ACCA

PaperP2INT/UK

CorporateReporting

CompleteText

British library cataloguinginpublication data

AcataloguerecordforthisbookisavailablefromtheBritishLibrary.

Publishedby:KaplanPublishingUKUnit2TheBusinessCentreMollyMillarsLaneWokinghamBerkshireRG412QZ

ISBN:9781784152192

KaplanFinancialLimited,2015

ThetextinthismaterialandanyothersmadeavailablebyanyKaplanGroupcompanydoesnotamounttoadviceonaparticularmatterandshouldnotbetakenassuch.Norelianceshouldbeplacedonthecontentasthebasisforanyinvestmentorotherdecisionorinconnectionwithanyadvicegiventothirdparties.Pleaseconsultyourappropriateprofessionaladviserasnecessary.KaplanPublishingLimitedandallotherKaplangroupcompaniesexpresslydisclaimallliabilitytoanypersoninrespectofanylossesorotherclaims,whetherdirect,indirect,incidental,consequentialorotherwisearisinginrelationtotheuseofsuchmaterials.

PrintedandboundinGreatBritain

Acknowledgements

WearegratefultotheAssociationofCharteredCertifiedAccountantsandtheCharteredInstituteofManagementAccountantsforpermissiontoreproducepastexaminationquestions. TheanswershavebeenpreparedbyKaplanPublishing.

Allrightsreserved.Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmitted,inanyformorbyanymeans,electronic,mechanical,photocopying,recordingorotherwise,withoutthepriorwrittenpermissionofKaplanPublishing.

ii KAPLAN PUBLISHING

Contents

Page

Chapter 1 TheConceptualFramework 1

Chapter 2 Theprofessionalandethicaldutyoftheaccountant

23

Chapter 3 Performancereportingandperformanceappraisal

31

Chapter 4 Revenue 63

Chapter 5 Noncurrentassets,agricultureandinventories 85

Chapter 6 Foreigncurrencyinindividualfinancialstatements

143

Chapter 7 Leases 159

Chapter 8 Employeebenefits 191

Chapter 9 Sharebasedpayment 219

Chapter 10 Eventsafterthereportingperiod,provisionsandcontingencies

245

Chapter 11 Financialinstruments 269

Chapter 12 Tax 333

Chapter 13 Segmentreporting 359

Chapter 14 Relatedparties 371

Chapter 15 AdoptionofIFRS 387

Chapter 16 Specialisedentitiesandspecialisedtransactions

401

Chapter 17 Nonfinancialreporting 449

Chapter 18 Currentissues 471

Chapter 19 Groupaccountingbasicgroups 483

Chapter 20 Complexgroups 541

Chapter 21 Changeinagroupstructure 577

KAPLAN PUBLISHING iii

Chapter 22 Groupaccountingforeigncurrency 621

Chapter 23 Groupreorganisations 649

Chapter 24 Groupstatementofcashflows 657

Chapter 25 Questions&Answers 709

iv KAPLAN PUBLISHING

PaperIntroduction

v

chapterIntroduction

How to Use the Materials ThenatureoftheP2CorporateReportingexam,isthatofapillartopic.ThismeansthatstudentswillneedagoodunderstandingofthebasicsofaccountingascoveredinitiallyinF3andtheninF7.

TheACCAwebsitewww.accaglobal.comincludesausefulFAQsection.Withinthissectiontheexaminerrecommends:

TheseKaplanPublishinglearningmaterialshavebeencarefullydesignedtomakeyourlearningexperienceaseasyaspossibleandtogiveyouthebestchancesofsuccessinyourexaminations.

Theproductrangecontainsanumberoffeaturestohelpyouinthestudyprocess.Theyinclude:

Thesectionsonthestudyguide,thesyllabusobjectives,theexaminationandstudyskillsshouldallbereadbeforeyoucommenceyourstudies.Theyaredesignedtofamiliariseyouwiththenatureandcontentoftheexaminationandgiveyoutipsonhowtobesttoapproachyourlearning.

Thecomplete text or essential textcomprisesthemainlearningmaterialsandgivesguidanceastotheimportanceoftopicsandwhereotherrelatedresourcescanbefound.Eachchapterincludes:

ItisimportantthatstudentshavedonesomeprecourseworksuchasattemptingashomeworkapastF7examasappropriaterevisionbeforestartingworkonP2.ThismessageappliesequallytostudentswhohaveattemptedandpassedF7andtothosewhohavegainedanexemptionfromF7.

P2examinerACCAwebsite

(1) Detailedstudyguideandsyllabusobjectives(2) Descriptionoftheexamination(3) Studyskillsandrevisionguidance(4) Completetextoressentialtext(5) Questionpractice

Thelearning objectivescontainedineachchapter,whichhavebeencarefullymappedtotheexaminingbody'sownsyllabuslearningobjectivesoroutcomes.Youshouldusethesetocheckyouhaveaclearunderstandingofallthetopicsonwhichyoumightbeassessedintheexamination.

Introduction

vi KAPLAN PUBLISHINGvi KAPLAN PUBLISHING

Qualityandaccuracyareoftheutmostimportancetoussoifyouspotanerrorinanyofourproducts,pleasesendanemailtomykaplanreporting@kaplan.comwithfulldetails,orfollowthelinktothefeedbackforminMyKaplan.

OurQualityCoordinatorwillworkwithourtechnicalteamtoverifytheerrorandtakeactiontoensureitiscorrectedinfutureeditions.

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Test your understandingsectionsprovideanopportunitytoassessyourunderstandingofthekeytopicsbyapplyingwhatyouhavelearnedtoshortquestions.Answerscanbefoundatthebackofeachchapter.

Summary diagramscompleteeachchaptertoshowtheimportantlinksbetweentopicsandtheoverallcontentofthepaper.Thesediagramsshouldbeusedtocheckthatyouhavecoveredandunderstoodthecoretopicsbeforemovingon.

Question practiceisprovidedthroughthistext.

Icon Explanations

Definition Keydefinitionsthatyouwillneedtolearnfromthecorecontent.

Key PointIdentifiestopicsthatharekeytosuccessandareoftenexamined.

NewIdentifiestopicsthatarebrandnewinpapersthatbuildon,andthereforealsocontain,learningcoveredinearlierpapers.

Expandable TextExpandabletextprovidesyouwithadditionalinformationaboutatopicareaandmayhelpyougainabetterunderstandingofthecorecontent.Essentialtextuserscanaccessthisadditionalcontentonline(readitwhereyouneedfurtherguidanceorskipoverwhenyouarehappywiththetopic)

Test Your UnderstandingExercisesforyoutocompletetoensurethatyouhaveunderstoodthetopicsjustlearned.

IllustrationWorkedexampleshelpyouunderstandthecorecontentbetter.

KAPLAN PUBLISHING vii

Tricky topic Whenreviewingtheseareascareshouldbetakenandallillustrationsandtestyourunderstandingexercisesshouldbecompletedtoensurethatthetopicisunderstood.

Tutorial noteIncludedtoexplainsomeofthetechnicalpointsinmoredetail.

FootstepsHelpfultutortips.

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Ouronlineresourcesaredesignedtoincreasetheflexibilityofyourlearningmaterialsandprovideyouwithimmediatefeedbackonhowyourstudiesareprogressing.

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Paper introduction Paper background

TheaimofACCAPaperP2(INT),CorporateReporting,istoapplyknowledgeandskillsandtoexerciseprofessionaljudgementintheapplicationandevaluationoffinancialreportingprinciplesandpracticesinarangeofbusinesscontextsandsituations.

Introduction

viii KAPLAN PUBLISHING

Objectives of the syllabus

Core areas of the syllabus

Approach to INT and UK syllabus elements

BoththeInternationalandUKP2syllabusapplytheprinciplesofInternationalFinancialReportingStandards(IFRS).

Theinternationalsyllabushasbeenusedasthebasisofthetext.

UKsyllabusstudentsarealsorequiredtooutlineanddiscussthedifferencesbetweentheIFRSforsmallandmediumentitiesandUKaccountingstandards.TheymustalsohaveaknowledgeofsomeoftherequirementsoftheCompaniesAct.Theexaminabledifferencesarecoveredinchapter16ofthistext.

Discusstheprofessionalandethicaldutiesoftheaccountant Evaluatethefinancialreportingframework Adviseonandreportthefinancialperformanceofentities Preparethefinancialstatementsofgroupsofentitiesinaccordance

withrelevantaccountingstandards Explainreportingissuesrelatingtospecialisedentities Discusstheimplicationsofchangesinaccountingregulationon

financialreporting Appraisethefinancialperformanceandpositionofentities Evaluatecurrentdevelopments.

Theprofessionalandethicaldutyoftheaccountant Thefinancialreportingframework Reportingthefinancialperformanceofentities Financialstatementsofgroupsofentities Specialisedentities Implicationsofchangesinaccountingregulationonfinancialreporting Theappraisaloffinancialperformanceandpositionofentities Currentdevelopments.

KAPLAN PUBLISHING ix

Syllabus objectives

WehavereproducedtheACCAssyllabusbelow,showingwheretheobjectivesareexploredwithinthisbook.Withinthechapters,wehavebrokendowntheextensiveinformationfoundinthesyllabusintoeasilydigestibleandrelevantsections,calledContentObjectives.Thesecorrespondtotheobjectivesatthebeginningofeachchapter.

Syllabuslearningobjective/Chapter

A THE PROFESSIONAL AND ETHICAL DUTIES OF THE ACCOUNTANT

1 Professional behaviour and compliance with accounting standards

2 Ethical requirements of corporate reporting and the consequences of unethical behaviour

3 Social responsibility

B THE FINANCIAL REPORTING FRAMEWORK

1 The applications, strengths and weaknesses of an accounting framework

(a) Appraiseanddiscusstheethicalandprofessionalissuesinadvisingoncorporatereporting.[3] Ch. 2

(b) Assesstherelevanceandimportanceofethicalandprofessionalissuesincomplyingwithaccountingstandards.[3] Ch. 2

(a) Appraisethepotentialethicalimplicationsofprofessionalandmanagerialdecisionsinthepreparationofcorporatereports.[3]Ch. 2

(b) Assesstheconsequencesofnotupholdingethicalprinciplesinthepreparationofcorporatereports.[3]Ch. 2

(a) Discusstheincreaseddemandfortransparencyincorporatereports,andtheemergenceofnonfinancialreportingstandards.[3]Ch. 17

(b) Discusstheprogresstowardsaframeworkforintegratedreporting.[3]Ch. 17

(a) Evaluatethevaluationmodelsadoptedbystandardsetters.[3]Ch. 1(b) Discusstheuseofanaccountingframeworkinunderpinningthe

productionofaccountingstandards.[3]Ch. 1(c) Assessthesuccessofsuchaframeworkinintroducingrigorousand

consistentaccountingstandards.[3]Ch. 1

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x KAPLAN PUBLISHING

2Critical evaluation of principles and practices

C REPORTING THE FINANCIAL PERFORMANCE OF ENTITIES

1 Performance reporting

2 Noncurrent assets

3 Financial instruments

(a) Identifytherelationshipbetweenaccountingtheoryandpractice.[2]Ch. 1

(b) Criticallyevaluateaccountingprinciplesandpracticesusedincorporatereporting.[3]Ch. 1

(a) Preparereportsrelatingtocorporateperformanceforexternalstakeholders.[3]Ch. 3

(b) Discussandapplythecriteriathatmustbemetbeforeanentitycanapplytherevenuerecognitionmodeltoacontract.[3]Ch. 4

(c) Discussandapplythefivestepmodelwhichrelatestorevenueearnedfromacontractwithacustomer.[3]Ch. 4

(a) Applyanddiscussthetimingoftherecognitionofnoncurrentassetsandthedeterminationoftheircarryingamountsincludingimpairmentandrevaluations.[3]Ch. 5

(b) Applyanddiscussthetreatmentofnoncurrentassetsheldforsale.[3]Ch. 5

(c) Applyanddiscusstheaccountingtreatmentofinvestmentpropertiesincludingclassification,recognitionandmeasurementissues.[3]Ch. 5

(d) Applyanddiscusstheaccountingtreatmentofintangibleassetsincludingthecriteriaforrecognitionandmeasurementsubsequenttoacquisitionandclassification.[3]Ch. 5

(a) Applyanddiscusstherecognitionandderecognitionoffinancialassetsandfinancialliabilities.[2]Ch. 11

(b) Applyanddiscusstheclassificationoffinancialassetsandfinancialliabilitiesandtheirmeasurement.[2]Ch. 11

(c) Applyanddiscussthetreatmentofgainsandlossesarisingonfinancialassetsandfinancialliabilities.[2]Ch. 11

(d) Applyanddiscussthetreatmentoftheexpectedlossimpairmentmodel.[2]Ch. 11

(e) Accountforderivativefinancialinstruments,andsimpleembeddedderivatives.[2]Ch. 11

KAPLAN PUBLISHING xi

4 Leases

5 Segment reporting

6 Employee benefits

7 Income taxes

8 Provisions, contingencies, events after the reporting date

(f) Outlinetheprinciplesofhedgeaccountingandaccountforfairvaluehedgesandcashflowhedgesincludinghedgeeffectiveness.[2]Ch. 11

(a) Applyanddiscusstheclassificationofleasesandaccountingforleasesbylessorsandlessees.[3]Ch. 7

(b) Accountforanddiscusssaleandleasebacktransactions.[3]Ch. 7

(a) Determinethenatureandextentofreportablesegments.[3]Ch. 13(b) Specifyanddiscussthenatureofsegmentinformationtobedisclosed.

[3]Ch. 13

(a) Applyanddiscusstheaccountingtreatmentofshorttermandlongtermemployeebenefitsanddefinedcontributionanddefinedbenefitplans.[3]Ch. 8

(b) Accountforgainsandlossesonsettlementsandcurtailments.[2]Ch. 8(c) AccountfortheAssetCeilingtestandthereportingofactuarialgains

andlosses.[2]Ch. 8

(a) Applyanddiscusstherecognitionandmeasurementofdeferredtaxliabilitiesanddeferredtaxassets.[3]Ch. 12

(b) Determinetherecognitionoftaxexpenseorincomeanditsinclusioninthefinancialstatements.[3]Ch. 12

(a) Applyanddiscusstherecognition,derecognitionandmeasurementofprovisions,contingentliabilitiesandcontingentassetsincludingenvironmentalprovisionsandrestructuringprovisions.[3]Ch. 10

(b) Applyanddiscusstheaccountingforeventsafterthereportingdate.[3]Ch. 10

(c) Determineandreportgoingconcernissuesarisingafterthereportingdate.[3]Ch. 10

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xii KAPLAN PUBLISHING

9 Related parties

10 Sharebased payment

11 Reporting requirements of small and mediumsized entities (SMEs)

D FINANCIAL STATEMENTS OF GROUPS OF ENTITIES

1 Group accounting including statements of cash flow

(a) Determinethepartiesconsideredtoberelatedtoanentity.[3]Ch. 14(b) Identifytheimplicationsofrelatedpartyrelationshipsandtheneedfor

disclosure.[3]Ch. 14

(a) Applyanddiscusstherecognitionandmeasurementcriteriaforsharebasedpaymenttransactions.[3]Ch. 9

(b) Accountformodifications,cancellationsandsettlementsofsharebasedpaymenttransactions.[2]Ch. 9

(a) DiscusstheaccountingtreatmentsnotallowableundertheIFRSforSME'sincludingtherevaluationmodelforcertainassets.[3]Ch. 16

(b) DiscussandapplythesimplificationsintroducedbytheIFRSforSMEsincludingaccountingforgoodwillandintangibleassets,financialinstruments,definedbenefitschemes,exchangedifferencesandassociatesandjointventures.[3]Ch. 16

(a) Applythemethodofaccountingforbusinesscombinations,includingcomplexgroupstructures.[3]Ch. 19, 20 and 21

(b) Applytheprinciplesindeterminingthecostofabusinesscombination.[3]Chs. 19, 20 and 21

(c) Applytherecognitionandmeasurementcriteriaforidentifiableacquiredassetsandliabilitiesandgoodwillincludingstepacquisitions.[3]Chs. 19 and 21

(d) Applyanddiscussthecriteriausedtoidentifyasubsidiaryandanassociate.[3]Ch. 19

(e) Determineandapplyappropriateprocedurestobeusedinpreparinggroupfinancialstatements.[3]Csh. 19 23

(f) Identifyandoutlinethecircumstancesinwhichagroupisrequiredtoprepareconsolidatedfinancialstatementsthecircumstanceswhenagroupmayclaimanexemptionfromthepreparationofconsolidatedfinancialstatements,andwhydirectorsmaynotwishtoconsolidateasubsidiaryandwherethisispermitted.[2]Ch. 19

(g) Applytheequitymethodofaccountingforassociates.[3]Ch. 19

KAPLAN PUBLISHING xiii

2 Continuing and discontinued interests

3 Changes in group structures

4 Foreign transactions and entities

E SPECIALISED ENTITIES AND SPECIALISED TRANSACTIONS

1 Financial reporting in specialised, notforprofit and public sector entities

2 Entity reconstructions

(h) Outlineandapplythekeydefinitionsandaccountingmethodswhichrelatetointerestsinjointarrangements.[3]Ch. 19

(i) Prepareanddiscussgroupstatementsofcashflows.[3]Ch. 24

(a) Preparegroupfinancialstatementswhereactivitieshavebeendiscontinued,orhavebeenacquiredordisposedintheperiod.[3]Ch. 21

(b) Applyanddiscussthetreatmentofasubsidiarywhichhasbeenacquiredexclusivelywithaviewtosubsequentdisposal.[3]Ch. 21

(a) Discussthereasonsbehindagroupreorganisation.[3]Ch. 23(b) Evaluateandassesstheprincipaltermsofaproposedgroup

reorganisation.[3]Ch. 23

(a) Outlineandapplythetranslationofforeigncurrencyamountsandtransactionsintothefunctionalcurrencyandthepresentationalcurrency.[3]Ch. 22

(b) Accountfortheconsolidationofforeignoperationsandtheirdisposal.[2]Ch. 22

(a) Applyknowledgefromthesyllabustostraightforwardtransactionsandeventsarisinginspecialised,notforprofit,andpublicsectorentities.[3]Chs. 5 and 16

(a) Identifywhenanentitymaynolongerbeviewedasagoingconcernoruncertaintyexistssurroundingthegoingconcernstatus.[2]Ch. 16

(b) Identifyandoutlinethecircumstancesinwhichareconstructionwouldbeanappropriatealternativetoacompanyliquidation.[2]Ch. 16

(c) Outlinetheappropriateaccountingtreatmentrequiredrelatingtoreconstructions.[2]Ch. 16

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xiv KAPLAN PUBLISHING

F IMPLICATIONS OF CHANGES IN ACCOUNTING REGULATION ON FINANCIAL REPORTING

1 The effect of changes in accounting standards on accounting systems

2 Proposed changes to accounting standards

G THE APPRAISAL OF FINANCIAL PERFORMANCE AND POSITION OF ENTITIES

1 The creation of suitable accounting policies

2 Analysis and interpretation of financial information and measurement of performance

(a) Applyanddiscusstheaccountingimplicationsofthefirsttimeadoptionofabodyofnewaccountingstandards.[3]Ch. 15

(a) Identifytheissuesanddeficiencieswhichhaveledtoaproposedchangetoanaccountingstandard.[2]Ch. 15

(a) Developaccountingpoliciesforanentitywhichmeetstheentitysreportingrequirements.[3]Ch. 3

(b) Identifyaccountingtreatmentsadoptedinfinancialstatementsandassesstheirsuitabilityandacceptability.[3]Ch. 3

(a) Selectandcalculaterelevantindicatorsoffinancialandnonfinancialperformance.[3]Ch. 3

(b) Identifyandevaluatesignificantfeaturesandissuesinfinancialstatements.[3]Ch. 3

(c) Highlightinconsistenciesinfinancialinformationthroughanalysisandapplicationofknowledge.[3]Ch. 3

(d) Makeinferencesfromtheanalysisofinformationtakingintoaccountthelimitationoftheinformation,theanalyticalmethodsusedandthebusinessenvironmentinwhichtheentityoperates.[3]Ch. 3

KAPLAN PUBLISHING xv

H CURRENT DEVELOPMENTS

1 Environmental and social reporting

2 Convergence between national and international reporting standards

3Current reporting issues

Thesuperscriptnumbersinsquarebracketsindicatetheintellectualdepthatwhichthesubjectareacouldbeassessedwithintheexamination.Level1(knowledgeandcomprehension)broadlyequateswiththeKnowledgemodule,Level2(applicationandanalysis)withtheSkillsmoduleandLevel3(synthesisandevaluation)totheProfessionallevel.However,lowerlevelskillscancontinuetobeassessedasyouprogressthrougheachmoduleandlevel.

The examination Examination format

Thesyllabusisassessedbyathreehourpaperbasedexamination. Itexaminesprofessionalcompetenceswithinthecorporatereportingenvironment.

Studentswillbeexaminedonconcepts,theoriesandprinciplesandontheirabilitytoquestionandcommentonproposedaccountingtreatments.

(a) Appraisetheimpactofenvironmental,social,andethicalfactorsonperformancemeasurement.[3]Ch. 3 and 17

(b) Evaluatecurrentreportingrequirementsinthearea,includingthedevelopmentofintegratedreporting.[3]Ch. 17

(c) Discusswhyentitiesmightincludedisclosuresrelatingtotheenvironmentandsociety.[3]Ch. 17

(a) EvaluatetheimplicationsofworldwideconvergencewithInternationalFinancialReportingStandards.[3]Ch. 15

(b) Discusstheinfluenceofnationalregulatorsoninternationalfinancialreporting.[2]Ch. 15

(a) Discusscurrentissuesincorporatereporting,including recentIFRSs practiceandregulatoryissues proposedchangestoIFRS problemswithextantstandards.[3]Ch. 18 and throughout

Introduction

xvi KAPLAN PUBLISHING

Studentsshouldbecapableofrelatingprofessionalissuestorelevantconceptsandpracticalsituations.Theevaluationofalternativeaccountingpracticesandtheidentificationandprioritisationofissueswillbeakeyelementofthepaper.Professionalandethicaljudgementwillneedtobeexercised,togetherwiththeintegrationoftechnicalknowledgewhenaddressingcorporatereportingissuesinabusinesscontext.

Globalissueswillbeaddressedviathecurrentissuesquestionsonthepaper.Studentswillberequiredtoadopteitherastakeholderoranexternalfocusinansweringquestionsandtodemonstratepersonalskillssuchasproblemsolving,dealingwithinformationanddecisionmaking.

Thepaperalsodealswithspecificprofessionalknowledgeappropriatetothepreparationandpresentationofconsolidatedandotherfinancialstatementsfromaccountingdata,toconformwithaccountingstandards.

SectionAwillconsistofonescenariobasedquestionworth50marks.Itwilldealwiththepreparationofconsolidatedfinancialstatementsincludinggroupstatementsofcashflowsandwithissuesinfinancialreporting.

StudentswillberequiredtoanswertwooutofthreequestionsinSectionB,whichwillnormallycomprisetwoquestionswhichwillbescenarioorcasestudybasedandoneessayquestionwhichmayhavesomecomputationalelement. SectionBcoulddealwithanyaspectsofthesyllabus.

UK syllabus studentswillsitanexamthatisidenticalinformattotheInternationalsyllabusexam.TheExaminerhasindicatedthatthedifferencesfromtheIFRSpaperwhichmaybeexaminedintheUKpaperwillaccountfornomorethan20%ofthatpaper.Thedifferencesexaminedmaybeincludedwithinoneormorequestionsintheexaminationpaper.

Notethat,incommonwithotherACCAProfessionallevelpapers,therewillbeatotaloffourprofessionalmarksavailabletocandidatesineachP2examinationpaper.InthecaseofP2,theprofessionalmarkswillbeonlyavailableinsectionB,withtwomarksallocatedtoeachofthethreeoptionalquestions,withcandidatesrequiredtoattemptanytwoofthosequestions.

Number of marksSectionACompulsoryquestion 50SectionBTwofromthree25markquestions 50

Totaltimeallowed:3hours 100

KAPLAN PUBLISHING xvii

Study skills and revision guidance

ThissectionaimstogiveguidanceonhowtostudyforyourACCAexamsandtogiveideasonhowtoimproveyourexistingstudytechniques.

Preparing to study

Set your objectives

Beforestartingtostudydecidewhatyouwanttoachievethetypeofpassyouwishtoobtain.Thiswilldecidethelevelofcommitmentandtimeyouneedtodedicatetoyourstudies.

Devise a study plan

Determinewhichtimesoftheweekyouwillstudy.

Splitthesetimesintosessionsofatleastonehourforstudyofnewmaterial.Anyshorterperiodscouldbeusedforrevisionorpractice.

Putthetimesyouplantostudyontoastudyplanfortheweeksfromnowuntiltheexamandsetyourselftargetsforeachperiodofstudyinyoursessionsmakesureyoucoverthecourse,courseassignmentsandrevision.

Ifyouarestudyingformorethanonepaperatatime,trytovaryyoursubjectsasthiscanhelpyoutokeepinterestedandseesubjectsaspartofwiderknowledge.

Whenworkingthroughyourcourse,compareyourprogresswithyourplanand,ifnecessary,replanyourwork(perhapsincludingextrasessions)or,ifyouareahead,dosomeextrarevision/practicequestions.

Effective studying

Active reading

Youarenotexpectedtolearnthetextbyrote,rather,youmustunderstandwhatyouarereadingandbeabletouseittopasstheexamanddevelopgoodpractice.AgoodtechniquetouseisSQ3RsSurvey,Question,Read,Recall,Review:

(1) Survey the chapter lookattheheadingsandreadtheintroduction,summaryandobjectives,soastogetanoverviewofwhatthechapterdealswith.

(2) Question whilstundertakingthesurvey,askyourselfthequestionsthatyouhopethechapterwillanswerforyou.

Introduction

xviii KAPLAN PUBLISHING

Youmayalsofindithelpfultorereadthechaptertotrytoseethetopic(s)itdealswithasawhole.

Notetaking

Takingnotesisausefulwayoflearning,butdonotsimplycopyoutthetext.Thenotesmust:

Tryingtosummariseachapterwithoutreferringtothetextcanbeausefulwayofdeterminingwhichareasyouknowandwhichyoudon't.

Three ways of taking notes:

Summarise the key points of a chapter.

Make linear notes alistofheadings,dividedupwithsubheadingslistingthekeypoints.Ifyouuselinearnotes,youcanusedifferentcolourstohighlightkeypointsandkeeptopicareastogether.Useplentyofspacetomakeyournoteseasytouse.

Try a diagrammatic form themostcommonofwhichisamindmap.Tomakeamindmap,putthemainheadinginthecentreofthepaperandputacirclearoundit.Thendrawshortlinesradiatingfromthistothemainsubheadings,whichagainhavecirclesaroundthem.Thencontinuetheprocessfromthesubheadingstosubsubheadings,advantages,disadvantages,etc.

Highlighting and underliningyoumayfinditusefultounderlineorhighlightkeypointsinyourstudytext,butdobeselective.Youmayalsowishtomakenotesinthemargins.

(3) Readthroughthechapterthoroughly,answeringthequestionsandmakingsureyoucanmeettheobjectives.Attempttheexercisesandactivitiesinthetext,andworkthroughalltheexamples.

(4) Recall attheendofeachsectionandattheendofthechapter,trytorecallthemainideasofthesection/chapterwithoutreferringtothetext.Thisisbestdoneafterashortbreakofacoupleofminutesafterthereadingstage.

(5) Review checkthatyourrecallnotesarecorrect.

beinyourownwords beconcise coverthekeypoints bewellorganised bemodifiedasyoustudyfurtherchaptersinthistextorinrelatedones.

KAPLAN PUBLISHING xix

Revision

Thebestapproachtorevisionistorevisethecourseasyouworkthroughit.Alsotrytoleavefourtosixweeksbeforetheexamforfinalrevision.Makesureyoucoverthewholesyllabusandpayspecialattentiontothoseareaswhereyourknowledgeisweak.Herearesomerecommendations:

Readthroughthetextandyournotesagainandcondenseyournotesintokeyphrases.Itmayhelptoputkeyrevisionpointsontoindexcardstolookatwhenyouhaveafewminutestospare.

Reviewanyassignmentsyouhavecompletedandlookatwhereyoulostmarksputmoreworkintothoseareaswhereyouwereweak.

Practiseexamstandardquestionsundertimedconditions.Ifyouareshortoftime,listthepointsthatyouwouldcoverinyouranswerandthenreadthemodelanswer,butdotrytocompleteatleastafewquestionsunderexamconditions.

Alsopractiseproducinganswerplansandcomparingthemtothemodelanswer.

Ifyouarestuckonatopicfindsomebody(atutor)toexplainittoyou.

Readgoodnewspapersandprofessionaljournals,especiallyACCA'sStudentAccountantthiscangiveyouanadvantageintheexam.

Ensureyouknowthestructureoftheexamhowmanyquestionsandofwhattypeyouwillbeexpectedtoanswer.Duringyourrevisionattemptallthedifferentstylesofquestionsyoumaybeasked.

Further reading

Youmayfindthefollowingadditionalreadinghelpful:

'Astudent'sguidetopreparingfinancialstatements'bySallyBaker

'Astudent'sguidetogroupaccounts'byTomClendon.

'Astudent'sguidetoInternationalFinancialReportingStandards'byClareFinch.

YoucanalsofindtechnicalarticleswithinthestudentsectionofACCA'swebsite.

PleasebeawarethatACCAupdatetheirlistofexaminabledocumentsannually.Youshouldrefertothisbeforeundertakinganyfurtherreading.

Introduction

xx KAPLAN PUBLISHING

Technical update

ThistexthasbeenupdatedtoreflectExaminableDocumentsSeptember2015toJune2016issuedbyACCA.AdditionaldocumentsandstandardsthatareexaminablefromSeptember2015include:

Therearealsoanumberofexposuredraftsthatarenewlyexaminable.TheseareoutlinedinChapter18.

IFRS15RevenuefromContractswithCustomers recentlyissuedsectionsofIFRS9FinancialInstruments.

KAPLAN PUBLISHING xxi

xxii KAPLAN PUBLISHING

TheConceptualFrameworkChapter learning objectives

Uponcompletionofthischapteryouwillbeableto:

evaluatemodelsadoptedbystandardssetters discusstheuseofthe2010ConceptualFrameworkforFinancial

Reporting(2010Framework)intheproductionofaccountingstandards

assessthesuccessofthe2010Frameworkinintroducingrigorousandconsistentaccountingstandards

identifytherelationshipbetweenaccountingtheoryandpractice criticallyevaluateaccountingprinciplesandpracticesusedin

corporatereporting explainthereasonsfortheintroductionofIFRS13Fairvalue

measurementtogetherwithapplicationofthekeyprinciplestodeterminefairvaluemeasurementinspecificsituations.

1

chapter

1

1Conceptual Framework for Financial Reporting Introduction: the need for a conceptual framework

Aconceptualframeworkisasetoftheoreticalprinciplesandconceptsthatunderliethepreparationandpresentationoffinancialstatements.

Ifnoconceptualframeworkexisted,thenitismorelikelythataccountingstandardswouldbeproducedonahaphazardbasisasparticularissuesandcircumstancesarose.Theseaccountingstandardsmightbeinconsistentwithoneanother,orperhapsevencontradictory.

Astrongconceptualframeworkthereforemeansthatthereisasetofprinciplesinplacefromwhichallfutureaccountingstandardsdraw.Italsoactsasareferencepointforthepreparersoffinancialstatementsifthereisnoadequateaccountingstandardgoverningthetypesoftransactionsthatanentityentersintothis(thiswillbeextremelyrare).

ThissectionofthetextconsidersthecontentsoftheConceptualFrameworkforFinancialReporting('theFramework')inmoredetail.

The purpose of the Framework

TheFrameworkstatesthatitspurposeisto:

(a) assistinthedevelopmentoffutureaccountingstandardsandinthereviewofexistingstandards

(b) provideabasisforreducingthenumberofalternativeaccountingtreatmentspermittedbyinternationalstandards

(c) assistnationalstandardsettersindevelopingnationalstandards(d) assistpreparersoffinancialstatementsinapplyinginternational

standardsandindealingwithissuesnotcoveredbyinternationalstandards

(e) assistauditorsinforminganopinionwhetherfinancialstatementsconformtointernationalstandards

The Conceptual Framework

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The objective of financial reporting

Theobjectiveoffinancialreportingistoprovideinformationaboutthereportingentitythatisusefultoexistingandpotentialinvestors,lendersandothercreditorsinmakingdecisionsaboutprovidingresourcestotheentity.

Financialreportsprovideinformationaboutthefinancialpositionofareportingentity,whichisinformationabouttheentityseconomicresourcesandtheclaimsagainstthereportingentity.Financialreportsalsoprovideinformationabouttheeffectsoftransactionsandothereventsthatchangeareportingentityseconomicresourcesandclaims.

Underlying assumption

TheFrameworkidentifiesoneunderlyingassumptiongoverningthepreparationoffinancialstatements:

InpreviousversionsoftheFramework,accrualswasalsoregardedasafundamentalassumption.AlthoughitisstillreferredtowithintheFramework,itisnolongeranunderlyingassumption.

Qualitative characteristics of useful financial information

TheFrameworkidentifiestypesofinformationthatareusefultotheusersoffinancialstatements.

Itidentifiestwofundamentalqualitativecharacteristicsofusefulfinancialinformation:

Informationisrelevantifitiscapableofmakingadifferenceindecisionsmadebyusersofthatinformation.

(f) assistusersoffinancialstatementsininterpretingtheinformationcontainedinfinancialstatementscomplyingwithinternationalstandards

(g) provideinformationabouttheIASBsapproachtosettinginternationalstandards.

Goingconcern Thegoingconcernbasisassumesthattheentityhasneitherthe

neednortheintentiontoliquidateorcurtailmateriallythescaleofitsoperations.

(1) Relevance

Informationwillberegardedasbeingrelevantifithaseitherpredictivevalueorconfirmatoryvaluetoauser

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Forfinancialinformationtobefaithfullypresented,itmustbe:

Therefore,itmustcompriseinformationnecessaryforaproperunderstanding,itmustbewithoutbiasormanipulationandclearlydescribed.

Inadditiontothetwofundamentalqualitativecharacteristics,therearefourenhancingqualitativecharacteristicsofusefulfinancialinformation.Theseshouldbemaximisedwhenpossible:

Informationismoreusefulifitcanbecomparedwithsimilarinformationaboutotherentities,oreventhesameentityoverdifferenttimeperiods.

Verifiabilitymeansthatdifferent,knowledgeableandindependentobserverscouldreachconsensus,althoughnotnecessarilycompleteagreement,thataparticularpresentationofanitemoritemsisafaithfulrepresentation.

Informationshouldbemadeavailabletouserswithinatimescalewhichislikelytoinfluencetheirdecisions.

Relevanceissupportedbymaterialityconsiderations Informationisregardedasmaterialifitsomissionor

misstatementcouldinfluencethedecisionsmadebyusersofthatinformation.

(2) Faithful representation

complete neutral freefromerror.

(1) Comparability

Consistencyofmethodology,approachorpresentationhelpstoachievecomparabilityoffinancialinformation.

Permittingdifferentaccountingtreatmentsforsimilaritemsislikelytoreducecomparability.

(2) Verifiability

Verifiabilityoffinancialinformationprovidesassurancetousersregardingitscredibilityandreliability.

(3) Timeliness

Olderinformationisgenerallylessuseful.

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Understandabilityisenhancedifinformationisclassified,characterisedandpresentedclearlyandconcisely.

The cost constraint

Itisimportantthatthecostsincurredinreportingfinancialinformationarejustifiedbythebenefitsthattheinformationbringstoitsusers.

(4) Understandability

The elements of financial statements

Thefinancialeffectsofatransactioncanbegroupedintooneoffivebroadclasses,knownastheelements.

AccordingtotheFramework,thefiveelementsoffinancialstatementsareasfollows:

Anassetisaresourcecontrolledbytheentityasaresultofpasteventsandfromwhichfutureeconomicbenefitsareexpectedtoflowtotheentity.

Aliabilityisapresentobligationoftheentityarisingfrompastevents,thesettlementofwhichisexpectedtoresultinanoutflowfromtheentityofresourcesembodyingeconomicbenefits.

Equityistheresidualinterestinanentitysassetsafterdeductingallitsliabilities.

Incomeistheincreaseineconomicbenefitsduringtheaccountingperiod.

Expensesaredecreasesineconomicbenefitsduringtheaccountingperiod.

Recognition of the elements of financial statements

Anitemshouldberecognisedinthefinancialstatementsif:

itmeetsoneofthedefinitionsofanelement itisprobablethatanyfutureeconomicbenefitassociatedwiththeitem

willflowtoorfromtheentity theitemcanbemeasuredatamonetaryamount(costorvalue)with

sufficientreliability.

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Therecognitionofassetsandliabilitiesfallsintothreestages:

Measurement of the elements of financial statements

Measurementistheprocessofdeterminingtheamountatwhichtheelementsshouldberecognisedandcarriedatinthestatementoffinancialpositionandthestatementofprofitorlossandothercomprehensiveincome.

TheFrameworkidentifiesfourpossiblemeasurementbases:

Historical cost

Assetsarerecordedattheamountofcashorcashequivalentspaidtoacquirethem.

Liabilitiesarerecordedattheproceedsreceivedinexchangefortheobligation,orattheamountsexpectedtobepaidtosatisfytheliability.

Current cost

Assetsarecarriedattheircurrentpurchaseprice.

Liabilitiesarecarriedattheundiscountedamountcurrentlyrequiredtosettlethem.

Realisable value

Assetsarecarriedattheamountthatcouldcurrentlybeobtainedbyanorderlydisposal.Liabilitiesarecarriedattheirsettlementvaluestheamounttobepaidtosatisfytheminthenormalcourseofbusiness.

Present value

Assetsarecarriedatthepresentdiscountedvalueofthefuturenetcashinflowsthattheitemisexpectedtogenerateinthenormalcourseofbusiness.Liabilitiesarecarriedatthepresentdiscountedvalueoftheexpectedcashoutflowsnecessarytosettlethem.

initialrecognition(e.g.thepurchaseofanoncurrentasset) subsequentremeasurement(e.g.revaluationoftheaboveasset) derecognition(e.g.saleoftheasset).

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OneoftheobjectivesoftheFrameworkistoprovideabasisfortheformulationofIFRS.Byprovidingdefinitionsoftheelementsofthefinancialstatementsaswellasguidanceonrecognitionandmeasurement,theFrameworkformsabasisfordealingwithanyaccountingissuesthatarisewhicharenotcoveredbyaccountingstandards.

TheFrameworksapproachbuildscorporatereportingaroundthedefinitionsofassetsandliabilitiesandthecriteriaforrecognisingandmeasuringtheminthestatementoffinancialposition.Thisapproachviewsaccountingfromtheperspectiveofthestatementoffinancialposition('abalancesheetperspective'),whereasmostcompanieswouldnotconsiderthemeasurementandrecognitionofassetsandliabilitiesasthestartingpointforthedeterminationofprofit.Inmanyjurisdictions,thefinancialstatementsformthebasisofdividendpayments,thestartingpointfortheassessmentoftaxation,andoftenthebasisforexecutiveremuneration.Abalancesheetfairvaluesystem,whichtheIASBfavours,hasmajorimpactsontheaboveelements.

Discussion paper: A review of the conceptual framework for financial reporting

TheIASBhasidentifiedanumberofproblemswiththeexistingFramework:

ThediscussionpaperissuedinJuly2013suggestswaystoaddresstheseweaknessesandcoversanumberofotherkeyareas.

The primary purpose of the framework

TheprimarypurposeoftherevisedFrameworkwouldbetoassisttheIASBbyidentifyingconceptsthattheIASBwilluseconsistentlywhendevelopingandrevisingIFRSs.

Importantareasarenotcovered.Forexample,theexistingFrameworkprovidesverylittleguidanceonmeasurement.

Theguidanceinsomeareasisunclear.Forexample,theexistingdefinitionsofassetsandliabilitiescouldbeimproved.

SomeaspectsoftheexistingFrameworkareoutofdateandfailtoreflectthecurrentthinkingoftheIASB.

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Assessment of the Framework

Current issues: The Framework

Definitions of assets and liabilities

Thediscussionpaperproposesthefollowingdefinitions:

Thesedifferfromcurrentdefinitionsofassetsandliabilities,whichstatethatinflowsoroutflowsofeconomicbenefitsshouldbeprobable.

Recognition and derecognition

ThediscussionpapersaysthatallassetsandliabilitiesshouldberecognisedunlesstheIASBdecides,whendevelopingastandard,thatrecognitionwouldnotberelevanttotheusersorthatfaithfulrepresentationisimpossible.

TheexistingFrameworkdoesnotaddressderecognition.TheIASBsviewinthediscussionpaperisthatanentityshouldderecogniseanassetoraliabilitywhenitnolongermeetstherecognitioncriteria.

Defining equity and distinguishing equity from liabilities

TheIASBhaveproposedthattheexistingdefinitionofequityshouldremain.

Intermsofdistinguishingequityfromliabilities,theIASB'spreferredapproachisthatitemsshouldbeclassifiedasliabilitiesifthereisanobligationtodelivereconomicresources.

UnderIAS32,someobligationstodeliverequityinstrumentsarecurrentlyclassedasliabilities.However,perthediscussionpaper,allobligationstodeliverequityinstrumentswouldbeclassifiedasequity.

Measurement

TheIASBisawarethatasinglemeasurementbasisforallassetsandliabilitiesmaynotprovidethemostrelevantinformationforusersoffinancialstatements.Therefore,whenselectingwhichmeasurementtouseforaparticularitem,theIASBshouldconsiderwhatinformationthatmeasurementwillproduceinboththestatementoffinancialpositionandthestatementofprofitorlossandOCI.

Anassetisapresenteconomicresourcecontrolledbytheentitybecauseofpastevents.

Aliabilityisapresentobligationoftheentitytotransferaneconomicresourcebecauseofpastevents.

An'economicresource'isaright,orothersourceofvalue,thatiscapableofproducingeconomicbenefits.

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Presentation and disclosure

TheexistingFrameworkdoesnotprovideguidanceonpresentationanddisclosure.Thediscussionpaperproposesthatgreaterguidanceshouldbegiven.

Presentation in the statement of profit or loss and other comprehensive income

Thecurrentframeworkdoesnotcontainprinciplestodeterminetheitemstoberecognisedinprofitorloss,andinOCI.

Accordingtoproposals,allitemsofincomeandexpenseshouldberecognisedinprofitorlossunlessrecognisinganiteminOCIenhancestherelevanceofprofitorlossinthatperiod.IfanitemisrecognisedinOCI,itmustsubsequentlybereclassifiedtoprofitorlosswhenthisresultsinrelevantinformation.

ThediscussionpapersaysthatrecognisinganiteminOCIenhancesrelevancefor:

Bridgingitemsarisewhenmeasurementusedinthestatementoffinancialpositiondiffersfrommeasurementinprofitorloss.Forinstance,anassetmaybeheldatfairvalueinthestatementoffinancialposition,buttheprofitorlossimpactmaybedeterminedusingamortisedcost.TheamounttoberecognisedinOCIwouldthereforebethedifference(the'bridge')betweenthetwomeasures.

Mismatchedremeasurementsarisethentherearelinkedassetsorliabilitiesbutonlyoneitemwithinthesetisregularlyremeasuredtocurrentvalue.ItisproposedthatthegainorlossonremeasurementofthesingleitemshouldberecordedinOCI.Thiswillberecycledtoprofitorlosslatersothattheeffectsofthetwolinkeditemsarepresentedtogether.

Theproblemwiththis'narrow'approachisthatitcontradictscertainaccountingstandardsalreadyinissue.Forexample,revaluationgainsonproperty,plantandequipmentarerecordedinOCI,eventhoughthisnotabridgingitemoranaccountingmismatch.

Therefore,abroadapproachhasalsobeenproposedthatwouldpermitmoreitemstoberecognisedinOCI.

bridgingitems mismatchedremeasurements.

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InSeptember2010,theIASBissuedtheConceptualFrameworkforFinancialReporting2010(theFramework).Nonetheless,proposalstorestartworkontheFrameworkquicklyachievedalotofsupport.ThisledtothereleaseofadiscussionpaperinSeptember2013thatoutlinedfurtherpotentialchangestotheFramework.ThesediscussionsclearlyhighlighttheimportanceoftheFrameworktotheusersandproducersofInternationalFinancialReportingStandards.Required:

(a) Explain the purpose of the Framework.(b) How does the Framework define the elements relating to

financial position, and why might these definitions be criticised?

2Fair Value Measurement IFRS 13 Introduction

TheobjectiveofIFRS13istoprovideasinglesourceofguidanceforfairvaluemeasurementwhereitisrequiredbyareportingstandard,ratherthanitbeingspreadthroughoutseveralreportingstandards.

Scope

IFRS13doesnotapplyto:

Fair value measurement and IFRS

Thefairvalueofanassetoraliabilitymayberequiredtobemeasuredinavarietyofcircumstancesasfollows:

sharebasedpaymenttransactionswithinthescopeofIFRS2SharebasedPayment

leasingtransactionswithinthescopeofIAS17Leases. measurementsthataresimilartofairvaluebutwhicharenotfairvalue,

suchasnetrealisablevalue(IAS2Inventories)orvalueinuse(IAS36ImpairmentofAssets).

Fairvalueuponinitial recognitionariseswhenareportingstandardrequiresfairvaluetobemeasureduponinitialrecognition. Forexample,IFRS3BusinessCombinations(Revised)requires

thattheseparablenetassetsoftheacquiredentityaremeasuredatfairvaluetodeterminegoodwillatacquisition.

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Test your understanding 1 Framework

Asindicatedbytheabove,arangeofIFRSsrequirethatassetsandliabilitiesaremeasuredatfairvalueatdifferenttimes.Therefore,theintroductionofIFRS13FairValueMeasurementhasbroughtmanybenefits.

Reasons for the issue of IFRS 13

Fairvalueonarecurring basisariseswhenareportingstandardrequiresfairvaluetobemeasuredonanongoingbasis. ExamplesofthisincludeIAS40InvestmentProperty,orIFRS9

FinancialInstrumentswhichrequiresomefinancialassetsandliabilitiestobemeasuredatfairvalueateachreportingdate.

Fairvalueonanonrecurring basisariseswhenareportingstandardrequiresfairvaluetobemeasuredatfairvalueonlyincertainspecifiedcircumstances. Forexample,IFRS5requiresthatassetsclassifiedasheldforsale

aremeasuredatfairvaluelesscoststosell.

Tostandardisethedefinitionoffairvalue. Tohelpusersbyprovidingadditionaldisclosuresrelatingtohowfair

valuehasbeendetermined. Toimproveconsistencyofreportedinformation. ToincreasetheextentofconvergencebetweenIFRSandUSGAAP.

The definition of fair value

Fair valueisdefinedbyIFRS13as:

The basis of a fair value measurement

Thefollowingfactorsshouldbetakenintoconsiderationwhenmeasuringfairvalue:

thepricethatwouldbereceivedtosellanassetorpaidtotransferaliabilityinanorderlytransactionbetweenmarketparticipantsatthemeasurementdate.

Theassetorliabilitytobemeasuredmaybeanindividualasset(e.g.plotofland)orliability,oragroupofassetsandliabilities(e.g.acashgeneratingunitorbusiness),dependinguponexactlywhatisrequiredtobemeasured.

Themeasurementshouldreflectthepriceatwhichanorderly transactionbetweenwillingmarketparticipantswouldtakeplaceundercurrentmarketconditions.Itshouldnotbeadistresstransaction.

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Thevalueoftheassetofliabilityshouldtakeintoaccounttheassumptionsofmarket participants,whowillgenerallywanttomaximisetheirownbestinterests Thevaluationmustthereforereflectthecharacteristicsoftheasset

orliability(age,condition,location,andrestrictionsonuseorsale)thatarerelevanttomarketparticipants.

Theentitymustdeterminethemarketinwhichanorderlytransactionwouldtakeplace Thiswillnormallybetheprincipal market,whichisthemarketin

whichthetransactionwouldnormallytakeplace Intheabsenceofaprincipalmarket,themostadvantageous

marketshouldbeused.

Fairvalueisnotadjustedfortransaction costsbecausethesearespecifictothetransactionandnotacharacteristicoftheassetorliability Transactioncostsshould,however,betakenintoconsiderationif

theentityneedstodeterminethemostadvantageousmarketforitsassetsorliabilities

Transactioncostsdonotincludetransportcosts.Locationisacharacteristicofmostassetsandthereforefairvalueshouldbeadjustedtoreflectthecostsofgettingtheassettomarket.

Anassetissoldintwodifferentactivemarketsatdifferentprices.Anentityentersintotransactionsinbothmarketsandcanaccessthepriceinthosemarketsfortheassetatthemeasurementdateasfollows:

Required:

What is the fair value of the asset if:

Market 1 Market 2$ $

Price 26 25Transactioncosts (3) (1)Transportcosts (2) (2)

Netpricereceived 21 22

(a) market 1 is the principal market for the asset?(b) no principal market can be determined?

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Test your understanding 2 Fair value

3Fair value hierarchy

Inordertomaximiseverifiability,aswellastoincreasecomparability,IFRS13statesthatanentityshouldmaximisetheuseofobservableinputswhendeterminingfairvalue.

Toaidwiththeapplicationoftheabove,IFRS13establishesahierarchythatcategorisestheinputstovaluationtechniquesusedtomeasurefairvalue:

IFRS13givesprioritytolevel1inputs.

Level 1 inputscomprisequotedprices(observable)inactivemarketsforidenticalassetsandliabilitiesatthemeasurementdate Thisisregardedasprovidingthemostreliableevidenceoffair

valueandislikelytobeusedwithoutadjustment.

Level 2 inputsareobservableinputs,otherthanthoseincludedwithinLevel1above,whichareobservabledirectlyorindirectly Thismayincludequotedpricesforsimilar(notidentical)assetor

liabilitiesinactivemarkets,orpricesforidenticalorsimilarassetsandliabilitiesininactivemarkets.Typically,theyarelikelytorequiresomedegreeofadjustmenttoarriveatafairvaluemeasurement

AnadjustmenttoaLevel2inputthatissignificanttotheentiremeasurementmightresultinafairvaluemeasurementcategorisedwithinLevel3ofthefairvaluehierarchy.

Level 3 inputsareunobservableinputsforanassetorliability,baseduponthebestinformationavailable,includinginformationthatmaybereasonablyavailablerelatingtomarketparticipants Anentityshalldevelopunobservableinputsusingthebest

informationavailableinthecircumstances,whichmightincludetheentitysowndata.

Inputsintoavaluationtechniqueshouldbeconsistentwiththosewhichwouldbeusedbymarketparticipants,includingcontrolpremiumsordiscountsforlackofcontrol.Pricesbaseduponbidaskspreadsshouldbethemostrepresentativeoffairvaluefromwithinthatspread.

Pricesmaybeprovidedbythirdparties,suchasbrokers,butthepricesmustbedeterminedinaccordancewiththerequirementsofIFRS13e.g.theymayberegardedaseitherobservableorunobservabledata.

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Inputs to determine fair value

Examplesofinputsusedtodeterminefairvalueinclude:

Asset or liability Example

Level 1 Equitysharesinalistedentity

Unadjustedquotedpricesinanactivemarket.

Level 2 Finishedgoodsinventoryataretailoutlet

Pricepaidbyretailcustomers.

Licenceacquiredaspartofabusinesscombinationwhichwasrecentlynegotiatedwithanunrelatedparty

Theroyaltyratecontainedwithinthecontract.

Cashgeneratingunit Valuationmultiplefromobservedtransactionsinvolvingsimilarbusinesses.

Buildingheldandused Pricepersquaremetreforthebuildingfromobservablemarketdata,suchasobservedtransactionsforsimilarbuildingsinsimilarlocations.

Level 3 Interestrateswap Adjustmentmadetoamidmarketnonbindingpriceusingdatathatcannotbedirectlyobservedorcorroborated

Decommissioningliabilityassumeduponabusinesscombination

Useofowndatatomakeestimatesofexpectedfuturecashoutflowstofulfiltheobligationusedtoestimatethepresentvalueofthatfutureobligation.

Cashgeneratingunit Profitorcashflowforecastusingowndata.

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Valuationtechniquesshouldbeusedwhichareappropriatetotheassetorliabilityatthemeasurementdateandforwhichsufficientdataisavailable,applyingthefairvaluehierarchytomaximisetheuseofobservableinputsasfaraspossible.IFRS13identifiesthreevaluationapproaches:

Morethanonevaluationtechniquemaybeusedinhelpingtodeterminefairvalueinaparticularsituation.NotethatachangeinvaluationtechniqueisregardedasachangeofaccountingestimateinaccordancewithIAS8whichneedstobeproperlydisclosedinthefinancialstatements.

(1) Incomeapproache.g.whereestimatedfuturecashflowsmaybeconvertedintoasingle,currentamountstatedatpresentvalue.

(2) Marketapproache.g.wherepricesandothermarketrelateddataisusedforsimilaroridenticalassets,liabilitiesorgroupsofassetsandliabilities.

(3) Costapproache.g.toarriveatwhatmayberegardedascurrentreplacementcosttodeterminethecostthatwouldbeincurredtoreplacetheserviceoroperationalcapacityofanasset.

Nonfinancial assets

Thefairvalueofanonfinancialassetisbaseduponhighestandbestuseofthatassetthatwouldmaximiseitsvalue,baseduponuseswhicharephysicallypossible,legallypermissibleandfinanciallyfeasible.Thisisconsideredfromtheperspectiveofmarketparticipants,eveniftheymayusetheassetdifferently.Currentuseofanonfinancialassetispresumedtobeitshighestandbestuse,unlesstherearefactorsthatwouldsuggestotherwise.

Ineithersituation,itisassumedthattheassetissoldindividually,ratherthanaspartofacollectionofassetsandliabilities.

Usedincombinationwithotherassetsfairvalueofanassetwillbebaseduponwhatwouldbereceivediftheassetwassoldtoanothermarketparticipant,andthatthecomplementaryassetsandliabilitiestheyneededforhighestandbestusewouldbeavailabletothem.

Usedonastandalonebasisthepricethatwouldbereceivedtoselltheassettoamarketparticipantwhowoulduseitonastandalonebasis.

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Specific application principles

Valuation techniques

Example Land

Anentityacquireslandinabusinesscombination.InaccordancewithIFRS3(revised),thismustbestatedatfairvalueatthedateofacquisitiontohelpdeterminethevalueofgoodwillatthatdate.Thelandiscurrentlydevelopedforindustrialuseasasiteforafactory.Alternatively,thesitecouldbedevelopedintoablockofresidentialflatswhich,baseduponevidencerelatingtoadjoiningplotsofasimilarsize,appearstobeapracticaluseofthesite.

Thecurrentuseoflandispresumedtobeitshighestandbestuseunlessmarketorotherfactorssuggestadifferentuse.Inthissituation,thereisapossiblealternativeusewhichshouldbeconsideredasfollows:

Thehighestandbestuseofthelandwouldbedeterminedbytakingthehighermeasurementfromthetwopossibleoutcomes:

Example Research and development project

Anentityacquiresaresearchanddevelopment(R&D)projectinabusinesscombination.Theentitydoesnotintendtocompletetheprojectas,ifcompleted,theprojectwouldcompetewithoneofitsownprojects(toprovidethenextgenerationoftheentityscommercialisedtechnology).Instead,theentityintendstohold(i.e.lockup)theprojecttopreventitscompetitorsfromobtainingaccesstothetechnology.Indoingthistheprojectisexpectedtoprovidedefensivevalue,principallybyimprovingtheprospectsfortheentitysowncompetingtechnologyandpreventingaccessbycompetitorstothetechnology.

Tomeasurethefairvalueoftheprojectatinitialrecognition,thehighestandbestuseoftheprojectwouldbedeterminedonthebasisofitsusebymarketparticipants.Forexample,thehighestandbestuseoftheR&Dprojectcouldbe:

(a) thevalueofthelandascurrentlydevelopedforindustrialuse(i.e.thelandwouldbeusedincombinationwithotherassets,suchasthefactory,orwithotherassetsandliabilities).

(b) thevalueofthelandasavacantsiteforresidentialuse,takingintoaccountthecostsofdemolishingthefactoryandothercosts(includingtheuncertaintyaboutwhethertheentitywouldbeabletoconverttheassettothealternativeuse,suchaslegalandplanningissues)necessarytoconvertthelandtoavacantsite(i.e.thelandistobeusedbymarketparticipantsonastandalonebasis).

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Liabilities and equity instruments

Ideally,fairvalueismeasuredusingquotedpricesforidenticalinstrumentsi.e.leveloneobservableinputs.Ifthisisnotpossible,itmaybepossibletousepricesinaninactivemarketleveltwoobservableinputs.Ifthisisnotpossible,avaluationmodelshouldbeusede.g.presentvaluemeasurement.

Notethatanyfairvaluemeasurementofaliabilityshouldincludenonperformanceordefaultrisk.Thismaybedifferentfordifferenttypesofliabilityheldbyanentityforexample,defaultriskforasecuredloanislessthandefaultriskofanunsecuredloanatanypointintime.Also,beawarethatthisriskmaychangeovertimeasanentitymayormaynotencounterfinancialandothercommercialdifficulties.

Fairvaluemeasurementofaliabilityorequityinstrumentassumesthatitistransferredatthemeasurementdate,andthatbothaliabilityand/orequityinstrumentwouldremainoutstanding,ratherthanbeingsettledorredeemed.

(a) to continue developmentifmarketparticipantswouldcontinuetodeveloptheprojectandthatusewouldmaximisethevalueofthegroupofassetsorofassetsandliabilitiesinwhichtheprojectwouldbeused(i.e.theassetwouldbeusedincombinationwithotherassetsorwithotherassetsandliabilities).Thefairvalueoftheprojectwouldbemeasuredonthebasisofthepricethatwouldbereceivedinacurrenttransactiontoselltheproject,assumingthattheR&Dwouldbeusedwithitscomplementaryassetsandtheassociatedliabilitiesandthatthoseassetsandliabilitieswouldbeavailabletomarketparticipants.

(b) to cease development for competitive reasonsifmarketparticipantswouldlockuptheprojectandthatusewouldmaximisethevalueofthegroupofassetsorofassetsandliabilitiesinwhichtheprojectwouldbeused.Thefairvalueoftheprojectwouldbemeasuredonthebasisofthepricethatwouldbereceivedinacurrenttransactiontoselltheproject,assumingthattheR&Dwouldbeused(i.e.lockedup)withitscomplementaryassetsandtheassociatedliabilitiesandthatthoseassetsandliabilitieswouldbeavailabletomarketparticipants.

(c) to cease development if market participants would discontinue its development.Thefairvalueoftheprojectwouldbemeasuredonthebasisofthepricethatwouldbereceivedinacurrenttransactiontoselltheprojectonitsown(whichmightbezero).

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Whenaquotedpriceisnotavailableforsuchanitem,anentityshallmeasurefairvaluefromtheperspectiveofamarketparticipantwhoholdstheidenticalitemasanassetatthemeasurementdate.Iftherearenosuchobservableprices,thenanalternativevaluationtechniquemustbeused.

Disclosuresshouldprovideinformationthatenablesusersoffinancialstatementstoevaluatetheinputsandmethodsusedtodeterminehowfairvaluemeasurementshavebeenarrivedat.

Thelevelinthethreetiervaluationhierarchyshouldbedisclosed,togetherwithsupportingdetailsofvaluationmethodsandinputsusedwhereappropriate.Aswouldbeexpected,moredetailedinformationisrequiredwherethereissignificantuseoflevelthreeinputstoarriveatafairvaluemeasurementtoenableusersoffinancialstatementstounderstandhowsuchfairvalueshavebeenarrivedat.

Disclosureshouldalsobemadewhenthereisachangeofvaluationtechniquetomeasureanassetorliability.Thiswillincludeanychangeinthelevelofinputsusedtodeterminefairvalueofparticularassetsand/orliabilities.

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Disclosures

Chapter summary

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Test your understanding answers

(a) TheFrameworksetsouttheconceptsthatunderliethepreparationandpresentationoffinancialstatementsforexternalusers.ThepurposeoftheConceptualFrameworkis:

NothingintheFrameworkoverridestherequirementsofaspecificIFRS.

toassisttheIASB whendevelopingorreviewingIFRSs toassisttheBoardinpromotingtheharmonisationof

accountingstandards toassistnationalstandardsettingbodiesindevelopingnational

standards toassistpreparersoffinancialstatementsinapplyingIFRSs

andindealingwithtopicsthathaveyettoformthesubjectofanIFRS

toassistauditorsinforminganopiniononwhetherfinancialstatementscomplywithIFRSs

toassistusersoffinancialstatementsininterpretingtheinformationcontainedinfinancialstatementspreparedincompliancewithIFRSs

toprovidethosewhoareinterestedintheworkoftheIASBwithinformationaboutitsapproachtotheformulationofIFRSs

(b) Anassetisaresourcecontrolledbytheentityasaresultofpasteventsandfromwhichfutureeconomicbenefitsareexpectedtoflowtotheentity.Aliabilityisapresentobligationoftheentityarisingfrompastevents,thesettlementofwhichisexpectedtoresultinanoutflowfromtheentityofresourcesembodyingeconomicbenefits.Equityistheresidualinterestintheassetsoftheentityafterdeductingallitsliabilities.Thefollowingcriticismscouldbemadeofthesedefinitions: Thedefinitionsareinconsistentlyappliedacrosstherangeof

IFRSs Theconceptofcontrolisnotclearlydefinedandcanprove

difficulttoapply

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Test your understanding 1 Framework

Thereisalackofguidanceaboutthemeaningofaneconomicresource

Thenotionofexpectationisvague.Doesitrefertotheprobabilityofaninflow/outflowortoamathematicalexpectedvalue?

Thedefinitionsdonotofferenoughguidanceastothedifferencebetweenliabilitiesandequity.Furtherguidanceherewouldbenefitusers,particularlywhenapplyingtheseconceptstofinancialinstruments.

(a) IfMarket1istheprincipalmarketfortheasset(themarketwiththegreatestvolumeandlevelofactivityfortheasset),thefairvalueoftheassetwouldbemeasuredusingthepricethatwouldbereceivedinthatmarket,aftertakingintoaccounttransportcosts.Thefairvaluewouldthereforebe$24($26$2).Transactioncostsareignoredastheyarenotacharacteristicoftheasset.

(b) Ifneithermarketistheprincipalmarketfortheasset,thefairvalueoftheassetwouldbemeasuredusingthepriceinthemostadvantageousmarket.Themostadvantageousmarketisthemarketthatmaximisestheamountthatwouldbereceivedtoselltheasset,aftertakingintoaccounttransactioncostsandtransportcosts(i.e.thenetamountthatwouldbereceivedintherespectivemarkets).

Becausethemaximumnetamountthattheentitywouldreceiveis$22inMarket2($25$3),thefairvalueoftheassetwouldbemeasuredusingpricesinMarket2.Thiswouldresultinafairvaluemeasurementof$23($25$2).Althoughtransactioncostsaretakenintoaccountwhendeterminingwhichmarketisthemostadvantageousmarket,theyarenotfactoredintothefairvaluemeasurementitself.

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Test your understanding 2 Fair value

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TheprofessionalandethicaldutyoftheaccountantChapter learning objectives

Uponcompletionofthischapteryouwillbeableto:

appraisetheethicalandprofessionalissuesinadvisingoncorporatereporting

assesstherelevanceandimportanceofethicalandprofessionalissuesincomplyingwithaccountingstandards

appraisethepotentialethicalimplicationsofprofessionalandmanagerialdecisionsinthepreparationofcorporatereports

assesstheconsequencesofnotupholdingethicalprinciplesinthepreparationofcorporatereports.

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chapter

2

Anumberofusergroupsrelyonthefinancialstatementstomakeeconomicdecisions.Itisimportantthattheseusersarenotmisled.However,theethicalbeliefsofindividualaccountantsmaybetoosimplisticwhendealingwithreallife,complexethicaldilemmas.Thestudyofethicsisthereforevitalsothataccountantscandevelopethicalreasoningskillsthatwillhelpthemtodecideontherightcourseofaction.TheACCArequiresitsmemberstoadheretoacodeofprofessionalethics.Thisprovidesasetofmoralguidelinesforprofessionalaccountants.Thefundamentalprinciplesofthiscodeare:

(a) Integritytobestraightforwardandhonestinallprofessionalandbusinessrelationships.

(b) Objectivitytonotallowbias,conflictofinterestorundueinfluenceofotherstooverrideprofessionalorbusinessjudgments.

(c) Professional Competence and Due Caretomaintainprofessionalknowledgeandskillatthelevelrequiredtoensurethataclientoremployerreceivescompetentprofessionalservicesbasedoncurrentdevelopmentsinpractice,legislationandtechniquesandactdiligentlyandinaccordancewithapplicabletechnicalandprofessionalstandards.

(d) Confidentialitytorespecttheconfidentialityofinformationacquiredasaresultofprofessionalandbusinessrelationshipsand,therefore,notdiscloseanysuchinformationtothirdpartieswithoutproperandspecificauthority,unlessthereisalegalorprofessionalrightordutytodisclose,norusetheinformationforthepersonaladvantageoftheprofessionalaccountantorthirdparties.

(e) Professional behaviourtocomplywithrelevantlawsandregulationsandavoidanyactionthatdiscreditstheprofession.

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24 KAPLAN PUBLISHING24 KAPLAN PUBLISHING

Accounting and ethics

Someoftheelementsoftheethicalcodeareconsideredinmoredetailintherestofthischapter.

Actingwithintegrityinvolvesbeinghonestandstraightforward.Anyattempttoconcealorhidetransactions,eitherthroughomittingthemorthroughinadequateorconfusingdisclosure,demonstratesalackofintegrity.

Laterinthistext,youwilllearnthatformsofnonfinancialreportingarebecomingincreasinglyimportant.Manyentitiespreparereportsthatdetailtheirrelationshipwith,andimpacton,societyandtheenvironment.Theseissuescouldbecombinedinanintegratedreport.Suchreportsarevoluntary.However,itcouldbearguedthatwithholdinginformationfromusersaboutacompanyssocialandenvironmentalimpactlacksintegrity.Moreover,failingtoreportissuesaboutlongtermsustainabilitymaybejustasmisleadingasincorrectinformationwithinthehistoricalfinancialstatements.

Therearemanytimeswhenanaccountantmightfindthattheyhaveanincentivetorepresenttheperformanceorpositionofacompanyinaparticularway:

Financialstatementsshouldfaithfullyrepresentthetransactionsthathaveoccurred.Theethicalcodeencouragesaccountantstonotletbiasoroutsideinfluenceimpacttheirjudgements.

Profit related bonuses:Anaccountantmightbemotivatedtomaximiseprofitinthecurrentperiodinordertoachievetheirbonus.Alternatively,ifcurrentperiodtargetshavebeenmet,anaccountantmightbemotivatedtoshiftprofitsintothenextreportingperiod.

Financing:Anentityismorelikelytobegivenaloanifithasvaluableassetsonwhichtheloancanbesecured.Anincentivemaythereforeexistfortheaccountantstooverstateassetsonthestatementoffinancialposition.

Achieving a listing: Acompanythatisbeinglistedonastockexchangewillwanttomaximisetheamountthatitreceivesfrominvestors.Therefore,theremaybeanincentivefortheaccountantstooverstatetheassetsandprofitsofacompanybeforeitlists.

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Objectivity

Integrity

OneofthereasonswhyobjectivityissuchanimportantpartoftheACCAethicalcodeisthataccountingstandardsfrequentlyinvolvetheuseofjudgement.Biaswouldthereforehaveadirectimpactonthefinancialstatementsproduced.SomeexamplesofthejudgementsrequiredbyIFRSarepresentedbelow:

Unlessanaccountantunderstandsandadherestothecodeofethics,thenmanipulationofthese(andother)standardsislikely.Thefinancialstatementswouldthereforenotfaithfullyrepresenttheperformanceandpositionoftheentityandtheusersmaybemisledintomakingincorrecteconomicdecisions.

Manystandardspermitassetsorliabilitiestobeheldatfairvalue.IFRS13FairValueMeasurementdefinesfairvalueasthepricethatwouldbereceivedtosellanassetorpaidtotransferaliabilityinanorderlytransactionbetweenmarketparticipantsatthemeasurementdate.IFRS13stressestheimportanceoflevel1inputsquotedpricesforidenticalassetsandliabilitiesinactivemarketsbut,intheabsenceofthese,allowsmorejudgementalmeasurestobeused.

IAS16Property,PlantandEquipmentstatesthatentitiesshoulddepreciateassetsovertheirestimatedusefullife.Byoverstatinganassetsusefuleconomiclife,depreciationischargedmoreslowlytoprofitorloss.

IAS36ImpairmentofAssetssaysthattherecoverableamountofanassetisthehigherofthefairvaluelesscoststosellandthevalueinuse.Bothofthesefiguresinvolvejudgementsabouteventsthatwillhappeninthefutureandarethereforeopentomanipulation.

IFRS2ShareBasedPaymentrequiresentitiestoestimatetheexpenseofanequitysettledsharebasedpaymentschemebasedonthenumberofoptionsexpectedtovest.Byunderestimatingthenumberofoptionsexpectedtovest,profitintheshorttermmightbemaximised.

IAS37Provisions,ContingentLiabilitiesandContingentAssetsstatesthatprovisionsshouldrecordedatthebestestimateoftheexpendituretobeincurred.Usinglowerthanexpectedestimateswillreducethevalueofaprovisionandthereforemaximisecurrentyearprofits.

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26 KAPLAN PUBLISHING

Areas of judgement in financial statements

Asyouwillbeawarefromyourstudies,newaccountingstandardsarefrequentlyissuedandolderstandardsareoftenupdatedorwithdrawn.Thismeansthataccountingknowledgebecomesoutofdateveryquickly.

Inordertocomplywiththecodeofethics,accountantshavearesponsibilitytoensurethattheyareawareofchangestoaccountingstandards.ThisisoftenreferredtoasCPD(ContinuingProfessionalDevelopment).CPDinvolves:

Withoutuptodatetechnicalknowledge,itisunlikelythatanaccountantcanproducefinancialstatementsthatcomplywithIFRS.Materialerrorswithinfinancialstatementswillmisleadtheusers.

Readingtechnicalarticles Attendingseminarsorpresentations Attendingtrainingcourses

Thejournalsandmagazinesofprofessionalinstitutesregularlyincludedetailsofprofessionaldisciplinaryproceedingsbroughtagainstindividualmemberswhowerebelievedtohavefallenshortoftheethicalstandardsexpectedofthem.

Theconsequencesofunethicalbehaviourindeliberatelypresentingincorrectfinancialinformationaresevere.Manyaccountantshavebeenfinedorjailedfornotfulfillingtheirprofessionalduties.

Theconsequencesforindividualsinclude:

Fines Thelossofprofessionalreputation Beingpreventedfromactingasadirectororofficerofapublic

companyinthefuture Thepossibilityofbeingexpelledbyaprofessionalaccountancy

body Aprisonsentence.

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Consequences of unethical behaviour

Professional competence and due care

Itiscommonlyarguedthattheprimaryobjectiveofacompanyistomaximisethewealthofitsshareholders.Actingethicallymightbeseentocontradictthisobjective.Forexample,whilstitmaybeethicaltoincurcostsassociatedwithlookingaftertheenvironment,suchcostsreduceprofits.

However,inmodernsociety,companiesareconsideredtobecorporatecitizenswithinsociety.Corporatesocialresponsibilityisincreasinglyimportanttoinvestorsandotherstakeholders.Itcanattractgreeninvestors,ethicalconsumersandemployeesandsointurnhaveapositiveimpactonfinancialresults.Thus,itcouldbearguedthattheperformanceandsustainabilityofacompanymaynotbemaximisedunlessitbehavesinanethicalmanner.

ThedirectorsofCookieareveryconfidentaboutthequalityoftheproductsthatthecompanysells.Historically,thelevelofcomplaintsreceivedaboutproductqualityhasbeenlow.However,whencalculatingtheirwarrantyprovision,theyhaveoverestimatedthenumberofitemsthatwillbereturnedasfaulty.Thedirectorsbelievethatthisisacceptablebecause itisimportantforfinancialstatementstoexhibitprudence.Required: Discuss the ethical issues raised by the treatment of the warranty provision.

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Ethics and the profit motive

Test your understanding 1 Cookie

Chapter summary

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Test your understanding answers

Financialstatementsareimportanttoarangeofusergroups,suchasshareholders,banks,employeesandsuppliers.Prudenceisimportantbecauseoverstatedassetsorunderstatedliabilitiescouldmisleadpotentialorcurrentinvestors.However,excessivecautiousnessmeansthatthefinancialperformanceandpositionofanentityisnotfaithfullyrepresented.

Afaithfulrepresentationisoftenpresumedtohavebeenprovidedifaccountingstandardshavebeencompliedwith.ItwouldappearthatthedirectorsarenotcalculatingtheprovisioninlinewiththerequirementsofIAS37,whichrequiresprovisionstoberecognisedatthe'bestestimate'oftheexpendituretobeincurred.Thismaymeanthatprofitisunderstatedinthecurrentperiodandthenoverstatedinsubsequentperiods.

ProfessionalethicsisavitalpartoftheaccountancyprofessionandACCAmembersareboundbyitsCodeofEthicsandConduct.Thissetsouttheimportanceofthefundamentalprinciplesofconfidentiality,objectivity,professionalbehaviour,integrity,andprofessionalcompetenceandduecare.

Integrityisdefinedasbeinghonestandstraightforward.Overestimatingaprovisioninordertoshiftprofitsfromoneperiodtoanotherdemonstratesalackofintegrity.

Iftheprovisionisbeingoverstatedinordertoachievebonustargetsorprofitexpectationsinthenextfinancialperiod,thenthisdemonstratesalackofobjectivity.

IfthedirectorsareunawareoftherequirementsofIAS37,thentheymaynotbesufficientlycompetent.

Financialstatementsshouldfaithfullyrepresentthetransactionsthathaveoccurred.CompliancewiththeethicalcodethusencouragesaccountantstoensurethattheyaretechnicallycapableandsufficientlyindependenttocomplywiththerequirementsofIFRS.

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30 KAPLAN PUBLISHING

Test your understanding 1 Cookie

PerformancereportingandperformanceappraisalChapter learning objectives

Uponcompletionofthischapteryouwillbeableto:

preparereportsrelatingtocorporateperformanceforexternalstakeholders.

31

chapter

3

1Presentation of financial statements (IAS 1 revised)

Acompletesetoffinancialstatementshasthefollowingcomponents:

Otherreportsandstatementsintheannualreport(suchasafinancialreview,anenvironmentalreportorasocialreport)areoutsidethescopeofIAS1.

astatementoffinancialpositionattheendofthereportingperiod astatementofprofitorlossandothercomprehensiveincome(or

statementofprofitorlosswithaseparatestatementofothercomprehensiveincome)

astatementofchangesinequityfortheperiod astatementofcashflowsfortheperiod(discussedinalater

chapter) accountingpoliciesnoteandotherexplanatorynotes astatementoffinancialpositionatthebeginningoftheearliest

comparativeperiodwhenanentityappliesanaccountingpolicyretrospectivelyorcorrectsanerrorretrospectively.

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32 KAPLAN PUBLISHING32 KAPLAN PUBLISHING

Components of financial statements

Anentityshallclassifyanassetascurrentonthestatementoffinancialpositionif:

Allotherassetsareclassifiedasnoncurrent.

Anentityshallclassifyaliabilityascurrentonthestatementoffinancialpositionif:

Allotherliabilitiesareclassifiedasnoncurrent.

itexpectstorealisetheasset,orintendstosellorconsumeit,initsnormaloperatingcycle

itholdstheassetprimarilyforthepurposeoftrading itexpectstorealisetheassetwithintwelvemonthsafterthe

reportingperiod.

itexpectstosettletheliabilityinitsnormaloperatingcycle itholdstheliabilityprimarilyforthepurposeoftrading theliabilityisduetobesettledwithintwelvemonthsafterthe

reportingperiod itdoesnothaveanunconditionalrighttodefersettlementofthe

liabilityforatleasttwelvemonthsafterthereportingperiod.

Other comprehensive income(OCI)comprisesincomeandexpensesthatarenotrecognisedinprofitorlossasrequiredorpermittedbyotherIFRSs.

Total comprehensive income(TCI)isdefinedbyIAS1asthechangeinanentity'sequityduringaperiodresultingfromtransactionsotherthanthosewiththeownersintheircapacityasowners(suchastheissueofsharecapitalorthepaymentofdividends).Insimplerterms,TCIisthetotaloftheentity'sprofitorlossandothercomprehensiveincomefortheperiod.

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Statement of financial position

Statement of profit or loss and other comprehensive income

ItemsofOCImustbeclassifiedintotwogroupsasfollows:

EntitiescanprepareonecombinedstatementshowingprofitorlossfortheyearandOCI.Alternatively,anentitycanprepareastatementofprofitorlossandaseparatestatementofOCI.Ifthelatteroptionischosen,thestatementofOCIshouldbeginwithprofitorlossfortheyearsothatthereisnoduplicationorconfusionastowhichitemsareincludedwithineachstatement.

Format one: statement of profit or loss and other comprehensive income

Forillustration,oneoftherecommendedformatsisasfollows:

itemsthatmightbereclassified(orrecycled)toprofitorlossinsubsequentaccountingperiods: foreignexchangegainsandlossesarisingontranslationofa

foreignoperation(IAS21) effectivepartsofcashflowhedgingarrangements(IFRS9) Remeasurementofinvestmentsindebtinstrumentsthatare

classifiedasfairvaluethroughOCI(IFRS9)

itemsthatwillnotbereclassified(orrecycled)toprofitorlossinsubsequentaccountingperiods: changesinrevaluationsurplus(IAS16&IAS38) remeasurementcomponentsondefinedbenefitplans(IAS19) remeasurementofinvestmentsinequityinstrumentsthatare

classifiedasfairvaluethroughOCI(IFRS9)

XYZ Group Statement of profit or loss and other comprehensive income for the year ended 31 December 20X3

$000Revenue XCostofsales (X)

Gross profit XOtheroperatingincome XDistributioncosts (X)Administrativeexpenses (X)Otheroperatingexpenses (X)

Profit from operations XFinancecosts (X)Shareofprofitofassociates X

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34 KAPLAN PUBLISHING

Profit before tax XIncometaxexpense (X)

Profit or loss for the period X

Other comprehensive incomeItemsthatwillnotbereclassifiedtoprofitorloss:

Gainsonpropertyrevaluation XRemeasurementoractuarialgainsandlossesondefinedbenefitpensionplans

(X)

RemeasurementofequityinvestmentsdesignatedtobeaccountedforthroughOCI

X

Incometaxrelatingtoitemsthatwillnotbereclassified (X)

Totalitemsthatwillnotbereclassifiedtoprofitorlossnetoftax:

X

Itemsthatmaybereclassifiedsubsequentlytoprofitorloss:

Cashflowhedges XExchangedifferencesontranslatingforeignoperations XIncometaxrelatingtoitemsthatmaybereclassified (X)

Totalitemsthatmaybereclassifiedtoprofitorlossnetoftax: X

Totalothercomprehensiveincomenetoftaxfortheyear (X)

Total comprehensive income for the year X

Profitattributableto:

$000Ownersoftheparent XNoncontrollinginterest X

X

Totalcomprehensiveincomeattributableto:Ownersoftheparent XNoncontrollinginterest X

X

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Other comprehensive income and related tax

IAS1requiresanentitytodiscloseincometaxrelatingtoeachcomponentofOCI.Thismaybeachievedbyeither:

Thepurposeofthisistoprovideuserswithtaxinformationrelatingtothesecomponents,astheyoftenhavetaxratesdifferentfromthoseappliedtoprofitorloss.

disclosingeachcomponentofOCInetofanyrelatedtaxeffect,or disclosingOCIbeforerelatedtaxeffectswithoneamountshownfor

tax(asshownintheaboveexamples).

IAS1requiresallchangesinequityarisingfromtransactionswithownersintheircapacityasownerstobepresentedseparatelyfromnonownerchangesinequity.Thiswouldinclude:

Totalcomprehensiveincomeisshowninaggregateonlyforthepurposesofreconcilingopeningtoclosingequity.

Issuesofshares Dividends.

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36 KAPLAN PUBLISHING

Statement of changes in equity

XYZ Group Statement of changes in equity for the year ended 31 December 20X3

Inadditiontothesesixcolumns,thereshouldbecolumnsheaded:

Acomparativestatementforthepriorperiodmustalsobepublished.

Equity capt'l

Ret'd earng's

Transl'n of for'gn

operations

Financial assets thru' OCI

Cash flow hdg's

Reval'n surplus

Total

$000 $000 $000 $000 $000 $000 $000

Balanceat1Jan20X3

X X (X) X X X

Changesinaccountingpolicy

X X

Restatedbalance X X X X X X X

Changes in equity for 20X3

Dividends (X) (X)

Issueofequitycapital

X X

Totalcomprehensiveincomeforyear

X X X X X X

Transfertoretainedearnings

X (X)

Balanceat31December20X3

X X X X X X X

(a) Noncontrollinginterest(b) Totalequity

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(a) Going concern

Oncemanagementhaveassessedthattherearenomaterialuncertaintiesastotheabilityofanentitytocontinuefortheforeseeablefuture,thefinancialstatementsshouldbepreparedontheassumptionthattheentitywillinfactcontinue.Inotherwords,thefinancialstatementswillbepreparedonagoingconcernbasis.

Theaccrualsbasisofaccountingmeansthattransactionsandeventsarerecognisedwhentheyoccur,notwhencashisreceivedorpaidforthem.

Thepresentationandclassificationofitemsinthefinancialstatementsshouldberetainedfromoneperiodtothenextunless:

Anitemismaterialifitsomissionormisstatementcouldinfluencetheeconomicdecisionsofuserstakenonthebasisofthefinancialstatements.Financialstatementsshouldthereforeshowmaterialitemsseparately,butimmaterialitemsmaybeaggregatedwithamountsofasimilarnature.

Assetsandliabilities,andincomeandexpenses,shouldnotbeoffsetexceptwhenrequiredorpermittedbyastandardoraninterpretation.

Comparativeinformationforthepreviousperiodshouldbedisclosed,unlessastandardoraninterpretationpermitsorrequiresotherwise.

(b) Accruals basis of accounting

(c) Consistency of presentation

itisclearthatachangewillresultinamoreappropriatepresentation

achangeisrequiredbyastandard(IASorIFRS)oraninterpretation(SICorIFRIC).

(d) Materiality and aggregation

(e) Offsetting

(f) Comparative information

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General features of financial statements

AnentitywhosefinancialstatementscomplywithIFRSshouldmakeanexplicitandunreservedstatementofsuchcomplianceinthenotes.

Accounting policies

Theaccountingpoliciesnoteshoulddescribe:

Sources of uncertainty

Anentityshoulddiscloseinformationaboutthekeysourcesofestimationuncertaintythatmaycauseamaterialadjustmenttoassetsandliabilitieswithinthenextyear,e.g.keyassumptionsaboutthefuture.

Reclassification adjustments

Reclassificationadjustmentsareamountsreclassifiedtoprofitorlossinthecurrentperiodthatwererecognisedinothercomprehensiveincomeinthecurrentorpreviousperiods.Thisissometimesreferredtoasrecycling.

IAS1requiresthatreclassificationadjustmentsshouldbedisclosed,eitheronthefaceofthestatementofprofitorlossandothercomprehensiveincomeorinthenotes.

Thisisnecessarytoinformusersofamountsthatareincludedasothercomprehensiveincomeinpreviousperiodsandinprofitorlossinthecurrentperiod,sothattheycanassesstheeffectofsuchreclassificationsonprofitorloss.

Dividends

Distributionstoequityholdersaredisclosedinthestatementofchanges.

Thisrequirementisinlinewithseparatedisclosureofownerandnonownerchangesinequitydiscussedearlier.

(g) Compliance with IFRS

themeasurementbasis(orbases)usedinpreparingthefinancialstatements(e.g.historicalcost,fairvalue,etc)

eachsignificantaccountingpolicy.

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Theaccountingtreatmentandguidancewithrespecttoothercomprehensiveincome(OCI)hasbeencriticisedinrecentyears.Someofthesecriticismsareasfollows:

ThereisnoconsistentbasisacrossIFRSfordeterminingwhenagainorlossisrecognisedinprofitorlossandwhenitisrecognisedinOCI.ThisoftenmeansthattheOCIisnotfullyunderstoodbytheusersofthefinancialstatements.

ManyusersignoreOCI,sincethegainsandlossesreportedtherearenotrelatedtotheoperatingflowsofanentity.Asaresult,materiallossespresentedinOCImaynotbegiventheattentionthattheyrequire.

ThenotionofrecyclinggainsandlossesfromOCIisunclear,particularlywithregardstowhichitemsarerecycledandwhen.Moreoverthisrecyclingresultinprofitsorlossesbeingrecordedinadifferentperiodfromthechangeintherelatedassetorliability,thuscontradictingtheConceptualFrameworksdefinitionofincomesandexpenses.

TherearedifferencesbetweenIFRSandUSGAAPinrespectofOCI.Thisreducesthecomparabilityofprofitbasedperformancemeasures.

ED/2014/1 Disclosure initiative

TheIASBhasproposedsomenarrowamendmentstoIAS1withtheaimofimprovingthequalityofdisclosures.ThesecanbefoundinED/2014/1,anExposureDraftthatisanexaminabledocumentinP2.Theproposedamendmentsaresummarisedbelow:

Materiality

TheIASBhasproposedamendmentstoemphasisethat:

entitiesmustnotaggregateordisaggregateinformationinamannerthatobscuresusefulinformation

materialityrequirementsapplytothestatementofprofitorlossandothercomprehensiveincome,statementoffinancialposition,statementofcashflowsandstatementsofchangesinequityandtothenotes.

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40 KAPLAN PUBLISHING

Problems with IAS 1

Current issues: disclosures

Presentation

TheIASBproposestoamendtherequirementsforpresentationinthestatementoffinancialpositionandinthestatementofprofitorlossandothercomprehensiveincomebyclarifyingthatthepresentationrequirementsforlineitemsmaybefulfilledbydisaggregatingaspecificlineitem.

Notes

TheIASBproposestoemphasisethatunderstandabilityandcomparabilityshouldbeconsideredbyanentitywhendecidingtheorderofitsdisclosurenotesinitsfinancialstatements.

2Discontinued operations

Adiscontinuedoperationisacomponentofanentitythathasbeendisposedof,orisclassifiedasheldforsale,and:

Ifthecomponent/operationhasnotalreadybeensold,thenitwillonlybeadiscontinuedoperationifitisheldforsale.

Anoperationisheldforsaleifitscarryingamountwillnotberecoveredprincipallybycontinuinguse.Tobeclassifiedasheldforsale(andthereforetobeadiscontinuedoperation)atthereportingdate,itmustmeetthefollowingcriteria.

representsaseparatemajorlineofbusinessorgeographicalareaofoperations

ispartofasinglecoordinatedplantodisposeofaseparatemajorlineofbusinessorgeographicalareaofoperations

isasubsidiaryacquiredexclusivelywithaviewtoresale.

Theoperationisavailableforimmediatesaleinitspresentcondition.

Thesaleishighlyprobableandisexpectedtobecompletedwithinoneyear.

Managementiscommittedtothesale. Theoperationisbeingactivelymarketed.

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Discontinued operations (IFRS 5)

Theoperationisbeingofferedforsaleatareasonablepriceinrelationtoitscurrentfairvalue.

Itisunlikelythattheplanwillchangeorbewithdrawn.

Usersofthefinancialstatementsaremoreinterestedinfutureprofitsthanpastprofits.Theyareabletomakeabetterassessmentoffutureprofitsiftheyareinformedaboutoperationsthathavebeendiscontinuedduringtheperiod.

IFRS5requiresinformationaboutdiscontinuedoperationstobepresentedinthefinancialstatements.

Asingleamountshouldbepresentedonthefaceofthestatementofprofitorlossandothercomprehensiveincomethatiscomprisedof: thetotaloftheposttaxprofitorlossofdiscontinuedoperations theposttaxgainorlossonthemeasurementtofairvalueless

coststoselloronthedisposalofthediscontinuedoperation.

Ananalysisofthesingleamountdescribedaboveshouldbeprovided.Thiscanbepresentedonthefaceofthestatementofprofitorlossandothercomprehensiveincomeorinthenotestothefinancialstatements.Theanalysismustshow: therevenue,expensesandpretaxprofitorlossofdiscontinued

operations therelatedtaxexpense thegainorlossrecognisedonthemeasurementtofairvalue

lesscoststoselloronthedisposalofthediscontinuedoperation

therelatedtaxexpense.

Thenetcashflowsattributabletotheoperating,investingandfinancingactivitiesofdiscontinuedoperationsmustbeshown,eitheronthefaceofthestatementofcashflowsorinthenotes.

Ifadecisiontosellanoperationistakenaftertheyearendbutbeforetheaccountsareapproved,thisistreatedasanonadjustingeventafterthereportingdateanddisclosedinthenotes.Theoperationdoesnotqualifyasadiscontinuedoperationatthereportingdateandseparatepresentationisnotappropriate.

Inthecomparativefigurestheoperationsarealsoshownasdiscontinued(eventhoughtheywerenotclassifiedassuchattheendofthepreviousyear).

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42 KAPLAN PUBLISHING

Presentation

Statement of profit or loss (showing discontinued operations as a single amount, with analysis in the notes)

20X2 20X1$m $m

Revenue 100 90Operatingexpenses (60) (65)

Profitfromoperations 40 25Financecost (20) (10)

Profitbeforetax 20 15Incometaxexpense (6) (7)

Profitfromcontinuingoperations 14 8Discontinued operationsLoss from discontinued operations* (25) (1)

Profit/(loss)fortheyear (11) 7

Theentitydidnotrecogniseanycomponentsofothercomprehensiveincomeintheperiodspresented.

*Theanalysisofthislosswouldbegiveninanotetotheaccounts.

ThePortugalgroupofcompanieshasafinancialyearendof30June20X4.Thefinancialstatementswereauthorisedthreemonthslater.Thegroupisdisposingofmanyofitssubsidiaries,eachofwhichisaseparatemajorlineofbusinessorgeographicalarea.

Asubsidiary,England,wassoldon1January20X4. On1January20X4,anannouncementwasmadethattherewere

advancednegotiationstosellsubsidiarySwitzerlandandthat,subjecttoregulatoryapproval,thiswasexpectedtobecompletedby31October20X4.

TheboardhasalsodecidedtosellasubsidiarycalledFrance.Agentshavebeenappointedtofindasuitablebuyerbutnonehaveyetemerged.TheagentsadviceisthatpotentialbuyersaredeterredbytheexpectedpricethatPortugalhopestoachieve.

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Illustration Discontinued operations

Example presentation

Required:

Explain whether each of these subsidiaries meets the definition of a 'discontinued operation' as defined by IFRS 5.

On10July20X4,anannouncementwasmadethatanothersubsidiary,Croatia,wasforsale.Itwassoldon10September20X4.

Englandhasbeensoldduringtheyear.ItisadiscontinuedoperationperIFRS5.

SwitzerlandisadiscontinuedoperationperIFRS5.Thereisclearintentiontosell,andthesaleishighlyprobablewithin12months.

FranceisnotadiscontinuedoperationperIFRS5.ItdoesnotseemthatFranceisbeingofferedforsaleatareasonablepriceinrelationtoitscurrentfairvalue.Thesaledoesnotseemtobehighlyprobablewithin12months.

CroatiaisnotadiscontinuedoperationperIFRS5.Theconditionsforclassificationasheldforsalewerenotmetuntilaftertheyearend.

3Accounting policies, estimates and errors

Accounting policiesarethespecificprinciples,bases,conventions,rulesandpracticesappliedbyanentityinpreparingandpresentingfinancialstatements.

Whereastandardorinterpretationexistsinrespectofatransaction,theaccountingpolicyisdeterminedbyapplyingthestandardorinterpretation.

Wherethereisnoapplicablestandardorinterpretation,managementmustuseitsjudgementtodevelopandapplyanaccountingpolicy.Theaccountingpolicyselectedmustresultininformationthatisrelevantandreliable.

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Solution

IAS 8: Policies, estimates and errors

Changes in accounting policies

Anentityshouldonlychangeitsaccountingpoliciesifthechangeisrequiredbyastandardorinterpretation,oritresultsinmorereliableandrelevantinformation.

Managementshouldrefertothefollowing: standardsandinterpretationsdealingwithsimilarandrelated

issues theFramework.

Providedtheydonotconflictwiththesourcesabove,managementmayalsoconsider: themostrecentpronouncementsofotherstandardsetting

bodiesthatuseasimilarconceptualframework otheraccountingliteratureandacceptedindustrypractices.

Anentitymustselectandapplyitsaccountingpoliciesconsistentlyforsimilartransactions.

Newaccountingstandardsnormallyincludetransitionalarrangementsonhowtodealwithanyresultingchangesinaccountingpolicy.

Iftherearenotransitionalarrangements,thenewpolicyshouldbeappliedretrospectively.Theentityadjuststheopeningbalanceofeachaffectedcomponentofequity,andthecomparativefiguresarepresentedasifthenewpolicyhadalwaysbeenapplied.

Whereachangeisappliedretrospectively,IAS1revisedrequiresanentitytoincludeinitsfinancialstatementsastatementoffinancialpositionatthebeginningoftheearliestcom