ACCA APPROVED CONTENT PROVIDERACCA PasscardsPaper P2Corporate Reporting (International and United Kingdom)Passcards for exams up to June 2015ACP2(INT)PC14.indd 1 29/05/2014 17:30Professional Paper P2Corporate Reporting (International and UK )(000)ACP2PC14 Int_FP_Ricoh.qxp5/16/20142:06 AMPage iFirst edition 2007, Ninth edition June 2014ISBN 9781 4727 1130 4e ISBN 9781 4727 1186 1British Library Cataloguing-in-Publication DataA catalogue record for this book is available from theBritish LibraryYour learning materials, published by BPP LearningMedia Ltd, are printed on paper obtained from traceablesustainable sources.Published byBPP Learning Media Ltd,BPP House, Aldine Place,142-144 Uxbridge Road,London W12 8AAwww.bpp.com/learningmediaPrinted in the UK by RICOH UK LimitedUnit 2Wells PlaceMersthamRH1 3LGAll rights reserved. No part of this publication may bereproduced, stored in a retrieval system or transmitted, inany form or by any means, electronic, mechanical,photocopying, recording or otherwise, without the priorwritten permission of BPP Learning Media.BPP Learning Media Ltd2014(000)ACP2PC14 Int_FP_Ricoh.qxp5/16/20142:06 AMPage iiContentsPage iiiPrefaceWelcome to BPP Learning Medias new syllabus ACCA Passcards for Professional Paper P2 CorporateReporting (International and UK Stream). They focus on your exam and save you time. They incorporate diagrams to kick start your memory. They follow the overall structure of BPP Learning Medias Study Texts, but BPP Learning Medias ACCAPasscards are not just a condensed book. Each card has been separately designed for clear presentation.Topics are self contained and can be grasped visually. ACCA Passcards are still just the right size for pockets, briefcases and bags.Run through the Passcards as often as you can during your final revision period. The day before the exam, tryto go through the Passcards again! You will then be well on your way to passing your exams.Good luck!(000)ACP2PC14 Int_FP_Ricoh.qxp5/16/20142:06 AMPage iiiContents PrefacePage1 Financial reporting framework 12 Professional and ethical dutyof the accountant 73 Environmental and social reporting 134 Non-current assets 215 Employee benefits336 Income taxes 417 Financial instruments 478 Share-based payment 639 Provisions, contingencies and EARP 6710 Related parties 7111 Leases75Page12 Revision of basic groups 8113 Complex groups and joint arragements 9514 Changes in group structures 10315 Continuing and discontinued interests 10916 Foreign currency transactions and entities 11317 Group statements of cash flows 12118 Performance reporting 12719 Current developments 14520 Reporting for specialised entities 15121 Reporting for small and medium-sizedentities 159(000)ACP2PC14 Int_FP_Ricoh.qxp5/16/20142:06 AMPage iv1: Financial reporting frameworkTopic ListRegulatory frameworkConceptual framework Revenue recognitionThis chapter sets the scene for your Corporate Reportingstudies.The reporting environment changes constantly throughnew regulations, standards etc.International influences are increasing, through the IASBand multinational business.(001)ACP2PC14 Int_CH01.qxp5/16/20142:07 AMPage 1RegulatoryframeworkRevenuerecognitionConceptualframeworkRegulatory frameworkNational Listing Rules tobe complied with by listedcompanies.Listed companies havecomplied with IAS since2005.IASC FoundationTrusteesInternational StandingStandardsAccounting Interpretations AdvisoryStandardsCommitteeCouncilBoard (SIC) (SAC)(IASB)InternationalAccounting StandardsEuropean UnionStock ExchangeOtherNational laws Take precedence overIFRS/IASOECD Undertakes its own researchinto accounting standards, viaad hoc working groups,issuing guidelines formembers(001)ACP2PC14 Int_CH01.qxp5/16/20142:07 AMPage 2Revenuerecognition1: Financial reporting framework Page 3RegulatoryframeworkConceptualframeworkConceptual framework a statement of generally accepted theoretical principles which form theframe of reference for financial reporting.Avoids patchwork or firefighting approachLess open to criticism of political/externalpressureSome standards may concentrate on theincome statement, others on the SOFP AdvantagesFinancial statements are intended for a varietyof users single framework may not suit allMay need different standards for differentpurposesPreparing and implementing standards is stilldifficult with a frameworkDisadvantages

(001)ACP2PC14 Int_CH01.qxp5/16/20142:07 AMPage 3RevenuerecognitionRegulatoryframeworkConceptualframeworkIASB Conceptual FrameworkThe IASB Framework for the Preparation and Presentation of Financial Statements was produced in 1989 andis gradually being replaced by the new Conceptual Framework for Financial Reporting.It is a joint IASB/FASB project and is being produced in phases. Phase 1: Chapters 1 and 3, published in September 2010 Chapter 1: The objective of general purpose financial reporting Chapter 3: Qualitative characteristics of useful financial information Chapter 2 The Reporting Entity has not yet been published and is still an ED Chapter 4 includes the remaining chapters of the 1989 Framework: Underlying assumption The elements of financial statements Recognition of the elements of financial statements Measurement of the elements of financial statements Concepts of capital and capital maintenance Discussion paper issued in July 2013 proposing topical areas for revision and amendment(001)ACP2PC14 Int_CH01.qxp5/16/20142:07 AMPage 4Revenuerecognition1: Financial reporting framework Page 5RegulatoryframeworkConceptualframeworkIAS 18Revenue is that which arises in the course of ordinary activities such as that from sales, services provided,interest, royalties and dividends. Fair value of considerationreceived/receivable. Deferred amountsdiscounted In a sale financed by the seller, anydifference between the fair value of theitem and the nominal sales value shouldbe accounted for as interest revenueMeasurementIncludes only those amounts receivable by the entity on itsown account. Not sales, goods and sales tax collected byagent to be passed to the principal.Recent developmentsIAS 18 was amended to give guidance on whether an entityacts as principal or agent. In addition, an ED issued in 2010and re-issued in November 2011 proposes changes to theaccounting for revenue recognition in contracts withcustomers.(001)ACP2PC14 Int_CH01.qxp5/16/20142:07 AMPage 5RevenuerecognitionRegulatoryframeworkConceptualframeworkRecognitionWhen the following are met:1 Transfer of significant risks and rewards ofownership (usually legal title)2 No more control over goods sold3 Amount of revenue can be reliably measured4 Probable that debt will be repaid5 Transaction costs can be reliably measuredGoods Conditions 3 to 5 as for goods The stage of completion of the transaction atthe year end can be measured reliably and aproportion applied to the revenue Interest time proportion basis (effective yield) Royalties accruals basis Dividends when the right to the dividend isestablishedServicesDisclosureAccounting policy for each recognition; the amount of each significant category of revenue; amount of revenuefrom exchange of goods or services.(001)ACP2PC14 Int_CH01.qxp5/16/20142:07 AMPage 62: Professional and ethical dutyof the accountantTopic ListEthical theoriesIndividual influencesEthics in organisationsProfessional ethicsEthics in the examEthics are an important part of the ACCA qualification.This chapter is concerned with the professional integrityof the accountant and director.(002)ACP2PC14 Int_CH02.qxp5/16/20142:07 AMPage 7Ethical theories IndividualinfluencesEthics inthe examProfessionalethicsEthics inorganisationsLack of objective standardsNon-cognitivism no possibility of acquiring objectiveknowledge of moral principles.Moral relativism right and wrong are culturallydetermined.Objective standardsCognitivism objective, universal principles exist andcan be known, ethics can be regarded as absolute.PluralismDifferent views may exist but it should be possible toreach a consensus; morality is a social phenomenon.EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market).Teleological Consequentalist ethicsDeontological ethicsMoral judgements based on outcomes orconsequences. Utilitarianism means acting for thegreatest good to the greatest number.Kant stated that acts can be judged in advance bymoral criteria: Do what others should be doing Treat people as autonomous beings and not asmeans to an end Act as if acting in accordance with universal laws(002)ACP2PC14 Int_CH02.qxp5/16/20142:07 AMPage 8Ethical theories IndividualinfluencesEthics inthe examProfessionalethicsEthics inorganisations2: Professional and ethical duty of the accountant Page 9National and cultural beliefsDifferences lie in four main areas. Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (money/possessions vpeople/relationships)MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences.Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong.Moral developmentKohlbergs three levels ethics determined by:Rewards/punishments (Pre-conventional)Others expectations (Conventional)123 Individuals own decisions (Post-conventional)Locus of controlEducation and employmentPeoples education/work background seems to be moresignificant with globalisation.Influence individuals believe they have over their ownlives. Internal individuals have significant influence External lives shaped by luck/circumstances(002)ACP2PC14 Int_CH02.qxp5/16/20142:07 AMPage 9Ethical theories IndividualinfluencesEthics inthe examProfessionalethicsEthics inorganisationsEthicsNot necessarilyenforced by lawA code of moral principles that people follow with respect to what is right or wrong Personal ethics eg deriving from upbringingor political or religious beliefs Professional ethics eg medical ethics Organisation culture Organisation systems may be in a formalcode reinforced by the overall statement ofvaluesEthical systems Two approaches Compliance based ensures that the companyacts within the letter of the law. Violations areprevented, detected and punished. Integrity based combines a concern for thelaw with an emphasis on managerialresponsibility for ethical behaviours. Strives todefine companies guiding values, aspirationsand pattern of thought and conduct.(002)ACP2PC14 Int_CH02.qxp5/16/20142:07 AMPage 10Ethical theories IndividualinfluencesEthics inthe examProfessionalethicsEthics inorganisations2: Professional and ethical duty of the accountant Page 11This lays out ACCAs rules stating the ethics and behaviour required by allmembers and students of the ACCA. Guidance is in the form of fundamentalprinciples (see below), specific guidance statements and explanatory notes.Integrity Members should be straightforward and honest in all business and professional relationships.Objectivity Members should not allow bias, conflicts of interest or undue influence of others to overrideprofessional or business judgements.Professionalcompetenceand due careMembers have a continuing duty to maintain professional knowledge and skill at a level required toensure that a client or employer receives competent professional service based on currentdevelopments in practice, legislation and techniques. Members should act diligently and in accordancewith applicable technical and professional standards when providing professional services.Confidentiality Members should respect the confidentiality of information acquired as a result of professional andbusiness relationships and should not disclose any such information to third parties without proper orspecific authority or unless there is a legal or professional right or duty to disclose. Confidentialinformation acquired as a result of professional and business relationships should not be used for thepersonal advantage of members or third parties.ProfessionalbehaviourMembers should comply with relevant laws and regulations and should avoid any action thatdiscredits the profession.Code of ethics and conduct(002)ACP2PC14 Int_CH02.qxp5/16/20142:07 AMPage 11Ethical theories IndividualinfluencesEthics inthe examProfessionalethicsEthics inorganisationsEthics are most likely to be considered in the context of the accountants role as adviser to the directors.Question 1, the case study, nearlyalways involves an ethical dilemmarelating to creative accounting.(002)ACP2PC14 Int_CH02.qxp5/16/20142:07 AMPage 123: Environmental and social reportingTopic ListEnvironmental reportingSustainabilitySocial responsibilityHuman resource accountingThese soft issues deserve just as much attention as themore technical topics.Environmental issues came up under the previoussyllabus in connection with directors social responsibility.(003)ACP2PC14 Int_CH03.qxp5/16/20142:06 AMPage 13Human resourceaccountingSustainability SocialresponsibilityEnvironmentalreportingEnvironmental accountingEnvironmental issues are likely to have a growing impact on business in the future due to forthcominglegislation, consumer pressure and so on.What is environmental accounting? Recognising and seeking to mitigate the negative environmental effects of conventional accounting practice Separately identifying environmentally related costs and revenues within the conventional accountingsystems Taking active steps to set up initiatives in order to ameliorate existing environmental effects of conventionalaccounting practice Devising new forms of financial and non-financial accounting systems, information systems and controlsystems to encourage more environmentally benign management decisions(003)ACP2PC14 Int_CH03.qxp5/16/20142:06 AMPage 143: Environmental and social reporting Page 15What is environmental reporting? Developing new forms of performancemeasurement, reporting and appraisal for bothinternal and external purposes Identifying, examining and seeking to rectify areason which conventional (financial criteria) andenvironmental criteria are in conflict Experimenting with ways in which sustainabilitymay be assessed and incorporated intoorganisational orthodoxyImpact on financial statementsNo disclosure requirements relating to environmentalissues at present. Some companies adopt voluntarydisclosures (descriptive and unquantified) in thefollowing areas. Contingent liabilities Exceptional charges Management Commentary comments Profit and capital expenditure forecastsIAS 37 Provisions, contingent liabilities and contingentassets (see Chapter 9) addresses environmentalliabilities (including site restoration costs).Questions on environmental accounting are a good bet you can always write something!(003)ACP2PC14 Int_CH03.qxp5/16/20142:06 AMPage 15Human resourceaccountingSustainability SocialresponsibilityEnvironmentalreportingPressure is mounting for companies to become more publicly accountable.GRI guidelines1 Vision and strategy2 Profile3 Governance structure andmanagement systems4 GRI content index5 Performance indicators Economic Environmental SocialLong-termMulti-stakeholderInternationalGlobal Reporting InitiativeAn increasing numberof companies followGRI guidelines eg Shell, BA(003)ACP2PC14 Int_CH03.qxp5/16/20142:06 AMPage 16Human resourceaccountingSustainability SocialresponsibilityEnvironmentalreporting3: Environmental and social reporting Page 17Few organisations would admit to being irresponsible. However, social responsibility as practised by businessis controversial. A socially responsible business engages in activities and incurs costs not very relevant to itsbusiness mission but which benefit society or groups within it.Examples Charitable donations Secondment of staff to voluntary organisations Imposing stricter pollution limits than requiredby law Refusing to deal with suppliers who employchild labourThe stakeholder view of company objectives is that many groups of people have an interest in what the companydoes. Management must balance the profit objective with the pressures from the non-shareholder groups.(003)ACP2PC14 Int_CH03.qxp5/16/20142:06 AMPage 17Human resourceaccountingSustainability SocialresponsibilityEnvironmentalreportingShould social responsibility come at the expense of profit? Its shareholders money The business of business is making money; itsfor governments to impose the law; raise taxes Society, not business, is the best judge of moralpriorities and social welfare Its patronising to a workforce, whose lives mightbecome controlled by the companyAgainst Property rights are not the only rights Businesses get government support Externalities businesses often don't pay thecosts they impose on others Businesses are not just economic machines butsocial institutions Shareholders rarely exercise power Society is not just a market place Social responsibility is good PR Social responsibility pre-empts legislationForThere are no right or wrong answers to thiskind of question, but you must support yourviews with reasons.(003)ACP2PC14 Int_CH03.qxp5/16/20142:06 AMPage 18Human resourceaccountingSustainability SocialresponsibilityEnvironmentalreporting3: Environmental and social reporting Page 19Human asset accounting was developed, later broadened into intellectual assets.Implications People are a resource Organisation must protect its investment Deterioration in attitudes is a cost to thecompanyBasic principle Employees are assets Competitive advantage is gained byeffective use of people(003)ACP2PC14 Int_CH03.qxp5/16/20142:06 AMPage 19Notes(003)ACP2PC14 Int_CH03.qxp5/16/20142:06 AMPage 204: Non-current assetsTopic ListDefinition of an assetIASs 16, 20 and 23ImpairmentInvestment propertyIAS 38GoodwillYou should have met IAS 16 in your earlier studies. It is afairly uncontroversial standard, though detailed.IASs 20 and 23 are covered only very briefly, as theyshould be familiar to you.IAS 40 Investment property is fairly straightforward.The treatment of goodwill changed following the revisionof IFRS 3 Business combinations.(004)ACP2PC14 Int_CH04.qxp5/16/20142:06 AMPage 21Goodwill IAS 38InvestmentpropertyImpairment IASs 16,20 and 23Definition of an assetIASB Framework: an asset is a resource controlledby an entity as a result of past events and fromwhich future economic benefits are expected to flowto the entityASB (UK): assets are rights or other access tofuture economic benefits controlled by an entity asa result of past transactions or eventsFASB (USA): assets are probable future economicbenefits obtained or controlled by a particular entityas a result of past transactions or eventsKey points Future economic benefit Control Transaction to acquire control has taken place(004)ACP2PC14 Int_CH04.qxp5/16/20142:06 AMPage 22Goodwill IAS 38InvestmentpropertyImpairment IASs 16,20 and 234: Non-current assets Page 23Definition of an assetInitial measurementOn initial recognition, property, plant and equipment(PPE) is measured at its cost. Finance costs must be capitalised if they aredirectly attributable to the acquisition,construction or production of a qualifying assetas part of its cost All other borrowing costs must be expensed Costs of dismantling andremoving the asset andrestoring the site areincluded to the extent thatthey are recognised as aprovision under IAS 37.Directly attributablecosts are included, egacquisition, sitepreparation, installation,delivery and professionalfees.PPE must be written down where necessary to its recoverable amount following IAS 36.Subsequent expenditure (repairs and maintenance) must be recognised in profit or loss as it is incurred,unless: It enhances the economic benefits A component of an asset that is treated separately for depreciation purposes has been restored or replaced It relates to a major inspection/overhaul restoring economic benefits consumed and reflected in depreciationIAS 16 Property, plant and equipment(004)ACP2PC14 Int_CH04.qxp5/16/20142:06 AMPage 23Goodwill IAS 38InvestmentpropertyImpairment IASs 16,20 and 23Definition of an assetDepreciation Depreciable amount (cost residual value) of PPEshould be allocated on a systematic basis overuseful life Depreciation should be recognised as anexpense unless included in carrying value ofanother asset (eg capitalising depreciation onassets used for development)Main points Useful life and depreciation method should bereviewed period at least annually and adjustedfor current and future periods where necessary Investment properties are still exempt fromdepreciationOther pointsSubsequent measurement Cost model: is cost less accumulated depreciation and impairment losses. Revaluation model: carry at arevalued amount less subsequent accumulated depreciation/impairment losses.(004)ACP2PC14 Int_CH04.qxp5/16/20142:06 AMPage 244: Non-current assets Page 25Revaluations gains are credited to a revaluation surplus except to the extent that they reverse revaluationdecreases of the same assets in which case P/L for the yearRevaluation decreases are charged First against any revaluation surplus relating to the same asset Thereafter in profit or lossRevaluationThere was a problem in the past with cherry pickingfor revaluation. Also, valuations became out of date.Under the allowed alternative of IAS 16, revaluingassets is still optional, but:Where a policy of revaluation is adopted, it must beapplied to a whole class of assets.The valuations must be kept up to date: annually forsignificant movements/volatile items, 3-5 years forother items.(004)ACP2PC14 Int_CH04.qxp5/16/20142:06 AMPage 25IAS 20 Government grantsProblems: Conflict of accruals vs prudence.Matching is difficult.Accounting entriesRevenue grantsDebit CashCredit P/LIn expenditure periodCapital grantsDebit CashCredit Deferred incomeOr Asset accountRelease to P/L overexpected useful lifeGoodwill IAS 38InvestmentpropertyImpairment IASs 16,20 and 23Definition of an asset Matched in P/L with related costs on asystematic basis Grants not recognised until reasonably certainconditions of receipt complied with Capital grants are presented either as deferredincome or by deducting grant in arriving atcarrying value of asset Revenue grants are shown as other income ordeducted from the related expense If repayable, accounted for as a change inaccounting estimate (IAS 8), ie in current periodAccounting treatmentIAS 23 Borrowing costsMust be capitalised if they are directly attributable Other borrowing costs must be expensed(004)ACP2PC14 Int_CH04.qxp5/16/20142:06 AMPage 26Goodwill IAS 38InvestmentpropertyImpairment IASs 16,20 and 234: Non-current assets Page 27Definition of an assetIAS 36Only review assets for impairmentif there are indicators of it, eg: Decline in market value Adverse change in market,technology, economics or law Increased interest rates Fall in value below carryingvalue Obsolescence or physicaldamage Change in use Poor performanceIf possible test individual assets,otherwise cash generating unit(CGU)Impairment losses arerecognised: For non-revaluedassets arerecognised in P/L For revalued assetsaccording to therelevant IFRS May be reversed ifevents causing itreverse An impairment lossrecognised forgoodwill is notreversedCompare carrying value with recoverable amount An impairment loss for a CGU should beallocated First to any goodwill of the CGU Then to other assets on a pro-rata basis,but not below recoverable amount Under IAS 36, impairment losses are nowrecognised for intangible assets with anindefinite useful life and goodwill acquired in abusiness combination Allocation of loss with unallocated corporateassets or goodwillWhere not all assets or goodwill have beenallocated to an individual CGU then differentlevels of impairment tests are performed toensure the unallocated assets are tested.(004)ACP2PC14 Int_CH04.qxp5/16/20142:06 AMPage 27Goodwill IAS 38InvestmentpropertyImpairment IASs 16,20 and 23Definition of an assetQuestions are likely to involve both calculation and discussion. Impairmenthas come up nearly every sitting of the current syllabus.Test of group of CGUs Test the smallest group of CGUs thatincludes the CGU under review and towhich the goodwill can be allocated/aportion of the carrying amount of corporateassets can be allocated on a reasonableand consistent basis.Test of individual CGUs Then test the individual CGUs (includingallocated goodwill and any portion of thecarrying amount of corporate assets thatcan be allocated on a reasonable andconsistent basis) basis.(004)ACP2PC14 Int_CH04.qxp5/16/20142:06 AMPage 28Goodwill IAS 38InvestmentpropertyImpairment IASs 16,20 and 234: Non-current assets Page 29Definition of an assetIAS 40Accounting treatment Choice of fair value model or cost model Fair value model Revalue to fair value at each accounting date Do not depreciate Gain or loss to P/L Cost model Follow cost model of IAS 16Note. Leasehold investment properties are accountedfor as finance leases.ExceptionsOwner-occupied property or property held for sale to orbeing constructed for third parties are not investmentproperty (IAS 16, IAS 2, IAS 11 respectively).Disclosures Criteria for classification Assumptions in determining fair value Use of independent professional valuer Rental income and expenses Any restrictions or obligationsAn investment property is property (land or building) held to earn rentals or for capital appreciation or both, ratherthan for: Use in the production or supply of goods or services or for administrative purposes Sale in the ordinary course of business(004)ACP2PC14 Int_CH04.qxp5/16/20142:06 AMPage 29Goodwill IAS 38InvestmentpropertyImpairment IASs 16,20 and 23Definition of an assetIAS 38Intangible assets deals with research and development costs, as well as intangible assets.Intangible asset: an identifiable non-monetary assetwithout physical substance held for use in theproduction or supply of goods or services, for rentalor others, or for administrative purposes.Development: the application of research findings orother knowledge to a plan or design for theproduction of new/substantially improved materials,devices, products, processes, etc.Internally generated brands, mastheads,publishing titles, customer lists and similar itemsshould not be recognised as intangible assets.Internally generated goodwill should not berecognised as an asset.Research: original or planned investigationundertaken with the prospect of obtaining newscientific or technical knowledge and understanding.(004)ACP2PC14 Int_CH04.qxp5/16/20142:06 AMPage 304: Non-current assets Page 31For R & D, the problem is one of matching concept vs prudence concept.Development: useofscientific/technicalknowledgeinordertoproducenew/substantiallyimprovedmaterialsdevices, processes etc.Initial measurement R&D, as above Purchased intangibleassets capitalised atcostCircumstances Probable future economic benefits Intention to complete and use/sell Resources adequate to complete anduse/sell Ability to use/sell Technical feasibility Expenditure can be reliably measuredWrite off as incurred Write off in year of expenditure except incertain circumstances when it can be capitalised and amortisedMeasurementSubsequent measurement Cost model: cost lessaccumulated depreciation andimpairment losses Revaluation model: revaluationAmortisation Systematic over useful life At least annual review of UL and amortisation period Intangibles with indefinite useful life are not amortised butreviewed at least annually for impairmentResearch: original and planned investigation undertakenwiththeprospectofgainingnewscientificortechnicalknowledge and understanding.(004)ACP2PC14 Int_CH04.qxp5/16/20142:06 AMPage 31Goodwill IAS 38InvestmentpropertyImpairment IASs 16,20 and 23Definition of an assetGoodwill can be purchased or be acquired as part of a business combination. In either case, the treatment iscapitalisation at cost or fair value under IFRS 3.A bargain purchase arises when the fair value of theacquisition-date identifiable net assets acquired exceeds theconsideration transferred. Before recognising a gain on bargain purchase, theacquirer must reassess whether it has correctly identifiedall the assets acquired and liabilities assumed Then the acquirer must review the procedures used tomeasure the amounts recognised for: Identifiable net assets Non-controlling interest (if any) Interest previously held (if any) Consideration transferredBargain purchaseFuture economic benefits arising from assetsthat are not capable of being individuallyidentified and separately recognised Recognise as an asset and measure atcost/excess of purchase cost overacquired interest Do not amortise Test at least annually for impairment(IAS 36)DefinitionYou may be asked for a complicatedcalculation of goodwill as part of a groupaccounts question.(004)ACP2PC14 Int_CH04.qxp5/16/20142:06 AMPage 325: Employee benefits Topic ListShort-term benefitsRetirement benefitsIAS 19 Employee benefits are likely to be tested as partof a longer question rather than as a full question.(005)ACP2PC14 Int_CH05.qxp5/16/20142:06 AMPage 33Short-termbenefitsRetirementbenefitsIAS 19IAS 19 Employee benefits dealswith all employee benefits, not justpensions.ObjectivesAn entity should recognise anexpense as it consumes theeconomic benefits of employeeservice in exchange for employeebenefits and a liability wherethese are to be paid in the future. Recognise expense on an accruals basis (undiscounted) Short-term accumulating compensated absences (eg unusedholiday carried forward) are recognised when the employee rendersservice increasing entitlement to compensated absences Short-term non-accumulating compensated absences (egmaternity pay) are recognised when the absences occurAccounting treatment Wages, salaries and social security contributions Paid annual/sick leave Profit sharing and bonuses (if payable within 12 months of year end) Non-monetary benefits (eg health care, accommodation etc)Examples Short-term benefits(005)ACP2PC14 Int_CH05.qxp5/16/20142:06 AMPage 34RetirementbenefitsShort-termbenefits5: Employee benefits Page 35Retirement benefitsDefined contribution plans are post-employmentbenefit plans under which an entity pays fixedcontributions into a separate entity (a fund) and willhave no legal or constructive obligation to payfurther contributions if the fund does not holdsufficient assets to pay all employee benefitsrelating to employee service in current and priorperiods.Defined benefit plans are post-employment plansother than defined contribution plans.Defined contribution plans The company's only obligation is to pay theagreed amount (normally a percentage ofsalary) into a plan on behalf of its employee Accounting treatment: charge contributionspayable in respect of the accounting period; ifamounts paid are different, then aprepayment/accrual will appear Disclosure: expense recognised for period(005)ACP2PC14 Int_CH05.qxp5/16/20142:06 AMPage 35Increase in present value of defined benefit obligation because benefits are one yearcloser to payment. The discount rate is determined by reference to market yields onhigh quality fixed-rate corporate bonds. It is applied to the net defined benefit at the startof the accounting period.Debit Interest cost (x% b/d obligation) (P/L)Credit PV defined benefit obligation (SOFP)RetirementbenefitsShort-termbenefitsA suggested approachCost RecogniseInterest coston obligationDefined benefit plans Role of actuary: calculates P/L charge for year; provides rateof expected return on assets and discount rate for liabilities(interest cost); values the assets and liabilities of pensionfund, determines contributions required Accounted for by actuary measuring the liability using theprojected unit credit methodDefined benefit plans The projected unit credit methodsees each period of service asgiving rise to an additional unit ofbenefit entitlement and measureseach unit separateey to build upthe final obligation(005)ACP2PC14 Int_CH05.qxp5/16/20142:06 AMPage 365: Employee benefits Page 37CurrentservicecostsIncrease in the present value of defined benefit obligation as the result of employeeservice in the current period (provided by the actuary, but may need to be discountedback to period end).DEBIT Current service cost (P/L)CREDIT PV defined benefit obligation (SOFP)Interest onplan assetsLong-term expected increase in assets based on discount rate (determined as for interestcost on obligation) and applied to b/d assets.DEBIT Plan assets (SOFP)CREDIT Expected return (x% b/d assets) (P/L)(Technically the expected return is also time apportioned on contributions less benefitspaid in year)Gains andlosses onsettlementDifference between the value of the obligation being settled and the settlement priceGainDEBIT PV defined benefit obligation (SOFP)CREDIT Service cost (P/L)LossDEBIT Service cost (P/L)CREDIT PV defined benefit obligation (SOFP)(005)ACP2PC14 Int_CH05.qxp5/16/20142:06 AMPage 37Remeasurements:actuarial gainsand losses Arising from annual valuations of obligation. On obligation, differences between actuarial assumptions and actual experienceduring the period, or changes in actuarial assumptions.GainDEBIT PV defined benefit obligation (SOFP)CREDIT Other comprehensive income (SPLOCI)LossDEBIT Other comprehensive income (SPLOCI)CREDIT PV defined benefit obligation (SOFP) Remeasurements:return on assetsArising from annual valuations of plan assetsGainDEBIT FV plan assets (SOFP)CREDIT Other comprehensive income (SPLOCI)Loss DEBIT Other comprehensive income (SPLOCI)CREDIT FV plan assets (SOFP)RetirementbenefitsShort-termbenefits(005)ACP2PC14 Int_CH05.qxp5/16/20142:06 AMPage 385: Employee benefits Page 39Treatment of remeasurements (actuarial gain/loss)IAS 19 requires actuarial gains and losses, now called remeasurements, tobe recognised in the period incurred.They are recognised in other comprehensive income and not reclassified(see Chapter 18) to profit or loss for the year.(005)ACP2PC14 Int_CH05.qxp5/16/20142:06 AMPage 39Short-termbenefitsRetirementbenefitsCalculation of actuarial gain/lossMarket value of plan assetsPresent value of obligation$m $mMarket value of plan assets b/d X PV of obligation at start of year XInterest on plan assets (x%) X Interest cost (x%) XContributions X Current service cost XBenefits paid (X) Past service cost XSettlements (X) Benefits paid (X)Return on plan assets: bal. figure X Settlements (X)__Market value of plan assets c/d X Actuarial (gain)/loss on obligation: bal. fig. X____PV of obligation at end of year X(005)ACP2PC14 Int_CH05.qxp5/16/20142:06 AMPage 406: Income taxesTopic ListIAS 12Deferred taxIAS 12 on current tax is straightforward and shouldpresent no problems.IAS 12 on deferred tax deals with the method ofproviding for deferred tax.The December 2007, June 2010 and June 2012 paperhad questions on deferred taxation.(006)ACP2PC14 Int_CH06.qxp5/16/20142:07 AMPage 41Deferred tax IAS 12IAS 12 requires the following treatment ofcurrent tax. Recognise a liability for amount unpaid,relating to current and prior periods Recognise an asset for amountsoverpaid/tax lossesSPLOCI disclosureCurrent tax XUnder/(over) statement of prior periods XDeferred tax expense/(income) relating to Origination and reversal of temporarydifferences X Reduction in tax rate (X)Share of tax of associates X__X____SOFP disclosure Distinguish between current and deferred tax assetsand liabilities Deferred tax assets/liabilities are based as non-current(006)ACP2PC14 Int_CH06.qxp5/16/20142:07 AMPage 42Deferred tax IAS 126: Income taxes Page 43Deferred taxThe tax charge to P/L is often differentfrom tax rate times the profit before taxfigure because of the differences whichexist between tax rules and financialaccounting principles.Permanent differences arise wherecertain items in the I/S are either nottaxable or not allowable.Temporary differences arise whereitems are taxable/allowable but are dealtwith in the tax computation in periodsdifferent from those in which they areincluded in the financial statements.Basis of provision Nil provision no provision Full provision temporary differences provided for in full Partial provision accounted for only to the extent that it isprobable that a liability or asset will crystalliseExamples Accelerated tax depreciationDevelopment costs Intragroup profits in inventoryUnrelieved tax losses Pension liabilitiesUnremitted earnings Revaluations of subsidiariesDeferred tax is the tax attributableto temporary differences.(006)ACP2PC14 Int_CH06.qxp5/16/20142:07 AMPage 43Deferred tax IAS 12Deferred tax is calculated by reference to the difference between the carrying value for accounts purposes andthe tax base (value attributed for tax purposes).Taxable temporary differencesTaxable temporary differences result in taxable profits in the future giving rise to a deferred tax liability Temporary differences where income or expense is included in accounting profit in one period and taxableprofit in another are called timing differences Interest revenue accrued for accounting purposes but taxed when received Accelerated tax depreciation where tax (or 'capital') allowances are received at a rate higher than theaccounting depreciation rate Development costs which are a deferred expense for accounting purposes, but receive a tax deductionwhen paid Temporary differences also arise on: Revaluations: the gain will be taxable in the future either on sale or if not sold by generating taxableincome in excess of tax depreciation; the temporary difference is the estimated chargeable gain Fair value adjustments: similar to revaluation but often occurring on consolidation(006)ACP2PC14 Int_CH06.qxp5/16/20142:07 AMPage 446: Income taxes Page 45Deductible temporary differencesDeductible temporary differences result intax deductible amounts in the futuregiving rise to a deferred tax asset. Examples are: Accrued expenses/provisionswhich are not deducted for taxpurposes until paid Downward revaluations where noadjustment is made for taxpurposes and hence the tax baseexceeds carrying value Deferral method: tax effects of temporary differences arecalculated using tax rates current when differences arise Liability method: deferred tax liabilities are calculated atthe rate at which it is estimated that tax will be paid (orrecovered) when the temporary differences reverseAlternative methods(006)ACP2PC14 Int_CH06.qxp5/16/20142:07 AMPage 45Deferred tax IAS 12 Deferred tax is provided for under thefull provision liability method but usingtax rate enacted or substantiallyenacted at the balance sheet date Deferred tax assets and liabilities canonly be offset if: The entity has a legal right to set offcurrent tax assets and liabilities, and They relate to the same tax authority A deferred tax asset is recognised forunused tax losses/credits when it isprobable that future taxable profit will beavailable to relieve them Deferred tax assets and liabilitiesshould not be discountedAccounting treatmentDisclosure Deferred tax asset/liability broken down by type oftemporary difference Amount of current/deferred tax charged or crediteddirectly to equity (eg revaluation)Statement of financial position Major components of the tax expense or income (seebefore) Explanation of relationship between tax expense andaccounting profit, eg reconciliation of accounting profit tax rate and tax expense identifying effect of temporarydifferences and/or changes in tax rateSPLOCI(006)ACP2PC14 Int_CH06.qxp5/16/20142:07 AMPage 467: Financial instrumentsTopic ListFinancial instrumentsIAS 32IFRS 9/IAS 39IFRS 7Recent developmentsFair value measurementThis is a controversial and complex topic. It is also thesubject of ongoing change as IFRS 9 replaces IAS 39.The examiner is fond of this topic and has tested it atevery sitting.(007)ACP2PC14 Int_CH07.qxp5/16/20142:06 AMPage 47IAS 32 Fair valuemeasurementFinancialinstrumentsIFRS 7 RecentdevelopmentsIFRS 9/IAS 39Financial instrumentAny contract that gives rise to a financialasset of one entity and a financial liabilityor equity instrument of another.Cash; equity instrument of another entity;contractual right to receive cash/otherfinancial assets; contract that can besettled in the entitys own equityinstruments and may be either a derivativeor a non-derivative.Relevant standardsIAS 32 deals with the classification of instruments as debt orequity.IFRS 9 has replaced IAS 39 in respect of classification andmeasurement of financial assets and liabilities andderecognition and will eventually replace it all.IAS 39 dealt with the recognition and measurement of financialinstruments, however it is gradually being replaced by IFRS 9.IFRS 7 provides disclosure requirements for financialinstruments.Financial asset(007)ACP2PC14 Int_CH07.qxp5/16/20142:06 AMPage 48IAS 32 Fair valuemeasurementFinancialinstrumentsIFRS 7 RecentdevelopmentsIFRS 9/IAS 397: Financial instruments Page 49Equity instrumentFinancial liabilityContractual obligation to deliver cash/otherfinancial asset; contractual obligation toexchange financial instruments underpotentially unfavourable conditions.Contract that evidences a residual interestin the assets of an entity after deducting allits liabilities. Financial instruments should be classified as either Liability (debt) or Equity Compound instruments (exhibiting characteristics of both)must be split into their debt and equity components Substance rather than legal form applies (egredeemable preference shares are a financial liability) Interest, dividends, loss or gains relating to a financialinstrument classified as a liability are reported in theSPLOCI, while distributions to holders of equityinstruments are debited directly to equity (in the SOCE) Offset of a financial asset and liability is only allowedwhere there is a legally enforceable right and the entityintends to settle net or simultaneouslyIAS 32 presentation(007)ACP2PC14 Int_CH07.qxp5/16/20142:06 AMPage 49IAS 32 Fair valuemeasurementFinancialinstrumentsIFRS 7 RecentdevelopmentsIFRS 9/IAS 39Recognise financial instruments in the SOFP when the entitybecomes a party to the contractual provisions of the instrument:Derecognise when Contractual rights to cashflows expire, or Substantially all risks and rewards of ownership aretransferred to another partyFinancial liabilities are classified as: FV through profit or loss (if held for trading or designated as such), or Amortised cost. [IFRS 9]Derecognise when financial liability isextinguished.Financial assets are classified as: Fair value, or Amortised coston the basis of the business model for managing the assetand its contractual cashflow characteristics. [IFRS 9]Reclassify debt instruments when an entity changes itsbusiness model for managing financial assets.IFRS 9 prohibits the reclassification offinancial liabilities.(007)ACP2PC14 Int_CH07.qxp5/16/20142:06 AMPage 507: Financial instruments Page 51Initial measurement Subsequent measurement Related income/expenseFinancial assets atamortised costFV of consideration given +transaction costsInitial measurement - principalrepayments +/- cumulativeamortisation - impairmentsInterest income (received +winding up) is recognised in profitor lossFinancial assets atfair valueFV of consideration given Remeasured to FV at eachperiod endChanges in FV are recognised in Profit or loss OCI if asset is equity instrument not held for trading and election madeFinancial liabilities atamortised costFV of consideration received- transaction costsInitial measurement - principalrepayments +/- cumulativeamortisation - impairmentsInterest expense (paid + windingup) is recognised in profit or lossFinancial liabilities atFVTPLFV of consideration received Remeasured to FV at eachperiod endChanges in FV of financial liabilitiesheld for trading are recognised inprofit or lossThe change in FV of a financial liability DESIGNATED as FVTPL is split into two elements: Gain or loss from credit riskrecognise in OCI Other gain or lossrecognise in profit or loss (007)ACP2PC14 Int_CH07.qxp5/16/20142:06 AMPage 51IAS 32 Fair valuemeasurementFinancialinstrumentsIFRS 7 RecentdevelopmentsIFRS 9/IAS 39Amortised cost ExampleThe method used in the following example applies to deep discount bonds and other similar instruments(including zero coupon bonds).Debt issued for $400,000 (nominal) on1.1.20X1 for proceeds of $315,526;redeemed for $400,000 (ie par) on31.12.20X5Interest rate = 4%IRR = 9.5%$Annual interest payments(4% $400,000 5) 80,000Deep discount $(400,000 315,526) 84,474______164,474____________At inception DEBIT Cash $315,526CREDIT Liability $315,526(007)ACP2PC14 Int_CH07.qxp5/16/20142:06 AMPage 527: Financial instruments Page 53Winding upP/L Actual interest interest charged Liability inYear charge payable to P/L closing SOFP*$ $ $ $20X1 29,975 16,000 13,975 329,50120X2 31,303 16,000 15,303 344,80420X3 32,756 16,000 16,756 361,56020X4 34,348 16,000 18,348 379,90820X5 36,092 16,000 20,092 400,000______ ______ ______164,474 80,000 84,474______ ______ ____________ ______ ______*9.5% opening liability in SOFPFair value is measured as quoted market price in an active market where possible.(007)ACP2PC14 Int_CH07.qxp5/16/20142:06 AMPage 53IAS 32 Fair valuemeasurementFinancialinstrumentsIFRS 7 RecentdevelopmentsIFRS 9/IAS 39Impairment [IAS 39] Impairment review where evidence offinancial asset being impaired Original effective interest rate shouldbe used when discounting futurecash flows to calculate theimpairment Impairment loss is charged to P/L Where financial asset suffersimpairment loss, cumulative losseson fair value adjustments previouslyrecognised in equity are recycled inP/L as well as impairment loss Reversal: P/LEmbedded derivatives[IFRS 9]= Derivatives embedded within a hostcontract, eg construction contract inforeign currencyHOST FINANCIAL ASSETSeparate derivative from host andaccount for as a derivative whenconditions are met.Account for host contract as normal,eg IAS 11HOST = IFRS 9 FINANCIAL ASSETAccount for hybrid contract inaccordance with IFRS 9Hedging [IAS 39]Hedge accounting is mandatorywhere a transaction qualifies as ahedge (all three criteria met): Designated at inception as ahedge Highly effective Hedge effectiveness can bereliably measured(007)ACP2PC14 Int_CH07.qxp5/16/20142:06 AMPage 547: Financial instruments Page 55IAS 39 identifies three types of hedges which determines their accounting treatment.*IAS 39 allows the hedge of a foreign currency firm commitment to be accounted for as a cash flow hedge.Type Hedges against Accounting treatmentFair value hedge Changes in fair value of a recognised asset orliability or an unrecognised firm commitment* (orportion of either) that could affect profit or loss Gain or loss on instrument is recognised in theP/L Gain or loss on hedged item also recognised inP/L (and adjusts the carrying value of hedgeditem)Cash flow hedge Exposure to variability in cash flows attributable toa risk associated with a recognised asset or liabilitythat could affect profit or loss Gain or loss on effective portion of instrument isrecognised in other comprehensive income (andrecognised in P/L when asset or liability affectsprofit or loss, eg by interest income) Gain or loss on ineffective portion is recognisedin P/LHedge of netinvestment in aforeign operationVariability in value of the net investment in aforeign operation or monetary items accounted foras part of that net investmentAs for cash flow hedge(007)ACP2PC14 Int_CH07.qxp5/16/20142:06 AMPage 55IAS 32 Fair valuemeasurementFinancialinstrumentsIFRS 7 RecentdevelopmentsIFRS 9/IAS 39The main disclosures required are: Carrying amount of financial assets andliabilities by IFRS 9 category Reasons for any reclassification between fairvalue and amortised cost Details of assets and exposure to risk wheretransfers of assets have taken place Carrying amount of financial assets pledged ascollateral Allowance for credit losses Multiple embedded derivatives Defaults and breachesStatement of financial position Net gains/losses by IFRS 9 category Interest income/expense Impairment losses by class of financial assetStatement of profit or loss and othercomprehensive income(007)ACP2PC14 Int_CH07.qxp5/16/20142:06 AMPage 567: Financial instruments Page 57 Description of hedge Description of financial instruments designatedas hedging instruments Nature of risks being hedged Cash flow hedges: when cash flows will occur FV hedges: gains or losses on hedged itemand hedging instrument Ineffectiveness recognised in profit or lossHedge accounting By class Methods and assumptionsFair value Qualitative disclosure: managementsobjectives, policies and processes formanaging those risks Quantitative disclosure: Extent of exposure to risk Credit risk Liquidity risk Market riskRiskIn January 2011 a supplement was issued making a distinction between good book/bad book(007)ACP2PC14 Int_CH07.qxp5/16/20142:06 AMPage 57IAS 32 Fair valuemeasurementFinancialinstrumentsIFRS 7 RecentdevelopmentsIFRS 9/IAS 39Exposure Draft: Amortised cost and impairmentIFRS currently uses an incurred loss model for the impairment of financial assets. This assumes all loanswill be repaid unless there is evidence to the contrary. The proposals in the ED are: Amortised costs objective is to provide information about the effective return on a financial asset orliability by allocating interest revenue or expense over the expected life of the financial instrument More guidance on the amortised cost of a variable instrument (ie applies to spread) Impairment Effective interest rate to include an initial estimate of expected credit losses (therefore they are spreadover instruments life) Credit losses held in a separate allowance account (a reconciliation is disclosed) Losses due to changes in cash flow estimates disclosed as a separate line item Write-offs direct to Financial Asset account if considered uncollectible Disclosures to show effect of credit losses, reconciliation of non-performing financial assets and results ofany stress testingIn January 2011 a supplement was issued making a distinction between good book/bad book(007)ACP2PC14 Int_CH07.qxp5/16/20142:06 AMPage 587: Financial instruments Page 59IFRS 9 Chapter 6 Hedging Review DraftThis was issued in September 2012, taking account of comments on a 2010 ED.Under the proposals the 80%-125% 'bright line' test of whether a hedging relationship qualifies for hedgeaccounting would be replaced by an objective-based assessment: This allows genuine hedging relationships to be accounted for as such whereas the IAS 39 rules sometimesprevented management from accounting for an actual hedging transaction as a hedge Fair value hedges: the IAS 39 treatment of recognising both changes in the fair value of the hedged itemand changes in value of the hedging instrument in profit or loss will be retained, but rules changed so thathedges of investments of equity instruments held at fair value through other comprehensive income can beaccounted for as hedges Cash flow hedges: will continue to be accounted for as under IAS 39. Hedging gains and lossesrecognised in other comprehensive income will be recognised in a separate cash flow hedge reserve inequity(007)ACP2PC14 Int_CH07.qxp5/16/20142:06 AMPage 59IAS 32 Fair valuemeasurementFinancialinstrumentsIFRS 7 RecentdevelopmentsIFRS 9/IAS 39The price that would be received to sell an asset orpaid to transfer a liability in an orderly transactionbetween market participants at the measurementrate.Fair value Fair value measurementIn May 2011 the IASB published IFRS 13 Fair valuemeasurement. Its objective is to: Define fair value Set out in a single IFRS a framework for measuringfair value Require disclosure about fair value measurementsThe rules of fair value measurement have now been revised by IFRS 13 Fair value measurement.(007)ACP2PC14 Int_CH07.qxp5/16/20142:06 AMPage 607: Financial instruments Page 61IFRS 13IFRS 13 states that valuation techniques must be those which are appropriate and for which sufficient data areavailable. Entities should maximise the use of relevant observable inputs and minimise the use ofunobservable inputs.The standard establishes a three-level hierarchy for the inputs that valuation techniques use to measure fair value:Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entitycan access at the measurement date.Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability,either directly or indirectly, eg quoted prices for similar assets in active markets or for identical orsimilar assets in non active markets or use of quoted interest rates for valuation purposes.Level 3 Unobservable inputs for the asset or liability, ie using the entity's own assumptions about market exitvalue.(007)ACP2PC14 Int_CH07.qxp5/16/20142:06 AMPage 61Notes(007)ACP2PC14 Int_CH07.qxp5/16/20142:06 AMPage 628: Share-based paymentTopic ListThe issueTypes of transactionThe examiner tests this topic regularly., usually as part ofa longer question. There was a full question on it inDecember 2010.(008)ACP2PC14 Int_CH08.qxp5/16/20142:05 AMPage 63Types oftransactionTheissueShare-based paymentsShare-based payments are transactions whereby entities purchase goods and service from other parties, suchas suppliers and employees, by issuing shares or share options.The issueThis is a good example of substance over form. In the past whena limited liability company gave employees share options asremuneration, no expense was recognised in P/L.This was believed to cause economic distortions and corporategovernance concerns.(008)ACP2PC14 Int_CH08.qxp5/16/20142:05 AMPage 64Types oftransactionTheissue8: Share-based payment Page 65IFRS 2 deals with three types of share-based payment transactions. Equity settled share-based payment transactions: the entityreceives goods or services as consideration for equityinstruments or the entity (including shares or share options). Cash-settled share-based payment transactions: the entityacquires goods or services by incurring liabilities to the supplier ofthose goods and services for amounts that are based on the price(or value) of the entitys shares or other equity instruments. Choice of equity/cash settled: entity or supplier can choose whether to settle the transaction in cash orequity instruments.DEBIT Expense (P/L)CREDIT Equity (if equity-settled)CREDIT Liability (if cash-settled)Recognition(008)ACP2PC14 Int_CH08.qxp5/16/20142:05 AMPage 65Types oftransactionTheissueMeasurementChoiceEntity has the choice: if there is apresent obligation to settle in cash,treat as a cash-settled transaction.If not, treat as equity settled.Counterparty has the choice: theentity has issued a compoundfinancial instrument Treat debt component as cashsettled Treat equity component asequity settledCash-settledEg share appreciation rights.Employees become entitled to afuture cash payment based onthe increase in the entitys shareprice.Company must recogniseservices received and relatedliability as services are rendered.Liability must be recognised at fairvalue using an option pricingmodel.This fair value must be updated ateach year end.Equity-settledUse the fair value of goodsreceived ORIf these cannot be measuredreliably, measure indirectly byreference to the fair value of theequity instruments granted.Estimating fair value of equityinstruments: Shares: market price at grantdate Share options: use optionpricing model to estimate fairvalue at grant date(008)ACP2PC14 Int_CH08.qxp5/16/20142:05 AMPage 669: Provisions, contingencies and EARPTopic ListIAS 10IAS 37IASs 10 and 37 should both be familiar to you from yourearlier studies. IAS 37 is particularly topical in the light ofincreasing environmental awareness. You may get askedabout environmental liabilities as part of a disclosurequestion on the environmental report.(009)ACP2PC14 Int_CH09.qxp5/16/20142:06 AMPage 67IAS 37 IAS 10Events after the reporting period (EARPs)Events, both favourable and unfavourable, which occur between the end of the reporting period and the dateon which the financial statements are approved by the board of directors.Adjusting events are EARPs which provideadditional evidence of conditions existing atthe reporting date, and therefore need to beincorporated into the financial statements. Nongoing-concern indicators after the reportingdate are adjusting.Non adjusting events are EARPs which concernconditions which did not exist at the reporting date. Donot adjust, but disclose if non-disclosure would affect theuser's ability to make proper evaluations and decisions.Dividends proposed after reporting date: do notrecognise as a liability.Disclosure for significant non-adjusting events: nature of the event, estimate of financial effect (or statementthat estimate cannot be made).(009)ACP2PC14 Int_CH09.qxp5/16/20142:06 AMPage 68IAS 379: Provisions, contingencies and EARP Page 69IAS 10Contingent liabilityShould be disclosed unless the possibility of anyoutflow of economic benefits to settle it is remote.Contingent assetShould be disclosed where an inflow of economicbenefits is probable.IAS 37IAS 37 Provisions, contingent liabilities and contingent assets was published in 1998 to remedy some abuses ofprovisions. Entities should not provide for costs that need to be incurred tooperate in the future, if those costs could be avoided by theentitys future actions Costs of restructuring are to be recognised as a provision onlywhen the entity has an obligation to carry out the restructuring The full amount of any decommissioning costs or environmentalliabilities should be recognised from the date on which they ariseProvisionA liability of uncertain timing oramount. Liabilities are obligations totransfer economic benefits as aresult of past transactions or events.(009)ACP2PC14 Int_CH09.qxp5/16/20142:06 AMPage 69IAS 37 IAS 10YesStartProvideDisclose contingentliabilityDo nothingPresent obligationas a result of anobligation event?Possibleobligation?Probable outflow? Remote?Reliable estimate?YesNoNoNoNo (rare)YesYesYesNo(009)ACP2PC14 Int_CH09.qxp5/16/20142:06 AMPage 7010: Related partiesTopic ListRelated party disclosuresThis topic is new to you at P2, and so could well betested, either as a full question or part of a question.(010)ACP2PC14 Int_CH10.qxp5/16/20141:51 AMPage 71Related partydisclosuresKey elements: control, joint control, significant influenceA person is related to an entity if:(1) They control or jointly control the entity (Mr A & B)(2) They have significant influence over the entity (MrA & C)(3) They are key management personnel of the entityor its parent(4) They are a close family member of any individualin (1)-(3)PLUS where an individual controls/jointly controls/hassignificant influence over two entities, they are relatedMr A40%BC80%V40%X80%An entity is related to another entity if:(1) They are members of the same group (Z & Y)(2) One is an associate or JV of the other (Z & X)(3) Both are JVs of a third party (W& U)(4) One is an associate and the other a JV of a thirdparty (X & W)(5) One is a pension plan for employees of the otherT ZW U Y50%50%50%50%KEY FACTOR: SUBSTANCE OF RELATIONSHIP(010)ACP2PC14 Int_CH10.qxp5/16/20141:51 AMPage 7210: Related parties Page 73Always(1) Name of parent + ultimate controlling party(2) Key management personnel compensationWhere RP transactions have occurred disclose foreach category of related party(1) Nature of relationship(2) Amount of transactions(3) Amount of outstanding balances(4) Provision for doubtful debts(5) Bad debt expense re related parties Two entities simply because they have a directorin common Two venturers simply because they share jointcontrol of a joint venture Providers of finance, trade unions, publicutilities, government departments and agenciesin the course of their normal dealings with anentity by virtue only of those dealings A single customer, supplier, franchisor,distributor or general agent with whom an entitytransacts a significant volume of businessmerely by virtue of the resulting economicdependenceDisclosureNot necessarily related parties(010)ACP2PC14 Int_CH10.qxp5/16/20141:51 AMPage 73Notes(010)ACP2PC14 Int_CH10.qxp5/16/20141:51 AMPage 7411: LeasesTopic ListForms of leaseLesseesLessorsOther issuesCriticism of IAS 17Leasing transactions are common in practice. Theexaminer is likely to test IAS 17 in conjunction with saleand leaseback transactions or revenue recognitionaspects rather than the mechanics.(011)ACP2PC14 Int_CH11.qxp5/16/20141:51 AMPage 75Finance lease Transfers substantially all the risks andrewards of ownership of an asset to thelessee; title may or may not betransferred Comparison of present value of minimumlease payments and fair value of leasedasset is commonly used to judge whetherrisks and rewards have been transferred(no numerical guidance in IFRS) PV: calculate using the interest rateimplicit in the leaseForms of lease Criticism ofIAS 17Other issues Lessors Lessees Minimum lease payments are the payments over the leaseterm that the lessee is, or can be required to make(excluding contingent rent, costs for services and taxes tobe paid by and reimbursed to the lessor), and Lessee any amounts guaranteed by him or a partyrelated to him Lessor any residual value guaranteed to lessor bylessee, party related to lessee or independent thirdparty Lease term: the period for which the lessee hascontracted to lease the asset (primary and secondaryperiods)You should know this from your earlier studies.Operating leaseA lease other than a finance lease(011)ACP2PC14 Int_CH11.qxp5/16/20141:51 AMPage 7611: LeasesPage 77Forms of lease Criticism ofIAS 17Other issues Lessors Lessees Finance lease: record as an asset andobligation at the lower of present value of theminimum lease payments and fair value The asset should be depreciated over theshorter of the lease term and its useful life A finance charge is made to produce a constantperiodic rate of charge on the outstanding leaseobligation (use actuarial method before tax andsum of the digits method) Operating lease: rentals charged on a straight-line basis over the lease term unless anothersystematic basis is representative of usersbenefitAccounting treatment Leased assets: net carrying amount at year end date Finance lease liabilities 2 disclosure notes Reconciliation of minimum lease payments and PV Breakdown of PV For both, give maturity analysis(< 1 yr; 2-5 yrs; >5 yrs) Operating leases: future minimum lease paymentsunder non-cancellable operating leases split < 1 yr, 2-5 yrs, > 5 yrs P/L (typical disclosures): depreciation charge onassets under finance leases, finance charge onfinance leases, operating lease rentals, accountingpolicyDisclosure(011)ACP2PC14 Int_CH11.qxp5/16/20141:51 AMPage 77Forms of lease Criticism ofIAS 17Other issues Lessors LesseesLessors accounting treatmentFinance lease Recognise receivable equal to net investment in the lease as a finance lease asset Mirror image of lessee's liability plus unguaranteed residual value Unguaranteed residual value is portion of residual value of asset not guaranteed by lessee or guaranteedonly by party related to lessor Finance income recognised reflecting constant periodic rate of return on net investment outstandingOperating lease Assets held for use under operating leases, are recorded as an asset on the SOFP and income in P/L on astraight line basis unless another systematic basis is more representativeYou are unlikely to be asked for the disclosures for lessors.(011)ACP2PC14 Int_CH11.qxp5/16/20141:51 AMPage 7811: LeasesPage 79Forms of lease Criticism ofIAS 17Other issues Lessors LesseesSales and leaseback transactions If leaseback is a finance lease, defer bookprofit/ loss and amortise over lease term Double entry is:DEBIT CashCREDIT Finance lease liabilityand then as any other finance lease If leaseback transaction is an operating lease;where SP = sales proceeds; FV = fair value: If SP = FV (see IFRS 13), recognise anyprofit/loss immediately If SP < FV, recognise profit/loss immediatelyunless the apparent loss is compensated byfuture rentals at below market price, in whichcase defer and amortise If SP > FV, defer the excess over FV andamortise over lease term (ie recognise FVminus Book Value)Sale and leaseback transactions are a favourite with this examiner.(011)ACP2PC14 Int_CH11.qxp5/16/20141:51 AMPage 79Forms of lease Criticism ofIAS 17Other issues Lessors Lessees IAS 17s key usefulness is theenforcing of application ofeconomic substance over legalform Without such enforcementleasing would be an example ofoff balance sheet financing No numerical guidance on what% of fair value constitutes adefinite transfer of risks andrewardsCriticisms of IAS 17 Issued in May 2013 (original ED in 2010) The current IAS 17 model of classification of leases would cease toexist Lessees would no longer be permitted to treat leases as 'off-balance sheet' financing, but instead would be required to recognisean asset and liability for all leases within the scope of the proposedstandard Options to extend a lease only included if there is a 'significantincentive' to exercise them Dual approach: For most real estate leases, report straight-line expense (like operating leases) For other leases, approach similar to current finance leasesED leasesA leasing question may be connected to off balance sheet finance in general. In particular, you may beasked to discuss the links between IAS 17 and substance over form.(011)ACP2PC14 Int_CH11.qxp5/16/20141:51 AMPage 8012: Revision of basic groups Topic ListGroup accountsIFRS 10 Consolidated financialstatementsIFRS 3 (Revised)Summary of techniqueAssociates and joint venturesIFRS 12 Disclosure of interests inother entitiesSome of this chapter should be very familiar to you.However, IFRS 10, 11 and 12 are new, and IAS 27 andIFRS 3 have recently been revised.You will always get a compulsory groups question in theexam. It will be part of a longer case study for 50 marks.You have met associates but not joint arrangements inyour earlier studies.(012)ACP2PC14 Int_CH12.qxp5/16/20141:50 AMPage 81IFRS 10 Summary oftechniqueAssociates andjoint venturesIFRS 12 GroupaccountsIFRS 3(Revised)Group accounts are prepared which show the group as a single economic entity.SIGNIFICANT INFLUENCE = power to participate in but not controlthe financial & operating policy decisions of an investee 2050% votesConsolidateSUBSIDIARY: An entity thatis controlled by another entityIFRS 9 rulesINVESTMENT: Asset heldfor accretion of wealthEquity accountASSOCIATE: An entity in whichthe parent has significantinfluencePARENT: An entity thathas one or moresubsidiaries(012)ACP2PC14 Int_CH12.qxp5/16/20141:50 AMPage 8212: Revision of basic groupsPage 83ControlAn investor controls an investee if it has: Power over the investee Exposure or rights to variable returns from involvement with the investee The ability to use its power over the investee to affect the amount of returns it receivesPower ReturnsExisting rights that give the current ability todirect the relevant activities of the investee.Power may be achieved through holding amajority of voting rights or by other means.May include: Dividends Remuneration for servicing investeesassets and liabilties Fees and exposure to loss from theprovision ofcredit support(012)ACP2PC14 Int_CH12.qxp5/16/20141:50 AMPage 83IFRS 10 Summary oftechniqueAssociates andjoint venturesIFRS 12 GroupaccountsIFRS 3(Revised) Different reporting dates adjustments shouldbe made Uniform accounting policies if not, disclosewhy. Adjustments should be made onconsolidation Intra-group transactions are eliminatedPreparationA parent need not prepare group accounts if: It is itself a wholly owned subsidiary It is partially owned and the other owners do notobject Its securities are not publicly traded The ultimate or intermediate parent publishesIFRS-compliant consolidated accounts Disclosures applyExemptionConsolidated financial statementsConsolidated financial statements include all subsidiaries other than those held for sale or those which operateunder long term restrictions and so are not controlled.Parents accountsSubsidiaries are accounted for at cost or inaccordance with IFRS 9(012)ACP2PC14 Int_CH12.qxp5/16/20141:50 AMPage 84IFRS 10 Summary oftechniqueAssociates andjoint venturesIFRS 12 GroupaccountsIFRS 3(Revised)12: Revision of basic groupsPage 85Acquisition method1 Identify the acquirer One entity acquires another in all business combinations2 Determine acquisition date Date on which control is gained3 Recognise and measure Assets and liabilities of acquiree At fair value Non-controlling interest At fair value or as a proportion of net assets4 Recognise and measure goodwillConsideration transferred XNon-controlling interest XXFV of net assets of acquiree (X)Goodwill X(012)ACP2PC14 Int_CH12.qxp5/16/20141:50 AMPage 85IFRS 10 Summary oftechniqueAssociates andjoint venturesIFRS 12 GroupaccountsIFRS 3(Revised)CONSIDERATION TRANSFERRED Cash/other assets Shares Debt instruments Record contingentconsideration at fair value Exclude considerationrelating to pre-existingrelationships Exclude acquisition costs(which are expensed)FV OF NET ASSETS ACQUIREDAll assets and liabilities areincluded at fair value inaccordance with IFRS 13(Ch 7) Exclude liabilities for futurelosses Include identifiable intangibleassets Include contingent liabilities iffair value can be measuredreliably Include reacquired rights &indemnification assets Use relevant standards tomeasure deferred tax,pensions, share-basedpayments & assets held for saleNON-CONTROLLING INTERESTMeasure at: Fair value, or As proportion of net assetsFair value should be determinedbased on market value of sharesor valuation techniques. It is notextrapolated from considerationtransferred for controlling interest.If the NCI is not entitled to aproportionate share of net assetson a winding up, the NCI must bemeasured at FV.When fair value is used to measurethe NCI, goodwill represents all ofthe goodwill of the business, notjust the parents share.(012)ACP2PC14 Int_CH12.qxp5/16/20141:50 AMPage 8612: Revision of basic groupsPage 87Disclosures Name and description of acquiree and date of acquisition Share of voting rights acquired and reason for combination Description of factors making up goodwill Consideration transferred by type and details of contingent consideration Details of assets and liabilities acquired The gain in a bargain purchase and a description of why it arose The NCI and measurement basis applied plus details of techniques to determine fair value where relevantFair valuesOn consolidation, the fair value of the consideration paid for a subsidiary is compared with the fair value of theidentifiable assets and liabilities acquired. Fair value is determined in accordance with IFRS 13, which wascovered in Chapter 7.(012)ACP2PC14 Int_CH12.qxp5/16/20141:50 AMPage 87IFRS 10 Summary oftechniqueAssociates andjoint venturesIFRS 12 GroupaccountsIFRS 3(Revised)12 Read the question and draw up the groupstructure, highlightingPrepare necessary proforma required byquestion The % owned Acquisition date Pre-acquisition reserves4Read through additional notes and attemptadjustments (show workings)Do the double entry for the adjustments onto yourproforma answer and onto your group workings Cancel any intragroup items eg current a/c balances,loans Adjust for unrealised profits Make fair value adjustments Leave out cost of investment Put in a line for goodwill Put in a line for investment in associate Include a line for non-controlling interests Leave spaces for any extra items3Work methodically down the SOFP, transferringfigures to proforma or workings 100% of all assets/liabilities in brackets on face ofproforma, ready for adjustments Cost of subsidiary/associate and reserves to workings Search capital & share premium (parent only) to faceof proforma answer Open up a (blank) working for NCI(012)ACP2PC14 Int_CH12.qxp5/16/20141:50 AMPage 8812: Revision of basic groupsPage 89Complete goodwill calculationConsideration transferred XNon-controlling interest XNet assets acquired as represented byShare capital XShare premium XOther reserves at acquisition XRetained earnings at acquisition XFair value adjustments X____(X)_____GoodwillXLess impairment losses to date (X)XThe NCI at acquisitionwill be either at % FVof net assets or at fullFVNote A similarworking is used forany other reserves5Complete retained earnings calculationP S APer question X X XAdjustments X/(X) X/(X) X/(X)______ ______ _____X Y Z______ ___________ _____Share of subsidiary post acquisition (Y %)XShare of associate post acquisition (Z %) X______XAny impairment of goodwill (X)______X____________6(012)ACP2PC14 Int_CH12.qxp5/16/20141:50 AMPage 89IFRS 10 Summary oftechniqueAssociates andjoint venturesIFRS 12 GroupaccountsIFRS 3(Revised)8Complete non-controlling interest calculationNCI at acquisition XNCI share of post acqn reserves XLoss: NCI share of impairment losses(only if NCI at full FV at acqn) (X)______X____________7Complete Investment in associate (if appropriate):Cost of associate XShare of post-acquisition retained reserves (from reserves working) XLess group impairment losses on associate to date (X)______X____________(012)ACP2PC14 Int_CH12.qxp5/16/20141:50 AMPage 9012: Revision of basic groupsPage 91Workings for common adjustmentsCalculation of provision for unrealised profitUnrealised profit on intragroup sales X% held @ y/e %= Provision for unrealised profit (PUP) X DR Retained earnings(adjust in company selling goods) CR Group inventoriesCalculation of fair value adjustmentsAcqn date Movement Year endInventories X (X) XDepreciable non-current assets X (X) XNon-depreciable non-current assets X (X) XOther fair value adjustments X/(X) X/(X) X/(X)X X XGoodwill Retd earningsAdjustfiguresin SOFP(012)ACP2PC14 Int_CH12.qxp5/16/20141:50 AMPage 91IFRS 10 Summary oftechniqueAssociates andjoint venturesIFRS 12 GroupaccountsIFRS 3(Revised)IAS 28 Associates and joint venturesSignificant influence Presumed when 20%50% voting shares are heldEvidenced by: Board representation Participation in policy making Material transactions between investor and investee Interchange of management personnel Provision of essential technical informationEquity method Method of accounting for an associate or joint venture. Applied where consolidatedaccounts are prepared, ie the parent also has a subsidiary. Also, where an investorhas an associate but no subsidiaries, then the investor does not prepare consolidatedaccounts, but includes the associate in its own accounts using the equity method.An ED Equity method: share of other net asset changes (November 2012) provides additional guidance on howinvestors should recognise their share of changes in the net assets of an investee that are not recognised in P/Lor OCI and are not distributions. Investors should recognise their share of such changes in the investors' equity.The criteria that exist to identify a joint venture are covered in Chapter 13.(012)ACP2PC14 Int_CH12.qxp5/16/20141:50 AMPage 9212: Revision of basic groupsPage 93Consolidated statement of financial position equity methodInvestment in associateConsolidated statement of profit or loss andother comprehensive income Share of profit after tax Share of other comprehensive incomeAdjustments Transactions between the group and the associateare not eliminated Group share of unrealised profits is eliminated Against inventories (where associate is seller) Against investment (where parent is seller) Excess depreciation on FV adjustmentsCost of investmentAdd share of post-acquisition reservesLess impairment losses to date$XX(X) _____ X__________Exception: use IFRS 5 if investment acquired and held for sale.(012)ACP2PC14 Int_CH12.qxp5/16/20141:50 AMPage 93IFRS 10 Summary oftechniqueAssociates andjoint venturesIFRS 12 GroupaccountsIFRS 3(Revised)IFRS 12 Disclosure of interests in other entitiesDisclose: Significant judgements and assumptions made in determining the nature of an interest in another entity Information about subsidiaries, associates, joint arrangements and structures entities that are not controlledby an entityDisclosure of subsidiaries Disclosure of associates / joint arrangements Interests of NCI in group activities and cash flows The nature and extent of restrictions of investorsability to use group assets and liabilities The nature of risks associated with interests inconsolidated structured entities Consequences of changes in ownership interest The nature, extent and financial effects of anentitys interests in associates or joint arrangements Risks associated with an interest in an associate orjoint arrangement(012)ACP2PC14 Int_CH12.qxp5/16/20141:50 AMPage 9413: Complex groups and joint arrangementsTopic ListComplex groupsSub-subsidiariesD shaped groupsJoint arrangementsThis chapter covers one of the more complicatedconsolidation topics that you meet for the first time atPaper P2.It is always helpful to sketch a diagram of the groupstructure.(013)ACP2PC14 Int_CH13.qxp5/16/20141:51 AMPage 95JointarrangementsD shaped groupsSub-subsidiaries Complex groupsPS1 S2Several subsidiary entitiesIn the consolidated statement of financial position: A single figure is given for non-controllinginterest Separate totals for goodwill and gain on abargain purchase arising(013)ACP2PC14 Int_CH13.qxp5/16/20141:51 AMPage 96JointarrangementsD shaped groupsSub-subsidiaries Complex groups13: Complex groups and joint arrangements Page 97P controls S P P P controls S80% 60%S controls SS S S S controls SS80% 60%Therefore P controls SS SS SS Therefore P controls SSP effectively owns (80% 80%) 64% of SS P effectively owns (60% 60%) 36% of SSConsolidation method:Net assets: show what group controls.Capital and reserves: based on effective holdings eg80% 80% = 64% therefore NCI = 100% 64% = 36%.Date of effective control:SS comes under Ps control: Date S acquired, if S already holds shares in SS. If S acquired SS later, that later date.Exam focus pointYou must identify subsidiaries based on control. Then most of the consolidation is the same as for a simple group.(013)ACP2PC14 Int_CH13.qxp5/16/20141:51 AMPage 97JointarrangementsD shaped groupsSub-subsidiaries Complex groupsA complex group structure has an impact on two of the basic workings you need for a consolidated statement of financial positionCalculation of goodwillGoodwill in S1Goodwill in S2Consideration transferred X X 80%Non-controlling interests (at % FVNA or at full FV) X XLess: Net FV of identifiable assets acquired& liabilities assumed:Share capital and share premium X XPre-acqn reserves at date P obtains control X XFV adjustments X X(X) (X)X XTotal X(013)ACP2PC14 Int_CH13.qxp5/16/20141:51 AMPage 9813: Complex groups and joint arrangements Page 99Calculation of non-controlling interestsS1S2NCI at acquisition X XNCI share of post acqn reserves X/(X) X/(X)Less NCI share (20%) of S1s investment in S2(X)Less NCI share of impairment losses (if NCI at full FV) (X) (X)X XTotal NCINotice thetreatment ofcost of thesubsidiarysinvestment inthe sub-subsidiary (013)ACP2PC14 Int_CH13.qxp5/16/20141:51 AMPage 99JointarrangementsD shaped groupsSub-subsidiaries Complex groupsYou can check that you have worked out thecorrect NCI by assuming a dividenddistribution of $100 from SS.S will receive $75P will receive 80% $75 60P will receive 10% $100 10___70______Leaving for NCI in SS 30______Having ascertained the structure and workedout the non-controlling interests, proceed as fora typical sub-subsidiary situation.P80%10% S NCI (direct) 20%75%SS NCI (direct) 15%In this structure there is A direct NCI in S of 20%____ A direct NCI in SS of 15% An indirect NCI in SS of 20% 75% 15%__30%____(013)ACP2PC14 Int_CH13.qxp5/16/20141:51 AMPage 100JointarrangementsD shaped groupsSub-subsidiaries Complex groups13: Complex groups and joint arrangements Page 101IFRS 11 Joint arrangementsJoint arrangementAn arrangement in which two or more parties have joint control.Joint operationsParties with joint control have rights to the assets andobligations for the liabilities of the joint arrangement.Includes all joint arrangements not structured through aseparate entity.Joint controlThe contractually agreed sharing of control which exists when decisions about relevant activities requireunanimous consent of the parties sharing control.Joint venturesParties with joint control have rights to the net assetsof the arrangement.IFRS 11 was published in 2011. It defines a joint arrangement and provides criteria for distinguishing betweenjoint ventures and joint operations.(013)ACP2PC14 Int_CH13.qxp5/16/20141:51 AMPage 101JointarrangementsD shaped groupsSub-subsidiaries Complex groupsAccounting for joint arrangementsJoint operationJoint operator should recognise: Its assets including its share of jointly-heldassets Its liabilities including its share of jointly-incurredliabilities Revenue from the sale of its share of output fromthe joint operation Its share of revenue from the sale of output bythe joint operation Its expenses including its share of expensesincurred jointlyJoint ventureA joint venturer should recognise its interest in a jointventure as an investment and account for thatinvestment using the equity method (IAS 28). Thiswas covered in Chapter 12 and is the same as forassociates.An ED was issued in 2012 giving guidance onaccounting for acquisitions of interests in jointoperations acquirers should apply the principles inIFRS 3 and other relevant standards.Another 2012 ED, sale or contribution of assetsbetween an investor and its associate or jointventure, addresses discrepancies between IAS 28and IFRS 10.(013)ACP2PC14 Int_CH13.qxp5/16/20141:51 AMPage 10214: Changes in group structuresTopic ListDisposalsBusiness combinations achieved instagesChanges in direct ownershipDont be afraid of the topics in this chapter, they are allwithin your grasp, provided a logical approach isadopted.Question practice is crucial.(014)ACP2PC14 Int_CH14.qxp5/16/20141:50 AMPage 103Disposals Business combinationsachieved in stagesChanges in directownershipIn group accounts where control is lost$FV of consideration received XFV of investment retained XLess net assets x share (%) heldat date control lost (X)(X)Less goodwill____Group profit (loss) X/(X)________Gain or loss on disposal is calculated as follows.In parent company$FV of consideration received XLess carrying value of investment (X)____Profit/(loss) X/(X)________In group accounts (control retained)$FV of consideration received XIncrease in NCI in net assetsat disposal (X)___X______The treatment in the groupaccounts dependson whether controlis lost (ie whetherthe 50% boundaryis crossed).No gain or loss isrecognised. Thistotal is shown asan adjustment tothe equity ownedby the parent.(014)ACP2PC14 Int_CH14.qxp5/16/20141:50 AMPage 10414: Changes in group structures Page 105Subsidiary to subsidiary NCI in SPLOCI will be based on % before andafter disposal, ie time apportion No group gain or loss as control retained NCI in SOFP based on year end % Adjustment to parents equity will be madebetween NCI and retained earnings in SOFPSubsidiary to trade investment SPLOCI: treat as subsidiary to date of disposal.Show dividend income only thereafter SOFP: Fair value of remaining investment atdate of disposal; available for sale investment(IFRS 9) thereafterFull disposal In SPLOCI Consolidated results to date of disposal Show group gain or loss separately beforeinterest In SOFP: no subsidiary therefore noconsolidation or NCISubsidiary to associate SPLOCI: treat as subsidiary to date of disposal,consolidate for correct no. of months and showNCI in that amount. Treat as associate thereafter SOFP: Fair value at date of disposal; equityaccount thereafter(014)ACP2PC14 Int_CH14.qxp5/16/20141:50 AMPage 105Business combinationsachieved in stagesChanges in directownershipDisposalsA controlling interest in a subsidiary may be built up over a period of time. The important point is whencontrol is obtained, which is usually when the 50% threshold is crossed.Consideration transferred XFV of associate XLess FV identifiable net assets X__Group share % (X)__XGoodwill ____Associate becomes subsidiaryFair value of consideration paid (X)Decrease in NCI at date of transaction (X)____Adjustment to parent equity (X)________Increase in control eg 60% sub to 80% sub(014)ACP2PC14 Int_CH14.qxp5/16/20141:50 AMPage 106Changes in directownershipBusiness combinationsachieved in stagesDisposals14: Changes in group structures Page 107Reasons for group reorganisationNew top holding company A group may want to float a business to reduce the gearing of the group. The holding company will initiallytransfer the business into a separate company Companies may be transferred to another business during a divisionalisation process The group may reverse into another company to obtain a stock exchange quotation Internal reorganisations may create efficiencies of group structure for tax purposesBefore shareholdersSAfter shareholdersSHSubsidiary moved upBefore HAfter HS1S1S2S2(014)ACP2PC14 Int_CH14.qxp5/16/20141:50 AMPage 107Business combinationsachieved in stagesChanges in directownershipDisposalsSubsidiary moved alongBefore HAfter HS1S2S1S2S3S3Subsidiary moved downBefore HAfter HS1S2S1S2(014)ACP2PC14 Int_CH14.qxp5/16/20141:50 AMPage 10815: Continuing and discontinued interestsTopic ListIFRS 5 definitionsNon-current assets held for saleProforma disclosureThis topic is more likely to come up as part of a SectionB question.(015)ACP2PC14 Int_CH15.qxp5/16/20141:50 AMPage 109IFRS 5definitionsProformadisclosureNon-current assetsheld for saleIFRS 5 Non-current assets held for sale and discontinued operations was published in 2004.DefinitionsDiscontinuedoperationA component of an entity that either has been disposed of or is classified as held for saleand:a) Represents a separate major line of business or geographical area of operationsb) Is part of a single co-ordinated plan to dispose of a separate major line of businessor geographical area of operations, orc) Is a subsidiary acquired exclusively with a view to resaleComponent of anentityOperations and cash flows that can be clearly distinguished, operationally and forfinancial reporting purposes, from the rest of the entityDisposal group A group of assets to be disposed of (by sale or otherwise) together as a group in a singletransaction; and liabilities directly associated with those assets that will be transferred inthe transactionAsset held for sale Its carrying amount will be recovered principally through sale rather than continuing use(015)ACP2PC14 Int_CH15.qxp5/16/20141:50 AMPage 110Non-current assetsheld for saleIFRS 5definitionsProformadisclosure15: Continuing and discontinued interests Page 111Non-current assets held for saleCriteria The asset (or disposal group) must be available forimmediate sale in its present condition, subject only tousual and customary sales terms and The sale must be highly probable.For this to be the case: The appropriate level of management must becommitted to a plan to sell An active programme to locate a buyer andcomplete the plan must have been initiated The asset (or disposal group) must be activelymarketed for sale at a price that is reasonable inrelation to its current fair value The sale should be expected to qualify for recognitionas a completed sale within one year from the date ofclassification as held for sale (subject to limitedspecified exceptions) Actions required to complete the plan should indicatethat it is unlikely that significant changes to the planwill be made or that the plan will be withdrawnPresentationAssets and disposal groups (including associated liabilities)classified as held for sale are presented: In the SOFP Separately from other assets and liabilities Normally as current assets and liabilities (not offset)MeasurementAn entity must measure a non-current asset or disposal groupclassified as held for sale at the lower of: Carrying amount Fair value less costs to sellImmediately before initial classifications, measure asset perapplicable IFRS. Any impairment loss is accounted for asnormal.Non-current assets/disposal groups classified as held for saleare not depreciated.(015)ACP2PC14 Int_CH15.qxp5/16/20141:50 AMPage 111IFRS 5definitionsProformadisclosureNon-current assetsheld for saleProforma disclosureXYZ GROUP STATEMENT OF PROFIT OR LOSSAND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20X320X320X2$000$000Continuing operationsRevenueXXCost of sales(X)(X)____Gross profitXXOther incomeXXDistribution costs(X)(X)Administrative expenses(X)(x)Other expenses(X)(X)Finance costs(X)(X)Share of profit of associatesXX____Profit before taxXXIncome tax expense(X)(X)____Profit for the year from continuing operationsXX____Discontinued operationsProfit for the year from discontinued operationsXX____Profit for the yearXX________Profit attributable toOwners of the parentXXNon-controlling interestXX____XX________(015)ACP2PC14 Int_CH15.qxp5/16/20141:50 AMPage 11216: Foreign currency transactions and entitiesTopic ListIntroductionIndividual entity stageConsolidated FS stageMany large entities have subsidiaries overseas. In theexam you may well have to consolidate foreignsubsidiaries.There are two important concepts: functional currencyand presentation currency. You need to know when andhow to apply each.IAS 21 also deals with the individual entity.This topic was tested in June 2008 and June 2011.(016)ACP2PC14 Int_CH16.qxp5/16/20141:50 AMPage 113Consolidated FS stageIndividualentity stageIntroductionTwo currency conceptsFunctional currency Currency of the primary economic environmentin which an entity operates The currency used for measurement in thefinancial statements Other currencies treated as a foreign currencyPresentation currency Can be any currency Special rules apply to