SCHOOL OF MANAGEMENT AND LANGUAGES

Tutorials: Student Copy

Questions
Contemporary Issues in Financial
Accounting
C39CA

Author: Kate Clements

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Introduction

This booklet should be read in conjunction with the course handbook. References to the
course textbook refer to Melvilles International Financial Reporting (5th edition). Access to
this book is essential for reading and questions. It is available as a print book and as an
ebook.

This booklet contains details about the topics for each week, along with details of the
associated reading you should be doing to support what you have learnt in the lectures and
questions to confirm and consolidate your understanding of the topics.

To do well in the exam, you must read the relevant essential weekly reading from the course
text book and attempt all the tutorial questions before the tutorial. The multiple choice
questions on the Melville companion website provide a very good test of your understanding
and recall. The tutorial then provides an opportunity for discussion of some of the more
complex issues and clarification of any confusion over different aspects of the topic /
computations. If you are aiming to get a first class honours degree, you should also read at
least one recommended journal article each week to get a wider perspective on the subject.
Building up experience of reading journal articles will also help you if you progress to year 4
and undertake a dissertation.

There are some topics for which there are no class tutorials. These are topics which are
generally more straightforward but are still an important part of the syllabus. You should
ensure that you do the essential reading for these topics and attempt the questions.

Solutions to most of the Melville questions are available in the textbook; solutions to other
questions will normally be available on Vision at the end of the relevant week.

Contents
Topic 1: Regulatory and Conceptual Frameworks...........................2

Topic 2: Presentation of financial statements...................................3

Topic 3: Accounting policies, accounting estimates and errors.......3

Topic 4: Financial Statement Analysis..............................................4

Topic 5: Segmental Reporting...........................................................4

Topic 6: Leasing & Off Balance Sheet Financing..............................5

Topic 7: Revenue (IAS18) & Earnings Management..........................7

Topic 8: Transactions and operations in foreign currencies.............7

Topic 9: Taxation in financial statements..........................................8

Topic 10 (a): Accounting for changing prices...................................8

Topic 10 (b): Related Party Transactions...........................................9

Topic 11: Narrative Reporting:.........................................................10

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Topic 1: Regulatory and Conceptual Frameworks (self-study no tutorial)

Learning Objectives:
Once you have mastered this topic you should be able to:
Explain the need for regulation of financial statements
Describe the core regulatory framework
Critically appraise the limitations of the current framework

Reading

Essential
Melville Chapters 1 & 2

Recommended
Text of a public lecture on Accounting Harmonisation and Global Economic Consequences
by Hans Hoogervorst, Chairman of the IASB, available online at:
http://www.ifrs.org/Alerts/Conference/Documents/HH-LSE-November-2012.pdf

This gives a very readable overview of why financial accounting matters.

There is an excellent set of readings on IFRS adoption (including the benefits and the
drawbacks) within the Accounting and Business Research Journal, Vol 41, No. (3) 2011
Special Issue on International Accounting Policy Forum.

Questions
There is no tutorial class for this week but you should attempt the following questions
(solutions available in the text book)

1. Attempt the multiple choice questions for Chapters 1&2 on the Melville companion
website (www.pearsoned.co.uk/melville) to test your recall and understanding

2. Explain the term generally accepted accounting practice (GAAP). Is there just one
GAAP which is accepted worldwide? If not, why not? (Melville ch1, question 1.2)

3. Explain the purpose of accounting standards (whether national or international) and

identify advantages that stem from the standardisation of accounting practice. Are
there any disadvantages? (Melville ch1, question 1.5)

4. The qualitative characteristics of relevance, faithful representation and comparability

which are identified in the IASB Framework for the Preparation and Presentation of
Financial Statements are some of the attributes that make financial information useful
to the various users of financial statements. Explain what is meant by relevance,
faithful representation and comparability and how they make financial information
useful (Melville ch2, 2.7).

Examinability
This topic is examinable by essay style or short answer questions. There are many questions
you could be asked to test your understanding of the topic. For example, you could be asked
to describe the regulatory context within which financial statements are prepared, to compare
a rules- based with a principles-based approach to standard setting and the merits and

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limitations of each approach. You could be asked to critically appraise whether the ideal of
one set of international standards is an achievable or a desirable goal.

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Topic 2: Presentation of financial statements

Learning Objectives:
Once you have mastered this topic you should be able to:
Identify and explain the structure and content of each component of a set of financial
statements
Prepare a set of financial statements in accordance with the requirements of IAS 1.

Reading
Essential - Melville Chapters 3

Questions
Attempt the multiple choice questions for Chapter 3 on the Melville companion website
(www.pearsoned.co.uk/melville) to test your recall and understanding, then try the following
questions from the end of the chapter: 3.1 3.7. (Make sure that you attempt some of both
the narrative and the computational questions. The answer to 3.7 will be available on Vision
at the end of the week).

Topic 3: Accounting policies, accounting estimates and errors.

Learning Objectives:
Once you have mastered this topic you should be able to:
Define and explain the terms accounting policy, accounting estimate, prior period error
Describe how an entity should select its accounting policies
Demonstrate the impact on financial statements of a change in accounting policy/
accounting estimate / prior period error

Reading
Essential Melville, Chapter 4

Recommended: Callen, J., Livnat,J., Segal, D. (2006). Accounting Restatements: Are they
always bad news for investors? Journal of Investing, 15 (3), pp: 57-68

Questions
Attempt the multiple choice questions for Chapter 4 on the Melville companion website
(www.pearsoned.co.uk/melville) to test your recall and understanding, then try questions 4.1
4.7 from the end of the chapter

Examinability of Topics 2 & 3

These topics can be tested through computational style questions (such as those covered in
tutorials) or through essay style ones where you may need to draw on your wider reading and
knowledge of recent cases requiring restatements, explain why a certain accounting policy is
most appropriate etc. (applying also your knowledge from topic 1).

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Topic 4: Financial Statement Analysis

Learning Objectives:
Once you have mastered this topic you should be able to:
Explain the purposes of financial statement analysis
Define and calculate relevant financial ratios
Analyse and interpret ratios
Discuss the limitations of ratio analysis

Reading

Essential
Melville Chapter 22

Recommended
Robinson et al, International Financial Statement Analysis, 3rd edition, Chapter 7: Available as
an e-book through the library website. This is an excellent book, well worth dipping into
other chapters if this is a topic you are interested in.

Kaminski, K. a., Wetzel, T. S., & Guan, L. (2004). Can financial ratios detect fraudulent
financial reporting? Managerial Auditing Journal, 19(1), pp 1528.

Questions
Attempt the multiple choice questions for Chapter 22 on the Melville companion website
(www.pearsoned.co.uk/melville) to test your recall and understanding, then try questions
22.1 - 22.6 at the end of the chapter.

Examinability
Although you could be required to calculate some basic ratios, more marks will be available
for interpreting and critiquing ratios.

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Topic 5: Segmental Reporting

Learning Objectives:
Once you have mastered this topic you should be able to:
Explain the significance of segmental analysis
Define the terms operating segment and reporting segment
Identify an entitys reportable segments and make the appropriate disclosures required
by IFRS8
Discuss the benefits and limitations of Segmental reporting under IFRS8 (compared
with alternative methods)
Discuss the controversies around this standard

Reading
Essential
Melville Chapter 24 (very brief doesnt cover the controversy around the area)
Nobes & Parker, Comparative International Accounting (13th edition) Ch 18 (This is available
on Vision). This is much more in depth than Melville and should be read carefully)

Recommended
Kou, W., Hossain, S. (2007). Predictive gains to segmental disclosure matrices, geographic
information and industry sector comparability. British Accounting Review, Vol 39, No.3, pg.
185-195 (examines the type of segmental disclosure that financial analysts find useful)

Berger, P.G., Hann, R.N. (2007) Segment Profitability and the Proprietary and Agency Costs
of Disclosure. The Accounting Review, Vol. 82, pp 869-906.

Crawford, Hellier, Power (2010) Politics or Accounting Principles: Why was IFRS 8 so
controversial? ICAEW Briefing paper Available at
http://www.icaew.com/~/media/corporate/files/technical/research%20and
%20academics/publications%20and%20projects/financial%20reporting
%20publications/tecpln9573%20ifrs%208%20briefing.ashx (last accessed 18/11/2016)

Nichols, N., Street, D., Cereola, S. (2012). An analysis of the impact of adopting IFRS 8 on
the segment disclosures of European blue chip companies. Journal of International
Accounting, Auditing and Taxation, Volume 21, Issue 2, pp 79105. (This paper examines the
impact of the changes to segmental reporting practices)

Crawford, Extance, Hellier and Power (2012), Operating Segments: the usefulness of IFRS8
ICAS report. Available at https://www.icas.com/__data/assets/pdf_file/0003/7617/8-
Operating-Segments-the-usefulness-of-IFRS-8-ICAS.pdf (last accessed 18/11/2016)

You will also find a report from Company Reporting (2011) on vision that examines similar
issues. Further reading on the adoption of IFRS 8 can be found on http://www.ifrs.org/Current-
Projects/IASB-Projects/PIR/IFRS-8/Documents/PIR-IFRS-8-Operatihg-Segments-July-2013.pdf

Questions
Attempt the multiple choice questions for Chapter 24 on the Melville companion website
(www.pearsoned.co.uk/melville) to test your recall and understanding, then try questions
24.1 24.6 at the end of the chapter.

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Additional Question: Discuss evidence on the benefits to segment reporting (there is an

extensive discussion of this in Nobes & Parker section 18.3).
Topic 6: Leasing & Off Balance Sheet Financing
Note: The IASB and the FASB have developed a new approach to lease accounting that
requires a lessee to recognise assets and liabilities for the rights and obligations created
by leases. This project was completed in January 2016 with the publication of IFRS 16
Leases. However, the new standard will not become effective until 2019. Students are
therefore expected to understand and be able to apply IAS 17, and discuss the key
differences (and reasons for them) in IFRS 16.

Learning Objectives:
Once you have mastered this topic you should be able to:
Discuss the role of leases in businesses
Explain the importance of distinguishing between finance leases and operating leases
Account for operating and financing leases in accordance with IAS 17
Analyse the reasons for the development of IFRS 16

Reading

Essential: Melville Chapter 9 (only covers IAS17 with brief discussion of the new proposals
at the end of the chapter).

Recommended
For the latest on the proposed IFRS on Lease Accounting see
http://www.ifrs.org/current-projects/iasb-projects/leases/Pages/leases.aspx

Robinson et al: ch 9: 9 Leasing; Ch 10: 3 Leases

Questions

Attempt the multiple choice questions for Chapter 9 on the Melville companion website
(www.pearsoned.co.uk/melville) to test your recall and understanding, then try questions
9.1 - 9.8 (but not 9.3) at the end of the chapter.

Additional Question:
Describe briefly the core differences between IAS 17 and IFRS 16, giving examples of the
impact the changes would have on the financial statements of lessors and lessees with
operating leases and with finance leases.

Examinability

You could be asked to account for assets financed by finance leases and/ or for operating
leases in the records of the lessee. You could also be asked to critically appraise why
accounting for leases has been such a controversial area and describe the key changes
which IFRS 16 will introduce, explaining their impact on the financial statements.

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Topic 7: Revenue from contracts with Customers (IFRS 15)

Learning Objectives:
Once you have mastered this topic you should be able to:
Explain the importance of Revenue in the FS
Discuss the challenges of accounting for Revenue and the limitations of IAS11 and IAS 18
Explain the scope and purpose of IFRS15
Describe and apply the five-step model for revenue recognition and measurement under IFRS 15
Discuss what is meant by earnings management and earnings quality
Describe how analysts assess earnings quality

Reading

Essential: Melville Chapter 13

Recommended
Nobes & Parker, Ch 9, pp 238 240. Although brief, this is a very useful overview of the
difficulties of accounting for Revenue
Robinson et al, International Financial Statement Analysis, 3rd edition, Chapter 17: 4
Earnings Quality. Available as an e-book through the library website.
This reading is based primarily on US examples but does provide a very good discussion
of issues in relation to manipulation of revenue. It is important that you go through this
reading, mainly focusing on the main discussion in the reading (the discussion within the
boxes are examples).

Questions

Attempt the multiple choice questions for Chapter 13 on the Melville companion website
(www.pearsoned.co.uk/melville) to test your recall and understanding, then try questions
13.1 13.7 (not 13.6) at the end of the chapter.

Additional Questions:
1. Discuss why company management would be inclined to manipulate earnings

2. Discuss the major types of revenue recognition issues in relation to accrual

accounting that can affect earnings quality

Examinability
You could be asked to apply the five steps in the recognition of revenue to identify whether or
when certain transactions should be recognised. You could be asked to discuss the issues
surrounding revenue recognition and why it is such a critical area and one prone to
manipulation.

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Topic 8: Transactions and operations in foreign currencies

Learning Objectives:
Once you have mastered this topic you should be able to:
Discuss the challenges of accounting for transactions and operations in different
currencies
Account for the translation of foreign currency transactions and monetary / non-
monetary foreign currency items at the reporting date.
Translate and entitys financial statements into a presentation currency and translate
the financial statements of a foreign operation

Reading

Essential - Melville Chapter 21 pg 345 end.

Recommended
Robinson et al, Ch 16: Multinational Operations
Nobes & Parker, Ch 17: Foreign Currency Translation (This goes into a lot more depth than
you need to know)

Examinability
This topic could be examined using computational and / or discursive questions

Questions
Attempt the multiple choice questions for Chapter 21 on the Melville companion website
(www.pearsoned.co.uk/melville) to test your recall and understanding, then try questions
21.2 and 21.3 at the end of the chapter and past exam question below.

Past Exam Question

Red Construction plc a UK based company sets up a subsidiary Blue Transport Ltd in
Oceania on the 1st of January Year 1. The currency of Oceania is the Oceanian Doller
(O$). Blue Transport Ltd was set up with a share capital of 100,000 O$ and its financial
statements relating to its first year of trading is provided below. Red Construction plc
follows International Accounting Standard 21 in accounting for its foreign operations. Blue
Transport Ltd is considered an integral part of Red Construction plc operations. Information
about the movement in the British Pound () and the Oceanian Doller (O$) on key dates
has been provided below.

The information overleaf relates to Blue Transport Ltds trading operations during Year 1,
the first year of operations (in Oceanian Doller):

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Income Statement
Oceanian Doller
(O$)
000
Sales 20,000
Cost of goods sold 8,000
Gross Profit 12,000
Depreciation Expenses 400
Other Operating Expenses 3,000
Net Profit 8,600
Dividends 5,000
Retained Earnings 3,600

Statement of financial position

Assets:
Cash 3,000
Receivables 5,000
Inventory 2,000
Property Plant and
3,600
Equipment(net)
Total Assets 13,600

Short Term Liabilities 1,000

Long Term Liabilities 5,000
Ordinary shares 4,000
Retained Earnings 3,600
Total Liabilities and Equity 13,600

Key Exchange rate movements over the course of Year 1:

On January 1, Year 1 1 = 7 O$
On January 2, Year 1 (when Property, plant and equipment
1= 7O$
was purchased)

Average for Year 1 1 = 6.5 O$

On the date closing inventory was acquired 1 = 6.30O$
On December 31, Year 1 1 = 6 O$

Required:
(i) Translate Year 1 financial statements of Blue Transport Ltd from Oceanian Doller
(O$) to British Pounds (1) following IAS 21.
(ii)Explain the reason for the change in the carrying amount of Red Construction plcs
investment in Blue Transport Ltd.

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Topic 9: Taxation in financial statements

Learning Objectives:
Once you have mastered this topic you should be able to:
Define the term current tax and account for it in accordance with IAS 12
Explain the term temporary differences and distinguish between taxable and
deductible temporary differences
Explain what is meant by a tax base
Calculate deferred tax assets and liabilities arising from temporary differences
Explain the impact on deferred tax of changes in tax rates
Account for deferred tax in accordance with IAS 12
Discuss the significance of tax in annual reports

Reading

Essential
Melville Chapter 15

Recommended
Robinson , Ch 13
FRC Corporate Reporting Thematic Review: Tax Disclosures October 2016. Available online
at https://www.frc.org.uk/Our-Work/Publications/Corporate-Reporting-Review/Corporate-
Reporting-Thematic-Review-Tax-Disclosur.pdf

Questions
Attempt the multiple choice questions for Chapter 15 on the Melville companion website
(www.pearsoned.co.uk/melville) to test your recall and understanding, then try questions
15.1 15.6 at the end of the chapter.

Examinability

This topic could be examined quantitatively or qualitatively. You could be asked to discuss or
explain concepts surrounding the treatment of taxation in financial statements, or to calculate
and present in an appropriate format for the accounts, the deferred tax account, given
relevant information.

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Topic 10 (a): Accounting for changing prices

Learning Objectives:
Once you have mastered this topic you should be able to:
Explain the term historic cost accounting and critically appraise its strengths and
weaknesses
Describe the main alternatives to historic cost accounting and outline their strengths
and weaknesses
Outline the main requirements of IAS29 Financial Reporting in Hyperinflationary
Economies

Reading
Essential - Melville Chapter 17

Questions
Attempt the multiple choice questions for Chapter 17 on the Melville companion website
(www.pearsoned.co.uk/melville) to test your recall and understanding, then try questions
17.1 17.5 at the end of the chapter.

Topic 10 (b): Related Party Transactions

Learning Objectives:
Once you have mastered this topic you should be able to:
Define and identify related parties
Explain why additional disclosures should be made about transactions with related
parties
Give examples of historic accounting malpractice involving related parties

Reading

Essential Melville, Chapter 21 pp 341 - 344

Questions
Attempt the multiple choice questions for Chapter 21 on the Melville companion website
(www.pearsoned.co.uk/melville) to test your recall and understanding, then try questions
21.1 and 21.4 at the end of the chapter.

Examinability

These topics are most likely to be examined by discursive style questions, although you could
be asked to use calculations to demonstrate the impact of alternatives to Historic Cost
Accounting.

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Topic 11: Narrative Reporting (self-study, no tutorial)

Learning Objectives:
Once you have mastered this topic you should be able to:
Describe the narrative reporting elements which may be included in a companys
annual report
Critically appraise the IASBs IFRS Practice Statement Management Commentary
Outline the Companies Act 2006 requirements for a Strategic Report and analyse the
FRCs 2014 guidance for this

Reading

Essential
Melville, Ch 3, pp 53 - 60
Robinson et al, ch 17: 7 sources of information about risk

Recommended
IFRS Management commentary material (available here: http://www.ifrs.org/Current-
Projects/IASB-Projects/Management-Commentary/Pages/Management-Commentary.aspx)

FRC Guidance on the Strategic Report (available here: https://www.frc.org.uk/Our-

Work/Publications/Accounting-and-Reporting-Policy/Guidance-on-the-Strategic-Report.pdf)

Abraham, S., Marston, C. L. & Darby, P. 2012. Risk reporting: Clarity, relevance and
location. The Institute of Chartered Accountants of Scotland (ICAS), Edinburgh. Available
online at http://icas.org.uk/abraham/

Abraham, S., & Shrives, P. J. (2014). Improving the relevance of risk factor disclosure in
corporate annual reports. The British Accounting Review, 46(1), pp 91107.

Accounting Standards Board 2009. Rising to the challenge. A review of narrative

reporting by UK listed companies. Available online at https://www.frc.org.uk/Our-
Work/Publications/ASB/Full-results-of-a-Review-of-Narrative-Reporting-by/Full-results-of-
a-Review-of-Narrative-Reporting-by.pdf (last accessed 24/03/2014)

Campbell, D., Slack, R. (2008). Narrative Reporting. Analysts perceptions of its value and
relevance. Available online at
http://www.accaglobal.com/content/dam/acca/global/PDF-technical/narrative-reporting/rr-
104-001.pdf

Examinability
This topic would be examined through a discussion style question where you could be
expected to demonstrate understanding of the narrative sections of the annual report, the
regulations regarding such narrative, and its usefulness for stakeholders.

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