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PAPER P8

proposals to harmonise accounting for financial instruments, this issue took on greater significance and priority after the credit crunch. Amendments to IAS39 and IFRS7 dealing with derecognition of financial assets and related disclosures have been approved and will become effective this year. As the table on the facing page shows, there are still numerous areas where differences between IFRS and US Gaap persist. There are also several longer-term projects to continue the harmonisation process. These cover aspects including: n The measurement of fair value. The objective is to clarify the definition of fair value and to establish a single source of guidance for measuring it. n Post-employment benefits. The boards intend to move to a common standard on this topic, but significant differences remain between their positions. n Revenue recognition. The objective is to develop a single model that can be applied across industries and regions. This would improve the comparability of financial reporting information. n Leases. A new standard may lead to the treatment of operating leases as an asset for the right to use an item, while also recognising the liability to make rental payments. A standard on this topic is not expected until 2011. n Earnings per share. Both boards have reviewed proposed changes to the calculation of diluted EPS. n Conceptual framework. To date, work has focused on the aims of financial reporting and the qualitative characteristics of reporting information. Its clear, then, that the IASB and FASB have made significant strides towards their goal of producing compatible standards that are suitable for both domestic and cross-border financial reporting. While there is still some way to go and there are numerous obstacles to be negotiated, it seems that they will maintain their momentum over the coming years. Tony Sweetman is a content specialist with Kaplan Publishing and a tutor with Kaplan Financial in Glasgow.

The examiner for P8 offers some hints and tips for maximising your marks in Novembers exam.
To revise effectively for the P8 exam you must first consider the learning outcomes that the paper is designed to assess. They are as follows: n Prepare consolidated accounts and explain the accounting principles associated with this area. n Appropriately employ the relevant accounting standards. n Evaluate an entitys financial statements and analyse its performance. n Discuss and evaluate current developments in external reporting. CIMA provides indicative weightings to help you assess how much coverage each area will be given in any exam diet. The consolidation and analysis of financial statements each account for 35 per cent of the syllabus, so it shouldnt come as a surprise to you that the exams reflect this every year. Section A: group financial statements Accounting for investments in consolidated accounts makes up 35 per cent of the syllabus. The learning outcome is allencompassing and totally logical: you must be able to prepare the primary financial statements for a group of companies. The disclosures are not required in this paper, but a detailed knowledge of the primary financial statements ie, the income statement, balance sheet, cash flow statement and statement of changes in equity is essential. The main adjustments in the balance sheet are likely to be for goodwill on acquisition and its subsequent impairment, minority interest and retained earnings. The main adjustment for preparing an income statement is the split between profit available for shareholders of the parent and profit attributable to minority interests. You will not be forgiven for not knowing these basic adjustments. As well as the basic consolidation adjustments, there are numerous factors that can make the preparation of group accounts more complex. They include: n Acquisitions in the period. n Disposals in the period. n Inter-company trading. n Associated companies and joint ventures. n Foreign subsidiaries and sub-subsidiaries. The key to dealing with these complexities is to think about how they will affect the key consolidation adjustments and the elements within the group financial statements. Ask yourself: what headings in the income statement or balance sheet will be affected by this transaction/adjustment? And how will this transaction/adjustment affect the key consolidation calculations: goodwill, minority interest and consolidated retained earnings? You cant predict which of these complexities youll face in the exam, of course, but you can ensure that you are able to draft the basic calculations for the big three: goodwill, minority interest and group retained earnings. This paper is designed to test your application of skills, so learning consolidation by rote is a dangerous game. By taking the time to understand the basic consolidation adjustments, you will have s

This paper is designed to test your application of skills, so learning consolidation by rote is a dangerous game
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prepared yourself for adapting your knowledge to preparing the primary financial statements for the group. Section B: the measurement of income and capital The syllabus content for this section includes substance over form, profit measurement and asset valuations, financial instruments and employee benefits. The weighting (about 20 per cent of each diet) requires me to include one or more of these areas in the exam and to ensure that the paper meets the second main learning outcome. Why, then, are students often unprepared for such questions when its obvious that they will be asked? The two areas that you need to be comfortable with here are initial recognition and measurement, and the rules for subsequent measurement. When you feel that youve studied them fully, ask yourself: do I know when this asset/liability/cost/ revenue will be included in the statements? And how it will be valued year on year? You will be expected to classify financial instruments, record them and measure them according to that classification. You should be able to apply substance over form to a range of transactions, justifying your conclusion by referring to international guidance and making your answer specific by discussing each detail of the transaction provided in the question. The ability to make your answer specific to the scenario is the difference between identify and apply. P8 is a test of practical skills, so few marks will be awarded for general accounting knowledge. Section C: Analysis and interpretation of financial accounts Traditionally, P8 candidates have been poor at analysis surprising, given that they know it constitutes 35 per cent of the syllabus although I have seen a significant improvement in recent exams. Candidates are often required to read a scenario, study the financial information it provides, calculate some common ratios and comment on the companys performance etc. The key to scoring well on such questions without wasting valuable time is to focus on the most relevant information. Scan the financials to get a feel for the entity. Choose the most appropriate ratios to its situation eg, is it raising external debt, mounting a takeover, considering an investment etc? Youll usually score one mark per pair of ratios, so dont waste time preparing pages of them. To ensure that your report meets the clients needs, ask yourself the following questions: would the recipient be happy to pay for my report? Have I addressed their main concerns? And have I highlighted the main features and risks of the entity? Higher-level skills are again being tested here, so its important to be able to pinpoint the relevant factors and explain their impact on the entity. A colleague once said to me: Students would score well in these questions if their reports contained the word because repeatedly. She was right because that would signify that the candidates were not only identifying an issue but also discussing its effects. An appreciation of the time scales implied by the scenario is also important. For example, there is little point in suggesting a share issue as the main solution if the business has a cash crisis and has breached its banking agreements. That could take months and the firm would have gone bust by then. Attaching schedules to your recommendations can add relevance and authenticity to your report. Section D: developments in external reporting This part carries a ten per cent weighting in the syllabus. Now that youre working towards being a professionally qualified

PAPER P8

accountant, its important to keep abreast of significant technical changes in external reporting. The learning system covers the main ones, but you should also set aside some time to check for updates. Half an hour every month isnt a lot of time to dedicate to this, yet it would be so worthwhile. Use it to browse the IASBs web site (www.iasb.org) for new standards and news about the project to converge IFRS and US Gaap. Also look out for relevant articles in Financial Management and other CIMA publications. If I had to give only one piece of advice to P8 candidates, it would be to attempt as many practice questions as possible. You will start to see a pattern in terms of how the various areas are tested and what skills you have to demonstrate in order to pass the exam. As Gary Player, one of golfs all-time greats, once said when a spectator shouted that he had been lucky to hole a difficult bunker shot: Yes, its amazing. The more I practise, the luckier I get.

P8 further reading

C Gowthorpe, Financial Analysis CIMA Official Learning System (2009 edition), CIMA Publishing, 2008.

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