ACCA
PAPER P2
CORPORATE REPORTING
(INTERNATIONAL)
REVISION ESSENTIALS
For Examinations to June 2016
®
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CONTENTS
CONTENTS
Syllabus
Approach to examining
Core topics
IFRS and corporate reporting
International issues
Conceptual framework
Reporting financial performance
Accounting policies, estimates and errors
Non-current assets
IAS 36 Impairment of Assets
Financial instruments
IAS 17 Leases
IFRS 8 Operating Segments
IAS 19 Employee Benefits
IAS 12 Income Taxes
Provisions and contingencies
Related parties
IFRS 2 Share-based Payment
Conceptual principles of group accounting
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(i)
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(iii)
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CONTENTS
Basic group accounts
Goodwill
Complex groups
Changes in shareholdings
Associates and joint arrangements
Foreign currency transactions
IAS 7 Statement of Cash Flows
Analysis and interpretation
IFRS 1 First-time Adoption
Ethics and the accountant
Environmental reporting
IFRS 15 Revenue from Contracts with Customers
Additional reading
Articles
Past question analysis
Examiner’s report – December 2014
Exam technique
CAUTION: These notes offer guidance on key issues.
Reliance on these alone is insufficient to pass the examination.
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SYLLABUS
Syllabus structure
Aim
To apply knowledge, skills and exercise professional
judgement in the application and evaluation of financial
reporting principles and practices in a range of business
contexts and situations.
CR (P2)
Main capabilities
FR (F7)
On successful completion of this paper, candidates should be
able to:
A
Discuss the professional and ethical duties of the
accountant
B
Evaluate the financial reporting framework
C
Advise on and report the financial performance of
entities
D
Prepare the financial statements of groups of entities in
accordance with relevant accounting standards
E
Explain reporting issues relating to specialised entities
F
Discuss the implications of changes in accounting
regulation on financial reporting
G
Appraise the financial performance and position of
entities
H
Evaluate current developments
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FA (F3)
(i)
AAA (P7)
APPROACH TO EXAMINING
APPROACH TO EXAMINING THE SYLLABUS
Examinable documents
Exam format
The documents listed as examinable can be found at

3 hour paper-based examination.

Additional 15 minutes reading and planning time.
http://www.accaglobal.com/gb/en/student/exam-supportresources/professional-exams-studyresources/p2/examinable-documents.html

Two sections.
Section A
Section B
Compulsory question
2 from 3 questions of
25 marks each
These are the latest that were issued prior to 1st September
2014 and will be examinable from September 2015 to June
2016 examination sessions.
Marks
50
50
____
100
____
Section A will deal with the preparation of consolidated
financial statements including group statement of cash flows
and with issues in financial reporting.
Section B will normally comprise two scenario or case-study
based questions and one discursive question. These
questions could deal with any aspects of the syllabus.
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(ii)
CORE TOPICS
CORE TOPICS
Tick when completed
Professional and ethical duty of accountant

Integrated reporting

Creative accounting

Ethics and the accountant



Financial reporting framework

Conceptual framework

Accounting practices and principles

Valuation models, including fair value
CORE TOPICS

Provisions


Related parties


Share-based payment

SMEs


Preparation of financial statements for groups



Reporting financial performance

Complex groups

Changes in shareholdings

Foreign subsidiary

Statement of cash flows

Revenue

Specialised entities and transactions

Non-current assets


Financial instruments

Leases




Segment reporting


Employee benefits

Income taxes


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Tick when completed
Reconstructions





Changes in accounting regulations

(iii)
IFRS proposed changes

CORE TOPICS
CORE TOPIC
Tick when completed
Appraisal of performance

Accounting policies


Interpretation

Current developments

Environmental and social reporting

Current issues
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

(iv)
CONCEPTUAL FRAMEWORK
1
1.3 Underlying assumption
FRAMEWORK


1.1 Purpose and scope
Purpose

To help users/auditors/preparers of financial statements
understand the basis of preparation.

To help countries develop their own national standards.

To assist the IASB in developing consistent standards.
1.4 Elements of financial statements
Terminology

Objectives of financial statements
Underlying assumption
Qualitative characteristics
Definitions, recognition and measurement of elements
Concepts of capital and capital maintenance.

To provide information about:
 Financial position (e.g. solvency)  SoFP
 Financial performance (e.g. profitability)  SoCI
 Cash flows  CFS


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Assets less liabilities
Income




To show results of management’s stewardship
(“accountability”).
Present obligation
Past event
Outflow of future economic benefits
Equity (“residual”)


Control
Past event
Inflow of future economic benefits
Liability



1.2 The objective of financial statements

Asset



Scope





Entity will continue in operation for foreseeable future.
No intention or need to liquidate or significantly curtail
the scale of operations.
Increases in economic benefits
Due to increase in assets/decrease in liabilities
Resulting in increase in equity
Other than contribution by equity shareholders
CONCEPTUAL FRAMEWORK

Expense
2




Attributes that make information useful to users.
Decreases in economic benefits
Due to decrease in assets/increase in liabilities
Resulting in decrease in equity
Other than distribution to equity shareholders
2.1 “Economic phenomena”

Recognition

Meaning – incorporating in FS an item which meets the
definition and the criteria.

Criteria


Probable future economic benefits; and
Reliable measurement of cost/value.
Historical cost – at acquisition
Current cost – current amount
Realisable value – on sale or settlement
Present value – discounted
1.6 Success or failure?

Successful in defining the elements of financial
statements that underpin IFRS.

But many measurement bases could lead to
inconsistencies that hinder comparability.
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Transactions, conditions and other events that affect
economic resources and claims against the entity.
2.2 Fundamental characteristics

Relevance and faithful representation.
2.3 Relevance

Helps users:
 evaluate past, present or future events; and
 confirm or correct past evaluations.

Is affected by:
 nature (alone may be insufficient to be relevant);
 materiality.
1.5 Measurement bases




QUALITATIVE CHARACTERISTICS
“Information is material if its omission or misstatement could
influence the economic decisions of users taken on the basis
of the financial statements.”


0302
Depends on size ... omission or misstatement.
A “threshold” or “cut-off point” (not a primary
qualitative characteristic).
CONCEPTUAL FRAMEWORK
2.4 Faithful representation
3

3.1 Transaction and events
Financial statements represent economic phenomena in
words and numbers. Encompasses:



Neutrality (free from material bias);
Completeness (within materiality/cost constraints);
Accuracy (free from material error).
2.5 Enhancing characteristics

SUBSTANCE OVER FORM
Financial statements must reflect economic substance to
show a true and fair view, as opposed to legal form.
3.2 Recognition of assets and liabilities

Key issue underlying the treatment of a transaction is
whether an asset or liability should be shown in SoFP.
Schemes have been designed to keep assets and
liabilities “off-balance sheet”.

Comparability – Accounting bases, etc. (over time and
between companies).


Verifiability – different parties could reach same
consensus through direct or indirect means.
3.3 Creative accounting

Timeliness – available in time for users to make
decisions.

Off balance sheet financing
Understandability – presenting information clearly and
concisely. Difficulty is not grounds for exclusion.

Present obligation (debt) omitted from the statement of
financial position.

For example, a sale and repurchase transaction, if
accounted under its legal form.
2.6 Cost constraint

The cost of providing information should not exceed the
benefit obtained from it.
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Profit manipulation or smoothing

Manipulation of revenue or costs to give a required profit.

Examples include early recognition of revenue and
incorrect recognition of provisions.
0303
CONCEPTUAL FRAMEWORK
Window dressing
4.2 IASB stance

Financial statements are made “pretty” for one moment
in time (e.g. year end); can affect ratio calculations.

Framework identifies valuation models – historical cost,
current cost, realisable value and present value.

For example, settling trade payables on the last day of
the year and re-instating them the next day.

IFRS 13 Fair Value Measurement applies to the
measurement of fair value when another standard
requires fair value measurement.
5
FAIR VALUE
3.4 Accounting theory v practice

Principles must be applied; different users may apply a
principle in different ways.
5.1 Background

Management may seek to report the “best” profit figure.

Nearly every figure relating to assets and liabilities
appearing in the SoFP is subjective in its amount.
4
MEASUREMENT
What is the most relevant and reliable value of an asset
three years after its purchase?





Historical (original) cost;
Depreciated historical cost;
Replacement cost;
Net realisable value;
Value in use (present value of future cash flows).
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Use of fair value has become far more widespread.
IFRS 13 issued in 2011.
Standard does not prescribe when to use fair value but
how to use fair value.
5.2 Terminology
4.1 Bases




The price that would be received ... or paid ... in an orderly
transaction between market participants at measurement date.
5.3 Non-financial assets

Fair value reflects “highest and best” use:



0304
use which is physically possible;
what is legally allowed; and
the financial feasibility of using the asset.
CONCEPTUAL FRAMEWORK
5.4 Valuation techniques
5.7 Benefits and limitations

Market approach – uses prices generated in a market of
identical or comparable assets or liabilities.
Benefits

Cost approach – to replace the service capacity of the
asset (current replacement cost).

Income approach – discounts future cash flows to a
current value (e.g. present value).
5.5 Hierarchy of inputs

Level 1 – quoted (unadjusted) prices in active market
for identical item available at measurement date.

Level 2 – inputs other that quoted prices that are
observable, either directly or indirectly.


Provide information about values most relevant to
current economic conditions.

No need for impairment testing.

Financial statements are more transparent.
Limitations

Definition is market-based but market values may not
be readily available.

Significant judgements required, therefore subjective.

Users may not comprehend the effect of fair value on
financial statements.
6
NOT-FOR-PROFIT ORGANISATIONS
Level 3 – unobservable inputs for the item.
5.6 Disclosure

Quantitative and qualitative.

Recurring and non-recurring

Reason for using fair value.

Level of hierarchy used.
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6.1 Primary objectives

Is not profitability!

Is usually not financial.

Usually to meet needs of members of society (e.g. in
health and education).
0305
CONCEPTUAL FRAMEWORK
6.2 Value for money
7.3 Recognition and measurement
The “3 Es”
Recognition




Economy – minimising the cost of inputs.
Efficiency – maximising outputs.
Effectiveness – meeting objectives.
6.3 Accounting

Usually accruals-based but cash-based accounting is
still used in some public sector institutions.

Public sector bodies follow standards issued by public
sector authority.

Charitable organisations must produce accounting
records to show the stewardship of funds.
7
IAS 41 AGRICULTURE
7.1 Objective and scope
Usual asset recognition criteria.
Measurement

At fair value less costs to sell:


on initial recognition; and
at the end of each reporting period.

Any gain/(loss) on initial measurement is recognised in
profit or loss.

Presumption that fair value can be measured reliably
can be rebutted only on initial recognition if:
 a quoted market price is not available; and
 alternative estimates are clearly unreliable.
7.4 Presentation
Prescribes recognition, measurement, presentation and
disclosures related to agricultural activity.

Carrying amount of biological assets is presented
separately in the SoFP.
7.2 Terminology
8
DISCUSSION PAPER


8.1 Background
Biological asset – a living animal or plant.
Agricultural produce – the product harvested from a
biological asset.
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

0306
First issued in 1989 and updated in 2010.
Discussion paper issued in 2013.
CONCEPTUAL FRAMEWORK
8.2 Introduction
Measurement



Outlines intended purpose and scope and summarises
the objectives of financial reporting and the qualitative
characteristics of useful financial information.
Main purpose to assist the IASB by identifying
concepts that can be used consistently when developing
and revising IFRSs.
 Cost-based;
 Current market prices (including fair values);
 Other cash-flow-based measures.
8.4 Presentation and disclosure
General requirements
8.3 Assets and liabilities

Definitions of elements

DP proposes to remove reference to economic benefits
and focus more on underlying economic resource that
generates benefits.


Profit or loss total (or subtotal) for the period is
required.
Element cannot be recognised if it cannot be reliably
measured.

Some items should be recycled.

Derecognition – when an asset or liability no longer
meets the recognition criteria.
Other comprehensive income should be limited to
remeasurements.
8.5 Other issues
Distinguishing equity from liabilities

DP does not propose changes but IASB may develop
further guidance or educational material for users.
Statement of comprehensive income
Recognition and derecognition

Identifies three main categories of measurement:
Obligations to issue equity instruments and obligations
that only arise on the liquidation of an entity would not
meet the definition of a liability.
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




0307
Concepts of stewardship, reliability and prudence.
Use of the business model concept.
Unit of account (i.e. level of aggregation required).
When going concern assumption is relevant.
Capital maintenance concepts.
IAS 36 IMPAIRMENT OF ASSETS
1
IMPAIRMENT
2.2 Intangible assets

1.1 Objective of IAS 36

To ensure assets are not carried at an amount that is
greater than their recoverable amount.
2.3 Indications of potential impairment loss
1.2 Terminology


External sources of information
Impairment loss – Amount by which carrying amount
exceeds recoverable amount.
Recoverable amount – Higher of fair value less costs
of disposal and value in use.

Fair value – as per IFRS 13.

Value in use – present value of estimated future cash
flows associated with asset (continuing use and disposal).
2
Goodwill, intangibles not yet ready for use and
intangibles with an indefinite life must be tested
annually for impairment.

Decline in market value significantly more than
expected.

Significant adverse changes, in technological, market,
economic or legal environment.

Increases in market interest rates.

Carrying amount of net assets exceeds entity’s market
capitalisation.
BASIC RULES
2.1 All assets
Internal sources of information


Obsolescence or physical damage.

Significant adverse changes in extent or manner of use.

Deterioration in economic performance.
At end of each reporting period, assess whether any
indication of impairment exists:
 If yes – make formal estimate of recoverable amount;
 If no – formal estimate is not required, except for
intangible assets:
 with indefinite-life; or
 not yet available for use.
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0701
IAS 36 IMPAIRMENT OF ASSETS
3

RECOVERABLE AMOUNT
Value in use differs from fair value:


3.1 Measurement principles
4
value in use is more entity specific;
fair value only reflects the assumptions market
participants would use.
CASH GENERATING UNITS
4.1 Basic concept
Smallest identifiable group of assets generating cash flows
independently.
3.2 Fair value less costs of disposal
4.2 Allocating shared assets

Assess fair value using IFRS 13 hierarchy.
Goodwill acquired in a business combination

Costs of disposal – incremental costs directly
attributable to asset disposal, excluding finance costs,
income tax expense and any cost included as a liability.

Allocate to CGUs expected to benefit from synergies of
business combination.

Test for impairment:
3.3 Value in use




at least annually; or
if impairment of goodwill or CGU indicated.
The present value of the future cash flows expected to
be derived from an asset.
Corporate assets
Involves:

 Estimating future cash flows;
 Applying appropriate discount rate.
Assets other than goodwill (e.g. head office, research
centre).

Similarly allocate to CGUs, test for impairment and
treat impairment losses as for goodwill.
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0702
IAS 36 IMPAIRMENT OF ASSETS
5
6
ACCOUNTING FOR IMPAIRMENT LOSS
SUBSEQUENT REVIEW
5.1 Basics
6.1 Basic provisions


Recoverable amount < carrying amount means that
impairment has occurred:
Review impaired assets each year if indications of:


 Dr Profit or loss
(or Dr Revaluation surplus in respect of the same
impaired asset).
Cr Asset
further impairment;
impairment reversal.
6.2 Reversals of impairment losses

Only reverse if original factors of impairment no longer
apply.
5.2 Allocation within a cash generating unit

Cannot reverse impairment of goodwill.

Order of allocation of impairment between assets (after
accounting for any specific impairments):

Cannot increase carrying amount to more than
depreciated cost if impairment had not occurred.

Goodwill, if any;

Other assets on a pro-rata basis; but

No asset should be reduced below the higher of:
With the difference in amounts (impairment loss).




Fair value less cost of disposal;
Value in use;
Zero.
Any current assets do not bear any of the impairment
loss as they will already be measured at a current value.
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0703
COMPLEX GROUPS
1
TYPES OF STRUCTURE
Or
1.1 Chains of control
2
STATUS OF INVESTMENT
2.1 Importance of control
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
Status is always based on control.

If P controls S, and S controls T, even if effective
control is less than 50%, P will also control T.
1901
COMPLEX GROUPS
3
3.4 D-shaped groups
TECHNIQUE
3.1 Approaches involving sub-subsidiaries
Indirect approach (two stages)


Consolidate smaller group first.
Consolidate that small group into the larger group.
Direct approach

Consolidate sub-subsidiary using effective control %.
3.2 Direct technique

Calculate effective holding in sub-subsidiary (T):


P’s % share in S × S’s % share in T
+ any direct holding of P in T.

Non-controlling interest in T is 100% less P’s effective %.

Goodwill in T is calculated as:



only P’s % of cost of investment; plus
fair value of non-controlling interest; less
T’s net assets on acquisition.
3.5 Statement of comprehensive income

3.3 Timing of acquisitions

Parent has control on later of:


date P acquired S; and
date S acquired T.
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1902
Consolidate as normal – non-controlling interest is
remaining % of sub-subsidiary’s profit for period.
FOREIGN CURRENCY TRANSACTIONS
1
Subsequent recognition
ACCOUNTING ISSUES
1.1 Introduction



End of each period, retranslate any foreign currency
monetary items using the closing exchange rate.

Non-monetary items at historical cost are translated at
the exchange rate at the transaction date.

Non-monetary items at fair value are translated at the
exchange rate when the fair value was measured.
May buy or sell goods denominated in foreign currency.
May acquire foreign entity.
1.2 Key issues


Which exchange rate should be used.
How should any exchange difference be treated.
1.3 Scope


Accounting for transactions in foreign currencies.
Translate the financial statements of foreign operations.
1.4 Terminology

Functional currency – currency of the primary
economic environment in which the entity operates.

Presentation currency – currency in which financial
statements are presented.
2
INDIVIDUAL COMPANY STAGE
2.1 Basic transactions
Initial recognition


In functional currency using spot rate on transaction date.
Exchange differences reported in profit or loss.
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2201
FOREIGN CURRENCY TRANSACTIONS
3
CONSOLIDATED FINANCIAL STATEMENTS
4.2 IAS 21
3.1 Nature of exchange difference

Opening net assets and profit for year translated at
different exchange rates to closing net assets.
3.2 Identifying the functional currency

Is dictated by the primary economic environment.
Consider:


4
currency that mainly influences selling prices;
currency affecting input costs.
FOREIGN OPERATION
4.1 Presentation currency

Financial statements of a foreign operation are
translated into the presentation currency of the parent.

Assets and liabilities are translated using the closing
exchange rate.

Income and expenses are translated using average
exchange rates.

Exchange difference reported in other comprehensive
income, and then to exchange reserve.
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2202
FOREIGN CURRENCY TRANSACTIONS
4.3 Calculation of exchange difference
5
DISPOSAL OF FOREIGN OPERATION
5.1 Cumulative exchange differences

Reclassified to profit or loss on disposal.
5.2 Partial disposal

Only recognise proportionate share in profit or loss.
6
DISCLOSURE

Amount of exchange differences included in profit or
loss for the period.

Net exchange differences shown within other
comprehensive income.

Any changes in functional currency and the reasons for
the change.
4.4 Goodwill

Translate at closing exchange rate:


gives rise to a further exchange difference;
report in other comprehensive income.
4.5 Foreign associates

Asset balance translated at closing exchange rate.
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2203