P (International) Study Text Valid for exams from September 2017 to June 2018 ACCA ACCA Paper P2 Corporate Reporting (International) Welcome to Emile Woolf‘s study text for Paper P2 Corporate Reporting (INT) which is: Written by tutors Comprehensive but concise In simple English Used around the world by Emile Woolf including China, Russia and the UK Tenth edition published by Emile Woolf International Limited Bracknell Enterprise & Innovation Hub Ocean House, 12th Floor, The Ring Bracknell, Berkshire, RG12 1AX United Kingdom Email: info@ewiglobal.com www.emilewoolf.com © Emile Woolf International Limited, March 2017 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, scanning or otherwise, without the prior permission in writing of Emile Woolf International Limited, or as expressly permitted by law, or under the terms agreed with the appropriate reprographics rights organisation You must not circulate this book in any other binding or cover and you must impose the same condition on any acquirer Notice Emile Woolf International Limited has made every effort to ensure that at the time of writing the contents of this study text are accurate, but neither Emile Woolf International Limited nor its directors or employees shall be under any liability whatsoever for any inaccurate or misleading information this work could contain British Library Cataloguing in Publications Data A catalogue record for this book is available from the British Library ISBN: 978-1-84843-664-0 Printed and bound in Great Britain Acknowledgements The Syllabus and study guide are reproduced by kind permission of the Association of Chartered Certified Accountants All IASB material is adapted and reproduced with the kind permission of the International Accounting Standards Committee Foundation © International Accounting Standards Committee Foundation (IASB) All rights reserved ii © Emile Woolf International Limited Emile Woolf Publishing Limited are grateful to the IFRS Foundation for permission to reproduce extracts from The International Financial Reporting Standards including all International Accounting Standards, SIC and IFRIC Interpretations IFRS Standards together with their accompanying documents are issued by; The International Accounting Standards Board (the “Board”) 30 Cannon Street, London, EC4M 6XH, United Kingdom Tel: +44 (0)20 7246 6410 Fax: +44 (0)20 7246 6411 Email: info@ifrs.org Web: www.ifrs.org Disclaimer: To the extent permitted by applicable law, the Board and the IFRS Foundation (Foundation) expressly disclaim all liability howsoever arising from this publication or any translation thereof whether in contract, tort or otherwise (including, but not limited to, liability for any negligent act or omission) to any person in respect of any claims or losses of any nature including direct, indirect, incidental or consequential loss, punitive damages, penalties or costs Information contained in this publication does not constitute advice and should not be substituted for the services of an appropriately qualified professional ISBN: 978-1-84843-664-0 Copyright © IFRS Foundation All rights reserved Reproduction and use rights are strictly limited Contact the Foundation for further details The authoritative text of IFRS Standards is that issued by the International Accounting Standards Board in the English language Copies may be obtained from the Foundation’s Publications Department Please address publication and copyright matters to: IFRS Foundation Publications Department 30 Cannon Street, London, EC4M 6XH, United Kingdom Tel: +44 (0)20 7332 2730 Fax: +44 (0)20 7332 2749 Email: publications@ifrs.org Web: www.ifrs.org © Emile Woolf International Limited iii iv © Emile Woolf International Limited Paper P2 (INT) Corporate Reporting c Contents Page Syllabus and study guide vii Chapter The professional and ethical duty of the accountant Chapter Beyond financial reporting Chapter The financial reporting framework 33 Chapter Reporting financial performance 73 Chapter Revenue 111 Chapter Non-current and current assets 151 Chapter Financial instruments 199 Chapter IFRS 16: Leases 255 Chapter Employee benefits 319 Chapter 10 IFRS 2: Share-based payments 335 Chapter 11 Taxation 357 Chapter 12 Provisions and events after the reporting period 379 Chapter 13 SMEs and specialised entities 401 Chapter 14 Group financial statements: Revision 419 Chapter 15 Joint arrangements, associates and joint ventures 469 Chapter 16 Group financial statements: complex groups 483 Chapter 17 Group financial statements: step acquisitions 509 Chapter 18 Group financial statements: disposals 523 Chapter 19 Group reorganisations and restructuring 545 Chapter 20 IFRS 13: Fair value measurement 559 Chapter 21 Foreign currency 577 © Emile Woolf International Limited v Paper P2 (INT): Corporate Reporting vi Chapter 22 Statements of cash flows 601 Chapter 23 Capital reconstructions 637 Chapter 24 Performance measurement 645 Chapter 25 Other issues 675 Practice questions 693 Answers 729 Index 791 © Emile Woolf International Limited Examinable documents Examinable documents International Accounting Standards (IASs)/International Financial Reporting Standards (IFRSs) Chapter: IAS IAS IAS IAS IAS 10 IAS 12 IAS 16 IAS 17 IAS 19 IAS 20 Presentation of Financial Statements Inventories Statement of Cash Flows Accounting Policies, Changes in Accounting Estimates and Errors Events after the Reporting Period Income Taxes Property, Plant and Equipment Leases Employee Benefits 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 Separate Financial Statements IAS 28 Investments in Associates and 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 40 Investment Property IFRS First-time Adoption of International Financial Reporting Standards IFRS Share-based Payment IFRS Business Combinations (revised) IFRS Non-Current Assets Held for Sale and Discontinued Operations IFRS Financial Instruments: Disclosures IFRS Operating Segments IFRS Financial Instruments IFRS 10 Consolidated Financial Statements IFRS 11 Joint Arrangements IFRS 12 Disclosure of Interests in Other Entities IFRS 13 Fair Value Measurement IFRS 15 Revenue from contracts with customers IFRS for SMEs IFRS for small and medium sized entities © Emile Woolf International Limited 22 12 11 21 14 15 4 6, 14 12 6 25 10 14, 17 6, 18 7 3, 14 3, 15 3, 14 20 13 vii Paper P2 (INT): Corporate Reporting Chapter: Other Statements The Conceptual Framework for Financial Reporting Practice statement: Management Commentary The International Framework EDs, Discussion Papers and Other Documents ED 2014/04 Measuring quoted investments in subsidiaries, joint ventures at fair value ED 2015/01 Classification of liabilities – proposed amendments to IAS ED 2015/03 Conceptual framework for financial reporting ED 2015/08 Practice statement on materiality viii 2 14 3 © Emile Woolf International Limited Paper P2 (INT): Corporate Reporting (2) Share capital and premium Share capital Share premium Total $000 $000 $000 At end of year 1,900 95 1,995 At beginning of year 1,100 30 (1,130) Cash receipts from share issue (3) Interest payable Accrued interest at beginning of year Interest charge in profit and loss Accrued interest at end of year Interest payments in the year (4) $000 25 60 85 (40) 45 Current tax payable Tax payable at beginning of year Tax charge in profit and loss Tax payable at end of year Tax payments in the year 784 865 $000 325 400 725 (540) 185 © Emile Woolf Publishing Limited Answers to practice questions 28 Bishop Group (a) Statement of cash flows for year ended 31 December Year $000 $000 2,282 Cash flows from operating activities (Note 1) (325) Interest paid (120 + 205) Dividends received 90 (117) Taxation paid (W2) –––––––––––––––––––––––––––––––––– Net cash flows from operating activities Cash flows from investing activities: Payments to acquire non-current assets (W3) Receipts from sale of non-current assets Purchase of investments 1,930 (4,996) 810 (300) –––––––––––––––––––––––––––––––––– Net cash used in investing activities Cash flows from financing activities: Proceeds of share issue Additional loans (1,200 – 800 – 25) Capital payments under leases (W4) Dividends paid to NCI (W1) Equity dividends paid (4,486) 3,824 375 (150) (295) (600) –––––––––––––––––––––––––––––––––– Net cash provided by financing activities 3,154 –––––––––––––––––––––––––––––––––– Net increase in cash and cash equivalents Effect of exchange rate movements 598 53 –––––––––––––––––––––––––––––––––– 651 169 Cash and cash equivalents b/fwd –––––––––––––––––––––––––––––––––– Cash and cash equivalents c/fwd 820 –––––––––––––––––––––––––––––––––– Notes to the statement of cash flows Reconciliation of operating profit to net cash inflow from operating activities Operating profit Depreciation Profit on sale of non-current assets (810 – 720) Increase in inventories (6,135 – 5,740 – 117) Increase in receivables (5,720 – 4,380 – 339) Decrease in payables (1,420 – 1,760 – 58) Net cash flows from operating activities © Emile Woolf International Limited $000 2,849 1,200 (90) (278) (1,001) (398) 2,282 785 Paper P2 (INT): Corporate Reporting Workings (1) Non-controlling interest $000 Dividend paid to NCI 295 Balance b/fwd Statement of profit or Balance c/fwd 2,800 loss Exchange gain (20% × 875) 3,095 $000 2,500 420 175 3,095 (2) Tax Tax paid C/fwd current tax C/fwd deferred tax (3) $000 117 700 550 1,367 B/fwd current tax B/fwd deferred tax Statement of profit or loss $000 167 400 800 1,367 Non-current assets $ Opening NBV 7,520 Depreciation (1,200) (720) Disposals at NBV New leases 700 Exchange rate gains 424 4,996 Purchase for cash 11,720 Closing NBV (4) Lease liabilities $000 $000 Cash paid 355 Balance b/f < year 50 Balance c/f < year 110 Balance b/f > year 250 Balance c/f > year 740 Finance charge in profit or loss 205 New right of use assets 700 1,205 1,205 The payment of $355,000 is split as $205,000 interest and $150,000 capital as payments are made in arrears and hence the year end payment pays off the year’s finance cost 786 © Emile Woolf Publishing Limited Answers to practice questions (b) The statement of profit or loss and statement of financial position are based on the accruals concept whereas the statement of cash flows is based on the cash concept Cash is the 'life blood' of the company and is therefore critical to an entity’s survival Without cash to pay suppliers, the work force and other payables, the company will cease to operate, irrespective of how profitable it is Shareholders need to know that a company is viable and has the resources to continue, and perhaps expand, operations Suppliers need to know they will be paid and customers need to know the company is in a position to continue operations Profit may be significantly affected by the choice of accounting policies made by a company This means it is more subjective than cash and more open to manipulation However, the statement of cash flows itself may be subject to window dressing, for example by delaying payment of suppliers until after year end The auditor needs to be involved in this respect to ensure the shareholders and other users receive meaningful information The statement of cash flows gives additional information not provided by the other financial statements 29 The Grape Group Group statement of cash flows for the year ended 31 March Year $000 Cash flows from operating activities Net profit before taxation Adjustments for: Depreciation (Note 1) Loss on sale of assets Income from associate Interest expense Operating profit before working capital changes Increase in inventories (1,127 – 139) Increase in receivables (273 – 85) Increase in payables (203 – 68) Cash generated from operations Interest paid Income taxes paid (W3) Net cash from operating activities $000 9,550 1,176 18 (139) 552 11,157 (988) (188) 135 10,116 (552) (2,400) 7,164 Cash flows from investing activities Acquisition of subsidiary net of cash acquired (346 – 3) Purchase of property, plant and equipment (1,875 – 315) Proceeds from sale of property, plant and equipment (W1) Dividends received from associate (W2) Net cash used in investing activities © Emile Woolf International Limited (343) (1,560) 156 93 (1,654) 787 Paper P2 (INT): Corporate Reporting Cash flows from financing activities Proceeds from issuance of share capital (675 + 519 - 152) Repayment of loan notes Dividends paid Net cash used in financing activities Net increase in cash and cash equivalent Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period 1,042 (990) (2,100) (2,048) 3,462 1,728 5,190 Notes to the statement of cash flows (1) Major non-cash transactions During the year the group purchased a subsidiary undertaking Part of the consideration for the acquisition was in the form of shares Further details of the acquisition are given below (2) Purchase of subsidiary undertaking $000 Net assets acquired: Property, plant and equipment Inventories Receivables Cash at bank and in hand Payables Goodwill Satisfied by: Shares allotted Cash 315 139 85 (68) 474 24 498 152 346 498 Workings (1) Proceeds from sale of property, plant and equipment Cost of assets sold Accumulated depreciation Loss on sale Proceeds 788 $000 429 (255) (18) 156 © Emile Woolf Publishing Limited Answers to practice questions (2) Dividends received from associate Interest in associate $000 Balance b/d 1,920 Dividends received from associates Share of associates' profit after tax 139 Balance c/d 2,059 (3) $000 93 1,966 2,059 Taxation Cash paid Balance c/d © Emile Woolf International Limited Taxation $000 2,400 Balance b/d 2,950 Statement of profit or loss 5,350 $000 2,400 2,950 5,350 789 Paper P2 (INT): Corporate Reporting 790 © Emile Woolf Publishing Limited Paper P2 (INT) Corporate Reporting i Index A About the IFRS for SMEs ACCA Code of conduct Accountants in practice Accounting concepts policies standards Acid test ratio Acquisition of a subsidiary in the statement of cash flows Active market Actuarial method Adjusting events Amortisation of intangible assets Amortised cost Artistic-related intangible assets Asset ceiling test Assets held for sale Associates and the group statement of cash flows 404 64 62 35 659 625 217 273 380 175 211 454 332 46 165 622 B Bargain purchase/s option © Emile Woolf International Limited 458 292 Basic earnings per share and a bonus issue of shares and a rights issue Bid /Offer prices Borrowing costs Business review 88 90 91 217, 570 154 12, 31, 649 C Call option Capital reconstructions Cash and cash equivalents cycle flow/s hedge from financing activities investing activities operating activities generating units in transit Chairman’s statement Changes in accounting policies Closing rate Codes of conduct Company law Comparability Compliance with accounting standards Components of equity 202 638 614 655 602 241 612 609 603 182 461 649 63 581 35 44 80 791 Paper P2 (INT): Corporate Reporting Compound instruments 247 Conceptual framework for financial reporting (The) 37 framework 36 Condorsement 680 Confidentiality Consideration 445 Consistency of presentation 64 Consolidated accounts 424 statement/s of financial position 427 cash flows 616 Consolidation stage 591 Constructive obligation 387 Contingent asset 399 consideration 445 liabilities 449 liability 398 Contingently-issuable shares 97 Contract-related intangible assets 454 Control 422 Convergence 676 Convertible instruments and EPS 95 Corporate social responsibility 10 Cost/s bases 68 constraint on useful information 45 model 158, 168, 174 of a non-current asset: subsequent expenditure 157 of acquisition: transaction costs 445 of an acquisition 445 Creative accounting 38, 385, 649 Credit risk 254 CSR reporting 13 Current assets 75 liabilities 75 ratio 659 tax 358 value 51, 68 Customer-related intangible assets 454 792 E Earnings per share (EPS) Economy, effectiveness and efficiency D Days sales outstanding Decommissioning costs 395 Defaults and breaches 252 Deferred consideration 445 tax 359 assets 370 business combinations 374 expense 364 individual company 370 liability 360 principles 361 relating to revaluation 371 Defined benefit pension plans 325 contribution pension plans 324 Demerger 553 Depreciation 161 after revaluation 160 and components of non-current assets 162 Derecognition of financial instruments 222 Development costs 173 and deferred tax 366 Diluted earnings per share 94 Direct method 603 Directors’ report 649 Discontinued operations 185 Discounting of provisions 391 Dismantling costs 153, 395 Disposal group 186, 188 of a foreign subsidiary 599 of a revalued asset 163 of a subsidiary in the statement of cash flows 633 of non-current assets 162 Dividend/s and IAS10 383 cover 664 received from an associate 623 yield 664 Divisionalisation within a group 551 88, 663 416 657 © Emile Woolf International Limited Index ED 2014/04: Measuring quoted investments in subsidiaries, joint ventures and associates at fair value 421 ED 2016/01: Definition of a business and previously held interests 513 ED 2015/3: Conceptual framework for financial reporting 53 ED: IFRS Practice Statement Application of Materiality to Financial Statements 70 Effective rate 211 Efficiency ratios 655 Elements of financial statements 46 Embedded derivatives 220 Employee benefits 320 share option 338 Enhancing qualitative characteristics 44 Environmental provisions 393 Report 13 Equity 47 instrument 246 method 478 Events after the reporting period 380 Exchange difference/s 581, 589 in other comprehensive income 596 rate differences (statement of cash flows) 619 Expenses 48 F Fair presentation value/s adjustments and deferred tax adjustments in profit and loss adjustments at acquisition hedge hierarchy hierarchy method of accounting for NCI minus costs of disposal model Faithful representation FASB and the IASB © Emile Woolf International Limited 66 68, 449 366 457 455 448 238 218 570 433 179 168 44 679 Finance income Financial asset gearing instruments liability ratios First-time adoption Flow through method Foreign currency operation operation: accounting rules Forward contracts Full goodwill method provision method Functional currency Future/s operating losses and provisions 298 206 207 662 200 209, 246 652 682 369 578, 579 581 588 201 429, 433 362 579 202 392 G GAAP Gain or loss arising on translation on translation Gearing ratio Global Reporting Initiative Going concern assumption Goods in transit Goodwill Government grants Gross investment in the lease profit percentage Group reorganisations 36 584 589 660 661 18 383 461 427 155 296 654 546 H Harmonisation Hedge/s accounting effectiveness of a net investment in a foreign operation 676 234, 237 236 234 793 Paper P2 (INT): Corporate Reporting of a net investment in a foreign operation Hedged item Hedging instrument with derivatives Hedging Held for sale Historical cost Holding company 244 235 234 236 203 165 51 424 I IAS and group accounts 421 IAS 1: Presentation of financial statements 74 IAS 2: Inventories 193 IAS 7: Statements of cash flows 602 IAS 8: Accounting policies, changes in accounting estimates and errors 62, 67 IAS 10: Events after the reporting period 380 IAS 12: Income taxes 358 IAS 16: Property, plant and equipment 152 IAS 19: Employee benefits 320 IAS 20: Accounting for government grants and disclosure of government assistance 155 IAS 21: The effects of changes in foreign exchange rates 578 IAS 23: Borrowing costs 154 IAS 24: Related party disclosures 105 IAS 27: Separate financial statements 443 IAS 28: Investments in associates and joint ventures 477 IAS 32: Financial instruments: Presentation 200, 246 IAS 33: Earnings per share 88 IAS 34: Interim financial reporting 102 IAS 36: Impairment of assets 177 IAS 37: Provisions, contingent liabilities and contingent assets 385 IAS 38: Intangible assets 170 IAS 40: Investment property 167 IAS 41: Agriculture 195 IASB Conceptual Framework 39 Framework 37, 62 Identifying a finance lease 291 IFRIC16 245 794 IFRS 1: First Time Adoption of International Financial Reporting Standards 682 IFRS 2: Share-based payment 336 IFRS 3: Business combinations 444 IFRS 5: Non-current assets held for sale and discontinued operations 165, 185, 541 IFRS 7: Financial instruments: Disclosure 200, 251 IFRS 8: Operating segments 82 IFRS 11: Joint arrangements 470 IFRS 15: The five step model 114 IFRS FOR Small and medium-sized entities (SMEs) 402 IFRSs and measurement 68 Impairment loss on a disposal group 188 of assets 177 of financial assets 225 of goodwill 442 Improvements in IFRSs 676, 681, 682 Inception and commencement 258 date of the lease 258 Income 48 Indirect method 606 Initial direct costs of a lease 266 Institute of Social and Ethical Accountability (The) 23 Intangible assets 170 at acquisition 453 Integrity Interest cover 662 receivable and deferred tax 365 Interim financial reporting 102 Internally-generated intangible assets 172 International GAAP 66 Intra-group adjustments 459 balances 461 interest 468 loans 468 sales 459 Inventory 193 turnover 656 Investment entity 426 property 167 © Emile Woolf International Limited Index Investor ratios Items in transit 663 462 J Joint arrangements control operation venture 470 471 472 472 L Lease/s of land and buildings payments made in advance payments term Legal obligation Liabilities Liability method Liquidity ratios risk Listing rules 256 294 276 263 262 387 47 362 658 254 35 M Management commentary Manufacturer/dealer leases Market risk Marketing-related intangible assets Material items Materiality and aggregation Measurement Memorandum of Understanding Modified historical cost accounting Monetary items Most advantageous market 31, 32 301 254 454 78 64 50 679 68 581 565 N NCI and losses Negative goodwill Net investment in a foreign operation © Emile Woolf International Limited 443 458 581 the lease realisable value (NRV) New holding company Nil provision method Non-adjusting events Non-controlling interest/s and intra-group loans and the group statement of cash flows Non-current assets held for sale Non-financial performance indicators (NFPIs) Non-monetary items Norwalk Agreement Not-for-profit entity 296 68, 194 546 369 380 428, 440 468 620 185 667 581 679 415 O Objectivity Offsetting Onerous contracts Operating and financial review cycle lease incentives segments Options Other comprehensive income Owner changes in equity 64, 249 392 31, 649 655 307 82 202 421 80 P Parent company Partial goodwill method provision method Past service cost Payables payment period Permanent differences Post-acquisition accumulated profits Post-employment benefits Potential new ordinary shares Pre- and post-acquisition profits Preference dividends and EPS Present obligation value Presentation currency 421 428, 429 369 331 658 360 429 324 94 440 89 387 51 579 795 Paper P2 (INT): Corporate Reporting Price earnings ratio (P/E) Principal market Professional behaviour competence and due care Profitability ratios Provision/s for environmental costs Public benefit entity Purchased goodwill and foreign subsidiaries Put option 663 565 2, 653 385 394 415 427 591 202 Q Qualitative characteristics of useful financial information disclosures Quantitative disclosures thresholds (segments) thresholds Quick ratio 43 253 253 83 83 659 R Ratio analysis Realisable value Receivables turnover Reclassification adjustments Recognition of financial instruments Recoverable amount Regulation Reimbursements and provisions Related party transactions Relevance Reportable segments Research costs Restoration costs Restructuring and provisions costs Retrospective adjustments 796 650 51 657 79 49 206 178 34 391 106 107 44 83 172 395 393 450 81 Return on (total) capital employed (ROCE) shareholders’ funds (ROSF) Revaluation/s and deferred tax model and deferred tax Reversing an impairment loss Rights issue and EPS 653 653 371 158, 174 366 181 91 S Sale and leaseback transactions 310 Sarbanes-Oxley Act Segmental information 82 Separate vehicle 472 Settlement of a transaction 585 value 51 Share options and EPS 96 SIC Interpretation 21 373 25 363 32 175 Small and medium-sized entities (SMEs) 402 Social and environmental report 13, 649 SOCIE 80 Software development costs 175 Solvency ratios 660 Specialised entities 415 Split accounting for compound instruments 247 Spot rate 581 Statement/s of changes in equity (SOCIE) 80 profit or loss and other comprehensive income 78 cash flows 602 Stepped bond 212 Subsidiary 421 Success of the Conceptual Framework 61 Sustainability Accounting Standards Board (SASB) (The) 21 Reporting Guidelines 18 reporting 16, 17 Sustainable Stock Exchanges (The) 22 © Emile Woolf International Limited Index Swaps 202 T Tax base 361 Technology-based intangible assets 454 Temporary difference/s 359, 361, 370 Theoretical ex-rights price 92 Theory and practice 60 Timeliness 45 Transaction/s costs 445 in a foreign currency 583 in own equity 249 Translation of transactions 582 stage 588 Transparency 11 Treasury shares 249 Triple bottom line reporting 23 True and fair view 66 Types of lessors 289 © Emile Woolf International Limited U UK Strategic Report Under-provision or over-provision of tax Understandability Unethical behaviour Unrealised profit in inventory Users and their information needs 28 358 45 465 40 V Value in use Verifiability 179 45 W Website development costs Window dressing 175 383 797 Paper P2 (INT): Corporate Reporting 798 © Emile Woolf International Limited 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ACCA Paper P2 Corporate Reporting (International) Welcome to Emile Woolf‘s study text for Paper P2 Corporate Reporting (INT) which is: Written by tutors... reporting ED 2015/08 Practice statement on materiality viii 2 14 3 © Emile Woolf International Limited Paper P2 (INT) Corporate reporting S Syllabus and study guide September 2017 to June 2 018. .. International Limited Paper P2 (INT) Corporate Reporting CHAPTER Beyond financial reporting Contents Corporate social responsibility Sustainability reporting Integrated reporting The UK Strategic