Locus of control
Influence individuals believe they have over their own
lives.
Internal individuals have significant influence
External lives shaped by luck/ circumstances
Moral development
Morality
12
Ethics in
organisations
Context
These are the sources of moral beliefs and how we account for the different moral behaviour of
others.
This is a very good company and a good client. There is very little chance of anyone
losing any money or us getting criticised if we go ahead and sign.
Partner B
I agree with Partner A but for a different reason. If we qualify the report it will cause
the clients share price to fall and they will start to lose investors and clients. We will
damage a good business and cause people to lose their jobs for the sake of a small
accounting technicality that really doesnt matter.
Partner C
I agree with you both but I cant go along with the idea of signing. The whole reason
investors accept accounts is because firms like GGG have independently audited them.
If we simply turn a blind eye to this and bend the rules we undermine the whole basis
of our profession and betray public confidence.
Solution 2.2
13
ETHICS IN ORGANISATIONS
14
Ethical theories
Individual
influences
Ethics in
organisations
Professional
ethics
Ethics in
the exam
Ethics
A code of moral principles that people follow with respect to what is right or wrong
Ethical systems
Personal ethics eg deriving from upbringing
or political or religious beliefs
Professional ethics eg medical ethics
Organisation culture
Organisation systems may be in a formal
code reinforced by the overall statement of
values
Not necessarily
enforced by law
Two approaches
Compliance based ensures that the company
acts within the letter of the law. Violations are
prevented, detected and punished.
Integrity based combines a concern for the law
with an emphasis on managerial responsibility
for ethical behaviours. Strives to define
companies guiding values, aspirations and
pattern of thought and conduct.
Context
Ethics in organisations is of utmost importance, relating to social responsibility and business
practice.
15
PROFESSIONAL ETHICS
Ethical theories
Individual
influences
Ethics in
organisations
Professional
ethics
Ethics in
the exam
This lays out ACCAs rules stating the ethics and behaviour required by all
members and students of the ACCA. Guidance is in the form of fundamental
principles (see below), specific guidance statements and explanatory notes.
Integrity
Members should be straightforward and honest in all business and professional relationships.
Objectivity
Members should not allow bias, conflicts of interest or undue influence of others to override
professional or business judgements.
Professional
competence
and due care
Members have a continuing duty to maintain professional knowledge and skill at a level required to
ensure that a client or employer receives competent professional service based on current
developments in practice, legislation and techniques. Members should act diligently and in accordance
with applicable technical and professional standards when providing professional services.
Confidentiality Members should respect the confidentiality of information acquired as a result of professional and
business relationships and should not disclose any such information to third parties without proper or
specific authority or unless there is a legal or professional right or duty to disclose. Confidential
information acquired as a result of professional and business relationships should not be used for the
personal advantage of members or third parties.
Professional
behaviour
16
Members should comply with relevant laws and regulations and should avoid any action that
discredits the profession.
Context
The key reason that accountants need to have an ethical code is that people rely on them and their
expertise.
17
Ethical theories
Individual
influences
Ethics in
organisations
Professional
ethics
Ethics in
the exam
Ethics are most likely to be considered in the context of the accountants role as adviser to the directors.
A question on the Pilot Paper asked you to explain why a deliberate misrepresentation in the
financial statements was unethical.
18
Context
Ethical issues are most likely to be examined in Question 1 of the exam paper, the 50 mark case
study question.
19
Reinforcement
Study Text Chapter 2
20
chapter 3
ENVIRONMENTAL REPORTING
SUSTAINABILITY
SOCIAL RESPONSIBILITY
ENVIRONMENTAL
AND SOCIAL
REPORTING
21
ENVIRONMENTAL REPORTING
Environmental
reporting
Sustainability
Social
responsibility
Environmental accounting
Environmental issues are likely to have a growing impact on business in the future due to forthcoming
legislation, consumer pressure and so on.
Recognising and seeking to mitigate the negative environmental effects of conventional accounting practice
Separately identifying environmentally related costs and revenues within the conventional accounting
systems
Taking active steps to set up initiatives in order to ameliorate existing environmental effects of conventional
accounting practice
Devising new forms of financial and non-financial accounting systems, information systems and control
systems to encourage more environmentally benign management decisions
Questions on environmental accounting are a good bet you can always write something!
22
Human resource
accounting
Context
Environmental reports are not compulsory, but many companies publish them as they wish to set
out their policies regarding the environment to their stakeholders.
Solution 3.1
23
SUSTAINABILITY
Environmental
reporting
Sustainability
Social
responsibility
Human resource
accounting
GRI guidelines
1
Profile
Performance indicators
Economic
An increasing number
of companies follow
GRI guidelines
eg Shell, BA
24
Environmental
Social
Context
Sustainability reporting is wider in scope than environmental reporting as it focuses on
environmental and social measures.
25
SOCIAL RESPONSIBILITY
Sustainability
Environmental
reporting
Social
responsibility
Human resource
accounting
Few organisations would admit to being irresponsible. However, social responsibility as practised by business is
controversial. A socially responsible business engages in activities and incurs costs not very relevant to its
business mission but which benefit society or groups within it.
Examples
Charitable donations
Secondment of staff to voluntary organisations
Imposing stricter pollution limits than required
by law
Refusing to deal with suppliers who employ
child labour
The stakeholder view of company objectives is that many groups of people have an interest in what the company
does. Management must balance the profit objective with the pressures from the non-shareholder groups.
26
For
Context
There is an argument that businesses have a responsibility beyond that of reporting to
shareholders, in that they have a social responsibility towards their environment.
27
Environmental
reporting
Basic principle
Sustainability
Social
responsibility
Human resource
accounting
Implications
Human asset accounting was developed, later broadened into intellectual assets.
Context
Human resource accounting is an approach which regards people as assets. An entity can gain a
competitive advantage by the effective use of the people within the organisation.
29
Reinforcement
Study Text Chapter 3
30
Read through the examples of environmental reports and case studies within
this chapter
chapter 4
DEFINITION OF AN ASSET
IMPAIRMENT
INVESTMENT PROPERTY
IAS 38
GOODWILL
This chapter covers the accounting standards on noncurrent assets property, plant and equipment,
government grants, investment property, borrowing
costs, impairment and intangible assets and goodwill.
NON-CURRENT
ASSETS
31
DEFINITION OF AN ASSET
Definition of
an asset
IASs 16,
20 and 23
Impairment
32
Investment
property
IAS 38
Goodwill
Key points
Future economic benefit
Control
Transaction to acquire control has taken place
Context
The Framework defines the elements of financial statements which are of key importance.
4: Non-current assets
33
IASs16, 20 AND 23
Definition of
an asset
IASs 16,
20 and 23
Impairment
Investment
property
IAS 38
Goodwill
PPE must be written down where necessary to its recoverable amount following IAS 36.
Subsequent expenditure (repairs and maintenance) must be recognised in profit or loss as it is incurred,
unless:
It enhances the economic benefits
A component of an asset that is treated separately for depreciation purposes has been restored or replaced
It relates to a major inspection/ overhaul restoring economic benefits consumed and reflected in depreciation
Depreciation
Main points
Other points
Subsequent measurement
Cost model: is cost less accumulated depreciation and impairment losses. Revaluation model: carry at a
revalued amount less subsequent accumulated depreciation/impairment losses.
34
Context
IAS 16 is a key accounting standard dealing with the basics of recognising and measuring noncurrent assets.
Solution 4.1
4: Non-current assets
35
IASs16, 20 AND 23
Revaluation
There was a problem in the past with cherry picking
for revaluation. Also, valuations became out of date.
Under the allowed alternative of IAS 16, revaluing
assets is still optional, but:
Revaluations gains are credited to a revaluation surplus except to the extent that they reverse revaluation
decreases of the same assets in which case P/L for the year
Revaluation decreases are charged
First against any revaluation surplus relating to the same asset
Thereafter in profit or loss
36
Accounting entries
Revenue grants
Debit
Cash
Credit
P/L
In expenditure period
Capital grants
Debit Cash
Credit Deferred income
Or Asset account
Release to P/L over
expected useful life
Context
Revaluation of non-current assets is an important area of accounting for non-current assets.
Government grants are funds provided to an entity for a specific purpose.
Borrowing costs are finance costs that are capitalised into the cost of a non-current asset.
4: Non-current assets
37
IMPAIRMENT
Definition of
an asset
IASs 16,
20 and 23
IAS 36
Only review assets for impairment
if there are indicators of it, eg:
Decline in market value
Adverse change in market,
technology, economics or law
Increased interest rates
Fall in value below carrying
value
Obsolescence or physical
damage
Change in use
Poor performance
If possible test individual assets,
otherwise cash generating unit
(CGU)
Impairment
Investment
property
Goodwill
IAS 38
May be reversed if
events causing it
reverse
An impairment loss
recognised for
goodwill is not
reversed.
38
Context
IAS 36 aims to ensure that an asset is not carried in the statement of financial position at more
than its recoverable amount.
4: Non-current assets
39
INVESTMENT PROPERTY
Definition of
an asset
IASs 16,
20 and 23
IAS 38
Goodwill
IAS 40
An investment property is property (land or building) held to earn rentals or for capital appreciation or both, rather
than for:
Use in the production or supply of goods or services or for administrative purposes
Sale in the ordinary course of business
Accounting treatment
Exceptions
40
Investment
property
Impairment
Disclosures
Context
IAS 40 Investment properties provides guidance on dealing with assets held for investment rather
than for use in the business.
4: Non-current assets
41
IAS 38
Definition of
an asset
IASs 16,
20 and 23
Investment
property
Impairment
IAS 38
Goodwill
IAS 38
Intangible assets deals with research and development costs, as well as intangible assets.
Measurement
Initial measurement
R&D, as above
Purchased intangible
assets capitalised at
cost
Subsequent measurement
Cost model: cost less
accumulated depreciation and
impairment losses
Revaluation model: revaluation
Amortisation
Systematic over useful life
At least annual review of UL and amortisation period
Intangibles with indefinite useful life are not amortised but
reviewed at least annually for impairment
42
Circumstances
Probable future economic benefits
Intention to complete and use/sell
Resources adequate to complete and
use/sell
Ability to use/sell
Technical feasibility
Expenditure can be reliably measured
Context
IAS 38 defines intangible assets as non-monetary assets without physical substance.
Solution 4.8
4: Non-current assets
43
GOODWILL
Definition of
an asset
IASs 16,
20 and 23
Impairment
Investment
property
IAS 38
Goodwill
Goodwill can be purchased or be acquired as part of a business combination. In either case, the treatment is
capitalisation at cost or fair value under IFRS 3.
Bargain purchase
A bargain purchase arises when the fair value of the
acquisition-date identifiable net assets acquired exceeds the
consideration transferred.
Before recognising a gain on bargain purchase, the
acquirer must reassess whether it has correctly identified
all the assets acquired and liabilities assumed.
Then the acquirer must review the procedures used to
measure the amounts recognised for:
- Identifiable net assets
- Non-controlling interest (if any)
- Interest previously held (if any)
- Consideration transferred
44
Definition
Future economic benefits arising from assets
that are not capable of being individually
identified and separately recognised
Recognise as an asset and measure at
cost/excess of purchase cost over
acquired interest
Do not amortise
Test at least annually for impairment
(IAS 36)
You may be asked for a complicated
calculation of goodwill as part of a group
accounts question.
Context
Purchased goodwill is recognised on the statement of financial position as an intangible asset.
4: Non-current assets
45
Reinforcement
Study Text Chapter 4
46