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P2 Exp Notes

P2 Exp Notes

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Sections

  • Chapter 1
  • Chapter 2
  • Chapter 3
  • Chapter 4
  • Chapter 5
  • Chapter 6
  • Chapter 7
  • Chapter 8
  • Chapter 9
  • Chapter 10
  • Chapter 11
  • Chapter 12
  • Chapter 13
  • Chapter 14

       

  

Notes
ACCA Paper P2 (INT)
Corporate Reporting
For exams in 2012
 

 

theexpgroup.com

ExPress Notes
   
ACCA P2 Corporate Reporting

Contents
About ExPress Notes
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. Group Accounting Foreign currency: IAS 21 Statements of cash flow: IAS 7 Provisions and contingencies: IAS 37 Taxation: IAS 12 Employment costs: IAS 19 Financial instruments: Share based payment: IFRS 2 Tangible non-current assets Intangible non-current assets: IAS 38 Impairment of assets: IAS 36 Revenue: IAS 18 Estimates, errors and accounting policies: IAS 8 Equity reconstructions (insolvency)

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7 15 21 26 28 32 36 42 49 52 56 59 61 63

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© 2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

 

theexpgroup.com

 

ExPress Notes
   
ACCA P2 Corporate Reporting

START About ExPress Notes
We are very pleased that you have downloaded a copy of our ExPress notes for this paper. We expect that you are keen to get on with the job in hand, so we will keep the introduction brief. First, we would like to draw your attention to the terms and conditions of usage. It’s a condition of printing these notes that you agree to the terms and conditions of usage. These are available to view at www.theexpgroup.com. Essentially, we want to help people get through their exams. If you are a student for the ACCA exams and you are using these notes for yourself only, you will have no problems complying with our fair use policy. You will however need to get our written permission in advance if you want to use these notes as part of a training programme that you are delivering. WARNING! These notes are not designed to cover everything in the syllabus! They are designed to help you assimilate and understand the most important areas for the exam as quickly as possible. If you study from these notes only, you will not have covered everything that is in the ACCA syllabus and study guide for this paper. Components of an effective study system On ExP classroom courses, we provide people with the following learning materials:     The ExPress notes for that paper The ExP recommended course notes / essential text or the ExPedite classroom course notes where we have published our own course notes for that paper The ExP recommended exam kit for that paper. In addition, we will recommend a study text / complete text from one of the ACCA official publishers, but we do not necessarily give this as part of a classroom course, as we think that it can sometimes slow people down and reduce the time that they are able to spend practising past questions.

ExP classroom course students will also have access to various online support materials, including:   The unique ExP & Me e-portal, which amongst other things allows “view again” of the classroom course that was actually attended. ExPand, our online learning tool and questions and answers database

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© 2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

 

theexpgroup.com

 

you need to have effectively input the knowledge and be effective in the output of what you know. concepts.g.   theexpgroup. approaches to exam questions. How to get the most from these ExPress notes  For people on a classroom course. Don’t make any annotations on the ExPress notes at this stage. Review each chapter after class at least once. syllabus. In other words. Don’t use at this stage.theexpgroup. Nobody passes an exam by what they have studied – we pass exams by being efficient in being able to prove what we know. At the start of the learning phase Work through in detail. Your stage in study for each paper Prior to study. the “size” of the paper and how much it appeals to you. or ExPedite notes Don’t use yet ExP recommended exam kit Don’t use yet ACCA online past exams Skim through the ExPress notes to get a feel for what’s in the syllabus.com   .ExPress Notes   ACCA P2 Corporate Reporting   Everybody in the World has free access to ACCA’s own database of past exam questions. Don’t try to feel that you have to understand everything – just get an idea for what you are about to study. etc. Make sure that you understand each area reasonably well. This depends where you are in terms of your exam preparation for each paper. Exam practice is key to this. mnemonics.   Page | 4 © 2012 The ExP Group. Work through each chapter of the ExPress notes in detail before you then work through your course notes. e. Always obtain expert advice on any specific issue. deciding which optional papers to take These ExPress notes ExP recommended course notes. These course materials are for educational purposes only and so are necessarily simplified and summarised. Have a quick look at the two most recent real ACCA exam papers to get a feel for examiner’s style. You can find links to the most useful pages of the ACCA database that are relevant to your study on ExPand at www. Reproduction by any means for any other purpose is prohibited. answers. but also make sure that you can recall key definitions. study guide and examiner’s commentaries on past sittings. No liability for damage arising from use of these notes will be accepted by the ExP Group. Individuals may reproduce this material if it is for their own private study use only. Refer to our full terms and conditions of use.com. Try to do at least one past exam question on the learning phase for each major chapter. this is how we recommend that you use the suite of learning materials that we provide. This can be an invaluable resource.

The night before the real exam Read through the ExPress notes in full. focusing on areas you’ve highlighted. Read through the two most recent examiner’s reports in detail. Refer to our full terms and conditions of use. Leave at home. Give up on any areas that you still don’t understand. approaches to exam questions. reading notes or listening to CDs). You pass real exams by passing mock exams. ExP recommended exam kit This is your most important tool at this stage. this time annotating to explain bits that you think are easy and be brave enough to cross out the bits that you are confident you’ll remember without reviewing them. You should aim to have worked through and understood at least two or three questions on each major area of the syllabus. Don’t be tempted to fall into “passive” revision at this stage (e. Read through the technical articles written by the examiner. Don’t touch it! ACCA online past exams ACCA P2 Corporate Reporting Work through the ExPress notes again. Try to see if there are any recurring criticisms he or she makes. or ExPedite notes Avoid reading through your notes again. etc. Leave at home. It will scare you. Try to focus on doing past exam questions first and then go back to your course notes/ ExPress notes if there’s something in an answer that you don’t understand. avoid looking at your course notes. Highlight the bits that you think are important but you think you are most likely to forget. At the door of the exam room before you go in. Read quickly through the full set of ExPress notes. Always obtain expert advice on any specific issue.ExPress Notes     Your stage in study for each paper Practice phase These ExPress notes ExP recommended course notes.   theexpgroup. Passive revision tends to be a waste of time. These course materials are for educational purposes only and so are necessarily simplified and summarised. key workings. Individuals may reproduce this material if it is for their own private study use only.g. Page | 5 © 2012 The ExP Group.com   . Read through some other older ones. especially if the notes are very big. It’s too late now. Reproduction by any means for any other purpose is prohibited. Avoid looking at them in detail. No liability for damage arising from use of these notes will be accepted by the ExP Group. You must avoid these! Do a final review of the two most recent examiner’s reports for the paper you will be taking tomorrow. Unless there are specific bits that you feel you must revise. Download the two most recent real exam questions and answers.

Our expert team has worked with many different audiences around the world ranging from graduate recruits through to senior board level positions. our portfolio of Page | 6 © 2012 The ExP Group.com and for any specific enquiries please contact us at info@theexpgroup. No liability for damage arising from use of these notes will be accepted by the ExP Group. expertise covers all areas of financial training ranging from introductory financial awareness courses for non financial staff to high level corporate finance and banking courses for senior executives.   theexpgroup. Refer to our full terms and conditions of use. Full details about us can be found at www.com. To maximise your chances of success in the exam we recommend you visit www. the ExP Group delivers courses through either one of its permanent centres or onsite at a variety of locations around the world. As well as courses for ACCA and other professional qualifications. START About The ExP Group Born with a desire to be the leading supplier of business training services.theexpgroup.com where you will be able to access additional free resources to help you in your studies. Notes Provide a comprehensive coverage of the syllabus and accompany our face to face professional exam courses Notes Provide detailed coverage of particular technical areas and are used on our Professional Development and Executive Programmes.ExPress Notes     Our ExPress notes fit into our portfolio of materials as follows: ACCA P2 Corporate Reporting Notes Provide a base understanding of the most important areas of the syllabus only. These course materials are for educational purposes only and so are necessarily simplified and summarised.com   . Always obtain expert advice on any specific issue. Reproduction by any means for any other purpose is prohibited. Individuals may reproduce this material if it is for their own private study use only. through local companies to individuals furthering themselves through studying for one of the various professional exams or professional development courses.theexpgroup. Our clients range from multinational household corporate names.

though we start with some core definitions and workings that should be familiar from paper F7. Reproduction by any means for any other purpose is prohibited. income and expenditure the parent company controls via its investment. groups are important. Always obtain expert advice on any specific issue. and will be worth approximately a third of the marks in the exam.   theexpgroup. liabilities. No liability for damage arising from use of these notes will be accepted by the ExP Group.com   . Paper P2 is mostly not about group accounting! Although question 1 will be a groups question at its core. Individuals may reproduce this material if it is for their own private study use only. Refer to our full terms and conditions of use. Consolidation is the process of replacing the single figure for “investment in subsidiary” in the individual financial statements of the parent with more useful information about what assets. Most people do rather better in the groups part of the exam. ie: Page | 7 © 2012 The ExP Group. but be careful not to over-estimate the importance of groups in your preparation. These course materials are for educational purposes only and so are necessarily simplified and summarised.ExPress Notes     Chapter 1 ACCA P2 Corporate Reporting Group Accounting START The Big Picture Group accounting will form the backbone of the compulsory question 1 in the exam. These notes focus on the areas of groups that are new to paper P2 from paper F7. there will be lots of other adjustments in the individual accounts that require correction before the consolidation. Without doubt.

Always obtain expert advice on any specific issue. we very frequently use the capital + reserves = net assets. this is the same as capital and reserves of any company at any date in time. For example. Reproduction by any means for any other purpose is prohibited. normally by having more than 50% of the voting power.   Consolidation is basically a double entry to derecognise the carrying value of the investment (Cr Investment in subsidiary) and recognise the individual assets (Dr PP&E. Key definitions   Subsidiary What group accounting is trying to do   Any entity that is controlled by another entity.com   . Individuals may reproduce this material if it is for their own private study use only. These course materials are for educational purposes only and so are necessarily simplified and summarised. etc). Page | 8 © 2012 The ExP Group. the non-controlling interest (CR NCI) and recognise goodwill as a balancing. By definition. Equity is defined in the Framework document as assets less liabilities. the liabilities (Cr Payables. Parent Associate Control Significant influence Equity The power to control the financial and operating policies of another entity. or has rights. etc). so as to obtain benefit from its activities. Consideration transferred to buy subsidiary (as shown in the parent company’s individual accounts) Non-controlling interests’ share of the net assets of the subsidiary. An investor controls an investee when it is exposed. An entity that controls one or more entities.   theexpgroup. though there is no minimum shareholding. but not control nor joint control (as with a joint venture).ExPress Notes     Net assets in the subsidiary’s financial statements (ie equity or capital plus reserves) at the acquisition date. In group accounting. ACCA P2 Corporate Reporting Goodwill arising on acquisition (premium paid to acquire the subsidiary). item (normally DR Goodwill). to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. No liability for damage arising from use of these notes will be accepted by the ExP Group. A company in which the parent has significant influence. Refer to our full terms and conditions of use. residual.

Formerly called minority interest. The premium paid by the parent to acquire its interest in a subsidiary or associate.200) 300 10.350 (30) 10.800) 1. Reproduction by any means for any other purpose is prohibited.ExPress Notes     this is used to work out the net assets on the date of acquiring control of a company (as part of the goodwill working) and to work out post-acquisition growth in a subsidiary’s assets (ie postacquisition profit). joint ventures and associates. Parent $’000 Today Omissions/ errors to correct in the individual financial statements of each company Provision (eg for unrealised profit) Time passage effects (eg write-off of fair value adjustments) Impairments of goodwill (cumulative) Sub-total Pre-acquisition reserves Post-acquisition 10. perhaps using the mnemonic TOP TIP PET to make sure you haven’t forgotten anything.000 200 (50) (40) 20 Sub 2 $’000 3.970 (1.170 4.   theexpgroup.110 (2. Produce one column for each company under the parent company’s influence.000 400 (20) Sub 1 $’000 4. Then work down the rows methodically.350 4. The share of the net assets and gains of a subsidiary that is not owned by the parent. but revise thoroughly     Group retained earnings This working is a core means of earning good marks in the exam. These course materials are for educational purposes only and so are necessarily simplified and summarised. No liability for damage arising from use of these notes will be accepted by the ExP Group.500 Page | 9 © 2012 The ExP Group. The parent company’s reserves. Group reserves The cumulative gains made under the control of the parent.com   .000) 2. Refer to our full terms and conditions of use.500 (4.000 (50) Assoc $’000 4. If the question has different types of reserves (eg revaluation reserve as well as retained earnings) you will need to do a separate working like the one below for each reserve to be shown in the group SOFP. Always obtain expert advice on any specific issue. ACCA P2 Corporate Reporting Non-controlling interest Goodwill         Key workings Hopefully familiar from paper F7.110 2. plus the post-acquisition retained gains of all subsidiaries. Individuals may reproduce this material if it is for their own private study use only.

266 x 40% ** 468 x 40% 120 ACCA P2 Corporate Reporting ** This is not a typo! A subsidiary may still be a subsidiary if an effective ownership of less than 50% still gives the parent control.800 250 2.018 3.044 4. Always obtain expert advice on any specific issue.   theexpgroup.204 x 60 % 1. calculated as: Capital and share premium of target Reserves of target at acquisition date Net assets (equity) of target at target’s book value Fair value adjustments to target’s net assets 800 2.110 40% 2. but not actually owned by the parent. No liability for damage arising from use of these notes will be accepted by the ExP Group. These course materials are for educational purposes only and so are necessarily simplified and summarised. Refer to our full terms and conditions of use.ExPress Notes     x Effective ownership x 100% 10. Non-controlling interests These show the net assets controlled by the parent and so part of the group.970 (80) - 5.240 800 4.000 2.974 Page | 10 © 2012 The ExP Group. Reproduction by any means for any other purpose is prohibited.com   .and post-acquisition profits when calculating non-controlling interests in the SOFP.350 TOTAL 12.110 250 (50) Sub 2 $’000 400 2. There is no need to consider pre. Sub 1 $’000 Capital and share premium at SOFP date Reserves.290 60% 1. as consolidated (see eg above) Fair value adjustments at acquisition Less: Any items in the individual company’s SOFP not recognised in the group SOFP (see below) Net assets (ie equity) as consolidated in the group SOFP x NCI % Non-controlling interest Total non-controlling interest Goodwill on a business combination Fair value of consideration transferred Less: Fair value of identifiable net assets acquired. See multiple groups below. Individuals may reproduce this material if it is for their own private study use only.

would be recognised as: Dr Goodwill Cr Non-controlling interests Fair values When buying a company. These course materials are for educational purposes only and so are necessarily simplified and summarised. Individuals may reproduce this material if it is for their own private study use only. Imagine that the fair value paid for the subsidiary was the fair value for a 60% stake. 3. or gross it up to show the implied total value of goodwill. Always obtain expert advice on any specific issue.240 3.350 2. In order to do the gross up. its previous owner will only accept the fair value of the company as consideration. client list.050) 540 410 130 Non-controlling interest at fair value at acquisition date Fair value of consideration transferred for 60% stake Implied total value of company Less: Fair value of identifiable net assets Implied total goodwill Partial goodwill automatically recognised (see above) Gross-up required for total goodwill recognition This gross up.ExPress Notes     Net assets (equity) of target at fair value X % acquired (60%) Goodwill arising in books of parent for consolidation Goodwill: gross (“total”) or net (“partial”)? The standard double entry working above produces a goodwill figures as it relates to the parent’s share. Reproduction by any means for any other purpose is prohibited. No liability for damage arising from use of these notes will be accepted by the ExP Group. it is necessary to be given the fair value of the non-controlling interests’ stake in the business at the acquisition date. if chosen as the accounting policy. Then we deduct 60% of the net assets. motivated staff) of the subsidiary.   theexpgroup.050 (1. IFRS 3 allows groups a choice with each acquisition whether to leave goodwill net as above. or they will not sell! 130 130 Page | 11 © 2012 The ExP Group.830) 410 ACCA P2 Corporate Reporting     EXAMPLE   1. Refer to our full terms and conditions of use. This logically gives 60% or thereabouts of the total implied goodwill (eg reputation. This would be given in the exam.com   .590 (3.

Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use.com   .   theexpgroup. Fair value is defined in IFRS 13 as the price that would be received to sell an asset or paid to transfer liability in an orderly transaction between market participants at measurement date.e. Therefore. it is therefore necessary to record all the assets and liabilities acquired in the subsidiary at their fair value. even if this is not certain. Proceeds (what is coming into the SOFP in the transaction) Less: Carrying value derecognised (what leaves the SOFP) Profit or loss on disposal (the increase or decrease in net assets) X (X) X The carrying value of a subsidiary in a group SOFP comprises:    Individual assets and liabilities of the subsidiary at the SOFP date Goodwill remaining from the purchase by the parent Non-controlling interests at the SOFP date. These course materials are for educational purposes only and so are necessarily simplified and summarised. Changes in group structure Disposals The gain or loss on disposal of anything is the increase or decrease in net assets recognised as a result of the transaction. Any contingent consideration is valued assuming that it will be paid. but their existence would reduce the amount the acquirer is willing to pay. it is an exit price or estimated using a valuation technique.A few notable fair value adjustments are: Consideration paid includes the market value of any shares paid. i. the gain or loss on derecognition of a subsidiary is: Proceeds (what is coming into the SOFP in the transaction) Less: Individual assets and liabilities of the subsidiary at the SOFP date (X) X Page | 12 © 2012 The ExP Group.ExPress Notes   ACCA P2 Corporate Reporting   In order to give a true and fair picture of the actual goodwill purchased. Reproduction by any means for any other purpose is prohibited. No liability for damage arising from use of these notes will be accepted by the ExP Group. They are therefore revalued as if they were provisions in the fair value exercise. Individuals may reproduce this material if it is for their own private study use only. Acquisition costs are written off immediately. Contingent liabilities of the subsidiary will be shown in the individual accounts at zero value (see notes on IAS 37).

Individuals may reproduce this material if it is for their own private study use only. Proceeds (what is coming into the SOFP in the transaction) Value of new associate recognised Less: Individual assets and liabilities of the subsidiary at the SOFP date Goodwill remaining from the purchase by the parent Non-controlling interests at the SOFP date Group gain or loss on disposal Step acquisitions Where an acquisition happens in stages (as it often does in reality).ExPress Notes     Goodwill remaining from the purchase by the parent Non-controlling interests at the SOFP date Group gain or loss on disposal (X) (X) XX ACCA P2 Corporate Reporting The same working can be used to calculate gain or loss on partial disposal. Always obtain expert advice on any specific issue.com   . where noncontrolling interest increases (eg where ownership goes from 80% to 60%). This results in an acquisition of a subsidiary and a gain or loss on disposal as part of the same transaction. Refer to our full terms and conditions of use. Where a holding goes from 80% to 40%. the treatment is to treat the acquisition as a purchase on the date when control happens. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. No liability for damage arising from use of these notes will be accepted by the ExP Group.   theexpgroup. Also derecognise any previous holding. as in addition to sales proceeds for the partial stake. step acquisitions use much the same logic as disposals. which might have been an available-for-sale financial asset or an associate. there will also be a new associate recognised. but in reverse. the calculation is amended slightly. (X) (X) (X) XX X X Page | 13 © 2012 The ExP Group. In effect.

This would give one goodwill calculation In the group SOFP. 60% ACCA P2 Corporate Reporting    Page | 14 © 2012 The ExP Group. using Parent’s resources. using resources controlled by Parent. Reproduction by any means for any other purpose is prohibited.1. or more. with noncontrolling interests of 64%. but has control. However.ExPress Notes     Multiple group structures You should expect the structure of the group in question 1 in the exam to be a multiple group structure. it may still be a subsidiary. These course materials are for educational purposes only and so are necessarily simplified and summarised. there would only be one transaction under Parent’s control.1. Always obtain expert advice on any specific issue. any historical costs of investments in subsidiaries are not included in the group SOFP.1. The dates of acquisition determine whether there is one goodwill calculation. as there is effectively a chain of command by which the parent can control subsidiary 2. the parent has an effective ownership of 36%. Refer to our full terms and conditions of use. then there would be two transactions under Parent’s control. This would require two goodwill calculations. Parent has control of subsidiary 1.com   . such as: Parent   Subsidiary 1 60% Subsidiary 2   The main additional maters to consider here are:  What is the nature of the relationship between parent and subsidiary 2? Even if the effective ownership is less than 50% (as it is here). In this example. if Subsidiary 1 had acquired Subsidiary 2 on 1.x1 and Parent acquired Subsidiary 1 on 1. which has control of subsidiary 2. This means that any cost of investment in Subsidiary 2 in the SOFP in Subsidiary 1 are excluded from the group SOFP and therefore NCI calculation.x1 and Subsidiary 1 acquired Subsidiary 2 on 1.1.   theexpgroup. Subsidiary 2 is therefore consolidated as part of the Parent group.x2. If Parent acquired Subsidiary 1 on 1.x2. as the subsidiary’s individual assets and liabilities are consolidated instead. No liability for damage arising from use of these notes will be accepted by the ExP Group. Individuals may reproduce this material if it is for their own private study use only.

Page | 15 © 2012 The ExP Group. There are two sets of rules to know. No liability for damage arising from use of these notes will be accepted by the ExP Group. The currency of the primary economic environment in which the company operates. Always obtain expert advice on any specific issue. These course materials are for educational purposes only and so are necessarily simplified and summarised. Effectively the currency that the company “thinks in”.   theexpgroup. depending upon where in the flow of transactions something is happening. the currency that the entity’s trial balance is produced in. Refer to our full terms and conditions of use. Foreign currency Translation rules   Functional currency    Functional currency Presentation rules Presentation currency Generally.ExPress Notes     Chapter 2 ACCA P2 Corporate Reporting IAS 21 START The Big Picture An entity cannot mix currencies when producing financial statements! Eg USD + EUR = Nothing useful. Reproduction by any means for any other purpose is prohibited. Individuals may reproduce this material if it is for their own private study use only.com   .

Don’t retranslate non-monetary items. An entity may choose any currency it likes for the presentation of its financial statements. At the period end: Translate monetary assets and liabilities at the closing rate. Eg a company with a dual listing in the USA and in the European Union is likely to choose the US dollar as its presentation currency and also the euro as its presentation currency.   Key workings/ methods Presentation rules     This is normally examined in the context of group accounting. especially if the company is more like a branch of a foreign parent and depends upon the foreign parent for day-to-day support. The basic rules are simple: translate the financial statements using these rules:   All items in the SOFP: translate at the closing rate. or spot rate for any large one-off items. but it could be examined as a single company only. All items in the SOCI: translate at the average rate for the period. All other currencies other than the functional currency are a foreign currency.com   . Page | 16 © 2012 The ExP Group. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. sales. 3 B  Exchange difference arising in the year on retranslation of foreign currency trade payables and receivables is reported in profit in other operating income/ other operating expenses. ACCA P2 Corporate Reporting      Key workings/ methods Translation rules     1 2 3A   Record all transactions in the functional currency.ExPress Notes      May not be the currency of the country in which the company operates. Refer to our full terms and conditions of use. Reproduction by any means for any other purpose is prohibited. Record all purchases.   theexpgroup. Exchange difference arising in the year on retranslation of foreign currency loans is reported in profit in finance income/ finance cost. No liability for damage arising from use of these notes will be accepted by the ExP Group. etc at the spot rate ruling on the date of the translation. Individuals may reproduce this material if it is for their own private study use only.

  theexpgroup.500) 11. Individuals may reproduce this material if it is for their own private study use only. No liability for damage arising from use of these notes will be accepted by the ExP Group.500 Exchange rate 1.15 USD 12. Refer to our full terms and conditions of use.000 2.725) 13.500) 11.ExPress Notes   ACCA P2 Corporate Reporting   Exchange differences will arise.25 1.25 1.000 1. Page | 17 © 2012 The ExP Group.15 Euro 10. eg imagine the position of Lear Co for the year ended 31 Dec 20x1: Date Net assets (equity) at 1 Jan 20x1 Profit for the year to 31 Dec 20x1 Other comprehensive income for the year to 31 Dec 20x1 Dividend declared for the year Net assets (equity) at 31 Dec 20x1 Assume these exchange rates USD/ EUR 1 Jan 20x1 Average for 20x1 31 Dec 20x1   Date Net assets (equity) at 1 Jan 20x1 Profit for the year to 31 Dec 20x1 Other comprehensive income for the year to 31 Dec 20x1 Dividend declared for the year Net assets (equity) at 31 Dec 20x1 Euro 10.250 (1.15 1.000 2. so is reported directly in equity in the statement of changes in equity. It is not reported as part of other comprehensive income. This is not considered to be a realised gain or loss.500     This does not add up! The error is an exchange difference arising in the year. These course materials are for educational purposes only and so are necessarily simplified and summarised.com   .000 (1.2 1. Always obtain expert advice on any specific issue. Reproduction by any means for any other purpose is prohibited.25 1.500 1.225 1.000 1.2 1.000 (1.000 2.

No liability for damage arising from use of these notes will be accepted by the ExP Group.725) 800 13. Translate the subsidiary’s financial statements into the presentation currency of the parent using the presentation rules.250 (1. Refer to our full terms and conditions of use. These course materials are for educational purposes only and so are necessarily simplified and summarised. Individuals may reproduce this material if it is for their own private study use only. Groups and foreign currency It is common to have to translate the financial statements of a subsidiary into the reporting currency of the parent prior to consolidation. Page | 18 © 2012 The ExP Group. This is simply an additional stage to complete prior to the process of consolidation. Approach to questions with foreign subsidiaries:  1 2 3   Correct the individual accounts of each company for errors/ omissions in the individual accounts.225 This exchange gain or loss arising on translation in the year is a gain in the reserves of the subsidiary for consolidation.   theexpgroup.ExPress Notes   ACCA P2 Corporate Reporting   So Lear Co’s statement of changes in equity for the year ended 31 Dec 20x1 will show: Date Net assets (equity) at 1 Jan 20x1 Profit for the year to 31 Dec 20x1 Other comprehensive income for the year to 31 Dec 20x1 Dividend declared for the year Exchange gain on translation arising in the year (balancing item) Net assets (equity) at 31 Dec 20x1 USD 12. Consolidate as normal.000 2.500 1.com   . It is therefore split between parent and non-controlling interests. Reproduction by any means for any other purpose is prohibited. Always obtain expert advice on any specific issue.

Always obtain expert advice on any specific issue.000 (200) 800 Exchange rate 1. Refer to our full terms and conditions of use.   theexpgroup. These course materials are for educational purposes only and so are necessarily simplified and summarised. Reproduction by any means for any other purpose is prohibited.25 USD 1. The cost of buying the subsidiary from its previous owners can be broken down into:     Net assets in the subsidiary’s financial statements (ie equity or capital plus reserves) at the acquisition date. Consideration transferred to buy subsidiary (as shown in the parent company’s individual accounts)       Goodwill arising on acquisition (premium paid to acquire the subsidiary). This means that each year.25 balance 1.200 (250) 50 1. so  part of the parent’s  reserves Euro 1.com   . Individuals may reproduce this material if it is for their own private study use only.000 Page | 19 © 2012 The ExP Group.   The goodwill’s value will vary with the exchange rate as the value of the subsidiary’s future earnings in the parent’s currency will vary with the exchange rate.2 1. This means that goodwill must be revalued each year with a consequent revaluation gain or loss. No liability for damage arising from use of these notes will be accepted by the ExP Group. Non-controlling interests’ share of the net assets of the subsidiary.ExPress Notes     ACCA P2 Corporate Reporting Further aspects of foreign currency groups Goodwill Goodwill on consolidation always arises in the books of the acquirer (ie parent) since it is the property of the parent company. goodwill must be calculated similarly to how the exchange gain or loss is calculated for the translation of the net assets of the subsidiary: Date Goodwill at 1 Jan 20x1 Impairment loss in the year to 31 Dec 20x1 Exchange difference in the year Goodwill at 31 Dec 20x1            This gain of 50 is a gain  made by the parent.

com   . Reproduction by any means for any other purpose is prohibited. Individuals may reproduce this material if it is for their own private study use only.ExPress Notes     ACCA P2 Corporate Reporting Key workings/ methods Translation of subsidiary’s financial statements for consolidation       Foreign currency (€) €X €X €X €X €X €X Exchange rate Year end rate Rate at acquisition Rate at acquisition balance Year-end rate Presentation currency ($) $X $X $X $X $X $X Statement of financial position of subsidiary at the year-end Assets (top half of SOFP) Capital of subsidiary Reserves of subsidiary @ acquisition Post acquisition gains (balancing item) Liabilities Total equity and liabilities Page | 20 © 2012 The ExP Group.   theexpgroup. Refer to our full terms and conditions of use. Always obtain expert advice on any specific issue. No liability for damage arising from use of these notes will be accepted by the ExP Group. These course materials are for educational purposes only and so are necessarily simplified and summarised.

com   . Reproduction by any means for any other purpose is prohibited. you should revise the notes for paper F7 before studying these. Individuals may reproduce this material if it is for their own private study use only.ExPress Notes     Chapter 3 ACCA P2 Corporate Reporting IAS 7 START The Big Picture These notes focus on group statements of cash flow. Statements of cash flow for a group show cash and cash equivalents leaving the group of companies and coming into the group of companies.   theexpgroup. They are one of the more popular subjects with students and the level of performance in the exam itself is likely to be strong if a cash flow question comes up. Group statements of cash flow generally appear in question 1 of the exam. so you need to be well prepared for this topic. probably about one sitting in every five. Refer to our full terms and conditions of use. These course materials are for educational purposes only and so are necessarily simplified and summarised. Page | 21 © 2012 The ExP Group. fair value adjustments) are non-cash adjustments. Always obtain expert advice on any specific issue. but this is less common. No liability for damage arising from use of these notes will be accepted by the ExP Group. They may alternatively appear in section B of the exam. If you are unsure of single company statements of cash flow. allowances for unrealised profit. Group statements of cash flow are generally somewhat more straightforward than group statements of comprehensive income in the exam. since most of the adjustments required to group financial statements (eg intra-group balances. Intra-group cash flows are not reported.

These are the main techniques that you need to be familiar with when preparing a group statement of cash flow over a single company statement of cash flow:      Reconciliation of profit to operating cash flow: impact of purchase/ sale of a subsidiary Impact of purchase/ sale of subsidiary on T account workings (eg property. No liability for damage arising from use of these notes will be accepted by the ExP Group. Always obtain expert advice on any specific issue.      Key workings/ methods Reconciliation of profit before tax to cash from operations      A reconciliation is a statement explaining why two numbers do not agree. or vice versa. Reproduction by any means for any other purpose is prohibited. If you are reasonably comfortable with these two topics. IAS 7 (indirect method) starts with profit before tax and reconciles this to cash flow from operations.   theexpgroup.  Affects Affects In EBIT? operating reconciliation? cash flow? Depreciation Impairment of goodwill in the year Credit sale made but not paid in cash (ie increase in receivables) Write-down of inventory to recoverable value Increase in tax payable Goods purchased on credit (ie increase in payables) Increase in provision for warranty costs   Yes Yes Yes Yes No Yes Yes No No No No No No No Yes Yes Yes Yes No Yes Yes Page | 22 © 2012 The ExP Group. An item will appear in the reconciliation if it does affect EBIT but does not affect operating cash flow.ExPress Notes   ACCA P2 Corporate Reporting   You should study group statements of cash flow after revising single company statements of cash flow from paper F7 and studying groups for paper P2. Refer to our full terms and conditions of use.com   . The easiest way to do this is to reconcile EBIT (ie operating profit) to operating cash flow. group statements of cash flow are likely to give you few difficulties. These course materials are for educational purposes only and so are necessarily simplified and summarised. plant and equipment) Cash paid to non-controlling interests Cash received from associates Disclosures on acquisition and disposal of a subsidiary (these are simple). Individuals may reproduce this material if it is for their own private study use only.

    EXAMPLE   Edgar Co purchased a subsidiary Edmund Co on 30 September 20x1.        Affects EBIT? No (preacquisition) No (preacquisition) No (preacquisition) Affects operating cash flow? No No No In reconciliation? No No No Increase in receivables due to purchase of subsidiary Increase in payables/ accruals/ provisions due to purchase of subsidiary Increase in receivables/ prepayments due to purchase of subsidiary   This means that the usual working capital adjustments when you prepare the reconciliation of profit to operating cash flow needs to be amended. No liability for damage arising from use of these notes will be accepted by the ExP Group. When a subsidiary is purchased. Always obtain expert advice on any specific issue. Since the year-end figure will include any receivables (etc) arising on a purchase of subsidiary.   theexpgroup. Refer to our full terms and conditions of use. Normally. they must be deducted in the calculation. Reproduction by any means for any other purpose is prohibited. it is likely that the subsidiary will have receivables in its SOFP at purchase. These course materials are for educational purposes only and so are necessarily simplified and summarised.200. an increase in receivables is deducted.ExPress Notes   ACCA P2 Corporate Reporting   The only addition so far compared with statements of cash flow in paper F7 is the mention of goodwill impairment above.800 and on 31 December 20x1 had receivables of $11. Preacquisition revenue and expenses are not consolidated.450. Edmund Co had receivables in its SOFP of $1. Page | 23 © 2012 The ExP Group. since this is a credit sale (which has been credited to revenue) but no cash received.com   . These will cause an increase in group receivables. Individuals may reproduce this material if it is for their own private study use only. but these should be excluded from the reconciliation. Edgar Co and its subsidiaries at the start of 20x1 had receivables of $9. but they will not have affected group EBIT. Think about it – if the receivable existed when the subsidiary was purchased. that receivable must have been created by a pre-acquisition sale. On that date.

Reproduction by any means for any other purpose is prohibited.     1.x1   b/d   EXAMPLE   Associate (SOFP) 10.x1 Share of profit of (balancing item) subsidiaries 16.x1 17.000 500 31.800) (450)   Key workings/ methods Associates.com   . cash can come into the group from an associate (an associate is not part of the group.500 10.500 Page | 24 © 2012 The ExP Group.000     Non-controlling interests (SOFP) 1.000 12. Refer to our full terms and conditions of use.000 31. Individuals may reproduce this material if it is for their own private study use only. Always obtain expert advice on any specific issue.12.000 Share of profit after tax Cash received (balancing item) c/d 1.12. The cash paid to non-controlling interest will be their share of dividend paid by the subsidiary.x1 31.12.x1 31. since it’s not controlled by the parent) and cash paid to non-controlling interests.1.200 – 9.12.12. non-controlling interests     In a group statement of cash flows. Both of these can be calculated using a T-account (or similar presentation).12.x1 Share of other comprehensive income of subsidiaries 17.x1 b/d Cash paid 700 31.500 12.800 31.ExPress Notes   ACCA P2 Corporate Reporting   The figure in the reconciliation of profit to operating cash flow in the year to 31 December 20x1 will be: Increase in receivables (11.500 15.x1 31.1.   theexpgroup. These course materials are for educational purposes only and so are necessarily simplified and summarised.12. No liability for damage arising from use of these notes will be accepted by the ExP Group.x1 2.450 – 1. using the figures from the group SOFP.000 2.

12.x1 X XX 31. This will be the cash paid (if any) by the parent to the previous owners of the subsidiary.12. No liability for damage arising from use of these notes will be accepted by the ExP Group.x1 Depreciation expense Impairment losses X X 31. Reproduction by any means for any other purpose is prohibited. Individuals may reproduce this material if it is for their own private study use only.P&E in the year (balancing item) Revaluation surplus in the year X X X 31. plant and equipment (SOFP) 1. This increase will not represent a payment in cash directly for those non-current assets (any payment of cash to acquire control of a subsidiary was a payment to acquire shares!) This will need to be adjusted for in each item in the SOFP.1.x1 31.x1 31.x1 31.12.12. Always obtain expert advice on any specific issue. These course materials are for educational purposes only and so are necessarily simplified and summarised.x1 31.12.com   .ExPress Notes     Effect of acquisition or disposal of subsidiary The acquisition of a subsidiary in the year will increase the size of each item in the SOFP.12.12. eg: ACCA P2 Corporate Reporting Property.x1 Disposals @ NBV X 31. as a result of the parent having control of a greater number of (eg) non-current assets.   theexpgroup. Page | 25 © 2012 The ExP Group. less any cash balances of the subsidiary acquired.x1 c/d X XX   The actual acquisition itself will be shown as a single cash flow in the investing activities section of the statement of cash flows.x1 b/d Finance leases incepting in year Acquired via control of new subsidiary in year Cash paid to acquire new P.12. Refer to our full terms and conditions of use.

 Change in valuation: Update each period to the latest estimate.   theexpgroup.com   . An intention is never an obligation.000 would be recorded in profit in the year when the estimate is changed. not as a prior period adjustment: Page | 26 © 2012 The ExP Group. If requires an obligation (something that is legally or constructively impossible to avoid by any means). simply one of uncertain timing or amount. Individuals may reproduce this material if it is for their own private study use only. Refer to our full terms and conditions of use. use the expected value of the outflow and discount if the time value of money is material. No liability for damage arising from use of these notes will be accepted by the ExP Group. so an intention to incur an expense can never generate a provision. so an increase of $10. Initial valuation (provisions)  For a series of events (eg multiple goods sold under guarantee). For a one-off event (eg a single litigation). Always obtain expert advice on any specific issue. Reproduction by any means for any other purpose is prohibited. use the single most probable outcome and discount if the time value of money is material. This is a change in accounting estimates.ExPress Notes     Chapter 4 ACCA P2 Corporate Reporting IAS 37 START The Big Picture Provisions are a form of liability. These course materials are for educational purposes only and so are necessarily simplified and summarised.

000 $10. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. No liability for damage arising from use of these notes will be accepted by the ExP Group.ExPress Notes       Dr Expense Cr Provision $10. Individuals may reproduce this material if it is for their own private study use only.000 ACCA P2 Corporate Reporting Initial valuation (contingent liabilities) Given a value of zero. Refer to our full terms and conditions of use. unless on a fair value adjustment on acquisition by another company.com   . See groups notes. Always obtain expert advice on any specific issue. Page | 27 © 2012 The ExP Group.   theexpgroup. Summary diagram Provisions and contingent liabilities for individual companies Probable: Possible: Remote: Reliable: Provide: Greater than 50% estimated probability Greater than 5% and up to 50% estimated probability 5% of lower probability Any estimate which is more reliable than making no estimate Provide expected value and discount at an appropriate rate.

Generally a net liability. but can very occasionally be a net asset. Generally an estimate at the year-end.   theexpgroup. Normally. No liability for damage arising from use of these notes will be accepted by the ExP Group. Page | 28 © 2012 The ExP Group.ExPress Notes     Chapter 5 ACCA P2 Corporate Reporting IAS 12 START The Big Picture Current tax: The amount demanded by the tax authority in respect of taxable gains/ losses subject to tax in the current period. These course materials are for educational purposes only and so are necessarily simplified and summarised. Refer to our full terms and conditions of use. In practice. questions instruct you to ignore deferred tax. Reproduction by any means for any other purpose is prohibited. you will need to consider the deferred tax position of every transaction where the accounting policy and the tax base (tax accounting policy – see below) are not the same. though it is generally examined as either a part of a question or as a stand alone question on its own. Individuals may reproduce this material if it is for their own private study use only. Deferred tax: Future tax due on gains recognised in the current period but not assessed for tax until some future period. Always obtain expert advice on any specific issue. Deferred tax is pervasive in financial statements.com   .

Individuals may reproduce this material if it is for their own private study use only. Goodwill gives a permanent difference since impairment losses on goodwill are never a tax deductible expense.000 CR 25% 750 DR Page | 29 © 2012 The ExP Group.350 CR Provisions 3. Eg government grant income received may never be taxable. but it’s helpful in forming an understanding.000 DR 8. These course materials are for educational purposes only and so are necessarily simplified and summarised.200 CR Property 10.com   . Temporary difference Permanent difference     Key workings/ methods     Exchange differences will arise. so goodwill never appears at all in the tax computation.000 DR 2.   theexpgroup.000 DR 500 DR 4.000 DR 30% 600 CR Software 4. though it’s income in profit. The difference between the IFRS carrying value of an asset/ liability and its tax base. eg imagine the position of Lear Co for the year ended 31 Dec 20x1: Eg IFRS value in SOFP Less: Tax base Temporary difference Tax rate expected when the difference reverses Deferred tax Net deferred tax liability = 1. Both tax base and IFRS value start with purchase price and both will become zero when the asset is scrapped. The fact that it never appears makes it a permanent difference.500DR 30% 1.ExPress Notes     ACCA P2 Corporate Reporting Key definitions   Tax base These are ExP’s definitions. No liability for damage arising from use of these notes will be accepted by the ExP Group. This is not a phrase used in IAS 12.000 CR 0 CR 3. as a matter of principle. This is where the tax base and the IFRS value of an asset or liability are always different. The tax base of an investment in a subsidiary is historical cost of purchase. eg using taxable capital allowances instead of depreciation. Refer to our full terms and conditions of use. which are simplified for exam preparation purposes The carrying value of the asset as it would be in the statement of financial position if the tax policy were used as the accounting policy. Reproduction by any means for any other purpose is prohibited. Always obtain expert advice on any specific issue.

so has no future tax effects.ExPress Notes     ACCA P2 Corporate Reporting Exam approach   Calculation of deferred tax liability and SOCI effect          1 2 Go through the accounting policies of the entity and identify each one where the accounting policy (IFRS) is not the same as the tax base. Offset deferred tax liabilities against deferred tax assets with the same tax authority. These course materials are for educational purposes only and so are necessarily simplified and summarised. Calculate the movement on the deferred tax liability. 3 4 For each difference (other than permanent difference) calculate the temporary difference at the period end using the working above. Identify which of these differences are permanent differences. No liability for damage arising from use of these notes will be accepted by the ExP Group. This will be the total charge to the statement of comprehensive income for deferred tax. State in your exam answer that this is a permanent difference. Refer to our full terms and conditions of use. Note: Cr temporary differences produce Dr deferred tax assets Dr temporary differences produce Cr deferred tax liabilities 5 6 Look at all the deferred tax assets for evidence of impairment. Page | 30 © 2012 The ExP Group. Multiply the temporary difference by the tax rate expected to be in force when the item becomes taxable (when it “reverses”). Individuals may reproduce this material if it is for their own private study use only. eg:    Business entertaining expenditure Government grants receivable Goodwill arising on consolidation.com   .   theexpgroup. Reproduction by any means for any other purpose is prohibited. Always obtain expert advice on any specific issue.

These course materials are for educational purposes only and so are necessarily simplified and summarised. This is done by matching the movement on deferred tax (eg caused by a property upward revaluation) with where the gain or loss causing that movement in deferred tax was reported. Always obtain expert advice on any specific issue. Take the proportion of deferred tax movement on equity gains to equity. 7A Work out the movement in deferred tax due to items reported in equity. No liability for damage arising from use of these notes will be accepted by the ExP Group. eg:   Property revaluation gains Movements in value on available-for-sale financial assets 7 B  Show the movement in deferred tax that isn’t shown as gains taken to equity (step 7A) and show this as the deferred tax movement in profit.   theexpgroup. Individuals may reproduce this material if it is for their own private study use only.com   . Reproduction by any means for any other purpose is prohibited. Refer to our full terms and conditions of use.ExPress Notes     ACCA P2 Corporate Reporting 7 Split the movement on deferred tax liability in the year into the element reported in other comprehensive income and the rest that will be reported as part of the profit and loss charge for taxation in the period.    Page | 31 © 2012 The ExP Group.

  theexpgroup. they are surprisingly easy to deal with after working a few examples. you need to have:    A good working understanding of double entry bookkeeping To understand the transaction itself (ie how a promise is made and assets set aside to cover the cost of honouring that promise) A methodical step-by-step approach to dealing with the numbers in a logical. This may be a liability to pay pension funds into a private pension plan. Individuals may reproduce this material if it is for their own private study use only. These course materials are for educational purposes only and so are necessarily simplified and summarised. Reproduction by any means for any other purpose is prohibited. The act of making a promise to pay pensions creates an obligation (ie liability). depending on the pension type. Pension costs are fairly frequently examined.com   . No liability for damage arising from use of these notes will be accepted by the ExP Group. Page | 32 © 2012 The ExP Group. Refer to our full terms and conditions of use. Always obtain expert advice on any specific issue. Although they seem difficult at first. To master the subject. sequence. or a liability to pay a pension between retirement and death.ExPress Notes     Chapter 6 ACCA P2 Corporate Reporting IAS 19 START The Big Picture Promises of pensions payable to staff are an expense of the sponsoring company. There are two types of pension plan: defined contribution and defined benefit. chronological.

They are therefore much more risky for the employee than for the employer. Refer to our full terms and conditions of use.   theexpgroup. Pension plan liability (NPV of pensions promised by the year-end) Deferred costs and income (see below) Impact on SOCI: Service component: the cost of pensions promised in the year (current service cost and past service cost) that is charged to P/L. not with the employer. then the assets will precisely equal the liabilities. Here. No liability for damage arising from use of these notes will be accepted by the ExP Group. Page | 33 © 2012 The ExP Group. This is charged/credited to P/L. Always obtain expert advice on any specific issue. as the valuation of investments will be volatile. the employer promises to make future pension payments (an obligation. therefore a liability). The accounting is simple: Impact on SOFP: None. These course materials are for educational purposes only and so are necessarily simplified and summarised. Reproduction by any means for any other purpose is prohibited. All risks of the fund being inadequate to support the employee between retirement and death rest with the employee. Actuarial gains/ losses If a pension plan is perfectly in balance. Net interest component: computed by applying the discount rate to measure the plan obligation to the net defined benefit liability or asset. including the returns on plan assets less any amount taken to P/L as part of net interest component. Also. This is charged to OCI and will never be recycled to P/L in future periods. This is unlikely ever to happen. The employer makes contributions into a savings scheme for the employee. Impact on SOCI: Contributions payable into the pension plan are an expense. Individuals may reproduce this material if it is for their own private study use only. Defined benefit plans These are considerably more complicated for the accountant and considerably more risky for the employer. Remeasurement component: includes actuarial gains and losses during the reporting period. Impact on SOFP: Pension plan assets (ringfenced assets from which future pensions will be paid).ExPress Notes     ACCA P2 Corporate Reporting Defined contribution These are easy.com   .

. Refer to our full terms and conditions of use.           Assets    Liabilities  Deficit These unexpected movements give an actuarial gain or loss each period and are always a balancing item in the calculations. No liability for damage arising from use of these notes will be accepted by the ExP Group. Current service cost Past service cost Net interest component Relates to change in measurement in both the plan obligation and the plan assets arising from passage of time ans is reported as a separate component to P/L.(part of the service cost component). This is much less common than current service cost and might happen only if a company needs to eliminate an actuarial surplus on the pension plan (part of service cost component). so one extra period of service increases pensions liability.ExPress Notes   ACCA P2 Corporate Reporting   assumptions about the actuarial liability (ie expected cost of paying an uncertain amount to pensioners until they die) will vary year by year. Defined benefit plans are characterised by offering greater pensions to people who have worked for the company longer. Reproduction by any means for any other purpose is prohibited.   theexpgroup. These course materials are for educational purposes only and so are necessarily simplified and summarised. which are simplified for exam preparation purposes The NPV of the extra pensions promised to staff in return for work they did this period. Individuals may reproduce this material if it is for their own private study use only. Page | 34 © 2012 The ExP Group. Always obtain expert advice on any specific issue.com   . since (by definition) they are unexpected! Key definitions   These are ExP’s definitions. It is normal for a pension plan therefore to be slightly out of balance. The NPV of the extra pensions promised to staff in return for work they did in the past.

500 CR 500 CR 200 CR 450 CR 210 DR 10. Always obtain expert advice on any specific issue. relating to Cordelia Co’s defined benefit pension plan in the year to 31 December 20x1.440 CR 10. Refer to our full terms and conditions of use.920 CR 1. No liability for damage arising from use of these notes will be accepted by the ExP Group. Page | 35 © 2012 The ExP Group. These course materials are for educational purposes only and so are necessarily simplified and summarised.570 DR 8.000 DR 180 DR 210 CR 600 DR 10.ExPress Notes     ACCA P2 Corporate Reporting   EXAMPLE   Cordelia Co      Below are given the fictional numbers of Cordelia Co.200 CR 240 DR 1. Individuals may reproduce this material if it is for their own private study use only.650 DR Recognition of actuarial gains and losses Actuarial gains and losses arise each year.680 CR See below See below See below Profit and loss effect 500 DR 200DR 450 DR 600 CR B/f @ start of period Current service costs Past service costs Interest charge Contributions paid into the plan (Dr Plan assets. Reproduction by any means for any other purpose is prohibited. Cr company cash) Pensions paid to pensioners Interest return Expected figure c/f Actual figure c/f => Remeasurement component (gain) => Remeasurement component (loss) Net actuarial loss in year 10. Actuarial gains and losses arising during the accounting period (comprised in the remeasurement component) are recognised in OCI for the year and will not be recycled to P/L in future periods. Plan assets Pensions liability 9.   theexpgroup.com   . Often they are self-correcting over time (eg a short-term stock market crash is likely to recover by it comes time to pay out the pensions promised).

since they cover a huge array of different possible transactions. Reproduction by any means for any other purpose is prohibited. Refer to our full terms and conditions of use.com   . Always obtain expert advice on any specific issue. The best way to approach study is to know:    The classifications of all financial instruments The difference in fair value and amortised cost accounting The possible ways in which any gain or loss (whether on a financial instrument or not) may be reported in financial statements. then move on to study hedging. they are only at “level 2” knowledge within the syllabus. Page | 36 © 2012 The ExP Group.ExPress Notes     Chapter 7 ACCA P2 Corporate Reporting IAS 39 START The Big Picture Although financial instruments appear frequently in the P2 exam. though this has generally only been worth a couple of marks in the exam. Individuals may reproduce this material if it is for their own private study use only. These course materials are for educational purposes only and so are necessarily simplified and summarised. This means that the scenarios in which they are tested are likely to be relatively straightforward. No liability for damage arising from use of these notes will be accepted by the ExP Group. If you are keen to take this as far as you can. from regular trade receivables to exotic currency and interest rate swaps.   theexpgroup. It’s easy to spend too much time preparing for these accounting standards.

Reproduction by any means for any other purpose is prohibited..com   . redeemable preference shares Fair value Fair value (derivatives and liabilities held for trading) or amortised cost.. Always obtain expert advice on any specific issue. They are recognised when the entity becomes party to the contract rather than when control is obtained.. for as long as possible. Refer to our full terms and conditions of use. then fair value may lead to dysfunctional financial reporting. Profit or loss Financial assets Trade receivables.. Trade payables. So if the market is acting irrationally.ExPress Notes     Financial liabilities When used. Example. investments in equity shares Fair value and will exclude transactions costs for all assets kept at FVPL Fair value (either to P/L or OCI) or amortised cost less impairements. debenture loans. When used. Example that can’t be categorised this way Initial recognised value Year-end valuation method Gains or losses reported in. Individuals may reproduce this material if it is for their own private study use only.. Page | 37 © 2012 The ExP Group. The intention is to ensure that as many as recognised as possible. They are derecognised only when it’s virtually certain that all the risks of a financial instrument have expired or have been transferred to another party.. These course materials are for educational purposes only and so are necessarily simplified and summarised. Example.   theexpgroup.. options.. Profit or loss/OCI ACCA P2 Corporate Reporting Initial recognition Subsequent measurement Gains or losses reported in...... This is a recent criticism of fair value accounting techniques. No liability for damage arising from use of these notes will be accepted by the ExP Group. Fair value accounting “Fair value” essentially means market value.. Key workings/ methods Recognition and derecognition The recognition criteria for financial instruments are slightly different to the recognition criteria in many other IASs/ IFRSs..

The business model test establishes whether the entity holds the financial asset to collect the contractual cash flows or whether the objective is to sell the financial asset prior to maturity to realise changes in fair value. If this is not the case. For example. or Exceptionally if no reliable DCF valuation is possible. ACCA P2 Corporate Reporting Amortised cost Can apply to debt instruments only if the following two tests are passed: • the business model test. the test is failed and the financial asset cannot be measured at amortised cost. on specified dates. Reproduction by any means for any other purpose is prohibited. Refer to our full terms and conditions of use.ExPress Notes     Fair values are determined as:    Best achievable market value (but not deducting expected transaction costs). Always obtain expert advice on any specific issue. and • the contractual cash flow characteristics test. or Valuation using discounted cash flows that consider all matters relevant (eg expected cash flows. Individuals may reproduce this material if it is for their own private study use only. the test is passed. If this is the case. the test is failed and the financial asset cannot be measured at amortised cost. for a debt instrument to be measured at amortised cost. These course materials are for educational purposes only and so are necessarily simplified and summarised. convertible bonds contain rights in addition to the repayment of interest and principal (the right to convert the bond to equity) and therefore would fail the test and must be accounted for as fair value through profit or loss. it will therefore require that: • the asset is held within a business model whose objective is to hold the assets to collect the contractual cashflows. to cash flows that are solely payments of principal and interest on the principal outstanding. market interest rates. historical cost. No liability for damage arising from use of these notes will be accepted by the ExP Group. In summary.   theexpgroup.com   . The contractual cash flow characteristics test determines whether the contractual terms of the financial asset give rise to cash flows on specified dates that are solely of principal and interest based upon the principal amount outstanding.     EXAMPLE   Page | 38 © 2012 The ExP Group. it implies that there will be no or few sales of such financial assets from a portfolio prior to their maturity date. it would suggest that the assets are not being held with the objective to collect contractual cashflows. timing of cash flows. In this situation. If it is the former. credit risk. but perhaps may be disposed of to respond to changes in fair value. Where this is not the case. and • the contractual terms of the financial asset give rise.

ExPress Notes   ACCA P2 Corporate Reporting   On 1 January 20x1. which is illustrated below. it may be required to reclassify its financial assets as a consequence.000 (plus the coupon payable on that date). Impairments Page | 39 © 2012 The ExP Group. In reality. These course materials are for educational purposes only and so are necessarily simplified and summarised. but this is expected to be infrequent occurrence. it is accounted for from the first day of the accounting period in which reclassification takes place. Refer to our full terms and conditions of use. If reclassification does occur. The difference between interest calculated using the effective rate and the coupon paid/ received is the “rolled up” interest. No liability for damage arising from use of these notes will be accepted by the ExP Group. Reproduction by any means for any other purpose is prohibited. Cordelia Co issued a bond with a nominal value of $200. it’s likely that the effective rate would be worked out using a spreadsheet and the IRR function. This means that by the end of the five year life of the bond. The bond is due for redemption on 31 December 20x5 for $200. which is added to the value of the bond each year. So the charge or credit to profit for finance costs/ finance income is determined using the effective rate. Always obtain expert advice on any specific issue.   theexpgroup. a coupon rate (ie cash paid) of 4% of nominal value. Reclassication Where an entity changes its business model.com   . it has been transformed (“amortised”) from its initially recognised value to its redemption value of $200. Individuals may reproduce this material if it is for their own private study use only.000.000.

Refer to our full terms and conditions of use. Understanding the intricacies of how hedging relationships may be set up is not important for paper P2. No liability for damage arising from use of these notes will be accepted by the ExP Group. since it can take a lot of time to master for a relatively low profile in the exam itself. These course materials are for educational purposes only and so are necessarily simplified and summarised. Individuals may reproduce this material if it is for their own private study use only. as the risk has increased) would double count the risk factor and result in undervaluation of the asset. Reproduction by any means for any other purpose is prohibited. Always obtain expert advice on any specific issue. This “counterweight” is the hedging instrument and may be an almost infinite number of different financial instruments.ExPress Notes   ACCA P2 Corporate Reporting   All financial assets held at fair value are automatically revalued for impairments. It’s useful to know how to account for movements in the hedged item and the hedging instrument.com   .   theexpgroup. then the new impaired value must be calculated using:   The revised expected cash flows and expected timing At the original discount rate. It is common in practice and useful knowledge. eg:     Foreign currency investment Foreign currency payable Variable interest rate loan resulting in higher than expected cash outflows Forecast future major purchase in a foreign currency becoming unaffordable due to changes in the exchange rate.     Key workings/ methods       Hedged item: The thing the enterprise is worried about changing in value. though derivatives are common. the entity may buy something that is expected to move in value in the opposite direction to the hedged item. Page | 40 © 2012 The ExP Group. To remove or reduce this risk. Note that discounting the revised cash flows at the new rate (which would be higher. Hedging The Big Picture Hedging has only occasionally been tested in paper P2 and then normally as a relatively minor adjustment in question 1. Becoming expert in hedging should not be a top priority for most students studying for paper P2. If a financial asset measured at amortised cost appears to be impaired (eg if the credit risk increases a great deal).

Cash flow hedge. To protect against adverse exchange movements making the ship unaffordable. so there is no liability. the gain or loss on the hedging instrument is “hidden” in equity until the hedged transaction takes place. The forecast/ intended transaction is not yet a liability. so is not in the SOFP. there are only two accounting treatments for hedges. These course materials are for educational purposes only and so are necessarily simplified and summarised. Accounting for hedges A fair value hedge is simple. The accounting rules simply offset the gain on the hedged item with the loss on the hedging instrument. Page | 41 © 2012 The ExP Group. As there is no binding order. so will be in the SOFP. Always obtain expert advice on any specific issue. so there are basically two types of hedge: Fair value hedge. broadly! This might be to protect against adverse movements in an item not in the SOFP yet. Reproduction by any means for any other purpose is prohibited. Individuals may reproduce this material if it is for their own private study use only.com   . eg buy buying a foreign currency forward contract. Eg a foreign currency loan to protect against a foreign exchange chage in value ofa foreign currency receivable that is being shown in the SOFP. No liability for damage arising from use of these notes will be accepted by the ExP Group. though the company will want to ensure that they can afford the expected future cash outflow. A cash flow hedge is a bigger challenge for the writers of the IAS! The hedging instrument will be a contract. but the hedged item will be an intention.   theexpgroup. The hedging instrument was taken out in order to protect against value changes of an item recognised in the SOFP. Since the hedging instrument exists only because of the expected existence of the hedged item. Eg an entity may structure its business plan around buying a ship from a foreign ship builder.ExPress Notes   ACCA P2 Corporate Reporting   Though three types of hedge are mentioned in IAS 39. but it has not yet placed a binding order. Refer to our full terms and conditions of use. there is no obligation. A hedge that is not a fair value hedge. Both the hedged item and hedging instrument will be in the SOFP and will record a gain and a loss. the entity may hedge the foreign currency exposure. or vice versa.

with two effects:   The holder made a profit on sale. Always obtain expert advice on any specific issue.com   .ExPress Notes     Chapter 8 ACCA P2 Corporate Reporting IFRS 2 START The Big Picture Prior to IFRS 2. These course materials are for educational purposes only and so are necessarily simplified and summarised. Prior to IFRS 2. IFRS 2 is an unpopular accounting standard with many preparers of accounts.   theexpgroup. Reproduction by any means for any other purpose is prohibited. Refer to our full terms and conditions of use.   Page | 42 © 2012 The ExP Group. this was simply recorded as: Dr Cash (with actual cash received. No liability for damage arising from use of these notes will be accepted by the ExP Group. and The other shareholders lost wealth (ie suffered an expense) as the share price fell by new shares being issued below market price. IFRS 2 remedies this by making an estimate of the loss to other shareholders by granting cheap shares and spreading that cost over the period the company gains benefit from the share scheme. Individuals may reproduce this material if it is for their own private study use only. which in substance was part of their total remuneration. below market value) Cr Capital/ share premium account. listed companies often paid senior staff in shares that were issued below market value. who say that it generates artificial expenses. brings in highly subjective valuations as expenses and repeats the same information as IAS 33 diluted earnings per share. These shares were then sold at a profit by the holders.

Equity settled: The holder is paid only in shares. It is then frozen at the value per share at the grant date – it is never updated. He/ she has no right to a cash alternative. No liability for damage arising from use of these notes will be accepted by the ExP Group. Reproduction by any means for any other purpose is prohibited.   theexpgroup. Always obtain expert advice on any specific issue. it share plan to the holders by must be revalued at the end of multiplying the total number of each period to its latest value.     Work out the vesting period. This decides how the share based payment is valued. cheap shares to be issued by the option of the share at its grant date. as: Latest estimate of total cost of the plan Divided by years between grant and vesting date Less: Costs cumulatively already recognised (X) Current period expense X X X (Expected total cost) (Total cost to date) Page | 43 © 2012 The ExP Group. as the rules are different for pure equity schemes and schemes in cash. As this is a liability.            For a cash based payment. That is the period that staff must stay in the company’s employment to be able to exercise their options over cheap shares.   the total liability that the plan estimate the total benefit of the generates.com   . is a payment in cash that is linked to the share price or some mix of the two. Individuals may reproduce this material if it is for their own private study use only. This is the period over which the cost/ benefit of the share option plan will be spread. estimate For an equity settled transaction.ExPress Notes     ACCA P2 Corporate Reporting   KEY KNOWLEDGE Suggested approach to questions   1 1A 2 3       Decide whether the scheme is entirely payment in shares. Refer to our full terms and conditions of use. These course materials are for educational purposes only and so are necessarily simplified and summarised. This option value will be given in the exam. 1B Work out the cost of the share based payment each period.

No liability for damage arising from use of these notes will be accepted by the ExP Group.30 3. Although people may stay longer than that.000 x 180 x 3.30 = $2.40 3. Its value per share option is therefore frozen at the grant date.95 4. Step 2: The vesting period is three years. Crossmen Coropration granted 5.30 4. Always obtain expert advice on any specific issue.000 options on shares to each of its 200 most senior staff.ExPress Notes     ACCA P2 Corporate Reporting   REVIEW AND TEST 1 The Crossmen   On 1 January 20x1.25 3.80 3. Each option is conditional upon each member of staff staying in the company’s employment until 31 December 20x3. Page | 44 © 2012 The ExP Group.10 3.97 million.95 3. Individuals may reproduce this material if it is for their own private study use only. You are given this data and are required to calculate the expense for each of the years in question. the company cannot presume that they will voluntarily stay longer than the minimum required.com   . Step 3: The cumulative cost in each year is now worked out.20 4. Total expected cost to the company’s other shareholders: 5.45 2.30 Step 1: This is a pure equity settled transaction. participating staff can continue to hold the share options and may choose to exercise them on 31 December 20x4 or 31 December 20x5. On 31 December 20x3. Refer to our full terms and conditions of use. These course materials are for educational purposes only and so are necessarily simplified and summarised. Each option allows the holder to buy Crossmen Co shares at a price of $1 each.00 4. Date Fair value of option ($) Number of participants expected to stay until 31 Dec 20x3 180 175 180 165 165 165 Share price ($) 1 Jan 20x1 31 Dec 20x1 31 Dec 20x2 31 Dec 20x3 31 Dec 20x4 31 Dec 20x5 3. Reproduction by any means for any other purpose is prohibited.   theexpgroup.

Always obtain expert advice on any specific issue. Participants have to stay in Wright Co’s employment until 31 December 20x3 in order for the rights to vest.500 2.30 $3. Individuals may reproduce this material if it is for their own private study use only.       REVIEW AND TEST 2 Wright  On 1 January 20x1.500 0 0 ACCA P2 Corporate Reporting 31 31 31 31 31 Dec Dec Dec Dec Dec The expense each year is recognised as: Dr Expense Cr Equity.722.017. though they may exercise on either 31 December 20x3.45 1.000 (5.722. less the share price at the grant date.ExPress Notes     Date Cumulative expense ($) 20x1 20x2 20x3 20x4 20x5 (5.500 1.500 2.52 1.500 Expense Expense previously recognised recognised in year 0 962. No liability for damage arising from use of these notes will be accepted by the ExP Group.500 2.60 1.000 (5. Refer to our full terms and conditions of use. These course materials are for educational purposes only and so are necessarily simplified and summarised. Wright Co granted 15.com   .30 $3.980.000 (5.500 1.30 $3.000 cash appreciation rights to 150 of its staff.30 $3.722.500 1.722.100 800 260 Number of participants expected to stay until 31 Dec 20x3 140 140 142 144 144 144 Share price ($) 1 Jan 20x1 31 Dec 20x1 31 Dec 20x2 31 Dec 20x3 31 Dec 20x4 31 Dec 20x5 1.722.48 Page | 45 © 2012 The ExP Group.000 2. Date Number of options exercised in the period (000’s) 0 0 0 1.000 x x x x x $3. The cash appreciation rights offered a cash payment equal to the company’s share price at the exercise date.500 962.   theexpgroup. Reproduction by any means for any other purpose is prohibited.017.20 1. 31 December 20x4 or 31 December 20x5.30 x x x x x 175 180 165 165 165 x x x x x 1/3) 2/3) 3/3) 3/3) 3/3) 962. These rights gave a bonus in cash based on the price of Wright Co’s shares.500 742.500 2.000 (5.50 1.

1.x2 Expense c/d 691. Individuals may reproduce this material if it is for their own private study use only.12.12. the company cannot presume that they will voluntarily stay longer than the minimum required.000 31.000   Page | 46 © 2012 The ExP Group.200 104.x4 b/d Cash (800 x (1.x1 Expense 31.200 691.000 x 140 x (1.200 691. As a liability.000 426. including updates of cost in the last two years after the first vesting period but before the latest possible exercise date.000 0 175.000 104.1. Step 2: The vesting period is three years.12.60 – 320.x3 31.200 339.000 x 142 x (1.000 262.200 31.x3 Expense 691.12.000 x 144 x (1.x5 31.200 1 Jan 20x1 (15.800 424.000 251.48 – 1.12.ExPress Notes   ACCA P2 Corporate Reporting   Step 1: This is a cash settled transaction. Although people may stay longer than that.000 262. Always obtain expert advice on any specific issue.12.20) c/d (260 x (1. Date Liability recognised ($’000) 0 175.20 – 1.000 31.1.800 1.200 1.   theexpgroup.000 691. which therefore gives rise to a liability.12. Step 3: The cumulative cost in each year is now worked out.20) x 2/3 31 Dec 20x3 (15.x3 31.x5 Liability for Cash Appreciation Rights 1.000 Cash (260 x (1.000 x 140 x (1.000 251.x3 b/d $1.45 – 1.20) 72.12.x4 31.12. No liability for damage arising from use of these notes will be accepted by the ExP Group.200 Increase in liability ($’000) 0 175.000 1.20) 424.x4 Profit/ loss 1.com   .12.x1 b/c 31.x3 31.x5 b/d c/d (all expired) 0 Profit/ loss 31. the expected value must be revalued each year.20) x 0/3 31 Dec 20x1 (15.200 691. These course materials are for educational purposes only and so are necessarily simplified and summarised.20) x 3/3 31.x4 31.000 691.60 – 104.352.20) x 1/3 31 Dec 20x2 (15. Refer to our full terms and conditions of use.52.52 – 1.200 Cash (1.200 84.12.20)) c/d 339. Reproduction by any means for any other purpose is prohibited.000 104.1m x ($1.12.50 – 1.

25 3.310.80 2.80 3.30 3. or they may allow nothing. the examiner for paper P2 has always said to assume that the future tax deduction will be based on the “intrinsic value” of the share based payment.ExPress Notes     ACCA P2 Corporate Reporting   STAR PERFORMERS’ POINT Deferred tax and share based payment   Tax authorities may allow a future tax deduction for the expense created by share based payment.000 Deferred tax asset in SOFP @ 30% (2) 0 280. If there is an allowable deduction from taxable profits for share based payment. These course materials are for educational purposes only and so are necessarily simplified and summarised.25 2.000 585.30 The maximum tax recoveries are therefore: Date Number of options expected to vest (000s) 900 875 900 825 Intrinsic value per option 3.20 3. Refer to our full terms and conditions of use. Always obtain expert advice on any specific issue.40 3. (2) This is calculated as the expected future tax saving multiplied by the expected future tax rate.00 3.20 4.45 2. In exams to date.95 3. To return to the example of Crossmen (RAT 1) Date Fair value of option ($) Number of participants expected to stay until 31 Dec 20x3 180 175 180 165 165 165 Share price ($) Intrinsic value ($) 1 Jan 20x1 31 Dec 20x1 31 Dec 20x2 31 Dec 20x3 31 Dec 20x4 31 Dec 20x5 3.80 Expected future tax saving $ (1) 0 933. Individuals may reproduce this material if it is for their own private study use only.com   .30 4.00 4. then the future tax recovery (ie deferred tax asset) should be recognised systematically alongside the expense. IFRS 2 defines intrinsic value as the difference between the spot price of a share and the exercise price. 3/3 for each year. Reproduction by any means for any other purpose is prohibited.   theexpgroup.10 3.000 2.95 4.25 2. 2/3.00 3. No liability for damage arising from use of these notes will be accepted by the ExP Group.95 3.333 1.000 1 Jan 20x1 31 Dec 20x1 31 Dec 20x2 31 Dec 20x3 (1) This is calculated as number of options expected to vest x intrinsic value per option x 1/3.30 3. Page | 47 © 2012 The ExP Group.000 693.950.20 3.

  theexpgroup. Reproduction by any means for any other purpose is prohibited. REWIND Reread and rework the examples in this chapter once or twice until you are comfortable with it. Individuals may reproduce this material if it is for their own private study use only. These course materials are for educational purposes only and so are necessarily simplified and summarised.ExPress Notes     ACCA P2 Corporate Reporting Wrapping up this topic PAUSE Do something else for a while. Always obtain expert advice on any specific issue. EJECT Move on to something else! Page | 48 © 2012 The ExP Group. No liability for damage arising from use of these notes will be accepted by the ExP Group.com   . Reflect on how you might be able to apply this knowledge to something in your own life or work. Refer to our full terms and conditions of use.

No liability for damage arising from use of these notes will be accepted by the ExP Group.com   . Individuals may reproduce this material if it is for their own private study use only. Issues in accounting for all assets and liabilities        Initial recognition/ classification Initial valuation Write-off period Amortisation/ depreciation/ impairments Revaluation upwards Additions/ enhancements Profit/ loss on disposal calculation. Page | 49 © 2012 The ExP Group.ExPress Notes     Chapter 9 ACCA P2 Corporate Reporting IAS 16 START The Big Picture Property. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. It excludes investment property. Reproduction by any means for any other purpose is prohibited.   theexpgroup. plant and equipment comprises tangible non-current assets that a business uses in the course of its own business.

ExPress Notes
    Initial recognition/ classication Recognise when an entity has control over the asset, not necessarily ownership. This complies with the Framework definition of an asset and also enables assets held under finance leases to be shown as property, plant and equipment.
ACCA P2 Corporate Reporting

Initial valuation All costs directly attributable. This includes site preparation, irrecoverable import taxes, inwards delivery charges, professional fees, attributable borrowing costs (IAS 23, below). It excludes training costs, any abnormal costs in installation. Write-off period Depreciate the asset so that the pattern of depreciation charges match the income stream generated. Review useful life periodically. Depreciation is not aimed at showing market value of assets in the SOFP.

Impairments Recognise any losses in profit, unless to reverse any previous upwards revaluation shown in equity. See notes on IAS 36 impairments.

Revaluation Default accounting policy is simple historical costs. If choose to revalue a non-current asset:       Must revalue all property, plant and equipment in the same class Must keep up to date, generally annually Must disclose details of valuation, which may be done by the directors Cannot return to historical costs later Will charge depreciation on the higher revalued figure Common to make an annual transfer from revaluation reserve to retained earnings of the difference between deprecation on revalued amount and depreciation on historical costs. Eventual gain on disposal likely to be lower, as carrying value on derecognition will be higher (see below).

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© 2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

 

theexpgroup.com

 

ExPress Notes
    Additions Further costs must be added to the asset’s value if the cost enhances the earningsgenerating potential of the asset above its original specification, eg upgrade of a server’s memory capacity. Other cost (eg repair of hardware) must be expensed immediately.
ACCA P2 Corporate Reporting

Borrowing costs: IAS 23
Finance costs msut be added to the initial value of the asset if directly attributable to the acquisition of the asset. This can include a fair weighted average of general company finance costs. Must write off finance costs incurred during periods of extended stoppage when no construction work takes place. Must write off once the asset is ready for use, even if not brought into use on that date. Other borrowing costs must be written off as an expense.

 

  Key workings/ methods  
 

 
Profit or loss on disposal Proceeds (what is coming into the SOFP in the transaction) Less: Carrying value derecognised (what leaves the SOFP) Profit or loss on disposal (the increase or decrease in net assets) X (X) X

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© 2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

 

theexpgroup.com

 

ExPress Notes
    Chapter 10
ACCA P2 Corporate Reporting

IAS 38

START The Big Picture
Property, plant and equipment comprises tangible non-current assets that a business uses in the course of its own business. It excludes investment property.

Issues in accounting for all assets and liabilities        Initial recognition/ classification Initial valuation Write-off period Amortisation/ depreciation/ impairments Revaluation upwards Additions/ enhancements Profit/ loss on disposal calculation.

Initial recognition/ classication An identifiable non-monetary asset without physical substance. This can include the right to use a tangible asset. So premiums paid to acquire services of a person (eg transfer price of a sports player) are intangible assets. Goodwill is an example of an intangible asset.

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© 2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

 

theexpgroup.com

 

Plant and Equipment. An intangible asset may be acquired by an entity individually. in contrast to goodwill (though goodwill is also accounted for under IAS 38). brands. Reproduction by any means for any other purpose is prohibited. licenses. first check all the figures in the calculation. Property. or may arise as a result of a business combination (ie goodwill in group accounting). These course materials are for educational purposes only and so are necessarily simplified and summarised. Plant and Equipment. etc. such as patents: similar rules to IAS 16.   theexpgroup. do not amortise. Individuals may reproduce this material if it is for their own private study use only. Expenditure is development cost if (mnemonic RAT PIE):       Resources are adequate to complete the project Ability to complete Technically feasible Probable economic benefit (ie expected to be profitable) Intend to complete the project Expenditure on the project can be separately recorded. Intellectual property rights are controlled by the entity (eg patent) and so may be recognised. such as goodwill. which means that it’s controlled by the entity and it’s reasonably expected to generate a positive inflow of benefit. Similar rules to IAS 16. Initial valuation All costs directly attributable. recognise immediately in profit as income. Page | 53 © 2012 The ExP Group. If negative goodwill arises on a business combination. Property. patents. For intangible assets with an indefinite (ie unknown) life. An intangible is recognised once it meets the definition of an asset.ExPress Notes   ACCA P2 Corporate Reporting   Identifiable means that the asset can be seen as separate from the business as a whole. All intangible assets have a finite (ie limited) useful life.com   . but test annually for impairment. No liability for damage arising from use of these notes will be accepted by the ExP Group. It includes development costs. Write-off period For intangible assets with a definite (ie known) life. If all the figures appear to be correct. Always obtain expert advice on any specific issue. Research costs are written off as incurred as they either are not controlled by the entity or are not sufficiently certain to generate future benefits. So intellectual property (knowledge generally known) is not controlled by an entity and is not an intangible. Refer to our full terms and conditions of use. Paragraph 57 of IAS 38 gives the test for deciding if an expenditure is research (write off) or development (treat as an asset).

eg upgrade of a server’s memory capacity. Always obtain expert advice on any specific issue. It is common for intangible assets to be unique or at least very distinctive (ie not homogenous) or for the market in them to be shallow. Plant and Equipment.   theexpgroup. so can never be revalued upwards.     Key workings/ methods       Profit or loss on disposal Proceeds (what is coming into the SOFP in the transaction) Less: Carrying value derecognised (what leaves the SOFP) Profit or loss on disposal (the increase or decrease in net assets) X (X) X Page | 54 © 2012 The ExP Group. Paragraph 8 of IAS 38 defines an active market as:    the items traded in the market are homogeneous willing buyers and sellers can normally be found at any time. Intangible assets can be revalued upwards only by reference to a market value in an active market. there are similar consequences as for IAS 16 Property. Individuals may reproduce this material if it is for their own private study use only. Goodwill relating to a business is unique. ACCA P2 Corporate Reporting Revaluation Default accounting policy is simple historical costs.ExPress Notes     Impairments Recognise any losses in profit. If choose to revalue a non-current asset. unless to reverse any previous upwards revaluation shown in equity.com   . Other cost (eg repair of hardware) must be expensed immediately. Additions Further costs must be added to the asset’s value if the cost enhances the earningsgenerating potential of the asset above its original specification. and prices are available to the public. See notes on IAS 36 impairments. Active markets in intangibles are therefore rare so it is rare for intangibles to be revalued upwards. These course materials are for educational purposes only and so are necessarily simplified and summarised. No liability for damage arising from use of these notes will be accepted by the ExP Group. Reproduction by any means for any other purpose is prohibited. Refer to our full terms and conditions of use.

These course materials are for educational purposes only and so are necessarily simplified and summarised. See notes on business combinations. Always obtain expert advice on any specific issue.ExPress Notes     Goodwill on a business combination Fair value of consideration transferred Less: Fair value of identifiable net assets acquired. calculated as: Capital and share premium of target Reserves of target at acquisition date Net assets (equity) of target at target’s book value Fair value adjustments to target’s net assets Net assets (equity) of target at fair value X % acquired Goodwill arising in books of parent for consolidation X X X X/(X) X (X) X X ACCA P2 Corporate Reporting This figure may then be “grossed up” to full goodwill. Reproduction by any means for any other purpose is prohibited. Individuals may reproduce this material if it is for their own private study use only.   theexpgroup.com   . Page | 55 © 2012 The ExP Group. No liability for damage arising from use of these notes will be accepted by the ExP Group. Refer to our full terms and conditions of use.

since this would violate the Framework definition of an asset. Refer to our full terms and conditions of use.com   . CGUs exist since individual assets often do not generate cash inflows on their own. No liability for damage arising from use of these notes will be accepted by the ExP Group. Reproduction by any means for any other purpose is prohibited.   theexpgroup.ExPress Notes     Chapter 11 ACCA P2 Corporate Reporting IAS 36 START The Big Picture An asset cannot be shown in the SOFP at a valuation greater than the economic benefits it’s expected to generate.     Key workings/ methods       Cash generating unit A cash generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Individuals may reproduce this material if it is for their own private study use only. In practical terms. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Page | 56 © 2012 The ExP Group. it’s the smallest group of assets which together could be a going concern.

Always obtain expert advice on any specific issue. even if there is no indicator of impairment. No liability for damage arising from use of these notes will be accepted by the ExP Group. Refer to our full terms and conditions of use. Over a period of five years. not “real” rate. Using the latest general market risk-free interest rate. Determining impaired value The value in use is calculated using the NPV of expected future net cash flows (profit before interest and tax) from the asset:  In its current condition (ie not allowing for expected enhancements). Mutually compatible. Page | 57 © 2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. unless a longer period can be justified by reference to past accuracy in budgeting income streams longer than five years.ExPress Notes   ACCA P2 Corporate Reporting   Any asset which appears to have been impaired must be reviewed for an impairment.   theexpgroup. they must be discounted at an appropriate “money” discount rate. then charge to profit. Reporting impairment losses: individual assets Reverse any prior revaluation gain in equity (other comprehensive income). Impairment indicators: internal to the business include:    Change in intended use Poor performance Physical damage. eg if future cash flows are “money” flows including expected inflation. with any loss recognised as given below. These course materials are for educational purposes only and so are necessarily simplified and summarised. Foreign currency cash flows must be translated at the spot rate on the date of the impairment review.com   . Reproduction by any means for any other purpose is prohibited.      Impairment indicators: external to the business include:     Decline in market value Adverse technological or environmental changes Long-term increase in interest rates Obsolescence. Expected revenue less costs necessarily incurred to generate that revenue. although there is no prohibition on considering the most profitable potential use of the asset in its current condition (eg switching from making product X to product Y). Assets with a finite but indefinite life (eg purchased goodwill) must be reviewed for impairment each period.

then Other assets pro rata to value but never impair an asset below its potential net sales value. Refer to our full terms and conditions of use. Always obtain expert advice on any specific issue. to a minimum value of zero.   theexpgroup. BUT impaired goodwill can never be reversed. ie do not recognise internally generated negative goodwill. ACCA P2 Corporate Reporting Reversal of impairments This is possible if the circumstances creating the impairment no longer exist. No liability for damage arising from use of these notes will be accepted by the ExP Group. as the rational thing would be to sell an asset if it appears to have a higher value to somebody else than it does to the current owner.com   . then Goodwill attributable to the CGU. which is normally as a credit to profit. Individuals may reproduce this material if it is for their own private study use only. These course materials are for educational purposes only and so are necessarily simplified and summarised. Page | 58 © 2012 The ExP Group. The reversal would be reported wherever the initial impairment had been recorded. Reproduction by any means for any other purpose is prohibited.ExPress Notes     Reporting impairment losses: cash generating unit    Any assets physically damaged or otherwise specifically impaired.

The rules are different depending upon whether a sale is for goods or for services. Always obtain expert advice on any specific issue. but can come up as longer parts of Section B questions. The key issue is commercial substance over legal form. most frequently as adjustments in question 1. These course materials are for educational purposes only and so are necessarily simplified and summarised. Goods  Recognise revenue when most of the more important inherent risks and rewards of the goods have passed from the seller to the buyer. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. Refer to our full terms and conditions of use.com   . No liability for damage arising from use of these notes will be accepted by the ExP Group.ExPress Notes     Chapter 12 ACCA P2 Corporate Reporting IAS 18 START The Big Picture Adjustments for revenue recognition often appear in the exam. This might well be earlier or later than when legal title passes or when payment occurs.  Page | 59 © 2012 The ExP Group.   theexpgroup.

Where a service is paid for up front.ExPress Notes     Services  Recognise revenue as the costs of providing the service are incurred.000) 27. Always obtain expert advice on any specific issue. Reproduction by any means for any other purpose is prohibited. recognise this as: $ Total sales value Less: Market value of three year servicing agreement (to be recognised over 3 years) Value of goods sold (recognise immediately) (3. These course materials are for educational purposes only and so are necessarily simplified and summarised. ACCA P2 Corporate Reporting Valuation of revenue If sales are made with long-term payment terms. Refer to our full terms and conditions of use. revenue often must be deferred as a liability in the SOFP until the revenue is earned. recognise the sale and the receivable at its net present value using an appropriate discount rate. No liability for damage arising from use of these notes will be accepted by the ExP Group.000 Page | 60 © 2012 The ExP Group. then unbundle into separate components.com   . This then shows finance income over time.   theexpgroup.     EXAMPLE   If a car is sold for $30. Individuals may reproduce this material if it is for their own private study use only.000 30. Bundled sales Where goods are sold with serviced bundled (eg after-sales servicing for two years).000 with three years of free servicing.

They are normally simply corrected the following year with the following year taking the profit and loss effect of the correction.com   . It is normal for estimates to be wrong. These course materials are for educational purposes only and so are necessarily simplified and summarised. Reproduction by any means for any other purpose is prohibited.   theexpgroup. Accounting estimates    Normal Expected Affects profit of the year discovered Accounting errors ≠     Not normal Possibly careless Adjust prior year Normally no effect on profit in the year the error is discovered Page | 61 © 2012 The ExP Group. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group. Individuals may reproduce this material if it is for their own private study use only. Always obtain expert advice on any specific issue. such as:    Depreciation method (estimate of how assets generate a revenue stream) Provisions Tax payable for the year.ExPress Notes     Chapter 13 ACCA P2 Corporate Reporting IAS 8 START The Big Picture Preparation of financial statements involves inclusion of many accounting estimates.

To make a general accounting error is to be careless! Accounting errors are corrected by amending the previously issued financial statements of the previous year. Refer to our full terms and conditions of use.ExPress Notes     Accounting estimates and treatment of changes   Changes in accounting estimates result from new information or new developments and.   theexpgroup. Changes in accounting estimates are simply absorbed the following period as an expense (or income) in that following period. accordingly. meaning that there is not normally a profit effect in the current year when the error is discovered.com   . Always obtain expert advice on any specific issue. To make an error in an accounting estimate is to be human. ACCA P2 Corporate Reporting Accounting errors (prior period errors) These are errors and omissions the entity’s financial statements for prior period(s) arising from a failure to use reliable information that:   was available when financial statements for those periods were authorised for issue and could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements. Individuals may reproduce this material if it is for their own private study use only. No adjustment is made to the previously published financial statements of the previous period. are not corrections of errors. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. No liability for damage arising from use of these notes will be accepted by the ExP Group. Page | 62 © 2012 The ExP Group.

It’s generally better for investors and all other stakeholders to allow a business to restructure and be given an opportunity for a fresh start. The business goes bankrupt and a new entity takes over its viable assets in a liquidation. such as having large retained losses.ExPress Notes     Chapter 14 ACCA P2 Corporate Reporting Equity reconstructions     START The Big Picture Where an entity has become technically insolvent. or 2. there may be serious difficulties including:    Going concern being in doubt due to unsustainable cash outflow Inability to pay dividends before retained losses are made up Inability to raise new finance. ISA 570 assesses going concern indicators under the headings:    Financial Operating Other (eg legal and regulatory). Always obtain expert advice on any specific issue. There is a heavy overlap here with papers F8 and P7. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited.   theexpgroup.com   . The business obtains approval of the law courts and providers of finance to restructure its operations. Refer to our full terms and conditions of use. Where an entity’s going concern status is threatened due to uncertainty in its financing structure. These course materials are for educational purposes only and so are necessarily simplified and summarised. The syllabus for paper P2 requires that you be able to identify when an entity may no longer be a going concern. rather than to go bankrupt. but the underlying business appears to have potential to become stable. No liability for damage arising from use of these notes will be accepted by the ExP Group. Page | 63 © 2012 The ExP Group. there are two possible outcomes that commercially would happen: 1.

Reconstruction account Impairment of assets Retained earnings (losses) X X Oldco ordinary capital Oldco preference capital Oldco debentures Oldco payables Net worth c/d X Revaluation reserve (including any new revaluations) X X X X X Page | 64 © 2012 The ExP Group. All existing finance is extinguished and replaced with the new finance. ACCA P2 Corporate Reporting     Legally. No liability for damage arising from use of these notes will be accepted by the ExP Group. This approval is likely to be given if the court is satisfied that the scheme is a viable alternative to liquidation.ExPress Notes     Mechanics of a reconstruction The exact mechanism of a financing reconstruction vary greatly between legal systems. If this vote is passed. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. For accounting purposes.com   . The assets and liabilities are all revalued and the old company transferred to a new company. Agreement of at least 75% of each class of provider of finance must be obtained. with novation of all contracts. assumption of old company liabilities and continuity of employment contracts. This is normally done by a reconstruction account. The scheme then has to be approved by a court of law. the easiest way to do this is to retain the existing general ledger but record the replacement of the “old” company’s financing with the new company’s financing. each group needs to be convinced that they will be at least as well off under the proposed scheme than if the company were to be liquidated (see below). all providers of finance are bound by the reconstruction scheme.   theexpgroup. These course materials are for educational purposes only and so are necessarily simplified and summarised. This means that although a new company is taking on assets and liabilities from a legally separate old company. Individuals may reproduce this material if it is for their own private study use only.    A meeting of all the shareholders and creditors is convened. the general ledger recording continues as if it were always the same company. The following is based on Part 26 of the UK Companies Act 2006. Reproduction by any means for any other purpose is prohibited. the old entity is destroyed and a new entity created that takes on all the assets and liabilities (including trade name. etc) of the old business. A scheme of arrangement is provided to the providers of finance. In practice.

Always obtain expert advice on any specific issue. as they have little to lose. Unpaid preference dividends 7. it will be necessary to ensure that each finance provider is at least as well off under the transfer of the old company’s assets to the new company. Providers of equity finance are probably the easiest to please with the reconstruction. No liability for damage arising from use of these notes will be accepted by the ExP Group. The order is typically: 1.   theexpgroup. Other creditors ranked pari passu 6. VAT. (end of ExPress Notes) Page | 65 © 2012 The ExP Group.com   . Remember that each provider effectively has a right to veto a reconstruction. Preferred creditors (eg staff holiday pay. it’s necessary to understand the order in which insolvency law typically pays out assets on liquidation of a business. Preference capital 8. Debentures secured with a fixed charges. These course materials are for educational purposes only and so are necessarily simplified and summarised. Refer to our full terms and conditions of use. in date order of creation of fixed charges 4. taxes) 3. To get this. so for knock down prices. Ordinary capital.ExPress Notes     ACCA P2 Corporate Reporting XX Net worth b/d Newco ordinary capital Newco preference capital Newco debentures Newco payables X X X X XX X XX Selling the plan! XX In order to obtain the 75% or more approval of each class of provider of finance. Reproduction by any means for any other purpose is prohibited. Debentures secured with floating charges. it is generally best to list all the providers of finance and assess how much they are likely to receive from a liquidation and how much they are likely to receive from the reconstruction. so everybody will need to be better off. Fees of the lawyer/ liquidator (often described by the misleading euphemism of “costs”) 2. It is therefore unlikely that much money will be left over to pay much more than the preferred creditors. If you are required to assess whether a proposed reconstruction is likely to succeed. The fees of a liquidator are often substantial and the assets will be sold in a hurry. Individuals may reproduce this material if it is for their own private study use only. in date order of creation of floating charges 5.

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