ACCA Paper P2 (International) Corporate Reporting Class Notes December 2009 © The Accountancy College Ltd, July 2009 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of The Accountancy College Ltd w w w s t ud yi nt e r a c t i ve o r g Contents PAGE INTRODUCTION TO THE PAPER CHAPTER 1: BASIC GROUPS 15 CHAPTER 2: COMPLEX GROUPS 29 CHAPTER 3: FOREIGN CURRENCY TRANSLATION 35 CHAPTER 3: GROUP CASH FLOW STATEMENTS 45 CHAPTER 5: CORPORATE SOCIAL RESPONSIBILITY AND CURRENT ISSUES 57 CHAPTER 6: PERFORMANCE REPORTING 73 CHAPTER 7: PROVISIONS ETC 81 CHAPTER 8: NON CURRENT ASSETS 87 CHAPTER 9: LEASES 95 CHAPTER 10: EMPLOYEE BENEFITS 101 CHAPTER 11: SHARE BASED PAYMENTS 107 CHAPTER 12: FINANCIAL INSTRUMENTS 113 CHAPTER 13: TAX 121 APPENDIX: 135 ANSWERS w w w s t ud y i nt e r a c t i v e o r g w w w s t ud yi nt e r a c t i ve o r g IN T R O D U C T I O N T O T H E P A P ER Introduction to the paper w w w s t ud y i nt e r a c t i v e o r g IN T R O D U C T I O N T O T H E P A P E R AIM OF THE PAPER The aim of the paper is to test your understanding of financial reporting and probably more importantly to test your ability to solve problems in accounting scenarios that are every bit as messy as real life FORMAT OF THE EXAM PAPER The syllabus is assessed by a three hour paper-based examination The paper has 15 minutes reading time There are four questions of which you must three as follows: Section A (Compulsory Case Study) (q1) The case will be based around a group scenario There will be 35 marks of numbers and 15 marks of narrative (50 marks) Section B (Choice of from questions) (q2) Focus Typically the second question in the exam focuses on a single technical subject, such as pensions, financial instruments or deferred tax Often these questions require thorough technical knowledge (25 marks) (q3) Mix Usually there are roughly mini scenarios, each valued at marks and covering a wide range of financial reporting issues These questions require problem solving and usually far less technical knowledge than question two (25 marks) (q4) Current Issues and CSR Whether you call this question ―Corporate Social Responsibly‖, ―pure narrative‖ or another less polite phrase, there is no getting away from the very low technical content and the very high potential for letting your pen wander across a whole range of ideas These questions have to be seen to be believed So look at the chapter on Corporate Social Responsibility to get a feel for their style (25 marks) In reality, the examiner plays with the flavour of the B section Often the style of question 2, and can be so similar as to make distinction irrelevant w w w s t ud yi nt e r a c t i ve o r g IN T R O D U C T I O N T O T H E P A P ER INTERNATIONAL EXAMINABLE DOCUMENTS (JUNE 2009) Knowledge of new examinable regulations will not be required until at least six calendar months after the last day of the month in which the document was issued, or the legislation passed Documents may be examinable even if the effective date is in the future The documents listed as being examinable are the latest that were issued prior to 31 May of the same year for the December examinations, and 30 November of the previous year for the June examinations The study guide offers more detailed guidance on the depth and level at which the examinable documents will be examined The study guide should be read in conjunction with the examinable documents list International Accounting Standards (IASs)/International Financial Reporting Standards (IFRSs) IAS Presentation of Financial Statements IAS Inventories IAS Statement of Cash Flows IAS Accounting Policies, Changes in Accounting Estimates and Errors IAS 10 Events after the Reporting Period IAS 11 Construction Contracts IAS 12 Income Taxes IAS 16 Property, Plant and Equipment IAS 17 Leases IAS 18 Revenue IAS 19 Employee Benefits IAS 20 Accounting for Government Grants and Disclosure of Government Assistance IAS 21 The Effects of Changes in Foreign Exchange Rates IAS 23 Borrowing Costs IAS 24 Related Party Disclosures IAS 27 Consolidated and Separate Financial Statements IAS 28 Investments in Associates IAS 29 Financial Reporting in Hyperinflationary Economies IAS 31 Interests in Joint Ventures IAS 32 Financial Instruments: Presentation IAS 33 Earnings per Share IAS 34 Interim Financial Reporting IAS 36 Impairment of Assets IAS 37 Provisions, Contingent Liabilities and Contingent Assets IAS 38 Intangible Assets IAS 39 Financial Instruments: Recognition and Measurement IAS 40 Investment Property IAS 41 Agriculture IFRS First-time Adoption of International Financial Reporting Standards IFRS Share-based Payment IFRS Business Combinations IFRS Non-Current Assets Held for Sale and Discontinued Operations IFRS Financial Instruments: Disclosures IFRS Operating Segments � w w w s t ud y i nt e r a c t i v e o r g IN T R O D U C T I O N T O T H E P A P E R Other Statements Framework for the Preparation and Presentation of Financial Statements Interpretations of the International Financial Reporting Interpretations Committee (IFRIC) SIC-12 Consolidation – Special Purpose Entities SIC-13 Jointly Controlled Entities – Non monetary Contributions by Venturers SIC-15 Operating Leases – Incentives SIC-21 Income Taxes – Recovery of Revalued Non-depreciable Assets SIC-27 Evaluating the Substance of Transactions in the Legal Form of a Lease SIC-32 Intangible Assets – Website Costs IFRIC Changes in Existing Decommissioning, Restoration and Similar Liabilities IFRIC Determining Whether an Arrangement Contains a Lease IFRIC Rights to Interests from Decommissioning Restoration and Environmental Rehabilitation Funds IFRIC Applying the Restatement Approach under IAS 29, Financial Reporting in Hyperinflationary Economies IFRIC Scope of IFRS IFRIC Reassessment of Embedded Derivatives IFRIC 10 Interim Financial Reporting and Impairment IFRIC 11 IFRS 2: Group and Treasury Share Transactions IFRIC 12 Service Concession Arrangements IFRIC 13 Customer Loyalty Programmes EDs, Discussion Papers and Other Documents ED IFRS for Small and Medium-sized Entities DP Management Commentary DP Fair Value Measurements DP Preliminary Views on an Improved Conceptual Framework for Financial Reporting - The Objective of Financial Reporting and Qualitative Characteristics of Decision-useful Financial Reporting Information w w w s t ud yi nt e r a c t i ve o r g IN T R O D U C T I O N T O T H E P A P ER UK EXAMINABLE DOCUMENTS (JUNE 2009) FOR REFERENCE ONLY Knowledge of new examinable regulations will not be required until at least six calendar months after the last day of the month in which the document was issued, or the legislation passed Documents may be examinable even if the effective date is in the future The documents listed as being examinable are the latest that were issued prior to 31 May of the same year for the December examinations, and 30 November of the previous year for the June examinations The study guide offers more detailed guidance on the depth and level at which the examinable documents will be examined The study guide should be read in conjunction with the examinable documents list Statements of Standard Accounting Practice (SSAPs) SSAP Accounting for government grants SSAP Accounting for Value Added Tax SSAP Stocks and long-term contracts SSAP 13 Accounting for research and development SSAP19 Accounting for investment properties SSAP 21 Accounting for leases and hire purchase contracts SSAP 25 Segmental reporting Financial Reporting Standards (FRSs) FRS Cash Flow Statements FRS Accounting for Subsidiary Undertakings FRS Reporting Financial Performance FRS Reporting the Substance of Transactions FRS Acquisitions and Mergers FRS Fair Values in Acquisition Accounting FRS Related Party Disclosures FRS Associates and Joint Ventures FRS 10 Goodwill and Intangible Assets FRS 11 Impairment of Non current assets and Goodwill FRS 12 Provisions, Contingent Liabilities and Contingent Assets FRS 15 Tangible Non current assets FRS 16 Current Tax FRS 17 Retirement Benefits FRS 18 Accounting Policies FRS 19 Deferred Tax FRS 20 Share-based Payment FRS 21 Events After the Statement of financial position Date FRS 22 Earnings per share FRS 23 The Effect of Changes in Foreign Exchange Rates FRS 24 Financial Reporting in Hyperinflationary Economies FRS 25 Financial Instruments: Disclosure and Presentation FRS 26 Financial Instruments: Recognition and Measurement FRS 28 Corresponding Amount FRS 29 Financial Instruments: Disclosures w w w s t ud y i nt e r a c t i v e o r g IN T R O D U C T I O N T O T H E P A P E R Reporting Statement Operating and Financial Review (OFR) Other Statements Statement of Principles for Financial Reporting FRSSE Financial Reporting Standard for Smaller Entities Urgent Issues Task Force (UITF) Abstracts Foreword to UITF Abstracts UITF Abstract Presentation of long-term receivables in current assets UITF Abstract Transfers from current assets to non current assets UITF Abstract 24 Accounting for start-up costs UITF Abstract 27 Revision to estimates of the useful economic life of goodwill and intangible assets UITF Abstract 28 Operating lease incentives UITF Abstract 29 Website development costs UITF Abstract 31 Exchanges of businesses or other non-monetary assets for an interest in a subsidiary, joint venture or associate UITF Abstract 34 Pre-contract costs UITF Abstract 36 Contracts for sales of capacity UITF Abstract 40 Revenue recognition and service contracts UITF Abstract 41 Scope of FRS 20 UITF Abstract 42 Reassessment of embedded derivatives UITF Abstract 44 FRS 20 (IFRS 2) Group and Treasury Share Transactions Discussion Papers and Other Documents Revenue recognition 10 w w w s t ud yi nt e r a c t i ve o r g APPENDIX - ANSWERS CHAPTER 11 Answer: Appendix On assets 20X1 Market value at start of the year Expected return on the assets Contributions Benefits paid 20X2 20X3 1,000 1,190 1,372 120 131 137 90 100 110 (180) (190) (150) Actuarial gain (loss) – bal fig 130 ——— 131 ——— (241) ——— Market value at end of the year 1,190 1,372 1,188 On obligations 20X1 Obligation at start of the year 20X2 20X3 1,000 1,100 1,380 Interest 100 99 110 Current service cost 130 140 150 (150) (180) (190) Benefits paid Actuarial (gain) loss – bal fig 20 ——— 221 ——— (42) ——— Obligation at end of the year 1,100 1,380 1,408 Pension assets 1,190 1,372 1,188 Pension obligations (1,100) ——— 90 (1,380) ——— (8) (1,408) ——— (220) 130 140 150 100 99 110 The statement position of financial Pension asset (liability) The income statement Operating Current service cost Finance Interest cost Expected return on assets (120) ——— (131) ——— (137) ——— Other comprehensive Income Actuarial gain (loss) on assets 130 Actuarial gain (loss) on obligations (20) 182 131 (241) (221) 42 w w w s t ud yi nt e r a c t i ve o r g APPENDIX - ANSWERS Answer: Glossary (a) On assets Market value at start of the year 390 Expected return on the assets 47 Contributions 34 Benefits paid (26) Actuarial gain (loss) – bal fig (75) Market value at end of the year 370 On obligations Obligation at start of the year Interest 400 40 Service cost (14 + 100) 114 Benefits paid (26) Actuarial (gain) loss – bal fig Obligation at end of the year 530 The statement of financial position Pension assets 370 Pension obligations (530) Net pension asset (liability) (160) The income statement Operating Service cost (114) Finance Interest cost Investment income (40) 47 Other Comprehensive Income Actuarial (loss) on assets Actuarial (loss) on obligations Net Actuarial (loss) (b) (77) (2) (77) Policies There are essentially three policies available to Glossary as regards the recognition of the above net actuarial loss:(1) Recognised in the OCI (Other Comprehensive Income, sometimes known as the SORIE, Statement of Recognised Income and Expense) w w w s t ud y i nt e r a c t i v e o r g 183 APPENDIX - ANSWERS (2) Recognised in the P&L (Income Statement) (3) Unrecognised in the B/S (Position Statement) The last policy is widely criticised for its bizarre lack of logic as it recognises the loss on the balance sheet as if it were an asset The IASB are in the process of removing this option from the IAS via a development project However, in the meantime it is permissible to hold the entire current loss in the balance sheet as an asset on top of the actual pension asset This is subject to a tiny release of the opening loss to the p&l This release is even more bizarre than the capitalisation of a loss The opening unrecognised actuarial loss is compared to the opening ―corridor‖ to generate an ―excess‖ which is then divided by the employee working lives and that resultant fractional loss is released to the p&l The ―corridor‖ is defined as 10% of the higher of the pension asset or pension liability Do not look for any sense here, because there is none (c) Closing Unrecognised Loss Opening unrecognised loss Release to P&L Current unrecognised loss Closing unrecognised loss Opening unrecognised loss Opening corridor 10%(400 the higher) Excess Life Release to P&L 100 (6) 77 _ 171 _ 100 (40) _ 60 10 years _ _ Note: there is an excellent exam question that explores the above in more detail Its called Smith & Brown and is from June 2009 184 w w w s t ud yi nt e r a c t i ve o r g APPENDIX - ANSWERS CHAPTER 12 Benign Opening Increase 0.0 12.0 Closing year one (90)(0.40)(1/3) Increase 12.0 12.8 Closing year two (93)(0.40)(2/3) Increase 24.8 12.8 Closing year three (94)(0.40)(3/3) 37.6 Bilberry Opening Increase 0.0 1.2 _ Closing year one (18)(0.20)(1/3) Increase 1.2 0.8 _ Closing year two (15)(0.20)(2/3) Increase 2.0 1.2 _ Closing year three (16)(0.20)(1/2) 3.2 _ Beth Opening Increase 0.0 8.9 _ Closing (200)(10,000 – 1,100)(10)(1/2) 8.9 _ Easy Peasy Opening Increase 33,750 Closing year one (750)(6)(15)(1/2) 33,750 w w w s t ud y i nt e r a c t i v e o r g 185 APPENDIX - ANSWERS Sneaky Opening Increase 13,333 Closing (2)(2,000)(10)(1/3) 13,333 SARS Opening (400 – 100)(700)(18)(1/3) Increase 1,260 1,540 _ Closing (400 - 100)(700)(20)(2/3) 2,800 _ Jay Opening Increase 900 _ Closing (300)(500)(80%)(15)(1/2) 900 _ Normally Dr Operating expenses Cr Share capital 2m 2m Inventory Dr 186 Inventory Cr SBP reserve 6m 6m w w w s t ud yi nt e r a c t i ve o r g APPENDIX - ANSWERS CHAPTER 13 Answer: Blip This financial asset is for speculating which is for trading So it is a financial asset at fair value with gains and losses to profit and loss Purchase journal Dr Investment Cr Cash (bank) 400 400 Year end journal Dr Financing (P&L) Cr Investment (B/S) (400 – 330) 70 70 Closure journals Dr Dr Investment (B/S) Cr Finance (P&L) Bank (B/S) Cr Investment 40 40 370 370 Answer: Bliny This is a short-term investment and so asset held for trading This is a financial asset at fair value with gains and losses to profit and loss Purchase journal Dr Investment (debenture) Cr Bank 900 900 Year end journal Dr Financing (P&L) Cr Investment (B/S) 100 100 Closure journals Dr Dr Investment Cr Financing Bank Cr Investment w w w s t ud y i nt e r a c t i v e o r g 50 50 850 850 187 APPENDIX - ANSWERS Answer: Bling This is a derivative therefore it is a financial asset at fair value with gains and losses to profit and loss Derivatives are always assumed to be for trading, so are always financial assets at fair value with gains and losses to profit and loss By the way, a derivative is a fancy name for a bet All bets derive their value from something else For example, a bet on a football match derives its value from the score and a bet on gold price derives its value from gold prices Purchase journal Dr Derivative Cr Bank 100 100 Year end journal Dr Derivative Cr Finance (P&L) 10 10 Answer: Footy The equity is held with the intention of holding forever So this is a financial asset available for sale In this crazy FRS equity not available for sale is called ‗available for sale‘ Purchase journal Dr Equity investment Cr Bank 780 780 Year end journal Dr Available for sale (B/S) Cr Equity investment (B/S) 70 70 It is unspoken in the FRS, but it is clearly implied that if we plan to keep the asset forever, then the loss is unrealized So the loss goes into a separate equity bucket 188 w w w s t ud yi nt e r a c t i ve o r g APPENDIX - ANSWERS Answer: Special The asset is bought with the intention to keep forever hence this is a financial asset held for sale with gains and losses to reserves (even though later they change their mind) So again this is an available for sale investment Purchase journal Dr Investment Cr Bank 500 500 Year end journal Dr Investment Cr Reserves (available for sale) 40 40 Closure journals Dr Dr Bank Cr Investment Reserves (available for sale) Cr Finance (P&L) 540 540 40 40 Second journal - This process is called ‗recycling‘ and is widely criticized because it re-recognises a previously recognised gain Compare and contrast Sale Revaluation Gain on available for sale financial asset w w w s t ud y i nt e r a c t i v e o r g Year of gain Year of cash flow Recognised (in P&L) Recognised (in STRGL) Recognised (in STRGL) Not Not Recognised (in P&L) 189 APPENDIX - ANSWERS Answer: Travolta Travolta would be prepared to pay the discounted present value of the future cash inflow Discounted cash flow DCF Discount factor DF CF 20 20 1,020 0.930 0.873 0.816 PV 18.69 17.46 832.32 Present value 869.00 (Also known as FV) This must be a held to maturity loan asset There is definitely a market but the intent is not clear However, to carry the asset at fair value, the examiner would have to give us fair value He doesn‘t so we must carry at amortised cost Accounting Opening Finance Received 869 910 954 62 64 66 (20) (20) (20) Closing 910 954 1,000 Strictly the asset starts at zero and closes out at zero when the nominal is repaid But this is usually left off the table Answer: John The amount the company would be prepared to pay: DCF CF DF 80 80 80 8,080 PV 0.930 0.860 0.790 0.735 74.40 68.80 63.52 5,939.00 FV on market 6,145.72 Accounting 190 Opening Finance Received 6,145 6,557 7,001 7,482 492 525 560 598 (80) (80) (80) (80) Closing 6,557 7,001 7,481 8,000 w w w s t ud yi nt e r a c t i ve o r g APPENDIX - ANSWERS Answer: Bad DCF CF DF 10% 360 360 360 12,360 0.943 0.890 0.840 0.792 PV 339.48 320.40 302.40 9,789.12 10,750.00 However, as at the end of year just after receiving the $360 Bad read news that the receivable is in financial difficulties Bad believed they will receive no further interest and only $5,000 at the end Opening Finance Received Before closing Impairment 10,750 11,035 4,450 4,717 645 662 267 283 (360) (360) (0) (0) 11,035 11,337 4,717 5,000 (0) 6,887 (0) (0) After closing 11,035 4,450* 4,717 5,000 * PV = 5,000/1.062 = 4,450 Objective evidence This is the newspaper reports Recoverable amount This is the complete guess of $5,000 Conclusion Both criteria are met therefore account for bad debts Answer: Spot (1) Fair Value Hedging (2) Cash Flow Hedging w w w s t ud y i nt e r a c t i v e o r g 191 APPENDIX - ANSWERS Answer: Bescafe Opening journal Dr Derivative Cr Bank 0 Year end journal Dr Derivative Cr Hedge reserve 30 30 Closure journals Dr Dr Dr Inventory Cr Bank Bank Cr Derivative Hedge reserve Cr Inventory 530 530 30 30 30 30 Answer: Kent Opening journal Dr Derivative Cr Bank 0 Year end journal Dr Hedge reserve Cr Derivative 10 10 Closure journals Dr Dr Dr Machine Cr Bank Derivative Cr Bank Machine Cr Hedge reserve 140 140 10 10 10 10 Answer: Jewellery Opening journal Dr Dr Inventory Cr Bank Derivative Cr Bank 100 100 0 Year end journal Dr Dr 192 Inventory Cr I/S I/S Cr Derivative 9 9 w w w s t ud yi nt e r a c t i ve o r g APPENDIX - ANSWERS Closing journal Dr Dr Dr Dr Inventory Cr I/S I/S Cr Derivative WIP Cr Inventory Derivative Cr Bank 112 w w w s t ud y i nt e r a c t i v e o r g 3 112 12 12 193 APPENDIX - ANSWERS CHAPTER 14 Formula One Opening Increase 60 20 Closing 80 Formula Two Opening Increase 25 95 _ Closing 120 _ Newly Incorporated Opening Increase 360 _ Closing (1,200)(30%) 360 _ Temporary difference Carrying value Tax base 7,200 (6,000) _ TD 1,200 _ Timing difference Capital allowance Depreciation 2,000 (800) _ TD 1,200 _ Proviso Provision DT 194 CV TB TD (60) (60) X 30% _ (18) _ w w w s t ud yi nt e r a c t i ve o r g APPENDIX - ANSWERS Deviation Development CV TB TD 12 12 X 30% _ DT 3.6 _ Lost Losses CV TB 100 DT TD (100) X 30% _ (30) _ Relative Building CV TB 950 540 DT (IAS12) TD 410 X 30% _ 123 _ Inventory Inventory CV TB TD 55 50 X 30% _ DT (IAS12) 1.5 _ Thailand Sub DT (IAS12) CV TB 370 300 TD 70 X 60% _ 42 _ Actually, IAS12 says that the above DT should not be provided unless there is intent to distribute This is entirely inconsistent with other DT where intent is ignored This is the kind of nonsense the IASB plans to sort out in their current development project on DT Acky DT on goodwill is ignored because IAS12 says so w w w s t ud y i nt e r a c t i v e o r g 195 APPENDIX - ANSWERS SBP Actual carrying value = (20)(10)(1/4) = 50 Carrying value for DT = (20) (8)(1/4) = 40 SBP CV TB TD (40) (40) X 30% _ DT (12) _ Nette (i) (ii) (iii) (iv) (v) Building Grant Provision Losses Additional CV TB (1.8) (4) 0 70 Group TD TD (1.8) (4) (70) 40 _ (32.8) _ Tax rate 30% DT (asset) (9.84) Panel CV (i) (ii) (iii) (iv) Options (10(4.6)(1/2) Plant (12)(4/5) Liability (12 + (8%)(12) – 3) Inventory Sub (6 – 1.8) Group TD Tax rate DT (asset) (46.00) 9.60 (9.96) 7.00 5.200 TB 0 9.00 TD (46.00) 9.60 (9.96) (2.00) 1.20 _ (47.16) _ 30% (14.148) 196 w w w s t ud yi nt e r a c t i ve o r g ... 3,600 (2, 600) _ 1, 820 (1,400) _ Gross profit Operating expenses 5,000 (2, 500) _ 1,000 ( 420 ) _ 420 (22 0) _ Operating profit Interest Dividends received from Skye 2, 500 (700) 32 _ 580 (28 0)... Share premium P&L reserve 26 Skye $‘000 $‘000 28 0 190 (2, 800) (3, 020 ) _ (940) _ 12, 600 1,060 _ 700 _ 1,000 2, 000 9,600 20 0 100 760 _ 160 40 500 _ 12, 600 1,060 _ 700... FRS 20 Share-based Payment FRS 21 Events After the Statement of financial position Date FRS 22 Earnings per share FRS 23 The Effect of Changes in Foreign Exchange Rates FRS 24 Financial Reporting