ACCA Paper P2 (International) Corporate Reporting On-line Final Mock Examination

Question Paper Reading and planning Writing This paper is divided into two sections Section A Section B This question is compulsory and MUST be attempted TWO questions ONLY to be attempted 15 minutes 3 hours

Please attempt this exam under exam conditions and attach the frontsheet complete with your name and address to your script. The completed package should be sent to BPP Marking Department. Take a few moments to review the notes on the inside of this page titled, ‘Get into good exam habits now!’ before attempting this exam.


ACP2FM10(J) INT Online Mock

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Effective time management
• • Watch the clock and allow 1.8 minutes per mark. Work out how long you can spend on each question and do not exceed that time. Take a few moments to think what the requirements are asking for and how you are going to answer them.

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• This paper is in exactly the same format as the real exam. You should read through the paper and plan the order in which you will tackle the questions. Always start with the one you feel most confident about and take time to choose the questions you will answer in sections with choice. Read the requirements carefully: focus on mark allocation, question words (see below) and potential overlap between requirements. Identify and make sure you pick up the easy marks available in each question.

• •

Effective layout
• • • • Present your numerical solutions using the standard layouts you have seen. Show and reference your workings clearly. With written elements try and make a number of distinct points using headings and short paragraphs. You should aim to make a separate point for each mark. Ensure that you explain the points you are making i.e. why is the point a strength, criticism or opportunity? Give yourself plenty of space to add extra lines as necessary; it will also make it easier for the examiner to mark.

Common terminology
Identify Discuss Describe Summarise Recommend Analyse Explain Illustrate Appraise/assess/ evaluate List relevant points Explain the opposing arguments Present the characteristics of State briefly the essential points Present information to enable the recipient to take action Determine and explain the constituent parts of Set out in detail the meaning of Use an example to explain something Judge the importance or value of



Jarvis, Whitehill and Crow
The following draft statements of comprehensive income relate to Jarvis, Whitehill and Crow, all public limited companies, for the year ended 31 December 2008. Jarvis $m 4,500 (3,200) 1,300 80 (220) (180) (40) 940 (280) 660 140 800 600 Whitehill $m 2,800 (2,000) 800 20 (140) (110) (20) 550 (160) 390 90 480 380 Crow $m 1,800 (1,200) 600 (80) (60) (12) 448 (120) 328 80 408 260

Revenue Cost of sales Gross profit Other income Distribution costs Administrative expenses Finance costs Profit before tax Income tax expense PROFIT FOR THE YEAR Other comprehensive income: Gains on revaluations of property, net of tax TOTAL COMPREHENSIVE INCOME FOR THE YEAR Total comprehensive income for the year ended 31 December 2007 (1)

The following information is relevant to the preparation of the group financial statements: Jarvis acquired 80% of the ordinary shares of Whitehill on 1 January 2007 for $1,400 million when the fair value of Whitehill’s net assets was $1,500 million. Whitehill acquired 60% of the ordinary share capital of Crow on 1 April 2008 for $800 million when the fair value of Crow’s net assets was $1,100 million. Group policy is to measure non-controlling interests at the date of acquisition at their proportionate share of the net fair value of the identifiable assets acquired and liabilities assumed. (ii) Whitehill had sold $400 million of goods to Jarvis on 31 October 2008. There was no opening inventories of intragroup goods but the closing inventories of these goods in Jarvis’s financial statements was $100 million. The profit on these goods was 20% of selling price. The tax rate applicable to both Jarvis and Whitehill is 30%. Jarvis have a defined benefit pension scheme and the directors have included the following amounts in the figure for cost of sales: Current service cost Actuarial deficit on obligation Interest cost Actuarial gain on assets Charged to cost of sales $m 12 9 8 (6) 23


The fair value of the plan assets at 1 January 2008 was $120 million and the present value of the defined benefit obligation was $140 million at that date. The expected average remaining service lives of employees who were members of the scheme was 8 years. The company's accounting policy is to recognise actuarial gains and losses in the period incurred in other comprehensive income and interest cost as a finance cost. (iv) (v) During 2008 Jarvis paid a dividend of $150 million and Whitehill paid a dividend of $60 million. Neither company paid a dividend in 2007. There had been no impairment losses recorded relating to the investments in either Whitehill or Crow as at 1 January 2008. Whitehill and Crow are considered separate cash-generating units.


This asset had always been classified as available-for-sale by the directors of Jarvis and during the period in which it was owned $10 million of valuation gains were recognised directly in equity. Discuss the ethical issues of narrative reporting without reference to strategy and the lack of key performance indicators to support the narrative disclosures. (30 marks) Discuss what is meant by corporate responsibility and in particular the factors which should encourage companies to disclose social and environmental information. (5 marks) (Total: 50 marks) (vii) Required: (a) (b) 4 . (c) A recent survey has indicated that there has been a vast increase in narrative reporting by FTSE 350 companies on the subject of corporate responsibility however only a very small proportion of companies identify corporate responsibilities as strategic issues or provide key performance indicators in this area. (15 marks) Note: 2 marks will be awarded for the quality of discussion of the ideas and information. There was no impairment of the investment in Crow. and on which deferred tax was provided at 30%. The only accounting entries to have been made for this disposal to date have been to record the proceeds in the bank account.500 million as at 31 December 2008. The income tax charge on profit or loss has been correctly calculated for current and deferred tax effects on profit or loss for each individual company. Prepare a consolidated statement of comprehensive income for the Jarvis group for the year ended 31 December 2008. Ignore the deferred tax effects of the actuarial gains and losses on the pension scheme. Impairment losses are charged to cost of sales.The recoverable amount of Whitehill was $2. (vi) During 2008 Jarvis sold a financial asset which had a carrying value of $50 million at 31 December 2007 for $70 million.

Required: Write a report to the directors of Tele2 explaining how each of these matters should be dealt with in the group financial statements for the year ending 31 December 2008. (Total: 25 marks) (2 marks) 5 . The sale price of the building and its fair value are $8. Before the sale of the shares the net asset value of CSD at 31 March 2008 was $100 million. (2 marks) Effective communication to the directors. rising from $70 million on the date of the original acquisition. (9 marks) On 1 January 2008 Tele2 held a 30% holding in a communications software development company CSD.5 million in profit or loss for the year and to treat the lease as an operating lease. At 31 December 2007 the carrying value of the building was $7 million. At the end of the agreement the building will be transferred back to Tele2 at nil cost. (3 marks) Tele2 has recently been suffering a shortage of cash and to help to alleviate this had sold one of their office buildings to a third party institution on 1 January 2008 and then leased it back for a period of 15 years. The directors of Tele2 are proposing to include the profit on disposal of $1.44%. At 31 December 2008 the fair value of this holding was $19 million.2 Tele2 Tele2 is a company in the telecommunications industry providing landline and mobile telephone connections and equipment and other telecommunications services such as internet access. Tele2 received $20 million for its sale of the shares in CSD and the fair value of its remaining holding in CSD at 31 March 2008 was $17 million.8 million per annum payable in advance and the interest rate implicit in the lease is 5. On 31 March 2008 Tele2 sold a 15% holding in CSD reducing its investment to a 15% holding meaning that Tele2 no longer exercises significant influence over CSD. Although every effort has been made to sub-let these premises in the current economic climate it is recognised that it may not be possible to do so immediately. When Tele2 charge a connection fee to a customer together with the related equipment. The rental under the lease agreement is $0. (2 marks) The purchase of licences for operations from governments are treated as intangible assets and are capitalised at their initial cost. The company is currently preparing its consolidated financial statements for the year ending 31 December 2008. In cases where Tele2 is confident that the licence will be renewed (at no additional cost) then the licence will not be amortised. the entire connection fee is recognised at the date of connection even if the length of the customer relationship is expected to span a number of accounting periods. which originally cost $24 million a number of years ago. (7 marks) Tele2 has a number of properties held under finance leases which are surplus to requirements. Therefore there will be a shortfall arising from sublease rental income being lower than the lease costs being borne by Tele2.5 million which is the present value of the minimum lease payments.

The options will vest if the employees were still employed on 31 December 2010. However by the end of 2009 sales had increased and the three year target had been met. and this expectation has not changed. The actual/estimated figures for the market value of the share price and the number of the key personnel leaving each year and expected to leave are as follows at each year end: Market value 31 December 2008 31 December 2009 31 December 2010 Required: Explain how this would be accounted for in each of the years from 2008 to 2010. (5 marks) $8 $10 $13 Number of personnel leaving in the year 12 8 20 Additional number of personnel expected to leave before vesting 28 20 – 6 . However Scudder is short of cash and has agreed with VS that it will accept payment in the form of shares (nominal value $1). has entered into a number of share-based payment transactions. An exercise price of $6 was set being the market price of the shares on that date. The sales director was expected to remain employed over the vesting period. initially at the date the entity obtains the goods or the counterparty renders service and subsequently at the end of each reporting period and at the date of final settlement. with any change in intrinsic value recognised in profit or loss. However in 2008 there was a downturn in the market and sales only increased by 1% and it was thought by the other directors that the three year target would not be met.000 ordinary shares every six months in exchange for 400 hours of management consultancy services over each six month period. (ii) (4 marks) On 1 January 2008 Scudder provided 200 of its key personnel with 100 share options.' Estimates however were made of staff retention and the number of these key personnel who would leave during the three year period. (iii) (7 marks) On 1 January 2007 Scudder had granted options over 5. The hourly rate charged by VS on 1 January is $100 per hour but this is to increase by 10% on 1 July 2008 and by a further 10% on 1 July 2009. This was revised following the actual experience of leavers in 2008.3 Scudder Scudder. Scudder has agreed to issue 10. The agreement begins on 1 January 2008 and is initially for a two year period. Scudder was unable to reliably estimate the fair value of the options. There was a further condition that annual sales must increase by 5 % per annum compound over the three year period. The fair value of each share option at 1 January 2007 was $4. Scudder estimated that 45 people would leave before the vesting date. The market value of Scudder’s shares at 1 January 2008 was $6 per share. a public limited company. Required: Explain how this transaction would be accounted for in 2008 and 2009. In such circumstances. In 2007 sales increased by 7% and it was estimated that the three year increase would be achieved. Required: Explain how this would be accounted for in each of the years from 2007 to 2009. Scudder has a year end of 31 December.000 shares to the sales director on the condition that he must continue to work for Scudder for 3 years. (i) Scudder wishes to engage the services of VS a management consultant. IFRS 2 states: 'The entity shall instead measure the equity instruments at their intrinsic value. On 1 January 2008.

The subsidiary had granted 100 share appreciation rights to each of its 400 employees on 1 January 2008. (3 marks) (Total: 25 marks) 7 .000 shares (provided that they are not sold for one year after receipt) or cash to the value of 9.000 shares. (v) (6 marks) A subsidiary of Scudder is in a tax jurisdiction where a tax allowance is available for share-based transactions. both provided that he is still employed on that date . The expected market price of Scudder’s shares is as follows: Market value $ 6 8 10 13 1 January 2008 31 December 2008 31 December 2009 31 December 2010 The fair value of the shares option is estimated at $6 at 1 January 2008 (taking into account the post-vesting disposal restrictions). based on intrinsic value of the transaction at the year end. Required: Explain how this would be accounted for in each of the years from 2008 to 2010. At 31 December 2008 it is felt that 75% of these awards will vest on 31 December 2010.(iv) On 1 January 2008 Scudder granted the managing director a right under which he could receive on 31 December 2010 either 10. The managing director has the right to choose which route to take and at 31 December 2010 he is expected to take the shares. Required: Explain how the transaction should be accounted for and its deferred tax effect in the financial statements at 31 December 2008. The tax rate is 30%. The fair value of each share appreciation right at 31 December 2008 is $6 and the market value of the shares less exercise price at that date is $5.

Note: 2 marks will be awarded for the quality of the discussion of the ideas and information. (10 marks) (c) In November 2006 the IASB issued a discussion paper on fair value measurements.4 International convergence The International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) in the USA have recently been working on a number of joint projects including a new standard on reporting of comprehensive income and developing further guidance on the use of fair values. (Marks will be awarded for illustrating your answer with examples of inconsistencies of fair value measurement). Explain why the IASB are considering issuing further guidance on the use and measurement of fair values. (10 marks) (Total: 25 marks) 8 . (5 marks) Discuss the advantages and disadvantages of reporting comprehensive income and explain the issues to consider when deciding where figures should be reported under the concept of comprehensive income. Required: (a) (b) Explain the concept of reporting comprehensive income.

Focus on allocating your time better. Give yourself time and space to make the marker's job easy. Quiz yourself constantly as you study. Practise as many questions as possible. You need to develop your memory as well as your understanding of a subject. Work through easier examples first. Use models to help develop width to your thinking. Read questions carefully noting all the parts. Show why the point identified answers the question set. Use numbering sequences when identifying points. Review your notes/text. Practise questions under strict timed conditions. Did you waffle? Y/N Layout Was your answer difficult to follow? Y/N Use headings and subheadings. Leave space between each point. Learn subject jargon (study text glossary).Student self-assessment Having completed this paper take a few minutes to consider what you did well and what you found difficult. Did you fail to explain each point? Y/N Were some of your workings unclear? Y/N Content Did you struggle with: Interpreting the questions? Y/N Learn the meaning of question words (inside front cover). Common problems Timing and planning Did you finish too early? Did you overrun? Y/N Y/N Future emphasis if you answer Yes Focus your planning time on generating more ideas. If you get behind leave space and move on. Focus your planning time on developing a logical structure to your answer. Use this as a basis to focus your future study on effectively improving your performance. Understanding the subject? Y/N Remembering the notes/text? Y/N 9 . Contact a tutor for help.

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ACCA Paper P2 (International) Corporate Reporting On-line Final Mock Examination Commentary. marking scheme and suggested solutions ACP2FM10(J) INT Online Mock .

Favourite topics of the examiner in the past for single topic questions include: • • • • Employee benefits Share-based payments Financial instruments Deferred tax so make sure you are prepared for questions on these topics. Both of these topics have been identified as being likely to appear on a recurring basis in question 1 so make sure you are comfortable with answering discussion type questions. 2 Tele2 This is a specialised industry question which is based on a telecommunications company. 2 . Note that question 1 often includes adjustments on pensions and financial instruments as in this case. A methodical step by step approach is key here. This question covered discussion of the accounting treatment of revenue recognition. but so is the ability to read the scenario carefully and use basic principles.Commentary Tutor guidance on improving performance on the exam paper. This part includes a number of adjustments including pension costs. Whitehill and Crow Part (a) is a consolidated statement of comprehensive income for a complex group with the subsubsidiary being acquired part way through the year. Make it clear which question you are answering too! Make sure you answer ALL questions even if you have to guess. Clearly. The examiner has mentioned that he is likely to set questions in the context of a specialised industry. sale and leaseback. rather the industry is used as a vehicle to test application of accounting standards. It is amazing how a stab in the dark can generate the 50th mark – the one you need to pass – again it shows the marker that you can think about the question (albeit in simple terms). a good knowledge of accounting standards is helpful. Even very talented students can fall down at this paper because they do not consider the following points: The first question you attempt should be the one you feel most comfortable with. Give the marker the impression that you are comfortable with the syllabus as early as possible. General Your script is the only evidence you will provide to convince an ACCA marker that you should pass this paper and therefore progress through your qualification. Part (b) requires a discussion of corporate responsibility and in particular social and environmental reporting. 3 Scudder This is an entire question on various aspects and requirements of IFRS 2 Share-based Payment. Part (c) requires consideration of the ethical factors involved in companies disclosing large amounts of narrative information in these areas but not viewing corporate responsibility as part of corporate strategy. part disposal of an associate and an onerous contract. intra-group trading and unrealised profit. 1 Jarvis. intangible assets. The key to passing this type of question is to identify enough of the issues within the scenario. deferred tax and the sale of an available-for-sale financial asset. No specific knowledge of the industry is required.

The examiner has said that he intends to use question 4 for discussion of current developments in corporate reporting.4 International convergence This is the essay question which covers the issues of fair value measurement and reporting comprehensive income. 3 . What is required is some knowledge of these developments and the ability to put together a good essay.

800 x 9/12) – (W3) 400) Cost of sales (3.500 + 2.227 (7) 290 (3) 280 1. net of tax (W9) Gains on property revaluation.200 x 9/12) – (W3) 400 + (W3) 20 – (W4) 11 + (W7) 40) Gross profit Other income (80 + 20 + (W9) 30 – (W5) 48) Distribution costs (220 + 140 + (80 x 9/12)) Administrative expenses (180 + 110 + (60 x 9/12)) Finance costs (40 + 20 + (12 x 9/12) + (W4) 8) Profit before tax Income tax expense (280 + 160 + (120 x 9/12) – (W3) 6) PROFIT FOR THE YEAR Other comprehensive income: Available for sale financial assets: Reclassification adjustments for gains included in profit or loss.751 (524) 1. Whitehill and Crow Marking scheme Marks (a) Revenue and COS adjustment – intragroup sale Unrealised profit Deferred tax on unrealised profit COS – pension adjustment Impairment loss (including goodwill and net assets of Whitehill) Available-for-sale financial asset – profit/ reclassification/DT Elimination of dividend Finance costs – pension adjustment Non-controlling interests . net of tax (140 + 90 + (80 x 9/12)) Actuarial losses on defined benefit pension plan ((W4) 9 – 6) Other comprehensive income for the year: TOTAL COMPREHENSIVE INCOME FOR THE YEAR $m 8.250 (5.1 Jarvis.200 + 2.TCI Gain on property revaluation Actuarial losses on defined benefit pension plan Basic consolidation (J + W + 9/11 C) Explain corporate responsibility Public interest Shareholder value Government/regulation Lack of requirements Quality of discussion Not part of strategy Public relations Possibly misleading 1 1 2 2 6 6 1 1 2 2 1 1 4 3 3 3 2 2 2 15 (c) 2 2 1 5 50 30 (b) Suggested solution (a) Jarvis Group Consolidated statement of comprehensive income for the year ended 31 December 2008 Revenue (4.749) 2.000 + (1.PFY Non-controlling interests .507 4 .501 82 (420) (335) (77) 1.800 + (1.

4.2008 60% 80% Crow Effective interest in Crow (80% x 60%) 48% .507 – 251) Non-controlling interests (W2) 1.025 202 1.2007 Whitehill 1. Non-controlling interests 52% 100% Timeline 1..2008 5 .4.227 1.12..Profit attributable to: Owners of the parent (1.227 – 202) Non-controlling interests (W2) Total comprehensive income attributable to: Owners of the parent (1.1.507 Workings 1 Group structure Jarvis 1.2008 SOCI 1.2008 Jarvis (parent) – all year Whitehill – owned for whole year Crow – owned for 9/12 of year 2 Non-controlling interests Profit for the year Whitehill Crow $m $m PFY/TCI per Q: Whitehill 390 246 Crow: (328 × 9/12)/(408 × 9/12) Less: Unrealised profit (W3) (20) 370 246 × 20% 74 202 × 52% 128 Total comp income Whitehill Crow $m $m 480 306 (20) 460 306 × 20% 92 251 × 52% 159 31.1.256 251 1.

5 Intragroup dividend Jarvis has a figure for other income of $80m. the receiving company is the parent and so the deferred tax does not affect the subsidiary or the non-controlling interests calculation. 6 . This means that cost of sales requires a reduction of $11 million ($23m . If the '10% corridor approach' from IAS 19 were used rather than the recognition method which the directors have used so far. the amount of any unrecognised actuarial gains or losses would need to be compared with the higher of 10% of the present value of the defined benefit obligation at 1 January 2008 and 10% of the fair value of the plan assets at 1 January 2008. the deferred tax is deemed to be an issue related to the receiving company calculated at the receiving company’s tax rate (as the receiving company will get a tax deduction at that rate when the temporary difference reverses). This is because under IAS 12 Income Taxes. The actuarial gains and losses for the year are reported in other comprehensive income. 4 Defined benefit pension cost As the company's policy is to recognise all actuarial gains and losses in other comprehensive income. as a consolidation adjustment: DR Deferred tax asset CR Income tax expense (P/L) $6m $6m The deferred tax does not affect the non-controlling interests.3 Intragroup trading Cancel intragroup sale/purchase: DR Revenue CR Cost of sales $400m $400m Unrealised profit on intragroup sale: Unrealised profit = $100m x 20% = $20m In Whitehill's (seller's) books: DR Cost of sales CR Inventories $20m $20m This is profit made by Whitehill therefore will be used to adjust for the non-controlling interests. Tutorial note: The information about the fair value of plan assets and present value of pension obligations is not relevant to the profit or loss figures as the company's policy is recognition in other comprehensive income. The interest cost of $8 million can also be reported in cost of sales or as a finance cost. and any excess credited or charged to profit or loss over 8 years (the average remaining service lives of employees in the plan). but the company should be consistent with its past policy of recognising the interest cost as a finance cost. Deferred tax effect of unrealised profit: Deductible temporary difference = $20m x 30% = $6m This is a deferred tax asset and therefore is a credit to the group income tax expense. This includes its share of the dividend from Whitehill $48m ($60m x 80%) which must be removed on consolidation. despite relating to a profit made by the subsidiary. In this case.$12m). the charge therefore to cost of sales should simply be the current service cost of $12 million.

9 Profit on sale of available-for-sale financial asset Proceeds Carrying value at 31 December 2007 Gains reclassified to profit or loss from other comprehensive income Gain on sale $m 70 (50) 20 10 30 This figure (gross of tax) will be included in other income. 7 . 100% of cash flows for value in use or 100% of current fair value for the fair value less costs to sell figure).300 8 Carrying amount of net assets of Whitehill Fair value of net assets at 1 January 2007 Total comprehensive income for year to 31 December 2007 Total comprehensive income for year to 31 December 2008 Dividend paid during 2008 Tutorial notes: No adjustment is made to the net assets for the unrealised profit (W3).400 300 (1.e. An alternative would be to adjust both.500 50 40 $m 1. The current tax effect of the gain is already included in the income tax expense per the question. However. This is because recoverable amount for the group financial statements would be based on the individual financial statements of Whitehill (i. This is because fair value adjustments are taken into account in the goodwill calculation (reducing it) and therefore also need to be taken in account for the net assets (increasing them).500 380 480 (60) 2.300 2.6 Goodwill . So as the recoverable amount does not include a provision for unrealised profit (which is a consolidation adjustment).500) 200 7 Impairment loss Notional goodwill ((W6) 200 x 100%/80%) Carrying amount of net assets (W8) Recoverable amount Impairment loss Group share (Cost of sales) (50 x 80%) Whitehill $m 250 2.550 2. net assets do not need to be adjusted either when doing the group impairment test. although this would generate the same answer.500 x 20%) Less: Net fair value of identifiable assets and liabilities at acq'n $m 1. an adjustment would need to be made for any fair value adjustments at date of the impairment test.Whitehill Consideration transferred Non-controlling interests (1.

especially global businesses. Corporate responsibility also encompasses disclosure of areas that can be monitored: such as the level of the entity's carbon emissions or carbon ’footprint’ as it is now often called.In addition the gain reclassified to profit or loss will appear in other comprehensive income. 8 . net of the deferred tax previously provided: $m DR Other comprehensive income (10 x 70%) 7 DR Deferred tax liability (10 x 30%) 3 CR Profit or loss 10 (included in the gain above). Strategic decisions by businesses. suppliers and the general public. including employees. In the UK in late 2006 the Prince of Wales set up the Accounting for Sustainability project which is designed to develop systems that will help both public and private sector organisations account more accurately for the wider social and environmental costs of their activities. As investors become more aware of social and environmental issues affecting the globe then social responsibility factors will increasingly be seen as affecting shareholder value. A further factor is the increasing influence of governments and professional bodies in their encouragement of disclosure and sustainable practices. the goods or services that it provides and the social consequences of its activities. (b) Increasingly businesses are expected to be socially responsible as well as profitable. In fact it could be argued that a company produces two outputs. However what is missing is any substantial amount of legislation or accounting requirements in this area. In some countries there are awards for environmental and social reporting and the disclosures provided in the financial statements. If a company has a good reputation for care of its employees and care for the environment this will be an important marketing tool. Companies now appreciate that their attitude to corporate responsibility also can have a direct effect on shareholder value. Introducing Environmental Reporting and the ACCA’s Guide to Environment and Energy Reporting. Probably the most important factor however is the public interest which is increasing rapidly. Their social and environmental policies are an important part of their overall performance and responsible practices in these areas and the provision of information in the annual report on these areas will have a positive effect on shareholder value as the company is perceived to be a good investment. customers. Increasingly the end user customer is concerned about how the product is made and concerned about the use of cheap foreign labour. The Confederation of British Industry’s guideline. These latter aspects are what is meant by corporate responsibility and two of the main areas are social reporting and environmental reporting. All of these stakeholders are potentially interested in the way in which the company’s business affects the community and the environment. Equally the customer will be concerned about packaging and waste and the effects of this on the environment. and the use of sustainable inputs. the level of community support. nearly always have wider social consequences. such as buying paper from suppliers that plant new trees. It is now widely recognised that although financial statements are primarily produced for investors there are also many other stakeholders in a company. There are many factors which should encourage companies to disclose information on their levels of corporate responsibility in terms of social and environmental reporting in their financial statements. The disclosure that is taking place is largely driven by the factors considered above but the level and type of disclosure is then at the discretion of the company. There are also a variety of published guidelines and codes of practice designed to encourage the practices of social and environmental reporting such as the Global Reporting Initiative.

The reporting itself has no clear links to the business performance and strategy and is therefore not necessarily a clear reflection of the company’s thinking on these areas. If social and environmental issues do not genuinely affect strategic and operational decisions such as the types of products developed. One of the reasons for this is that few companies identify aspects of corporate responsibility as strategic priorities.(c) The problem that has been noted with companies’ disclosures regarding corporate responsibility is that although there is now widespread narrative disclosure in the annual report this tends not to be backed up with quantitative disclosures in the form of key performance indicators. supply chain issues. brand positioning and corporate culture then it could be argued that these corporate responsibility disclosures are little more than a public relations exercise which could at worst mislead stakeholders in the company. The ethical problem here is that the narrative reports are of extensive amounts of information that are not necessarily being actively managed within the business giving perhaps a false impression of the extent of corporate responsibility at board level. 9 .

2 Tele2 Marking scheme Connection fee Licences IAS 18 Defer Capitalisation Useful life Amortise Substance Treat as finance lease Part of PPE Value at $10m Deferred income Depreciation Finance charge Current liability Non-current liability Significant influence lost Remeasure remaining interest to fair value Gain on sale Financial asset remaining IAS 39 classification 31 Dec change in value Recognise onerous contract Provision Marks 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 1 1 1 1 1 2 25 Sale and leaseback Investment Sub-lease Effective communication Suggested solution To: From: Date: Subject: REPORT The Directors of Tele2 Accountant May 2009 Preparation of financial statements for year ending 31 December 2008 Terms of reference: This report considers the accounting treatment of a number issues and in particular: • • • • • Revenue recognition re the connection fee Licences Sale and leaseback Sale of investment in CSD Sub-lease costs Connection fee The accounting policy chosen for the connection fees is concerning. IAS 18 Revenue states that where services are performed over time then the 10 . The connection fee is a one-off fee at the start of a contract with the customer and is part of the revenue to be earned from that customer for the services provided.

5 million will be treated as deferred income and spread over the 15 year period of the lease with a release to profit or loss of $100. Therefore the building should remain in the statement of financial position as part of property. The remaining 15% investment will be accounted for in accordance with IAS 39. technological and commercial factors as well as potential actions by competitors.42 from above). IAS 27 Consolidated and Separate Financial Statements requires Tele2 to remeasure its remaining shareholding to fair value and recognise a gain on disposal of $4 million (see Appendix 1).5 million . Tele2's holding in CSD has crossed the boundary from being accounted for under IAS 28 to IAS 39 Financial Instruments: Recognition and Measurement. However the substance of the transaction is that it is a financing transaction which should not be dealt with as a sale but treated as a lease. The current element of this will be $0.4 million ($1. Therefore it will be classified as 11 . In the statement of financial position the building will appear within property. the licences purchased from governments should be treated as an intangible non-current asset and capitalised at their initial cost provided that it is probable that future economic benefits will flow to Tele2 from the licence and that the cost can be measured reliably.$0.12 – $0.5m/15 years) each year.32 million ($8. The fact that the present value of minimum lease payment is equal to the fair value of the building and that it will be transferred back to Tele2 at the end of the lease term are indicators that this is a finance rather than an operating lease. The assessment of this useful life should take into account many factors including technical. It would be argued by most that this is an unrealistic assumption even if the directors are confident of renewal and therefore the licences should be amortised over the period to the next renewal date. The property will be depreciated over the 15 year period with a depreciation charge of $0.1m) Finally there will be liabilities in the statement of financial position for the current and non-current elements of the financial lease payables. This investment will be classified as an available-for-sale financial asset or as a fair value through profit or loss financial asset. The profit on the sale of $1.42 million in 2008 (($8.93 million ($8. There will also be a finance charge in profit or loss of $0. in which case annual impairment tests are required.8 million. It would seem that both of these conditions are met therefore capitalisation is the correct accounting treatment. Licences In accordance with IAS 38 Intangible Assets. plant and equipment at a carrying value of $7.57m ($8. plant and equipment but should now be valued at its sales value of $8. Sale of investment in CSD The investment in CSD will have been accounted for up to 31 March 2008 as an associate using the equity method of accounting per IAS 28 Investments in Associates. Therefore a more appropriate accounting policy would be to defer these connection fees and recognise them over the expected life of the customer relationship. Sale and leaseback The directors of Tele2 wish to treat the sale of the building as a sale and leaseback transaction as an operating lease and to include the profit on disposal in profit or loss in the current year.5m – 0.5m – $0. However IAS 38 also states that such intangible assets should be amortised over their useful life unless the useful life is indefinite.44%). In order to be at fair value through profit or loss it must meet strict criteria set out in IAS 39 and it is doubtful that this investment will meet those criteria. If the investment is classified as at fair value through profit or loss then any changes in fair value will be taken to profit or loss. As Tele2 does not amortise these licences then clearly the directors believe that they have an indefinite useful life. once the 15% holding is sold then Tele2 has only a 15% holding remaining which does not enable Tele2 to exercise significant influence. The lease liability will be $8.000 per year. The subsequent treatment of this investment will depend upon how it is classified.8m) x 5. However. the next payment.8m 2009 payment). This gain is shown in profit or loss.revenue from those services should be recognised on a straight line basis.57m).12 million ($8. The balance on the deferred income account will be $1.5m – $0.5 million.8m + $0. The non-current element will be $7.

available-for-sale and the changes in fair value of the investment taken to other comprehensive income. Therefore the investment will be remeasured to $19m. Sub-lease costs The problem with the lease costs and the sub-letting of the buildings is an example from IAS 37 Provisions. its fair value. Contingent Liabilities and Contingent Assets. and a gain of $2 million ($19m . of an onerous contract. Appendix 1 Gain on sale of CSD $m Fair value of consideration received Fair value of interest retained Less: carrying value at disposal: cost post-acquisition profits [(100 – 70) x 30%] 24 9 (33) 4 $m 20 17 12 .17m) will be reported in other comprehensive income on 31 December 2008. The IAS states that a provision should be made for the amounts of the shortfall in the financial statements at 31 December 2008.

000 10.3 Scudder Marking scheme Marks (i) (ii) Valuation of service Correct figures Explanation 2008 2009 2010 Marker note: a maximum of 2 marks only not earned where the incorrect intrinsic value is used (iii) Explanation 2007 2008 2009 Explanation 2008 2009 2010 Transfer to equity Deferred tax asset Calculation 1 2 1 1 2 1 1 1 1 1 2 3 25 5 1 3 4 1 2 2 2 7 (iv) 6 (v) Suggested solution (i) Expense in profit or loss and increase in equity This is a share-based payment transaction with a third party where it is possible to measure reliably the fair value of the services received.000 44.000 10.84 Y/e 31 December 2009 = 400 hours x $110 400 hours x $121 13 .000 $ 44. Therefore it is this fair value which is both the cost of the services in profit or loss and the amount by which equity will increase.000 48.400 No.000 Value/share $ 4.40 4.400 92. shares Y/e 31 December 2008 = 400 hours x $100 400 hours x $110 $ 40.000 20.00 4.000 CR Share premium (bal) $64.000 CR Share capital $20. shares 10. No.000 20.000 Value/share $ 4.000 10.000 84.40 DR Expenses $84.

Y/e 31 December 2009 5. As the managing director can choose whether to take the cash or the shares then the instrument has both an equity and a debt element.000 Each year there will be a liability element and an equity element recognised together with the related expense: Liability Equity Expense $ $ $ Y/e 31 December 2008 Liability/equity c/d & profit or loss charge (9.000 14 .000x $4 $20.000 Therefore the fair value of the equity component is $60.000 The fair value of the share alternative is 10.000 shares @ $6 = $54.667 reversed as a credit to profit or loss.400 Scudder is unable to estimate reliably the fair value of the share options at the grant date and therefore IFRS 2 required that the value used should be the intrinsic value. should be remeasured annually and at the final settlement.$6) x 2/3 years Y/e 31 December 2010 Equity b/d ∴Charge to profit or loss Equity c/d (100 options x (200 – 12 – 8 – 20) employees x ($13 .000 (iii) The performance conditions are not market based therefore the effect of these non-market performance conditions is taken into account by adjusting the number of equity instruments likely to ultimately vest.000 x $10 x 2/3)/$6.667 $69. the liability to pay cash.000 – $54.000 2.000 $72.000 60.000 – charge to profit or loss $6. The debt element.DR Expenses CR Share capital CR Share premium (bal) (ii) $92.000 36. Y/e 31 December 2007 5.667 $42.667 $32.000 shares @ $6 = $60. At the grant date the fair value of the cash alternative is 9.333 $112. Y/e 31 December 2008 Equity c/d & charge to profit or loss: (100 options x (200 – 12 – 28) employees x ($8 .000 38.000 4.000 x $8 x 1/3)/($6.000 $42.$6) x 1/3 years Y/e 31 December 2009 Equity b/d ∴Charge to profit or loss Equity c/d (100 options x (200 – 12 – 8 – 20) employees x ($10 . This intrinsic value should subsequently be revised at each reporting date and all changes in intrinsic value recognised in profit or loss.000 x $4 x 1/3 Y/e 31 December 2008 Performance target considered will not be met therefore $6.667 – charge to profit or loss (iv) This is a share-based payment with a cash alternative.000 2.000 Y/e 31 December 2009 Liability/equity b/d ∴Profit or loss charge Liability/equity c/d (9. (IFRS 2 para 24(a)).$6) x 3/3 years $10.667 $10.000 2.000 x 1/3) 24.000 = $6.400 $20.000 26.000 x 2/3 24.

000 DR Deferred tax asset CR Deferred tax (P/L) $15.000 If the managing director elects to take the shares rather than the cash $117. (v) Deferred tax asset A liability will be shown for: 100 rights x 400 employees x 75% x $6 x 1year/3years = $60.000 15 .000 The tax saving is based on the intrinsic value (market value less exercise price).000 2.000 4. which is only $5 at the year end.000 57.000 will be transferred from liabilities to equity at the end of 2010.000 59.000 117.000 DR Expenses CR Liability $60.000 $15.000 x 3/3 60.000 6.000 x $13 x 3/3)/$6. A deferred tax asset will therefore be recognised amounting to: 100 rights x 400 employees x 75% x $5 x 30% x 1year/3years = $15.000 $60.Y/e 31 December 2010 Liability/equity b/d ∴Profit or loss charge Liability/equity c/d (9.

4 International convergence Marking scheme (a) Profit or loss items Other comprehensive income Reporting 1 mark per valid comment out of the following to a max For: Additional info for users What is financial performance Aggregation and characteristic Realised/unrealised Against: Too much aggregation Operating/revaluation gains Where in statement Recycling Why in two parts Effective communication (c) 1 mark per valid comment out of the following to a max Result of Memorandum of understanding Aim of discussion paper Single source of reference/codification Not aimed at increasing use of fair values Current inconsistency in use of fair values Examples of inconsistencies (2 mark per explained example. whether they are realised or unrealised. Therefore comprehensive income is all gains and losses. Normally the method of reporting will be to include items required to be taken to profit or loss by IFRSs in the 16 . gains and losses arising from the translation of the financial statements of a foreign operation. actuarial gains and losses on defined benefit pension plans. In the past of course these other comprehensive income items were reported separately in equity. Comprehensive income comprises items that are part of profit or loss for the period and other comprehensive income which includes revaluations of non-current assets. gains and losses arising on remeasurement of available-for-sale financial assets and the effective portion of gains and losses on hedging instruments in a cash flow hedge. The concept of reporting comprehensive income is that not only the profit or loss items but also these other comprehensive income items are reported together in one statement. max 4) Exit vs entry values Need for changes to other IFRSs 1 3 1 5 (b) 8 1 1 1 1 1 1 1 1 1 2 10 Marks 25 Suggested solution (a) The meaning of total comprehensive income is the change in equity during a period resulting from all transactions and events other than those changes which result from changes due to transactions with owners in their capacity as owners. but the concept excludes the raising of finance from shareholders and the payments of dividends or other distributions to shareholders.

first part of the statement followed by the second part which deals with items of other comprehensive income. It is increasingly the case that traditional performance measures such as earnings per share are not meeting users needs and the information provided in a comprehensive income statement does provide users with the additional information that they need. rather than recycled from equity. (b) There are a variety of advantages and disadvantages to reporting comprehensive income. and separating items with different characteristics. However it can be argued that this concept of realisation is outdated and is in many countries a legal concept which affects the payments of dividends. With the recent changes to require the presentation of a statement of comprehensive income. Traditionally the items of other comprehensive income are viewed as unrealised and that is part of the reason that they are shown separately from profit or loss items. which sometimes went to reserves in the past. Similar to the argument about realisation it can also be said that items such as revaluations are not as certain as operating figures and therefore again should be reported separately from profit or loss items. 17 . With the complexity of current day financial transactions and the widespread use of financial instruments the distinction between realised and unrealised profits is no longer a particularly useful basis of classifying elements of performance. A further problem is with determining where each of the elements of gain or loss do appear in the statement of comprehensive income. such as profit or loss items and other comprehensive income. However there are arguments that financial performance is a wider concept than this and includes management’s stewardship of non-current assets and financial assets. There is also the problem of recycling or reclassification. also makes it difficult to hide losses. This is where items are reported in one area of the financial statements in one period and then again in another area of the financial statements in another period. There is also an argument that there is a distinction between operating gains and revaluation gains and that these should be kept separately. Therefore elements of the financial statements such as revaluations and gains or losses on available-for-sale investments are part of financial performance and should be reported with profit or loss figures. it could be seen as even more confusing than before now that all of the elements are in the same comprehensive income report and are just being moved from one part to another. An example would be gains on available-for-sale financial assets which are initially reported in other comprehensive income as they happen but are then transferred to profit or loss on the eventual sale of the financial asset. One major argument for the reporting of comprehensive income is that as transactions and assets/liabilities and the accounting for them become more complex the users of financial statements require additional information than that provided in a traditional income statement. The traditional income statement views financial performance as the figures which appear in profit or loss according to IFRSs. However there are those that disagree with the aggregation of profit or loss items and other comprehensive income items arguing that there is too much aggregation of information which hinders its usefulness. There also has to be a question about what financial performance actually is. Are gains and losses part of operating profit or do they fall within the areas of other comprehensive income? For example gains or losses on disposals of non-current assets some argue should be shown as operating items whereas other gains or losses could be argued to be holding gains or losses. Unrealised items often play an important role in an entity’s overall performance and there is no real argument for excluding them from the main statement reporting income. such as transactions with owners in their capacity as owners. Reporting all income and expenses. It is also argued that the purpose of a comprehensive income report is to provide better information by aggregating items with shared characteristics.

Such inconsistencies. is not to expand the use of fair value in financial reporting. when held for trading purposes at fair value through profit or loss. Financial assets such as receivables. At the time of publishing the Memorandum work in the US was well advanced on a new US standard SFAS 157 Fair Value Measurement which has since been published. The IASB recognises the need for guidance in this area and for increased convergence with US GAAP and therefore decided to use this SFAS as the starting point for its own work on the subject. whereas IFRS 3 Business Combinations requires their fair value in a business combination to be used. which is neither an exit nor an entry (buying) price. starting with this Discussion Paper. or a liability settled. The aim is to develop high quality. based on valuation models/ estimates where there is no active market (in order to separate them from goodwill). Indeed the stated objective of the work in this area is to codify. intangible assets can only be revalued to fair value under IAS 38 Intangible Assets where there is an active market price. willing parties in an arm's length transaction'. clarify and simplify existing guidance on fair values. common accounting standards for use in the world’s capital markets. The work programme decided upon by the two bodies included a project on measuring fair value. This has led to criticism of the usefulness of the information and questions over whether fair values are appropriate other than for items that can be traded immediately in an active market. (c) As part of the global convergence process for accounting standards the IASB and US FASB published a Memorandum of Understanding reaffirming their commitment to the convergence of US GAAP and IFRSs in February 2006. Current IFRSs generally define fair value as 'the amount for which an asset could be exchanged. should provide a concise definition of fair value combined with consistent guidance that applies to all fair value measurements in order to communicate more clearly the objective of fair value measurement. SFAS 157 establishes a single definition for fair value and a framework for measuring fair value. Other items such as employee share options under IFRS 2 Share-based Payment are measured using complex mathematical models. the IASB believes. Similarly. between knowledgeable. However the actual guidance on measuring fair value is included in a number of individual IFRSs and is not always consistent. and the fair value project overall.Finally there is one further argument about the format of the statement of comprehensive income being dividend into two parts. Another issue is how to determine fair value itself and whether to measure it as an exit ( i. selling) price (as US GAAP does) or on some other basis. It can be argued that the distinction is unnatural and conceptually unsound. liabilities and equity instruments to be measured at fair value in some circumstances. The IASB acknowledges that various IFRSs require some assets.e. In order to establish this single set of guidance there will be a need for changes to other IFRSs which will change how fair value is measured in some standards and how the requirements are interpreted and applied. are unsatisfactory and that there should be a single source of guidance for all fair value measurements required by IFRSs. The IASB makes quite clear that the aim of the Discussion Paper. 18 . The proposed single source of reference for fair values. are valued at fair value based on discounted cash flow techniques.


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