ACCA P2 UK Supplement 2013

IFRS/UK differences – Paper P2 2013
There are no examinable differences relating to topics in chapters 1, 2 and 3
Chapter 4 Non-current assets

Frequency of valuation
IAS 16 requires that revaluations are made with sufficient regularity that the carrying amount does not
differ materially from fair value at the year end. In UK GAAP, FRS 15 Tangible fixed assets sets out a more
prescriptive timescale for revaluations.
FRS 15 General rule

The valuation of properties should be carried out on the basis of a 5 year cycle.
(a) A full valuation every 5 years
(b) An interim valuation in year 3 of the five-year cycle.
(c) An interim valuation also in years 1, 2 and 4 of the five-year cycle should also be done where it is
likely that there has been a material change in value.
Valuers
FRS 15 specifies who may carry out a full valuation.
(a) A qualified external valuer (eg a surveyor, who is independent of the company), or
(b) A qualified internal valuer, but subject to review by a qualified external valuer.
An interim valuation may be done by an internal or external, qualified valuer.
Other tangible fixed assets

For certain types of assets (other than properties) eg company cars, there may be an active second hand
market for the asset or appropriate indices may exist, so that the directors can establish the asset's value
with reasonable reliability and therefore avoid the need to use the services of a qualified valuer.
For an index to be appropriate:
(a) It must be appropriate to the class of asset, its location and conditions.
(b) It must take into account the impact of technological change.
(c) It must have a proven track record of regular publication.
(d) It is expected to be available in the foreseeable future.
Such valuations must be performed every five years, and also in the intervening years where there has
been a material change in value.
Paper P2 UK GAAP Supplement 2013 1

Valuation bases
If a policy of revaluation is adopted under IAS 16, the basis of valuation is ‘fair value’. This generally
means that open market values are used. FRS 15 specifies a number of different bases, depending on the
nature of the asset and whether it will continue to be used by the business.
Ke
y Replacement cost. The cost at which an identical asset could be purchased or constructed.
ter
ms Depreciated replacement cost. Replacement cost with appropriate deduction for age, condition and
obsolescence.
Recoverable amount. The higher of net realisable value and value in use.
Net realisable value. The amount at which an asset could be disposed of, less any direct selling costs.
Value in use. The present value of future cash flows obtainable as result of an asset's continued use,
including those resulting from ultimate disposal.
Open market value. The best price that could be obtained between a willing seller and a knowledgeable
buyer, assuming normal market conditions.
Existing use value. As for open market value, except that value is based on the assumption that the
property can be used for the foreseeable future only for its existing use.
The following valuation bases should be used for properties that are not impaired.
TYPE BASIS
Specialised properties  These should be valued on the basis of depreciated
replacement cost.
 Specialised properties are those which, due to their
specialised nature, there is no general market in their
existing use or condition, except as part of a sale of the
business in occupation. Eg oil refineries, hospitals, chemical
works, power stations, schools, colleges and universities
where there is no competing market demand from other
organisations using these types of property in the locality.
 The objectives of using depreciated replacement cost is to
make a realistic estimate of the current cost of constructing an
asset that has the same service potential as the existing asset.
Non-specialised properties  These should be valued on the basis of existing use value
(EUV), plus notional directly attributable acquisition costs
where material.
Properties surplus to an entity's  These should be valued on the basis of open market value
requirements (OMV) less expected direct selling costs where these are
material. They may be specialised or non-specialised
properties.
 The assumption supporting the specified accounting treatment
is that they will be sold.
Where there is an indication of impairment, an impairment review should be carried out in accordance with
FRS 11. The asset should be recorded at the lower of revalued amount (as above) and recoverable amount.
Tangible fixed assets other than properties should be valued using market value or, if not obtainable,
depreciated replacement cost.
2 Paper P2 UK GAAP Supplement 2013

Remember the decision to adopt a policy of revaluation of tangible fixed assets is discretionary. Do
not confuse this with other scenarios where the carrying value of a fixed asset should be adjusted:
(a) FRS 15 rule that:
'if the amount recognised when a tangible fixed asset is acquired or constructed exceeds its
recoverable amount, it should be written down to its recoverable amount.'
(b) FRS 11 response to indications of impairment that requires:
'A review for impairment of a fixed asset (or goodwill) should be carried out if events or
circumstances indicate that the carrying amount of the fixed asset (or goodwill) may not be
recoverable.'
In certain circumstances, a loss arising on revaluation is effectively tantamount to an impairment loss.
However, you must remember that this arises from the revaluation policy route rather than the indications
of impairment route.
Reporting gains and losses on revaluations

General points
A revaluation gain or loss arises when there is a difference between the valuation of a tangible fixed asset
when compared to its carrying amount.
Revaluation gains and losses are dealt with through either:
(a) Profit and loss account; or
(b) Statement of total recognised gains and losses (STRGL)
This will depend on the underlying scenarios, which are explored below.
Note: the STRGL is the UK equivalent of the ‘other comprehensive income’ section of the statement of
comprehensive income under IFRS. In the exam you are not expected to prepare the STRGL so you do not
need a detailed knowledge of its layout.
The key difference to note in respect of the treatment of gains and losses is that FRS 15 has a separate
rule for losses resulting from clear consumption of economic benefits, which does not exist in IAS 16.

Tangible fixed asset revalued upwards
Gain Treatment of gain
Asset not previously revalued  Gain credited to revaluation reserve.
 Reported in STRGL.
Asset previously revalued upwards  Gain credited to revaluation reserve.
 Reported in STRGL.
Asset subjected to previous revaluation loss  Portion of gain that in effect reverses the prior
revaluation losses should be credited to profit
and loss account, ie restores the asset to its
depreciated historical cost.
 Any gain in excess of the above should be
credited to revaluation reserve and reported
via STRGL.
Tangible fixed asset revalued downwards

Loss Treatment of loss
Loss clearly due to consumption of economic All of the loss must be debited to profit and loss
benefits eg physical damage or deterioration in account. It does not matter that the asset
quality of goods or services provided by the asset. involved might have been previously revalued
upwards. (FRS 15 suggests that this is really an
impairment loss)
Losses owing to other causes than the above. These losses should be recognised in the
Asset previously revalued upwards. following order.
(a) In STRGL until the carrying amount reaches
depreciated historical cost.
(b) In the profit and loss account.
Losses owing to other causes than top item above. These losses should be recognised in the profit
Asset not previously revalued upwards. and loss account.
Depreciation on revalued assets

Where an asset has been revalued, the depreciation charge is based on the revaluation amount, less
residual value, from the date of revaluation.
The asset's residual value should also be re-estimated on revaluation, based on values prevailing at that
date.
This approach entails two different and conflicting issues.

(a) The profit and loss account bears the cost of the economic benefits consumed, as measured by the
enhanced depreciation charge based on the revalued figure for the tangible fixed asset.
(b) Distributable profits should not be prejudiced by the additional depreciation caused by the
revaluation.
The remedy to this problem is to make an annual transfer from revaluation reserve to profit and loss
account covering the amount for the additional depreciation caused by the revaluation. This is permitted
by Companies Act and also represents best practice.

The principles of the differences relating to revaluations are within the scope of paper F7. In paper P2 you
could be asked to produce more detailed calculations.
Example 1: Accounting for revaluation losses

The following details are available in relation to a non specialised property.
Carrying value $960,000
Depreciated historic cost $800,000
Recoverable amount $760,000
Existing use value $700,000
How should the revaluation loss be treated under FRS 15?
Solution
(a) The revaluation loss on the property is $260,000 (ie carrying value of $960,000 compared with
EUV of $700,000).
(b) The fall in value from carrying value ($960,000) to depreciated historic cost ($800,000) of
$160,000 is recognised in the STRGL.
(c) The fall in value from depreciated historic cost ($800,000) to recoverable amount ($760,000) of
$40,000 is recognised in the profit and loss account.
(d) The difference between recoverable amount ($760,000) and EUV ($700,000) is recognised in the
STRGL.
Borrowing costs
Finance costs directly attributable to the construction of a fixed asset may be capitalised if it is company
policy to do so. However, this policy must be applied consistently.
All finance costs that are directly attributable to the construction of a tangible fixed asset should be
capitalised as part of the cost of the asset.
Directly attributable finance costs are those that would have been avoided if there had been no
expenditure on the asset.
Note that this is different to the rule under IAS 23, where directly attributable finance costs must be
capitalised. In other respects, capitalisation of borrowing costs is treated the same under UK GAAP as
under IFRS.
Intangible fixed assets
SSAP 13 Accounting for research and development

Definitions
 Pure/basic research is experimental/theoretical work with no commercial end in view and no
practical application.
 Applied research is original investigation directed towards a specific practical aim/objective.
 Development is the use of scientific/technical knowledge in order to produce new/substantially
improved materials, devices, processes etc.
Accounting treatment
 Pure and applied research should be written off as incurred.

 Development expenditure should be written off in year of expenditure, except in certain
circumstances when it may be deferred to future periods.
S Separately defined project
E Expenditure separately identifiable
C Commercially viable
T Technically feasible
O Overall profit expected
R Resources exist to complete the project
The key differences between SSAP 13 and IAS 38 are:
(1) Deferral of expenditure that meets the criteria is a choice, not a requirement as under IFRS.
(2) SSAP 13 requires the expenditure to be ‘separately defined’ and ‘separately identifiable’. These
requirements do not exist under IFRS.
Goodwill: Introduction
Accounting treatment of purchased goodwill

(a) Goodwill is an asset which at the date of acquisition has a definite value to the business.
(b) This asset is a measure of the extent to which the earnings of the purchased business will exceed
those which could be expected from the use of its identifiable assets. Consequently, it should be
capitalised and amortised so as to match costs against income (the accruals concept). This is
the view adopted by FRS 10 Goodwill and intangible assets.
(a) Purchased goodwill should be capitalised and classified as an asset on the balance sheet.
(b) It should be amortised on a systematic basis over its useful economic life.
Negative goodwill
Negative goodwill arises when the price paid for a business is less than the fair value of the separable net
assets acquired, for example, if the vendor needed cash quickly and was forced to sell at a bargain price.
FRS 10 Goodwill and intangible assets

FRS 10 states that purchased, positive goodwill and purchased intangible assets or internally-developed
intangible assets which have a readily ascertainable market value should be capitalised and amortised
over their useful economic life. This clearly differs from the treatment of goodwill under IFRS 3 which
does not allow amortisation and requires annual impairment reviews.
Objective of FRS 10
The objectives stated by FRS 10 are to ensure that:
(a) Capitalised goodwill and intangible assets are charged in the P&L account as far as possible in
the periods in which they are depleted.
(b) Sufficient information is disclosed in the financial statements to enable users to determine the
impact of goodwill and intangible assets on the financial position and performance of the
reporting entity.

Amortisation
FRS 10 states that, where goodwill and intangible assets are regarded as having limited useful economic
lives they should be amortised on a systematic basis over those lives.
FRS 10 gives little guidance on how to predict an asset's useful economic life, which can be very
difficult for goodwill and intangibles as it is impossible to see them actually wearing out. It does,
however, give examples of relevant considerations, which include certain economic and legal factors
relating to the asset. An intangible may, for example, be linked to a product with a specific lifespan, or
there may be time periods attached to legal rights (eg patents). It may also be necessary to look at the
nature of the business and of the market in which it operates.
There is a basic assumption that the useful economic lives of purchased goodwill and intangible assets
are limited to periods of 20 years or less. However, this presumption may be rebutted and a useful
economic life regarded as a longer period or indefinite only if:
(a) The durability of the acquired business or intangible asset can be demonstrated and justifies
estimating the useful economic life to exceed 20 years.
(b) The goodwill or intangible asset is capable of continued measurement (so that annual impairment
reviews will be feasible).
The circumstances where an indefinite useful economic life longer than 20 years may be legitimately
presumed are limited.
What factors determine the durability of goodwill?
FRS 10 mentions the following.
(a) The nature of the business
(b) The stability of the industry in which the acquired business operates
(c) Typical lifespans of the products to which the goodwill attaches
(d) The extent to which the acquisition overcomes market entry barriers that will continue to exist
(e) The expected future impact of competition on the business
Uncertainty about the length of the useful economic life is not a good reason for choosing one that is
unrealistically short or for adopting a 20 year useful economic life by default.
In amortising an intangible asset, a residual value may be assigned to that asset only if such residual
value can be measured reliably. In practice, the residual value of an intangible asset is often
insignificant.
No residual value may be assigned to goodwill.
The method of amortisation should be chosen to reflect the expected pattern of depletion of the goodwill
or intangible asset. A straight-line method should be chosen unless another method can be
demonstrated to be more appropriate.
Whatever the useful economic life chosen, the company should be able to justify it. It should be
reviewed annually and revised if appropriate.

Impairment review
In addition to the amortisation, the asset should be reviewed for impairment:
(a) At the end of the first full financial year following the acquisition ('the first year review').
(b) In other periods if events or changes in circumstances indicate that the carrying values may not
be recoverable.
Goodwill and intangible assets that are amortised over a period exceeding 20 years from the date of
acquisition should be reviewed for impairment at the end of each reporting period.
Where the impairment review indicates a diminution in value, the goodwill and intangible assets must be
written down accordingly. The revised carrying value should be amortised over the current estimate of
the remaining useful economic life.
Assets with an indefinite useful economic life

No amortisation
Where goodwill and intangible assets are regarded as having indefinite useful economic lives, they
should not be amortised.
'Indefinite' is not the same as 'infinite', it means merely that no limit can be fixed for it.
If the option not to amortise is taken, this constitutes a departure from the Companies Act and will need to
be justified by invoking the true and fair override. Statutory Instruments 409 and 410 contain a
requirement to amortise goodwill).
Impairment review
Goodwill and intangible assets that are not amortised (because their useful economic life is deemed to be
indefinite) should be reviewed for impairment at the end of each reporting period.
If an impairment loss is recognised, the revised carrying value, if being amortised, should be amortised
over the current estimate of the remaining useful economic life.
If goodwill arising on consolidation is found to be impaired, the carrying amount of the investment held
in the accounts of the parent undertaking should also be reviewed for impairment.
The emphasis on impairment reviews is a key feature of FRS 10. The ASB believes that a formal
requirement to monitor the value of acquired goodwill and intangible assets using standardised methods
and to report any losses in the financial statements will enhance the quality of the information provided
to users of financial statements.
Negative goodwill
How negative goodwill arises
Negative goodwill arises when the fair value of the net assets acquired is more than the fair value of the
consideration. In other words, the investor has got a bargain.
Subsequent accounting treatment

FRS 10 states that to ensure that any negative goodwill is justified:
(a) The investee's assets should be checked for impairment
(b) The liabilities checked for understatement.
Under IFRS 3 this gain on a bargain purchase is taken immediately to profit or loss. Under FRS 10 the
treatment is very different.

It is disclosed in the intangible fixed assets category, directly under positive goodwill, ie as a 'negative
asset'. A sub-total of the net amount of positive and negative goodwill should be shown on the face of the
balance sheet.
This presentation may seem a little odd. However, the ASB argues that negative goodwill does not meet
the definition of a liability under the Statement of Principles and that this treatment is consistent with that
of positive goodwill.
Transfers to profit and loss account

Negative goodwill should be recognised in the profit and loss account in the periods when the non-
monetary assets acquired are depreciated or sold.
There are two important points to note.
(a) It would be strange for the investor to pay less than its fair value for the monetary items acquired.
The value of cash, for example, is pretty universal. Therefore, it is more likely that the negative
goodwill represents a shortfall in the value of the non-monetary items.
(b) The benefit of the 'bargain' of getting these non-monetary items at less than fair value will only be
realised when the non-monetary items themselves are realised.
[ie it is the non-monetary assets (fixed assets, stock etc) that have been bought on the cheap, effectively
at a discount (negative goodwill). Therefore, carry the discount (negative goodwill) in the balance sheet
until the relevant assets are sold, or depreciated. Then transfer the relevant chunk of discount (negative
goodwill) from the balance sheet to the profit and loss account.]
Hence, any negative goodwill should be credited to the profit and loss account only when the non-
monetary assets themselves are realised, and this is when they are either depreciated or sold.
FRS 10 also requires any remaining goodwill in excess of fair values of the non-monetary assets
acquired should be recognised in the profit and loss account in the periods expected to benefit.
Question Negative goodwill
Kewcumber plc acquired its investment in Marrow Ltd during the year ended 31 December 20X8. The
goodwill on acquisition was calculated as follows.
£'000 £'000
Cost of investment 400
Fair value of net assets acquired (remaining useful life – 7 years)
Fixed assets 700
Stock 100
Non-monetary assets 800
Net monetary assets 200
(1,000)
Negative goodwill (600)
Required
Calculate the amount relating to negative goodwill as reflected in the profit and loss account and balance
sheet for the year ended 31 December 20X8. You should assume that all of the stock was sold before
31 December 20X8.

Answer
Amortisation in the profit and loss account for 20X8
Non-monetary assets recognised through the profit and loss account for the year ended 31 December 20X8:
£'000
Stock (all sold) 100
Depreciation (£700,000  7) 100
Non-monetary assets recognised this year 200
Total non-monetary assets at acquisition 800
 Proportion recognised this year ¼
Hence:
£'000
Negative goodwill arising on acquisition 600
Proportion released to profit and loss account for year to 31.12.X8 (¼) (150)
Balance at 31.12.X8, shown on balance sheet as deduction from positive goodwill 450
The balance of £450,000 will be carried forward and released into the profit and loss account over the next
6 years at £75,000 per annum, ie in the periods expected to be benefited.
Impairments
FRS 11 Impairment of fixed assets and goodwill

In outline, there are many similarities between FRS 11 and IAS 36 but there are several differences of
detail.
Impairment losses on assets carried at historical cost

The impairment should be recognised as an expense in the profit and loss account.
Impairment losses on revalued fixed assets

The general rule is that impairment losses on revalued fixed assets should be recognised in the
statement of total recognised gains and losses until the carrying value of the asset reaches its
depreciated historical cost with any further impairment recognised in the profit and loss account.
However, there may be specific circumstances where the impairment is clearly caused by a consumption
of economic benefits, eg damage, in which case the loss is recognised in the profit and loss account. ie
such impairments are regarded as additional depreciation rather than as a decline in value.
The key difference to be aware of here is that FRS 11 requires all impairments that result from
consumption of economic benefits to be recognised in the profit and loss account irrespective of whether
the asset had previously been revalued.
Allocation of impairment on an Income Generating Unit (IGU)

You have seen how impairments are calculated on cash generating units (CGUs) under IFRS. The same
principle exists in FRS 11 but is known as an ‘income generating unit. There is also a difference in the
order in which impairments are allocated to the various assets within the IGU.
Where the recoverable amounts of fixed assets can be estimated individually, these assets should be
written down to their individual recoverable amounts then any impairment loss calculated (ie where
carrying amount exceeds value in use) for the IGU should be allocated:

(a) First, to any goodwill in the unit.
(b) Thereafter to any capitalised intangible asset in the unit.
(c) Finally, to the tangible assets in the unit (pro-rata or other method).
The rationale behind the above allocation is to write down the assets with the most subjective valuations
first.
No intangible asset with a readily ascertainable market value should be written down to below NRV.
Similarly, no tangible asset with a reliably measured net realisable value should be written down below its
NRV.
Question Loss allocation
Nutrinitious Foods Limited has suffered an impairment loss of $90,000 on one of its income generating
units because low market entry barriers has enabled competitors to develop and successfully market rival
products.
The carrying value of net assets in the income generating unit, before adjusting for the impairment loss
are as follows:
$'000
Goodwill 50
Patent (with no market value) 10
Land and buildings 120
Plant and machinery 60
240
Demonstrate how the impairment loss of $90,000 should be allocated under FRS 11 and explain how this
differs from the treatment that would be required under IAS 36.
Answer
$'000
Remember the batting order is:
 Goodwill 50
 Capitalised intangible fixed assets 10
 Tangible fixed assets, on a pro-rata basis 30
90
Hence:
Pre-impairment Impairment Post-
loss impairment
$'000 $'000 $'000
Goodwill 50 (50) –
Patent 10 (10) –
120
Land and buildings (30 × ) 120 (20) 100
180
Plant and machinery (30 × 60 ) 60 (10) 50
180
240 (90) 150
This allocation is different to International. IAS 36 allocates the loss first to goodwill and then pro-rata to
other non-current assets. It makes no distinction between tangible and intangible assets.

Comprehensive example: revaluation
Rymachines plc is a manufacturing company with a number of separate factories scattered around
England, and its head office in York. The chief accountant, Arthur Isation, is concerned about the effect on
their figures for the year ending 31 December 20X7 of various transactions involving fixed assets. He has
come to you with the following information.
(a) A revaluation exercise took place on 1 July 20X7. Items of plant that originally cost $80,000 on 1
January 20X5 were revalued to $97,500. The plant was, and still is, being depreciated down to zero
over a ten year period from new.
(b) They are rather concerned regarding their ability to replace a specific type of machine because the
price has risen so dramatically. With this in mind, Arthur would like to charge extra depreciation of
$25,000 to 'retain more in the business to enable them to replace assets at the higher prices'.
(c) The useful lives of one group of plant has been revised downwards as follows:
Plant costing $140,000 is 3 years old at the balance sheet date, and was originally to be
depreciated over 7 years. The machinery is not surviving as well as hoped and it is now envisaged
that it will be worthless in two years time.
(d) The company operates a factory in Wiltshire which has suffered a decline in its volume of business
since a Czech competitor company began marketing its products in England. None of the other
businesses of Rymachines plc are affected.
The summarised balance sheet of this division shows:
$'000
Goodwill 100
Tangible fixed assets 420
Other net assets (excluding tax and financing) 110
630
The future cash flows of the division have been estimated and discounted using a risk-adjusted
interest rate to give a value in use for the division as a whole of $390,000.
There is no realistic prospect of selling the business as a going concern. The fixed assets could be
sold for $265,000 and the related costs would amount to $15,000. The other net assets would be
expected to realise their carrying value.
Required
Draft notes in preparation for a meeting with Mr Isation explaining the accounting treatment required in
respect of each of the points raised.
Solution
Notes for meeting with Arthur Isation, chief accountant of Rymachines plc on treatment of fixed assets.
(a) Revaluation of plant
Depreciation charge in the profit and loss account for the period should be based on the carrying
amount of the asset in the balance sheet. FRS 15 stresses the importance of the entire amount
being charged through profit and loss account for the year.

Rymachines have revalued mid year, hence the appropriate depreciation charge for the year will be
(assuming depreciation calculated on a monthly basis):
$
80,000 6
1st 6 months  = 4,000
10 12
97,500 6
2nd 6 months  = 6,500
7.5 12
Charge for the year 10,500
Note that this is $2,500 higher than if no revaluation had taken place and this should be disclosed if
material.
The revaluation as at 1 July 20X7 will amount to (97,500 – (80,000
should be credited to a revaluation reserve.
Best practice would be to transfer an amount equivalent to the excess depreciation on the revalued
amount from revaluation reserve to profit and loss account as the revaluation reserve in effect
becomes realised.
(b) Supplementary depreciation
Supplementary depreciation, namely that in excess of the depreciation based on the carrying
amount of the assets, should not be charged in the profit and loss account. This does not,
however, preclude the appropriation of retained profits to, for example, a reserve specially
designated for replacement of fixed assets.
The additional $25,000 should not be accounted for as conventional depreciation. The depreciation
charge must be based on the balance sheet carrying amount, and the additional $25,000 should
merely be an intra reserves transfer ie from profit and loss account reserve to a plant replacement
reserve.
(c) Revision of useful lives
When, as a result of experience or of changed circumstances, it is considered that the original
estimate of the useful economic life of an asset requires revision, the effect of the change in
estimate on the results and financial position needs to be considered.
It would appear that the estimate of future useful life is being made at the balance sheet date, which
would involve a normal $20,000 charge in respect of the year just finished (year ended 31
December 20X7), and a charge for the remaining two years of estimated useful life of
(140,00060,000)
 £40,000
2
(d) Under FRS 11, where there is an indication that an impairment has occurred a review must be
carried out to establish whether the recoverable amount is less than the carrying value of the
assets.
The recoverable amount (usually calculated for an income generating unit rather than an individual
asset) is defined as the higher of
(i) net realisable value (265,000 – 15,000 +110,000) $360,000
(ii) value in use (ie discounted future cash flows) $390,000
Therefore the assets must be adjusted for an impairment of $240,000, allocated as follows:
$100,000 to goodwill
$140,000 to tangible fixed assets.
The total will be charged as part of operating profit and disclosed as an exceptional item. (This
assumes that none of the tangible fixed assets have been revalued, otherwise the impairment of
$140,000 could have been charged to the revaluation reserve until the carrying value equalled
depreciated historical cost and thereafter to the profit and loss account).

Goodwill
Under FRS 11 the reversal of an impairment loss on intangible assets and goodwill should be recognised
in the current period if, and only if:
(a) an external event caused the recognition of the impairment loss in previous periods, and
subsequent external events clearly and demonstrably reverse the effects of that event in a way that
was not foreseen in the original impairment calculations; or
(b) the impairment loss related to an intangible asset with a readily ascertainable market value and the
net realisable value based on that market value has increased to above the intangible asset's
impaired carrying amount.
The reversal of the impairment loss should be recognised to the extent that it increases the carrying
amount of the goodwill or intangible asset up to the amount that it would have been had the original
impairment not occurred. However, the reversal of an impairment loss recognised under (b) above should
not be recognised beyond the extent that it increases the carrying amount of the intangible asset to its
net realisable value.
IFRS specifically prohibits reversal of an impairment loss for goodwill. Realistically reversals of
impairments for goodwill will be very rare under UK GAAP. Goodwill does not have a readily ascertainable
market value, and there will be very few situations where the original goodwill recovers its value, as
opposed to new goodwill being created.
Accounting for investment properties

You have learned that under IAS 40, entities choose between:
(a) the cost model; or
(b) the FV model
for all of their investment properties.
Under IAS 40, gains and losses on investment properties carried at fair value go to profit or loss.
The UK GAAP accounting treatment is governed by SSAP 19 Accounting for investment properties and
can be summarised as:
 investment properties are not depreciated, except where a leasehold has an unexpired term of less
than 20 years
 revalued every year to open market value
 increases in value are taken to the investment revaluation reserve (IRR)
 for diminutions in value:
– permanent diminutions are charged to the profit and loss account
– temporary diminutions are charged to the IRR even if this produces a temporary deficit on
that account
Notice that SSAP 19 gives no choice, investment properties must be carried at open market value and
that, apart from permanent diminution in value, under SSAP 19 gains and losses go to equity.

Chapter 5 Retirement benefits
The main difference is in the scope of the standards:
 IAS 19 covers various short and long-term benefits.
 FRS 17 Retirement benefits only covers retirement benefits
Until recently, the treatment of actuarial gains and losses was different. However, following the 2011
revision of IAS 19, this difference has been eliminated.
FRS 17 requires immediate recognition of all actuarial gains and losses in the statement of total
recognised gains and losses (ie the UK GAAP equivalent of ‘other comprehensive income’). IAS 19 now
also requires immediate recognition of actuarial gains and losses (termed ‘remeasurements’) in other
comprehensive income.
Here is an example of the accounting under FRS 17:
Example
The net pension liability of Sonya plc as at 1 January 20X3 comprised the following:
$
Pension fund assets 10,000,000
Pension fund liabilities (10,400,000)
400,000
The following information relates to the year ended 31 December 20X3.

Current service cost $800,000
Interest rate 5%
Expected return on assets 3%
Contributions paid $1,020,000
Pensions paid $560,000
Actual return on assets $400,000
Actuarial valuation of liabilities at 31.12.X3 $11,000,000
How will the pension scheme assets, liabilities, gains and losses will be recognised in the financial
statements for the year ended 31 December 20X3?
Solution
Balance sheet $
Pension liability (W1) (140,000)
Pension reserve (140,000)
Profit and loss account
Included in operating expenses 800,000
Other finance charges – 520,000 (journal (a)) – 300,000 (journal (c)) 220,000
Statement of total recognised gains and losses
Actual return less expected return on pension scheme (journal (f)) 100,000
Experience gains and losses arising on the scheme liabilities (journal (g) 160,000

Working: Pension liability
Journal Asset Liability
$ $
B/f 10,000,000 10,400,000
Current service cost (a) 800,000
Interest (b) 520,000
Expected return © 300,000
Contributions (d) 1,020,000
Pensions paid (e) (560,000) (560,000)
10,760,000 11,160,000
Actuarial gains (f)/(g) 100,000 (160,000)
10,860,000 11,000,000
Net deficit = $140,000

Journals
$ $
(a) DEBIT P&L account operating profits 800,000
CREDIT Obligations 800,000
Current service cost
(b) DEBIT P&L account interest charge 520,000
CREDIT Obligation 520,000
Restatement of opening liability (10,400,000  5%)
© DEBIT Pension fund assets 300,000
CREDIT P&L account interest receivable 300,000
Expected return (10,000,000  3%)
(d) DEBIT Pension fund assets 1,020,000
CREDIT Cash 1,020,000
Contributions
(e) DEBIT Obligations 560,000
CREDIT Pension fund assets 560,000
Pensions paid
(f) DEBIT Pension fund assets 100,000

CREDIT STRGL 100,000
Re actual return (400,000 – 300,000)
(g) DEBIT Pension fund obligations 160,000
CREDIT STRGL 160,000
Re actuarial gain obligations
Chapter 6 Income taxes

The only examinable differences relate to the principles of accounting for deferred tax. FRS 19 focuses on
timing differences. These are differences between taxable profit and accounting profit that originate in
one period and reverse in one or more subsequent periods.
Timing differences arise because certain items are included in the accounts of a period which is different
from that in which they are dealt with for taxation purposes.
Under FRS 19 deferred taxation is the tax attributable to timing differences.
Deferred tax. Estimated future tax consequences of transactions and events recognised in the financial
statements of the current and previous periods.
Deferred taxation under FRS 19 is therefore a means of ironing out the tax inequalities arising from timing
differences.

(a) In years when corporation tax is saved by timing differences such as accelerated capital
allowances, a charge for deferred taxation is made in the P&L account and a provision set up in the
balance sheet.
(b) In years when timing differences reverse, because the depreciation charge exceeds the capital
allowances available, a deferred tax credit is made in the P&L account and the balance sheet
provision is reduced.
Under IAS 12 a ‘balance sheet’ approach is taken, based on temporary differences. Temporary
differences are differences between the tax base of an asset or liability and its carrying amount in the
statement of financial position.
All timing differences are temporary differences, but there are some temporary differences which do not
give rise to timing differences. The most obvious is the revaluation of an asset, which gives rise to a
temporary difference but not a timing difference.
Revaluation of fixed assets – FRS 19

Revaluation of a fixed asset does not create an unavoidable tax liability and so does not affect the deferred
tax provision. The exception to this is where an agreement has been entered into to dispose of the asset at
the revalued amount, and the gains and losses expected to arise on the sale have been recognised at the
balance sheet date. In this case, FRS 19 requires deferred tax to be recognised on the timing difference. As
the revaluation gain will be recognised in the statement of total recognised gains and losses and credited
to the revaluation reserve, the deferred tax on the revaluation gain or loss will also be recognised in the
statement of total recognised gains and losses taken to the revaluation reserve.
Example:
Z Ltd owns a property which has a carrying value at the beginning of 20X9 of £1,500,000. At the year end
the property is revalued to £1,800,000.At the year end, it has entered into a contract to sell the property
for £1,800,000. The tax rate is 30%. How will this be shown in the financial statements under each of the
following assumptions?
(a) At the year end, Z Ltd has entered into a contract to sell the property for £1,800,000.
(b) Z Ltd is intending to sell the property but has not yet found a buyer.
Solution
(a)
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
£'000
Profit for the financial year X
Unrealised surplus on revaluation of property 300
Deferred tax on revaluation surplus (90)
Total gains and losses relating to year X
The journal entries will be as follows:

Dr Cr
£'000 £'000
Property 300
Deferred tax 90
Revaluation reserve 210
(b) If there is no binding contract to sell the property, the revaluation would still be reflected, but no
deferred tax would be recognised.
IAS 12
Under IAS 12 a temporary difference would have been recognised when the asset was revalued. It
would not have been necessary to have a sale agreement. A taxable difference is recognised even if the

entity does not intend to dispose of the asset. The deferred tax would be charged to the revaluation
surplus on the asset.
Measurement – discounting
Reporting entities are permitted but not required to discount deferred tax assets and liabilities to reflect
the time value of money.
The ASB believes that, just as other long-term liabilities such as provisions and debt are discounted, so
too in principle should long-term deferred tax balances. The FRS therefore permits discounting and
provides guidance on how it should be done. However, the ASB stopped short of making discounting
mandatory, acknowledging that there is as yet no internationally accepted methodology for discounting
deferred tax, and that for some entities the costs might outweigh the benefits. Entities are encouraged to
select the more appropriate policy, taking account of factors such as materiality and the policies of other
entities in their sector.
IAS 12 prohibits discounting of deferred tax assets and liabilities.
In paper P2 you may be asked to apply the principles you have learned about the differences between IAS
12 and FRS 19. You may have to calculate deferred tax provisions under FRS 19.
The following example illustrates the main differences:
Question Deferred tax calculation
(a) At 30 November 20X1 there is an excess of capital allowances over depreciation of $90 million. It is
anticipated that the timing differences will reverse according to the following schedule:
30 Nov 20X2 30 Nov 20X3 30 Nov 20X4
$m $m $m
Depreciation 550 550 550
Capital allowances 530 520 510
20 30 40
(b) The directors wish to revalue a property by $10 million as at 30 November 20X1.
(c) The balance sheet as at 30 November 20X1 includes deferred development expenditure of $40
million. This relates to a new product which has just been launched and the directors believe it has
a commercial life of only two years.
(d) Corporation tax is 30% and the company wishes to discount any deferred tax liabilities at a rate of
4%
Required
Explain the deferred tax implications of the above and calculate the deferred tax provision as at 30
November 20X1 in accordance with FRS 19.
Note: Present Value Table (extract)
Present value of $1 ie (1+r)-n where r = interest rate, n = number of periods until payment or receipt.
Periods
(n) 4%
1 0.962
2 0.925
3 0.889
4 0.855
5 0.822
Answer

Deferred tax implications
(a) Accelerated capital allowances: full provision should be made for the excess capital allowances.
The provision should be discounted based on a calculation of the timing of its reversal.
(b) Revaluation: assuming there is no binding contract to sell the property, no provision is required.
(c) Deferred development expenditure: the amount capitalised (which will have been allowable for tax
as incurred) is a timing difference. Full provision is again required, discounted based on the timing
of reversals.
Provision:
$m
Accelerated capital allowances (W1) 27
Deferred development expenditure (W2) 12
39
Discount (2.8)
Discounted provision for deferred tax 36.2
Workings
1 Capital allowances
Timing differences $90m
 undiscounted provision $90m × 30% = $27m
Years to Reversal of Deferred tax Discount factor Discounted liability
come timing liability
difference (× 30%)
$m $m $m
02 20 6 .962 5.8
03 30 9 .925 8.3
04 40 12 .889 10.7
90 27 24.8
2 Deferred development expenditure

Timing difference £40m
 undiscounted provision £40m × 30% = £12m
Years to come Reversal of Deferred tax Discount Discounted
timing liability
difference (× 30%) factor liability
£m £m £m
02 20 6 .962 5.8
03 20 6 .925 5.6
40 12 11.4
3 Total discounted provision (24.8 + 11.4) = £36.2m

Chapter 10 Related party disclosures
There are a number of differences between FRS 8 and IAS 24.
FRS 8 can be summarised as follows.
(a) FRS 8 Related party disclosures requires the disclosure of:
(i) Information on related party transactions.
(ii) The name of the party controlling the reporting entity and, if different, that of the ultimate
controlling party whether or not any transactions between the reporting entity and those
parties have taken place.
(b) No disclosure is required in consolidated financial statements of intragroup transactions and
balances eliminated on consolidation.
(c) Disclosure is not required of transactions entered into between two or more members of a group,
provided that any subsidiary undertaking which is a party to the transaction is wholly owned by a
member of that group.
IAS 24 does require the disclosure of related party transactions and balances in the separate financial
statements of both parent and subsidiary entities, regardless of the fact that these transactions and
balances involve a wholly owned subsidiary.
Disclosure of transactions and balances – FRS 8
Financial statements should disclose material transactions undertaken by the reporting entity with a
related party. Disclosure should be made irrespective of whether a price is charged. The disclosure
should include:
(a) The names of the transacting parties.
(b) A description of the relationship between the parties.
(c) A description of the transactions.
(d) The amounts involved.
(e) Any other elements of the transactions necessary for an understanding of the financial statements.
(f) The amounts due to or from related parties at the balance sheet date and provisions for doubtful
debts due from such parties at that date.
(g) Amounts written off in the period in respect of debts due to or from related parties.
IAS 24 requires information about the nature of related parties but does not require them to be identified
by name.
Both FRS 8 and IAS 24 require the disclosure only of material related party transactions (under the
general principle that standards only apply to items that are material). However, FRS 8 takes the concept
of materiality further than IAS 24. Under IAS 24 the materiality of a transaction is considered in relation to
the financial statements of the reporting entity. Under FRS 8 the materiality of related party transactions;
'is to be judged, not only in terms of their significance to the reporting entity, but also in relation to the
other related party when that party is:
(a) A director, key manager or other individual in a position to influence, or accountable for
stewardship of, the reporting entity.
(b) A member of the close family of any individual mentioned in (a) above.
(c) An entity controlled by any individual mentioned in (a) or (b) above.'

Chapter 11 Leasing
Here there is a difference between UK GAAP and IFRS which is referred to as the 90% rule.
Transfer of risks and rewards incidental to ownership can be presumed if at the inception of a lease
the present value of the minimum lease payments amounts to substantially all (normally 90% or
more) of the fair value of the leased asset.
Both UK GAAP and IFRS base the classification of a finance lease upon transfer of risks and rewards.
However, while SSAP 21 uses the 90% rule, IAS 17 gives examples of situations that would normally lead
to a lease being classified as a finance lease. One of these is:
‘at the inception of the lease the present value of the minimum lease payments amounts to at least
substantially all of the fair value of the leased asset’.
Others are issues such as ownership being transferred at the end of the lease, the lease term being for the
major part of the economic life of the asset and the lessee having the option to purchase at the end of the
lease term, on terms which make it reasonably certain that the option will be exercised.
The additional points examinable at P2 are:
Land and buildings
Under IAS 17 land and buildings are separately classified. Land is generally considered to have an
indefinite life, so is normally classified as an operating lease, whereas the building element could be either
an operating or a finance lease.
SSAP 21 does not require property leases to be separated into land and buildings. Under SSAP 21 more
buildings are therefore likely to be classified as operating leases.
However, an amendment to IAS 17 came into effect in January 2010 which stated that land and buildings
should be considered as operating or finance leases according to the substance of the transaction. Part of
the thinking is that for long-term leases, such as 999 years, the lessee does become party to the risks and
rewards of ownership of the land. So this brings IAS 17 more into line with SSAP 21.
Operating lease incentives
In UK GAAP this is addressed by UITF 28 Operating lease incentives. Abstract 28 deals with the way in
which both lessors and lessees should account for incentives given by the lessor to the lessee. The
Abstract reflects the UITF's view that the rental, net of any incentive, should be recognised as rental
expense or income over the period of the lease or, as appropriate, the period to the next rent review.
Under IFRS this issue is address by SIC 15, which stipulates that the incentive should be spread over the
lease term.
Sale and leaseback – accounting by seller/lessee
Under SSAP 21, in a sale and leaseback transaction which results in a finance lease, any apparent profit
or loss (that is, the difference between the sale price and the previous carrying value) should be deferred
and amortised in the financial statements of the seller/lessee over the shorter of the lease term or the
useful life of the asset.
IAS 17 also requires the excess of sales proceeds over the carrying value of the asset to be deferred and
amortised but over the lease term.

Chapter 12 Basic Groups
Group accounting – UK legal framework
Duty to prepare group accounts

Section 399 of the Companies Act 2006 states that if a company is a parent company at the end of a
financial year, the directors, as well as preparing individual accounts for the year, must prepare group
accounts for the year unless the company is exempt from the requirement.
Exemptions:
(a) The requirement to prepare group accounts does not apply to small companies
(b) A company that is included in the accounts of a larger group within the EEA (s 400)
(c) A company that is included in the accounts of a larger group outside the EEA (s 401)
(d) A company, none of whose subsidiaries need to be included in the consolidation. (s 402)
Where a company takes advantage of exemptions (b) and (c) it must disclose that it has taken advantage
of the exemption and also the name and country of incorporation of the parent undertaking who prepares
those group accounts.
Exclusion of a subsidiary
There may be situations where consolidation would not give a true and fair view of the group's affairs: this
would be exceptional.
 s 405 of the Companies Act 2006 permits exclusion from consolidation under the following
circumstances.
Reason Accounting treatment
Severe long-term restrictions Balance sheet: equity method up to date of severe
restrictions subject to any write-down for
impairment
P&L a/c: dividends received only
IAS 27 states that a parent is not permitted to
exclude a subsidiary that operates under severe
restrictions except where control is lost.
Held exclusively for subsequent resale; Current asset at the lower of cost and
never been consolidated net realisable value
Dissimilar activities Equity method
The subsidiary's inclusion is not material FRS 2 accepts this, as accounting standards only
apply to material items
 CA 2006 permits exclusion from consolidation in all of the circumstances cited above. CA 2006
permits exclusion for another reason, dismissed as invalid by the ASB.
– Information cannot be obtained without disproportionate expense or undue delay.
The consolidated balance sheet (statement of financial position)

The consolidated balance sheet will obviously follow a different format to the consolidated statement of
financial position under IFRS. Other than that, the major differences are in the treatment of goodwill,
contingent consideration and acquisition expenses and in the calculation of minority (non-controlling)
interest.

Measurement of goodwill
Goodwill arising on consolidation is one form of purchased goodwill, and is therefore governed by FRS
10. As explained earlier FRS 10 requires that purchased goodwill should be capitalised and classified as an
asset on the balance sheet. It is then eliminated from the accounts by amortisation or impairment
through the profit and loss account.
The unamortised (or unimpaired) portion will be included in the consolidated balance sheet under fixed
assets.
Under IFRS 3 there are two possible methods of valuing goodwill on an acquisition:
 at the non-controlling interest's proportionate share of the fair value of the acquiree's identifiable
net assets or
 at their (full) fair value
Under UK GAAP only the first of these, ie the “partial” method is used. There is no full fair value option.
This means that when an impairment of goodwill is recognised, none will ever be allocated to the minority
(non-controlling) interest, as only the group’s share of goodwill is recognised.
Recognition of intangibles
In calculating goodwill, fair values must be attached to the assets and liabilities of the subsidiary at
acquisition.
FRS 7 defines the identifiable assets and liabilities acquired as:
‘The assets and liabilities of the acquired entity that are capable of being disposed of or settled separately,
without disposing of a business of the entity’.
IFRS 3 does not contain a requirement that assets should be separable. The effect of this is that goodwill
may be higher in some acquisitions treated under UK GAAP as more of the other intangibles of the
subsidiary may fail to meet the ‘separability’ condition.
Contingent consideration
Under FRS 7 Fair Values in Acquisition Accounting the treatment of contingent consideration differs from
the requirement of IFRS 3 in respect of the treatment of subsequent changes to the estimated value of
contingent consideration.
Under IFRS 3, if a provisional figure has been used for the contingent consideration, adjustments made in
the first year after the acquisition may be reflected through goodwill. After this, any further adjustments
will be recognised in profit or loss. Under FRS 7, these adjustments can be reflected in goodwill, without
any time limit, up to the point when the payment is actually made.
The parent acquired 60% of the subsidiary’s £100m share capital on 1 Jan 20X6 for a cash payment of
£150m and a further payment of £50m on 31 March 20X7 if the subsidiary’s post acquisition profits have
exceeded an agreed figure by that date.
In the financial statements for the year to 31 December 20X6, three scenarios are possible:
(a) The amount has already been exceeded.
(b) It is probable that the amount will be exceeded by 31 March and this can reliably measured.
(c) It is not probable that the amount will be exceeded.
In the case of (a) and (b), the cost of the combination will be £200m (150 + 50)
In the case of (c) the cost of combination will be £150m. (We have ignored discounting in this example).
Should this estimate prove to be incorrect, the cost of acquisition can be adjusted, leading to an
adjustment of goodwill. For instance, if the cost of the combination was shown as £200m at 31
December 20X6 but in March 20X7 the additional £50m was not payable, the financial statements at 31
December 20X7 would shown the cost of the combination as £150m and goodwill would be reduced by
£50m.

Expenses and issue costs
Under FRS 7 expenses of the combination, such as lawyers and accountants fees are added to the cost of
the combination. However, the costs of issuing equity are treated as a deduction from the proceeds of the
equity issue. Share issue costs will therefore be debited to the share premium account. Issue costs of
financial instruments are deducted from the proceeds of the financial instrument.
Under IFRS 3 these expenses are not added to the cost of the combination – they are written off to profit
or loss as incurred.
Minority interests (non-controlling interests)

FRS 2 defines minority interest in a subsidiary undertaking as the 'interest in a subsidiary undertaking
included in the consolidation that is attributable to the shares held by or on behalf of persons other than
the parent undertaking and its subsidiary undertakings'.
The term ‘minority interest’ is used in UK GAAP rather than non-controlling interest, but as we saw above
in relation to goodwill, only the ‘partial’ method is used in UK GAAP. The calculations are the same as you
have seen in the context of IFRS 3.
Example: minority interests in UK GAAP

Peppa Ltd has owned 75% of the share capital of Salt Ltd since the date of Salt Ltd's incorporation. Their
latest balance sheets are given below.
PEPPA LIMITED – BALANCE SHEET
Fixed assets £
Tangible assets 50,000
30,000 £1 ordinary shares in Salt Ltd at cost 30,000
80,000
Net current assets 25,000
Net assets 105,000
Capital and reserves
80,000 £1 ordinary shares 80,000
Reserves 25,000
105,000
SALT LIMITED BALANCE SHEET
£
Tangible fixed assets 35,000
Net current assets 15,000
Net assets 50,000
Capital and reserves
40,000 £1 ordinary shares 40,000
Reserves 10,000
50,000
Prepare the consolidated balance sheet.
Solution
All of Salt Ltd's net assets are consolidated despite the fact that the company is only 75% owned. The
amount of net assets attributable to minority interests is calculated as follows.
£
Minority share of Salt’s net assets (25%  £50,000) 12,500

This simplified working is more commonly used in UK examples, but it gives exactly the same answer as
the working you will be more familiar with:
$
NCI at acquisition (25%  £40,000) 10,000
NCI share of post acquisition retained earnings (25%  £10,000) 2,500
12,500
Joint ventures
FRS 9 requires joint ventures to be accounted for as follows:
The venturer should use the gross equity method showing in addition to the amounts included under the
equity method, on the face on the balance sheet, the venturer's share of the gross assets and liabilities of
its joint ventures, and, in the profit and loss account, the venturer's share of their turnover distinguished
from that of the group. Where the venturer conducts a major part of its business through joint ventures, it
may show fuller information provided all amounts are distinguished from those of the group.
Under IFRS 11, published in 2011, joint ventures must be accounted for using the equity method as per
IAS 28 Associates and joint ventures, as for associates. This is similar to the UK FRS 9 treatment for
associates. IFRS 11 also distinguishes between joint ventures and jointly controlled operations. Jointly
controlled operations are similar to’ joint arrangements that are not entities’ under the UK FRS 9.
Illustrative example
Parachute has a 50% interest in Jump, an entity set up and controlled jointly with a third party.
The balance sheets of the two companies as at 31 December 20X5 are as follows:
Parachute Group Jump
$'000 $'000 $'000 $'000
FIXED ASSETS
Tangible assets 406 160
Investment in Jump 10
416 160
CURRENT ASSETS
Stocks 100 50
Others 200 110
300 160
CREDITORS: AMOUNTS FALLING DUE WITHIN
ONE YEAR (150) (120)
NET CURRENT ASSETS 150 40
566 200
CAPITAL AND RESERVES
Share capital 200 20
Profit and loss reserve 366 180
566 200
Their respective profit and loss accounts for the year ended 31 December 20X5 are as follows:
Parachute Group Jump
$'000 $'000
Turnover 490 312
Cost of sales and expenses (280) (200)
Dividend from Jump 20 –
Profit before tax 230 112
Tax (100) (32)
Profit after tax 130 80

Dividends charged to profit and loss reserve during the period: 60 40
Note
During December 20X5 Parachute transferred goods to Jump for $50,000. Parachute sells goods at a
mark-up of 25%. Jump had not paid Parachute's invoice or sold any of the goods to third parties by the
year end.
There was no goodwill arising on Parachute's original investment.
Required
Prepare a consolidated balance sheet and profit and loss account as at 31 December 20X5 including the
joint venture.
Solution
Parachute Group – Consolidated balance sheet as at 31 December 20X5
$'000 $'000 Notes
FIXED ASSETS
Tangible assets 406
Investment in joint venture
Share of gross assets [((160 + 160)  50%) - (W3) 5] 155
Share of gross liabilities (120  50%) (60) (1)
95
501
CURRENT ASSETS
Stocks 100
Others 200
300
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR 150
NET CURRENT ASSETS 150
651
CAPITAL AND RESERVES

Share capital 200
Profit and loss reserve (W2) 451
651
Parachute Group – Consolidated profit and loss account for year ended 31 December 20X5
$'000 $'000 Notes
Turnover: group & share of joint venture (490 + (312 × 621 (2)
50%) – (50 × 50%))
Less: share of joint venture's turnover ((312 × 50%) – (50 (131)
× 50%))
Group turnover 490
Cost of sales and expenses (280 + (W3) 5) (285)
Share of operating profit of joint venture (112 × 50%) 56
Profit before tax 261
Tax
Group 100
Joint venture (32 × 50%) 16
(116)
Profit after tax 145

Notes
(1) The effect of the gross equity method in the balance sheet (statement of financial position) is to
split out the figure of $95,000 into the underlying assets and liabilities. In this example there is also
an adjustment to eliminate the group share of the unrealised profit on goods sold by the parent to
the joint venture, treated in the same way here as under IFRS.
(2) The additional disclosure in the profit and loss account (income statement) is to show the group
share of the joint venture’s turnover. This is calculated and added to the group turnover. Then, on
the next line, the group share of the joint venture’s turnover is shown as a deduction. This looks
odd at first glance but the joint venture amount has only been included as a disclosure and the
group’s share of the joint venture’s profit is added just before the total of profit before tax.
Workings
1 Group structure
Parachute
50%
Jump Pre acq'n P&L reserve $0 (set up by Parachute)

2 Consolidated profit and loss reserve
Parachute Jump
$'000 $'000
Per question 366 180
PUP (W3) (5)
Pre-acquisition profit and loss reserve (0)
180
Group share of post acquisition P&L reserve:
Jump (180  50%) 90
451
3 Provision for unrealised profit on stocks

Investor's share of unrealised profit in stocks:
$50,000  25%/125%  50% = $5,000
... Dr Cost of sales & Profit and loss reserve $5,000
Cr Investment in joint venture $5,000 (as the stocks are held by Jump).
There are no examinable differences relating to topics in chapter 13
Chapter 14 Changes in group structures

Disposals
You have seen that under IFRS 3 there is a conceptual difference between two types of disposal. If a
disposal results in a loss of control, a profit or loss on disposal is calculated. If control is retained, no
profit or loss is recognised but an adjustment is made to the parent’s equity to reflect the reallocation of
ownership between parent and non-controlling equity holders.
This conceptual difference does not exist in FRS 2. All disposals and part disposals of investments in
subsidiaries will result in a profit or loss on disposal under UK GAAP.
There is also a difference in the calculation of the gain or loss, with no fair value adjustments made to any
remaining interests.

Disposals where control is retained
Under FRS 2, if the holding is still a subsidiary then it must still be consolidated line by line.
A comparison of the sale proceeds and the consolidated net asset value attributable to the shares sold at
the date of disposal will give the profit or loss on disposal. This is shown as an exceptional item after
profit before tax in the consolidated profit and loss account.
Smith Ltd bought 80% of the share capital of Jones Ltd for £324,000 a number of years ago. At that date
Jones Ltd's P&L account balance stood at £180,000. The balance sheets at 30 September 20X8 and the
summarised P&L accounts to that date are given below.
Smith Ltd Jones Ltd
£'000 £'000
Fixed assets 360 270
Investment in Jones Ltd 324 –
Net current assets 270 270
954 540
Share capital and reserves
£1 ordinary shares 540 180
Profit and loss account 414 360
954 540
Profit before tax 153 126
Tax 45 36
Retained profit 108 90
Retained profit b/f 306 270
Retained profit c/f 414 360
No entries have been made in the accounts for any of the following transactions.
Assume that profits accrue evenly throughout the year and that any goodwill has been amortised through
the profit and loss account.
Ignore taxation.
Required
Prepare the consolidated balance sheet and P&L account at 30 September 20X8 if Smith Ltd sells one
quarter of its holding in Jones Ltd for £160,000 on 30 June 20X8.

Partial disposal: subsidiary to subsidiary(control retained)
CONSOLIDATED BALANCE SHEET AS AT 30 SEPTEMBER 20X8
£'000
Fixed assets (360 + 270) 630
Net current assets (270 + 160 + 270) 700
1,330
£1 ordinary shares 540
Profit and loss account (see below) 574
1,114
Minority interest (40%  540) 216
1,330
CONSOLIDATED PROFIT AND LOSS ACCOUNT

FOR THE YEAR ENDED 30 SEPTEMBER 20X8
£'000 £'000
Profit before tax (153 +126) 279.0
Exceptional item (W1) 56.5
Tax (45 + 36) 81.0
Profit after tax 254.5
Minority interest
20%  90  9/12 13.5
40%  90  3/12 9.0
22.5
Profit attributable to members of Smith Ltd 232.0
Retained profit brought forward (W2) 342.0
Retained profit carried forward 574.0
Workings
1 Group profit on disposal
£'000
Sale proceeds 160.0
Less net assets of Jones now sold
20%  ((540 – 90) + (9/12  90)) 103.5
56.5
2 Retained profit brought forward

£'000
Smith 306
Jones: 80%  (270 – 180) 72
Goodwill fully amortised (36)
342
Disposals where control is lost
Subsidiary to associate status

When the subsidiary becomes an associate, the underlying asset is carried in one line on the balance
sheet.
Under IFRS the investment retained is shown at fair value. This is not done under UK GAAP. In practice
this means that the group profit on sale is likely to be higher under IFRS.
This can be illustrated using the same example as above but with a changed requirement:

Required
Prepare the consolidated balance sheet and P&L account at 30 September 20X8 assuming that Smith Ltd
sells one quarter of its holding in Jones Ltd for £160,000 on 30 June 20X8 and that the remaining
investment will be treated as an associate.
Partial disposal: subsidiary to associate
CONSOLIDATED BALANCE SHEET AS AT 30 SEPTEMBER 20X8
£'000
Fixed assets 360
Investment in associated undertaking (40%  540) 216
Net current assets (270 + 340) 610
1,186
£1 ordinary shares 540
Profit and loss account (see below) 646
1,186
CONSOLIDATED PROFIT AND LOSS ACCOUNT

FOR THE YEAR ENDED 30 SEPTEMBER 20X8
£'000
Profit before tax*
(153 + (9/12  126)) + (3/12  126  40%) 260.1
Exceptional item (W1) 133.0
Tax (45+ (9/12  36)) + (3/12  36  40%) 75.6
Profit after tax 317.5
Minority interest (20%  90  9/12) 13.5
Profit attributable to members of Smith Ltd 304.0
Retained profit brought forward (W2) 342.0
Retained profit carried forward 646.0
*Note. Per FRS 9 Associates and joint ventures disclosure should be made of group's share of associate's
operating profit. However, PBT is used here for the sake of simplicity (and this difference is not specifically
examinable per the list of examinable differences prepared by ACCA).
Workings
1 Group profit on disposal
£'000
Sale proceeds 340
Less: net assets of Jones now sold
40%  ((540 – 90) + ((9/12  90)) 207
133
2 Retained profit brought forward

£'000
Smith 306
Jones 80%  (270 – 180) 72
Goodwill fully amortised (36)
342
Business combinations achieved in stages (piecemeal acquisitions)

IFRS 3 follows a similar principle as for disposals. The treatment depends on whether the ‘control
boundary’ is crossed. A goodwill calculation is only carried out when a controlling interest is acquired.
Any previously- held investment is remeasured to fair value and any gain or loss on the remeasurement
recognised in profit or loss. The previously-held investment at FV then becomes part of the consideration
transferred in the goodwill calculation.
There is no requirement under UK GAAP to remeasure the previously-held investment to fair value.

In respect of goodwill, under FRS 2, three situations are considered:
(1) The parent owned an investment that gave no special influence then acquired additional shares and
this moved the holding from an investment (measured at cost or under the alternative accounting
rules) straight to subsidiary.
(2) The parent owned an investment accounted for as an associate (ie. the investor was able to exert
significant influence) and a further acquisition gives control, so the investment is now a subsidiary.
(3) The parent already controls a subsidiary and acquires a further stake in that company.
In circumstance (1) the only rule to remember is only take account of the subsidiary and calculate
goodwill when control is achieved. The cost of the original investment plus the cost of the new investment
is compared to the total share of net assets to calculate goodwill.
Where the acquired company is accounted for as an associate (circumstance (2)), goodwill is calculated at
the associate stage and again when control is acquired. In each case it is calculated as the cost of the
shares less the group share of the shares plus pre-acquisition profits. The share of the subsidiary’s post
acquisition reserves will be calculated using a ‘step by step’ approach.
Circumstance (3) follows the same approach as circumstance (2).
Example: Piecemeal acquisition

Suppose that X Ltd bought 20,000 ordinary £1 shares in Y Ltd in 20X1 when the reserves of Y Ltd stood
at £27,000 and a further 20,000 shares in 20X2 when the reserves of Y Ltd were £42,000. Finally, a
purchase of 30,000 shares in 20X3 when the reserves of Y Ltd were £60,000 gave X Ltd a controlling
interest over the 100,000 shares of Y Ltd. The cost of the shares purchased was £30,000 in 20X1,
£34,000 in 20X2 and £56,000 for the final 30,000 shares in 20X3.
What is the group share of post acquisition profits of Y Ltd, and what is the goodwill arising on
consolidation at the date of the final acquisition in 20X3? Assume that no dividends were paid in these
three years.
Solution: Y Ltd accounted for as an associate

% of shares in Y Ltd % of shares in Y Ltd
Purchase bought now held
20X1 20% 20%
20X2 20% 40%
20X3 30% 70% (controlling interest)
X Ltd exercises significant influence over the financial and operating policies of Y Ltd.
If X Ltd accounted for Y Ltd as an associate, we would use the step by step method. This method
calculates post acquisition profits by computing the proportion of reserves attaching to the shares at the
time of each individual purchase.
Post acquisition profits would be:
£
(a) on shares bought in 20X1:
20% of profits since 20X1 = 20% of £(60,000 – 27,000) = 6,600
(b) on shares bought in 20X2:

20% of profits since 20X2 = 20% of £(60,000 – 42,000) = 3,600
(since no dividends were paid out on profits in this time)
(c) On shares bought in 20X3 0
(no post acquisition reserves yet in respect of this slice of the investment) 10,200

Goodwill arising on consolidation would be :
20X1 acq’n 20X2 acq’n 20X3 acq’n
£'000 £'000 £'000 £'000 £'000 £'000
Cost of acquired entity 30 34 56
FV identifiable NA acquired:
SC 100 100 100
P&L reserve 27 42 60
127 142 160
Group share 20% 20% 30%

(25.4) (28.4) (48)
4.6 5.6 8
Total goodwill 18.2
Solution: Y Ltd not accounted for as an associate

If X Ltd did not exercise a significant influence when it bought the shares of Y Ltd in 20X1 and 20X2, but
only gained control when it made its final purchase in 20X3, the pre acquisition profits would be calculated
on the basis of reserves at the date of acquisition of control, ie in our example on the basis of reserves of
£60,000 at the date of acquisition in 20X3.
Reserve working: share of Y Ltd's post acquisition retained reserves = £0 (as the consolidation is being
performed as at the date of the acquisition).
Goodwill on consolidation would be
£m £m
Cost of acquired entity (30 + 34 + 56) 120
Fair value of net assets acquired:

Share capital 100
Reserves 60
Fair value adjustment (W7) 160
Group share (70%) (112)
8
Reconstructions and merger accounting

Under IFRS, all consolidations are performed using acquisition accounting.
Under UK GAAP, there is another method, called merger accounting. It is used for business combinations
that are not, in substance, acquisitions of one entity by another, but the formation of a new reporting entity
as a substantially equal partnership where no party is dominant.
The standard, FRS 6 Acquisitions and mergers sets very strict criteria for its use and as a result, merger
accounting is very rarely used.
In your P2 exam, you will not be tested on the detail of the method, but you need to understand the basic
principles of merger accounting and when it may be applied in the context of group reconstructions.
The main features of merger accounting are:
 Net assets are combined with no restatement to fair values
 Reserves are ‘pooled’; no distinction is made between pre- and post-acquisition reserves
 No goodwill arises

This method may be appropriate in the following types of reconstruction where there is no identifiable
‘acquirer’ and the substance of the combination is a new entity where parties have combined as a
substantially equal partnership.
A group may restructure itself internally to achieve a desired effect. For example:
Before After
Shareholders Shareholders
P P
S1
S1 S2
S2
Reasons for such a reorganisation include:
 S1 can be sold off (perhaps to reduce group gearing) without selling off S 2
 potential tax advantages (e.g. loss relief)
 divisionalisation so that S1 and S2 report independently to P.
Chapter 15 Continuing and discontinued interests

Discontinued operations
A discontinued operation is one which meets all of the following conditions.
(a) The sale or termination must have been completed before the earlier of 3 months after the year end
or the date the financial statements are approved. (Terminations not completed by this date may be
disclosed in the notes.)
(b) Former activity must have ceased permanently.
(c) The sale or termination has a material effect on the nature and focus of the entity's operations and
represents a material reduction in its operating facilities resulting either from:
(i) Its withdrawal from a particular market (class of business or geographical); or from
(ii) A material reduction in turnover in its continuing markets.
(d) The assets, liabilities, results of operations and activities are clearly distinguishable, physically,
operationally and for financial reporting purposes.
Note: Under IFRS 5 a discontinued operation is one that has either been disposed of or is classified as
held for sale. In order for the operation to be classified as held for sale, the sale should be expected to be
completed within one year from the date of classification. Contrast this with the UK requirement that the
sale must be completed by the earliest of 3 months after the year end or the date the statements are
approved. In practice this will mean that a discontinued operation can be recognised earlier under IFRS
than under UK GAAP.

Accounting for the discontinuation
(a) Results
The results of the discontinued operation up to the date of sale or termination or the balance sheet
date should be shown under each of the relevant profit and loss account headings.
(b) Profit/loss on discontinuation
The profit or loss on discontinuation or costs of discontinuation should be disclosed separately as
an exceptional item after operating profit and before interest.
(c) Comparative figures
Figures for the previous year must be adjusted for any activities which have become discontinued
in the current year.
Disclosure in the profit and loss account

All statutory headings from turnover to operating profit must be subdivided between that arising from
continuing operations and that arising from discontinued operations. In addition, turnover and
operating profit must be further analysed between that from existing and that from newly acquired
operations.
This contrasts with IFRS, where IFRS 5 requires the result of discontinued operations to be shown as a
one-line item. There is no requirement under IFRS to show separately the results of newly acquired
operations.
Only figures for turnover and operating profit need be shown on the face of the P & L account; all
additional information regarding costs may be relegated to a note.

PROFIT AND LOSS (extract)
EXAMPLE 1 (as shown in FRS 3)
20X2 as
20X3 20X3 restated
£m £m £m
Turnover
Continuing operations 550 500
Acquisitions 50
600
Discontinued operations 175 190
775 690
Cost of sales (620) (555)
Gross profit 155 135
Net operating expenses (104) (83)
Operating profit
Continuing operations 50 40
Acquisitions 6
56
Discontinued operations (15) 12
Less 20X2 provision 10 __
51 52
PROFIT AND LOSS ACCOUNT EXAMPLE 2 (to operating profit line)

Continuing Discontinued Total
Operations Acquisitions of operations Total 20X2 as
20X3 20X3 20X3 20X3 restated
£m £m £m £m £m
Turnover 550 50 175 775 690
Cost of sales (415) (40) (165) (620) (555)
Gross profit 135 10 10 155 135
Net operating expenses (85) (4) (25) (114) (83)
Less 20X2 provision 10 10 __
Operating profit 50 6 (5) 51 52
Profit on sale of properties 9 9 6
Provision for loss on
operations to be discontinued (30)
Loss on disposal of the
discontinued operations (17) (17)
Less 20X2 provision 20 20
Profit on ordinary activities
before interest 59 6 (2) 63 28

NOTES TO THE FINANCIAL STATEMENTS
Note required in respect of profit and loss account example 1
20X2
20X3 (as restated)
Continuing Discontinued Total Continuing Discontinued Total
£m £m £m £m £m £m
Cost of sales 455 165 620 385 170 555
Net operating expenses
Distribution costs 56 13 69 46 5 51
Administrative
expenses 41 12 53 34 3 37
Other operating income (8) 0 (8) (5) 0 (5)
89 25 114 75 8 83
Less 20X2 provision 0 (10) (10)
89 15 104
Note required in respect of profit and loss account example 2

20X2
20X3 (as restated)
Continuing Discontinued Total Continuing Discontinued Total
£m £m £m £m £m £m
Turnover 500 190 690
Cost of sales 385 170 555
Net operating expenses
Distribution costs 56 13 69 46 5 51
Administrative
expenses 41 12 53 34 3 37
Other operating income (8) 0 (8) (5) 0 (5)
89 25 114 75 8 83
Operating profit 40 12 52
There are no examinable differences relating to topics in chapter 16
Chapter 17 Group statements of cash flows

The specific differences that are examinable in F7 in relation to statements of cash flows are not
examinable in paper P2. The only additional difference that is examinable in P2 relates to the exemptions
available from preparing a statement of cash flows.
IAS 7 gives no exemptions but under the UK standard, FRS 1 Cash flow statements, the following entities
are exempt from preparing a cash flow statement:
 A subsidiary, where 90% or more of its voting rights are controlled within a group, providing the
consolidated financial statements in which the subsidiary is included are publicly available
 Mutual life assurance companies
 Pension schemes
 Open-ended investment funds
 Small companies and groups (as per s444 of Companies Act 2006)

Chapter 18 Performance reporting
Segmental reporting
IFRS 8 bases the segmental report on internal management reporting. Reportable segments are based on
segments that are being treated as reportable by the ‘chief operating decision-maker’. In this way,
segment data reflects the operational strategy of the business. This could lead to segments being based
on the class of business or on geographical areas, depending on which basis is used by the chief
operating decision maker.
SSAP 25 requires segment information to be disclosed for both business and geographical segments,
defined as follows:
A class of business is a distinguishable component of an enterprise that provides a separate product or a
separate group of related products or services.
A geographical segment is an area comprising an individual country or group of countries in which a
company operates or to which it supplies products or services.
SSAP 25 uses a ‘risks and returns’ approach, to determine how segments should be identified . The aim
behind this principle is to provide useful information for the user of financial statements where an entity
carries on operations in different classes of business or in different geographical areas that:
(a) earn a return on investment that is out of line wit the remainder of the business, or
(b) are subject to different degrees of risk, or
(c) have experienced different rates of growth, or
(d) have different potentials for future development.
SSAP 25 is a disclosure standard so does not contain any detailed measurement rules. It does require that
the information is reconciled to corresponding figures the financial statements. This implies that the
segmental information should be based on the same accounting polices as are used in the financial
statements. IFRS 8 requires the amounts reported to be those reported to the chief operating decision
maker, implying that this could be management information.
Under SSAP 25, companies can dispense with the disclosure of segmental information if, in the opinion of
the directors, it would be seriously prejudicial to the interests of the company: a statement to that effect
is required. This is not allowed under IFRS 8.
Chapter 21 Reporting for small and medium-sized

entities
You have studied the IFRS for SMEs and may be aware of the existence of the UK ‘equivalent’, the
Financial reporting standard for smaller entities (FRSSE)
The UK FRSSE is an accounting standard developed specifically for smaller entities, by collecting together
in one document, and in simplified form, the requirements of other accounting standards and UITF
Abstracts that are applicable to smaller entities.
The latest version of the FRSSE was published in June 2008, including the application of the most recent
accounting standards.
It is a 'one-stop shop' standard for smaller entities bringing together in a single document the contents of
the current FRSSE and the accounting requirements of companies legislation applicable to smaller
companies.

Scope
The FRSSE may be adopted by companies qualifying as small under companies legislation. This means
companies that satisfy at least two of the following criteria:
 Turnover not more than £6.5 million.
 Balance sheet total not more than £3.26 million
 No more than 50 employees
Smaller entities that choose to comply with the FRSSE are exempt from applying all other accounting
standards and UITF Abstracts. Smaller entities that choose not to adopt the FRSSE should apply SSAPs,
other FRSs and UITF Abstracts.
IFRS for Small and Medium-sized Entities (July 2009)
The main difference in principle between the UK FRSSE and the IFRS for SMEs is in its definition of the
entities that may use it. The IFRS for SMEs defines small and medium-sized entities as those that:
(a) do not have public accountability (i.e. do not issue debt or equity instruments in a public market
or hold assets in a fiduciary capacity for outsiders); and
(b) publish general purpose financial statements for external users.
There is no size test, as this would be difficult to apply to companies operating under different
legal frameworks.
Recent developments
In January 2012 the ASB issued FREDs 46 to 48, setting out revised proposals for the future of financial
reporting in the UK and Republic of Ireland.
 FRED 46 (FRS 100) sets out the application of financial reporting requirements in the UK and
Republic of Ireland.
 FRED 47 (FRS 101 or IFRS with reduced disclosures) outlines the reduced disclosure framework
available for use by ‘qualifying entities’ choosing to report under IFRS.
 FRED 48 (FRS 102 or FRSUKI) is the Financial Reporting Standard applicable in the UK and
Republic of Ireland, including the reduced disclosures available for ‘qualifying entities’ reporting
under this FRS. This proposed FRS is based upon the IASB’s IFRS for SMEs but has been further
amended from earlier versions.
FREDs 46 and 47 became FRS 100 and 101 respectively in November 2012, which is after the cut-off date
for your exam.
More detail on the FRSUKI
For all entities choosing not to apply IFRS or IFRS with reduced disclosures, the ASB is proposing
the use of a new standard based on the IASB’s IFRS for SMEs. The ASB's proposed standard, FRS
102 or FRSUKI, runs to less than 300 pages and has been adapted to comply with UK and EU law,
extended and amended to address the needs of a broader group of preparers in response to feedback
on FRED 44.
Implications
(a) All entities currently reporting under UK GAAP will be required to report under FRSUKI but may
voluntarily adopt IFRS. The three tier system previously proposed is eliminated, so that the
application of EU-adopted IFRS will not be extended beyond that required by regulation.
(b) Accounting treatments permitted under current accounting standards are introduced. Previously the
ASB had proposed keeping changes to the IFRS for SMEs to a minimum. It now proposes that where
an accounting treatment is permitted currently in UK and Irish accounting standards and in
international accounting standards it should be retained. This means that the options to revalue land
and buildings, capitalise borrowing costs or carry forward certain development expenses have been
incorporated into the FRSUKI.

(c) The requirements are aligned more closely to company law, with the majority of the presentation
requirements for the balance sheet and income statement being replaced by the formats in company
law rather than in the IFRS for SMEs.
(d) There are amendments to accounting for deferred taxation, updates to consolidation requirements
and accounting for pension plans, and the introduction of an option to recognise grant income over
the life of a grant.
(e) Qualifying entities will be able to take advantage of reduced disclosure requirements that include
exemption from disclosure of a cash flow statement, certain financial instruments, related party and
share based payments disclosures. The reliefs available are different between IFRS and FRSUKI.
(f) Small entities currently eligible to apply FRSSE will continue to be able to do so. Should a new
framework for micro entities be introduced as a result of EU consultation processes, the ASB would
then review the status of the FRSSE and consult again on how to amend the FRSSE to accommodate
any change.
(g) Guidance for public benefit entities is to be incorporated into the FRSUKI (FRED 48)


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IFRS/UK differences – Paper P2 2013

There are no examinable differences relating to topics in chapters 1, 2 and 3

Chapter 4 Non-current assets

FRS 15 General rule

Other tangible fixed assets

Paper P2 UK GAAP Supplement 2013 1

2 Paper P2 UK GAAP Supplement 2013

Reporting gains and losses on revaluations

Paper P2 UK GAAP Supplement 2013 3

Tangible fixed asset revalued downwards

Depreciation on revalued assets

This approach entails two different and conflicting issues.

4 Paper P2 UK GAAP Supplement 2013

Example 1: Accounting for revaluation losses

Intangible fixed assets

SSAP 13 Accounting for research and development

Paper P2 UK GAAP Supplement 2013 5

Accounting treatment of purchased goodwill

FRS 10 Goodwill and intangible assets

6 Paper P2 UK GAAP Supplement 2013

Paper P2 UK GAAP Supplement 2013 7

Assets with an indefinite useful economic life

Subsequent accounting treatment

8 Paper P2 UK GAAP Supplement 2013

Transfers to profit and loss account

Question Negative goodwill

Paper P2 UK GAAP Supplement 2013 9

FRS 11 Impairment of fixed assets and goodwill

Impairment losses on assets carried at historical cost

Impairment losses on revalued fixed assets

Allocation of impairment on an Income Generating Unit (IGU)

10 Paper P2 UK GAAP Supplement 2013

Question Loss allocation

Paper P2 UK GAAP Supplement 2013 11

12 Paper P2 UK GAAP Supplement 2013

Paper P2 UK GAAP Supplement 2013 13

Accounting for investment properties

14 Paper P2 UK GAAP Supplement 2013

The following information relates to the year ended 31 December 20X3.

Paper P2 UK GAAP Supplement 2013 15

Net deficit = $140,000

(f) DEBIT Pension fund assets 100,000

Chapter 6 Income taxes

16 Paper P2 UK GAAP Supplement 2013

Revaluation of fixed assets – FRS 19

The journal entries will be as follows:

Paper P2 UK GAAP Supplement 2013 17

Question Deferred tax calculation

18 Paper P2 UK GAAP Supplement 2013

2 Deferred development expenditure

3 Total discounted provision (24.8 + 11.4) = £36.2m

There are no examinable differences relating to topics in chapters 7, 8 and 9

Paper P2 UK GAAP Supplement 2013 19

20 Paper P2 UK GAAP Supplement 2013

Paper P2 UK GAAP Supplement 2013 21

Duty to prepare group accounts

The consolidated balance sheet (statement of financial position)

22 Paper P2 UK GAAP Supplement 2013

Paper P2 UK GAAP Supplement 2013 23

Minority interests (non-controlling interests)

Example: minority interests in UK GAAP

Prepare the consolidated balance sheet.