ATC DIPLOMA IN INTERNATIONAL FINANCIAL REPORTING. Study System INTERNATIONAL

Transcription

1 ATC INTERNATIONAL DIPLOMA IN INTERNATIONAL FINANCIAL REPORTING Study System

2 ACCA Professional Diploma in International Financial Reporting Sample

3 Sample Typesetting by Jana Korcakova Printed in Romania by Rom Team Solutions, Srl

4 Sample ACCA Professional Diploma in International Financial Reporting Technical Editor Kim Smith Accountancy Tuition Centre (International Holdings) Limited 16 Elmtree Road Teddington TW11 8ST Telephone: +44 (0) Internet:

5 Sample No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the author, editor or publisher. This training material has been published and prepared by Accountancy Tuition Centre (International Holdings) Limited 16 Elmtree Road Teddington TW11 8ST United Kingdom. Editorial material Copyright Accountancy Tuition Centre (International Holdings) Limited, All other material copyright as credited. ISBN for complete set of 3 volumes: rd (revised) edition reprinted ( nd edition) ISBN for this volume: X. 3rd (revised) edition reprinted ( nd edition) All rights reserved. No part of this training material may be translated, reprinted or reproduced or utilised in any form either in whole or in part or by any electronic, mechanical or other means, now known or hereafter invented, including photocopying and recording, or in any information storage and retrieval system, without permission in writing from the Accountancy Tuition Centre (International Holdings) Limited. IASCF Copyright and Acknowledgement International Financial Reporting Standards, International Accounting Standards, Interpretations, Exposure Drafts, and other IASB publications are copyright of the International Accounting Standards Committee Foundation (IASCF). The approved text of International Financial Reporting Standards, International Accounting Standards and Interpretations is that published by the IASB in the English language and copies may be obtained direct from IASB. Please address publications and copyright matters to: IASCF Publications Department, 30 Cannon Street, London EC4M 6XH, United Kingdom. Telephone: +44 (0) , Fax: +44 (0) , publications@iasb.org Internet: All rights reserved. No part of IASB s publications may be translated, reprinted or reproduced or utilised in any form either in whole or in part or by any electronic, mechanical or other means, now known or hereafter invented, including photocopying and recording, or in any information storage and retrieval system, without prior permission in writing from the International Accounting Standards Committee Foundation. The various extracts of International Financial Reporting Standards or International Accounting Standards in this training material, are reproduced by the publisher, ATC (International Holdings) Ltd with the permission of IASCF. IAS, IASB, IASCF, IASC, IFRIC, IFRS, International Accounting Standards, International Financial Reporting Standards and SIC are Trade Marks of the International Accounting Standards Committee Foundation. IASB s 2004 Bound Volume International Financial Reporting Standards contains the full text of all International Financial Reporting Standards including International Accounting Standards and Interpretations at 31 March 2004 (ISBN X), price 54 each.

6 SYLLABUS Sample Introduction This Study System is the Association of Chartered Certified Accountants Approved Study material specifically written for the Professional Diploma in International Financial Reporting. Together with the Question Bank, it provides comprehensive coverage of the syllabus and is designed to be used both as a reference text and interactively with the ATC Learning System, providing you with the knowledge, skill and confidence to succeed in your Diploma studies. Syllabus Aim To provide qualified accountants or graduates, possessing relevant country specific qualifications or work experience with an up to date and relevant conversion course, providing a practical and detailed knowledge of the key international financial reporting standards and how they are interpreted and applied. Objectives On completion of the Diploma candidates should be able to: Understand and explain the structure of the international conceptual framework of accounting. Apply relevant financial reporting standards to key elements of financial reports. Identify and apply disclosure requirements for companies relating to the presentation of financial reports and notes. Prepare financial statements of single entities and account for their key elements complying with specified International Financial Reporting Standards and other related pronouncements. Prepare group financial statements (excluding group cash flow statements) including subsidiaries, associates, and joint ventures. Position within the portfolio of ACCA's qualification framework Dip IFR builds on the technical and/or practical knowledge acquired from recognised country specific accountancy qualifications or relevant work experience. The course introduces the candidate to the wider international framework of accounting and the system of standard setting. This conversion course concentrates on the application of conceptual and technical financial accounting knowledge that candidates have already obtained to the specific requirements of financial reporting under international professional regulation and standards. Dip IFR also provides essential international financial reporting knowledge and principles that will prepare candidates for the increasingly global market place and keep them abreast of international developments and how they might apply to the companies and businesses. Accountancy Tuition Centre (International Holdings) Ltd 2005 (i)

7 SYLLABUS Sample The prerequisite knowledge for Dip IFR can come from: a country specific professional qualification; or possessing a relevant degree (giving exemptions from Part 1 and 2.1 and 2.2 of Part 2 of ACCA s Professional Scheme) and two years accounting experience; or having three years full-time relevant accounting experience. Syllabus content 1 International sources of authority a b c d e f The structure of the International Accounting Standards Board (IASB) The standard setting process The role of the International Financial Reporting Interpretations Committee (IFRIC) Progress towards international harmonisation The IASB s Framework for the Preparation and Presentation of Financial Statements First-time Adoption of International Financial Reporting Standards. 2 Elements of financial statements a b c d e f g h i j k Property plant and equipment Intangible assets Goodwill Current assets including inventories Construction contracts Liabilities Financial instruments Provisions and contingencies (including post retirement benefits) Current and deferred tax Biological assets and agricultural produce Share-based payments. 3 Presentation and additional disclosures a b c d e f Events after the balance sheet date Earnings per share Related party disclosures Interim financial reporting Effects of changes in foreign exchange rates Segment reporting. Accountancy Tuition Centre (International Holdings) Ltd 2005 (ii)

8 SYLLABUS Sample 4 Preparation of external financial reports for single entities a b c Income statement and discontinued operations Cash flow statements Statement of changes in equity. 5 Preparation of external financial reports for combined entities and joint ventures a b c d e f Definitions of subsidiaries, investments in associates and joint ventures Exclusions from consolidation Preparation of consolidated balance sheets and income statements Equity accounting Proportionate consolidation Definition, substance of, and accounting for unitings of interests. Excluded topics The following topics are specifically excluded from the syllabus: Partnership and branch financial statements Complex group structures including sub-subsidiaries or mixed groups and foreign subsidiaries Piece-meal acquisitions, disposal of subsidiaries and group reconstructions Financial statements of banks and similar financial institutions Accounting and reporting by retirement benefit plans Information reflecting the effects of changing prices and financial reporting in hyperinflationary economies Multi-employer pension schemes Share-based payments with cash alternatives Group cash flows Schemes of reorganisation/reconstruction Company/share valuation International Financial Reporting Standard Exposure Drafts and Discussion Papers The international public sector perspective. Accountancy Tuition Centre (International Holdings) Ltd 2005 (iii)

9 SYLLABUS Sample Key areas of the syllabus The key topic area headings are as follows: International sources of authority Elements of financial statements Presentation of accounts and additional disclosures Preparation of external financial reports of single entities Preparation of external reports for combined entities and joint ventures. Approach to examining the syllabus The examination is a three-hour paper in two sections. It will contain a mix of computational and discursive elements. Some questions will adopt a scenario/case study approach. Section A comprises a compulsory question requiring the preparation of consolidated group financial statements, and may include a related discussion element. Section B comprises four questions from which the candidate is required to answer three. Computations will be designed to test an understanding of principles. At least one of the optional questions in Section B will be a conceptual/discursive question that may include illustrative numerical calculations. An individual question may often involve elements that relate to different areas of the syllabus. For example a question on the preparation of financial statements for public issue could include elements relating to several accounting standards. In scenario questions candidates may be expected to comment on management s chosen accounting treatment and determine a more appropriate one, based on circumstances described in the question. Some International Financial Reporting Standards are very detailed and complex. In the Dip IFR exam candidates need to be aware of the principles and key elements of these Standards. Candidates will also be expected to have an appreciation of the background and need for international accounting standards and issues related to harmonisation of accounting in a global context. Examination structure Number of marks Section A: 1 compulsory question 25 Section B: Choice of 3 from 4 questions (25 marks each) Additional information Candidates need to be aware that questions involving knowledge of new examinable regulations will not be set until at least six months after the last day of the month in which the regulation was issued. Accountancy Tuition Centre (International Holdings) Ltd 2005 (iv)

10 SYLLABUS Sample Examinable documents Conceptual framework Session reference Framework for the Preparation and Presentation of Financial Statements 2 International Financial Reporting Standards IAS 1 Presentation of Financial Statements (Revised) 3 IAS 2 Inventories (Revised) 7 IAS 7 Cash Flow Statements 29 IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (Revised) 4 IAS 10 Events After the Balance Sheet Date (Revised) 32 IAS 11 Construction Contracts 6 IAS 12 Income Taxes 19 IAS 14 Segment Reporting 30 IAS 16 Property, Plant and Equipment (Revised) 8 IAS 17 Leases (Revised) 11 IAS 18 Revenue 5 IAS 19 Employee Benefits 17 IAS 20 Accounting for Government Grants and Disclosure of Government Assistance 9 IAS 21 The Effects of Changes in Foreign Exchange Rates (Revised) 26 IAS 23 Borrowing Costs 10 IAS 24 Related Party Disclosures (Revised) 33 IAS 27 Consolidated and Separate Financial Statements (Revised) 21 IAS 28 Investments in Associates (Revised) 25 IAS 31 Interests In Joint Ventures (Revised) 26 IAS 32 Financial Instruments: Disclosures and Presentation 20 IAS 33 Earnings Per Share (Revised) 28 IAS 34 Interim Financial Reporting 34 IAS 36 Impairment of Assets (Revised) 15 IAS 37 Provisions, Contingent Liabilities and Contingent Assets 16 IAS 38 Intangible Assets (Revised) 12 IAS 39 Financial Instruments: Recognition and Measurement 20 IAS 40 Investment Property (Revised) 13 IAS 41 Agriculture 14 IFRS 1 First-Time Adoption of International Financial Reporting Standards 35 IFRS 2 Share-based Payment 18 IFRS 3 Business Combinations IFRS 5 Non-current Assets Held for Sale and Discontinued Operations 31 Accountancy Tuition Centre (International Holdings) Ltd 2005 (v)

11 SYLLABUS Sample SIC Interpretations Session reference SIC-10: Government Assistance No Specific Relation to Operating Activities 9 SIC-12: Consolidation Special Purpose Entities 21 SIC-13: Jointly Controlled Entities Non-Monetary Contributions by Venturers 26 SIC-15: Operating Leases Incentives 11 IFRIC Interpretations IFRIC-1: Changes in Existing Decommissioning, Restoration and Similar Liabilities 16 Examinable documents are also listed in the Exam Notes section of student accountant available on Accountancy Tuition Centre (International Holdings) Ltd 2005 (vi)

12 CONTENTS Sample Session Page Introduction 1 Introduction to International Financial Reporting Standards Framework for the Preparation and Presentation of Financial Statements IAS 1 Presentation of Financial Statements IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors 0401 Income statement 5 IAS 18 Revenue IAS 11 Construction Contracts 0601 Assets 7 IAS 2 Inventories IAS 16 Property, Plant and Equipment IAS 20 Accounting for Government Grants and Disclosure of Government Assistance IAS 23 Borrowing Costs IAS 17 Leases IAS 38 Intangible Assets IAS 40 Investment Properties IAS 41 Agriculture IAS 36 Impairment of Assets 1501 Accountancy Tuition Centre (International Holdings) Ltd 2005 (vii)

13 CONTENTS Sample Session Page Liabilities 16 IAS 37 Provisions, Contingent Liabilities and Contingent Assets IAS 19 Employee Benefits IFRS 2 Share-based Payments IAS 12 Income Taxes IAS 32 and IAS 39 Financial Instruments 2001 Group accounts 21 Regulatory framework Basic principles Consolidated balance sheet Further adjustments Consolidated income statement IAS 28 Investments in Associates IAS 31 Interests in Joint Ventures IAS 21 The Effects of Changes in Foreign Exchange Rates 2701 Disclosure and analysis 28 IAS 33 Earnings Per Share IAS 7 Cash Flow Statements IAS 14 Segment Reporting IFRS 5 Non-current Assets Held for Sale and Discontinued Operations IAS 10 Events After the Balance Sheet Date IAS 24 Related Party Disclosure IAS 34 Interim Financial Reporting IFRS 1 First-time Adoption of International Financial Reporting Standards 3501 Index 3601 Accountancy Tuition Centre (International Holdings) Ltd 2005 (viii)

14 CONTENTS Sample Session 00 Introduction Syllabus Aim Objectives Position within the portfolio of ACCA's qualification framework Syllabus content Excluded topics Key areas of the syllabus Approach to examining the syllabus Additional information Examinable documents i i i i i ii iii iv iv iv v Session 01 Introduction to International Financial Reporting Standards 1 Introduction What is GAAP? Sources of GAAP Role of statute and standards Role of the European Union IASB Background Objectives Structure IFRIC Standard setting Projects and work program International Financial Reporting Standards GAAP hierarchy Scope Role in international harmonisation 0114 Session 02 Framework for the Preparation and Presentation of Financial Statements 1 Purpose and status Purpose Scope Financial statements Application Users and their information needs The objective of financial statements Financial position, performance and changes in financial position Underlying assumptions Accrual basis Going concern 0205 Accountancy Tuition Centre (International Holdings) Ltd 2005 (ix)

15 CONTENTS Sample 4 Qualitative characteristics Principal qualitative characteristics Understandability Comparability Relevance (to decision-making needs of users) Reliability Elements of financial statements Definitions Recognition Measurement bases Concepts of capital and capital maintenance Capital Capital maintenance and the determination of profit 0211 Session 03 IAS 1 Presentation of Financial Statements 1 Scope Objective General purpose financial statements Application of IAS Financial statements Objectives Components Supplementary statements Overall considerations Fair presentation and compliance with IFRS Going concern Accrual basis of accounting Consistency of presentation Materiality and aggregation Offsetting Comparative information Structure and content Disclosure Identification of financial statements Prominently displayed Reporting date and period Terms used Balance sheet Current/non-current distinction Current assets Current liabilities Overall structure Presentation of balance sheet items Income statement Presentation of income statement items Structure of the income statement Statement of changes in equity A separate statement Function Structure Items which are taken directly to equity 0324 Accountancy Tuition Centre (International Holdings) Ltd 2005 (x)

16 CONTENTS Sample 8 Notes to the financial statements Definition Structure Disclosure of accounting policies Key assumptions Other disclosures 0327 Session 04 IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors 1 Reporting performance Information Disaggregation Relevant standards on the reporting of performance IAS Accounting policies Definition Selection and application Consistency of accounting policies Changes in accounting policy What? When? How? Disclosure Changes in accounting estimates Definition Examples Accounting treatment Disclosure Errors Definition Accounting treatment Disclosures 0410 Session 05 IAS 18 Revenue 1 IAS 18 Revenue Scope Definitions Measurement of revenue Sale of goods Rendering of services Interest, royalties and dividends Disclosure 0505 Accountancy Tuition Centre (International Holdings) Ltd 2005 (xi)

17 CONTENTS Sample 2 Specific examples sale of goods Bill and hold sales Goods shipped subject to conditions Lay away sales Advance payment Sale and repurchase agreements Sales to intermediate parties Subscriptions to publications and similar items Instalment sales Real estate sales Specific examples rendering of services Installation fees Servicing fees included in the price of the product Advertising commissions Insurance agency commissions Financial service fees Admission fees Tuition fees Initiation, entrance and membership fees Franchise fees Fees from the development of customised software Interest, royalties and dividends examples Licence fees and royalties Sales tax General principles Operation 0515 Session 06 IAS 11 Construction Contracts 1 Construction contracts Definitions Key issue Revenue Contract costs Recognition and measurement The rules Calculations Recognition Presentation and disclosure 0613 Accountancy Tuition Centre (International Holdings) Ltd 2005 (xii)

18 CONTENTS Sample Session 07 IAS 2 Inventories 1 Basics Objective Scope Definitions Measurement Cost Meaning of cost Components of cost Techniques for measurement of cost Cost formulas Net realisable value Need for Considerations Materials Timing Recognition As an expense As an asset Disclosure In financial statements Expense recognition 0714 Session 08 IAS 16 Property, Plant and Equipment 1 Scope Scope Exclusions Definitions Recognition of property, plant and equipment Criteria Initial measurement at cost Components of cost Exchange of assets Subsequent costs Accounting treatment Part replacement Major inspection or overhaul costs Measurement subsequent to initial recognition Accounting policy Cost model Revaluation model Revaluations Fair value Frequency Accumulated depreciation Increase/decrease 0810 Accountancy Tuition Centre (International Holdings) Ltd 2005 (xiii)

19 CONTENTS Sample 7 Depreciation Accounting standards Depreciable amount Depreciation methods Recoverability of carrying amount impairment losses Impairment Compensation Derecognition Accounting treatment Derecognition date Disclosure For each class Others Items stated at revalued amounts Encouraged 0817 Session 09 IAS 20 Accounting for Government Grants and Disclosure of Government Assistance 1 Scope Application Matters not dealt with Government grants Definitions Recognition criteria Forgivable loans Broad approaches to accounting treatment Accounting standards Non-monetary government grants Presentation of grants related to assets Presentation of grants related to income Repayment of government grants Government assistance Definition Exclusions from definition government grants Loans at nil or low interest rates SIC-10: Government Assistance No Specific Relation to Operating Activities Disclosure Matters 0910 Accountancy Tuition Centre (International Holdings) Ltd 2005 (xiv)

20 CONTENTS Sample Session 10 IAS 23 Borrowing Costs 1 Issue Recognition Arguments IAS Treatment Definitions Capitalisation Borrowing costs eligible for capitalisation Commencement of capitalisation Suspension of capitalisation Cessation of capitalisation Disclosure 1008 Session 11 IAS 17 Leases 1 The issue Traditional accounting for leases (pre IAS 17) Problem Overview Key definitions Types of arrangement Lease classification: two types Risks and rewards of ownership Indicators Terms of the lease Land and buildings Finance leases Principles Rentals in arrears Rentals in advance Disclosures finance leases Operating leases Accounting for an operating lease Disclosures SIC-15: Operating Leases Incentives Lessor accounting Definitions Finance leases Allocation of finance income Disclosure Sale and leaseback transactions Background Sale and leaseback as a finance lease Sale and leaseback as an operating lease 1122 Accountancy Tuition Centre (International Holdings) Ltd 2005 (xv)

21 CONTENTS Sample Session 12 IAS 38 Intangible Assets 1 Introduction to IAS Scope Definitions Definition criteria Recognition and initial measurement General criteria Initial measurement cost Subsequent expenditure Internally generated intangible assets Internally generated goodwill Other internally generated assets Specific recognition criteria for internally generated intangible assets Recognition of expenses and costs Measurement after recognition Cost model Revaluation model Active markets Accounting entries on revaluation Useful life Factors Finite useful lives Indefinite useful lives Impairment and derecognition Impairment losses Retirements and disposals Disclosure Intangible assets Revaluations Research and development expenditure 1232 Session 13 IAS 40 Investment Properties 1 Investment properties Objective Definitions Examples Scope Recognition Rule Initial measurement Meaning of cost Subsequent expenditure 1304 Accountancy Tuition Centre (International Holdings) Ltd 2005 (xvi)

22 CONTENTS Sample 3 Measurement subsequent to initial recognition Rule Fair value model Cost model Change in method Transfers Disposals Disclosure All circumstances Fair value model Cost model 1309 Session 14 IAS 41 Agriculture 1 Agricultural activity Objective Scope Definitions Features Recognition and measurement Recognition Measurement Gains and losses If fair value cannot be determined Government grants Presentation and disclosure Presentation Disclosure 1407 Session 15 IAS 36 Impairment of Assets 1 Introduction Objective of the standard Definitions Basic rules All assets Intangible assets Indications of potential impairment loss Measurement of recoverable amount General principles Fair value less costs to sell Value in use Cash-generating units Basic concept Allocating shared assets 1516 Accountancy Tuition Centre (International Holdings) Ltd 2005 (xvii)

23 CONTENTS Sample 5 Accounting for impairment loss Basics Allocation within a cash-generating unit Subsequent review Basic provisions Reversals of impairment losses Disclosure For each class of assets Segment reporting Material impairment losses recognised or reversed 1526 Session 16 IAS 37 Provisions, Contingent Liabilities and Contingent Assets 1 Introduction Objective Scope Definitions The relationship between provisions and contingent liabilities Recognition Provisions Recognition issues Contingent assets and liabilities Measurement General rules Specific points Double entry IAS 37 guidance Changes in provisions Decommissioning costs IFRIC Scope Issue Consensus Application of rules to specific circumstances Future operating losses Onerous contracts Specific application Restructuring Provisions for repairs and maintenance Refurbishment costs No legislative requirement Refurbishment costs Legislative requirement Disclosures Provisions Contingent liabilities Contingent assets Rarely 1624 Accountancy Tuition Centre (International Holdings) Ltd 2005 (xviii)

24 CONTENTS Sample Session 17 IAS 19 Employee Benefits 1 Introduction Key problem Objective Scope Definitions Short term benefits Types Accounting for short-term employee benefits Post retirement benefits Defined contribution schemes Introduction Accounting for defined contribution schemes Recognition and measurement Disclosure Defined benefit schemes Introduction IAS 19 approach Accounting basics Complication Expense Sundry guidance Actuarial valuation method Discount rate Regularity Past service cost Presentation and disclosure Presentation Disclosure defined benefit plans 1719 Session 18 IFRS 2 Share-based Payments 1 Share-based payments Need for a standard Key issues Objective of IFRS Scope Effective date Definitions Share-based payment transaction arrangement Types of transactions Recognition On receipt or acquisition 1805 Accountancy Tuition Centre (International Holdings) Ltd 2005 (xix)

25 CONTENTS Sample 4 Measurement Fair value Equity-settled transactions Granting of equity instruments Indirect measurement Valuation technique Cash-settled transactions Disclosures Purpose Nature and extent of schemes in place How fair value was determined Effect of expenses arising 1814 Session 19 IAS 12 Income Taxes 1 Introduction Objective Scope Definitions Current tax Deferred taxation an introduction The underlying problem The concept illustrated Tax bases Temporary differences Recognition of deferred tax liabilities The rule Discussion Recognition of deferred tax assets The rule Discussion Measurement issues Rates Change in rates Accounting for the movement on the deferred tax balance Summary of approach Business combinations Introduction Temporary differences arising on the calculation of goodwill Inter-company transactions Presentation and disclosure Deferred taxation presentation Deferred taxation separate disclosure 1927 Accountancy Tuition Centre (International Holdings) Ltd 2005 (xx)

26 CONTENTS Sample Session 20 IAS 32 and IAS 39 Financial Instruments 1 Background Traditional accounting Financial instruments History Application and scope IAS IAS Definitions From IAS From IAS Presentation (IAS 32) Liabilities and equity Settlement in own equity instruments Offset Interest, dividends, losses and gains Compound instruments Contingent settlement provisions Treasury shares Disclosure (IAS 32) Rules Illustrative notes Nokia Recognition (IAS 39) Initial recognition Examples Derecognition Derecognition of a financial asset Derecognition of a financial liability Measurement (IAS 39) Initial measurement of financial assets and financial liabilities Fair value considerations Subsequent measurement of financial liabilities Subsequent measurement of financial assets Hedging IAS 39 definitions Hedging instruments Hedged items Hedge accounting 2028 Accountancy Tuition Centre (International Holdings) Ltd 2005 (xxi)

27 CONTENTS Sample Session 21 Regulatory framework 1 Introduction Definitions Accounting for subsidiaries in separate financial statements Truth and fairness Inclusions Parent and control SIC-12: Consolidation Special Purpose Entities Purchase method Sundry provisions of IAS Results of intra-group trading Accounting year ends Accounting policies Date of acquisition or disposal Exemption from preparing group accounts Rule Rationale Disclosure IAS 27 disclosures IFRS 3 disclosures 2109 Session 22 Basic principles Consolidated balance sheet 1 The issue Background Rule Conceptual background Consolidation Goodwill Overview of the technique Individual company adjustments Consolidation adjustments Consolidation Basic principles Goodwill Post acquisition growth in reserves Minority interest Complications Mid-year acquisitions Adjustments Inter-company balances Unrealised profit Inventory Non-current asset transfers 2224 Accountancy Tuition Centre (International Holdings) Ltd 2005 (xxii)

28 CONTENTS Sample Session 23 Further adjustments 1 Adjustments Items not accounted for Background Proposed dividends Partially recorded dividends Dividends paid out of pre-acquisition profits Group accounting policy adjustments Goodwill Definition Cost of acquisition Fair value of purchase consideration Identifiability Fair values general guidance Accounting for the revaluation in the accounts of subsidiaries Exam question complication How is the revaluation accounted for? Accounting for goodwill Goodwill Excess of acquirer s interest over cost Initial accounting determined provisionally Consolidated balance sheet workings 2318 Session 24 Consolidated income statement 1 Introduction Income generation Control and ownership Inter-company transactions and unrealised profit Dividends Inter-company items Entitlement of the minority Basics Mid-year acquisitions Inclusion of subsidiary s results Dividends from subsidiary acquired mid-year Treatment of goodwill Consolidated statement of changes in equity IAS Accountancy Tuition Centre (International Holdings) Ltd 2005 (xxiii)

29 CONTENTS Sample Session 25 IAS 28 Investments in Associates 1 Equity accounting Background Scope Definitions Significant influence Separate financial statements Accounting treatment Relationship to a group Basic rule Equity accounting Treatment in a consolidated balance sheet Treatment in a consolidated income statement Recognition of losses Accounting policies and year ends Impairment Exemptions to equity accounting Inter-company items with an associate Inter-company trading Dividends Unrealised profit Disclosure Investments in associates Using the equity method 2517 Session 26 IAS 31 Interests in Joint Ventures 1 IAS Scope Joint ventures Definitions Forms of joint venture Characteristics Jointly controlled operations Description Presentation and accounting Jointly controlled assets Description Presentation and accounting Jointly controlled entities Description Presentation and accounting Transactions between venturer and a joint venture SIC-13: Jointly Controlled Entities Non-Monetary Contributions by Venturers Exemptions to proportionate consolidation and equity methods Separate financial statements of a venturer Reporting the interests of an investor Ceasing to be a venturer in a joint venture 2616 Accountancy Tuition Centre (International Holdings) Ltd 2005 (xxiv)

30 CONTENTS Sample 6 Disclosure Contingencies Interests Consolidation methods Summary 2618 Session 27 IAS 21 The Effects of Changes in Foreign Exchange Rates 1 Accounting issues Introduction Key issues Objectives Key definitions Functional and Presentation currency Functional currency Presentation currency Individual entities Accounting treatment basic transactions Exceptions to the basic rules Disclosure Exchange differences 2708 Session 28 IAS 33 Earnings Per Share 1 Introduction Earnings performance Scope Definitions Earnings per share (EPS) Basic EPS Which earnings? Preference dividends Weighted average number of ordinary shares Basic rule Issues of shares where no consideration is received Multiple capital changes Issuable shares Diluted earnings per share Purpose Method Options Contingently issuable shares Presentation and disclosure Presentation Disclosure 2815 Accountancy Tuition Centre (International Holdings) Ltd 2005 (xxv)

31 CONTENTS Sample Session 29 IAS 7 Cash Flow Statements 1 Scope Applies to all entities Importance of cash flow Benefits of cash flow information Definitions Presentation of a cash flow statement Classification Illustration Reporting cash flows from operating activities Direct method Indirect method Techniques Reporting cash flows from investing and financing activities Separate reporting Investing activities Components of cash and cash equivalents Reconciliation Proforma Direct method Indirect method Notes to the cash flow statement (Direct and indirect methods) Additional disclosures Analysis of cash and cash equivalents Major non cash transactions Cash and cash equivalents not held by the group Reporting futures, options and swaps Voluntary disclosures 2917 Session 30 IAS 14 Segment Reporting 1 Scope and purpose Public companies Group accounts Purpose Concerns Segments Meaning Business segments Geographical segments 3004 Accountancy Tuition Centre (International Holdings) Ltd 2005 (xxvi)

32 CONTENTS Sample 3 Reporting Primary vs secondary Geographical segments Materiality Disclosures Analysis of revenue Analysis of expenses Segment result Analysis of assets Segment liabilities Sundry disclosures 3015 Activity Summary information reported For each reported industry and geographical segment 3016 Session 31 IFRS 5 Non-current Assets Held for Sale and Discontinued Operations 1 Introduction Reasons for issuing IFRS Definitions Component of an entity Disposal group Discontinued operation Held for sale classification Definitions Held for sale non-current assets Abandoned non-current assets Measurement Changes to a plan of sale Presentation and disclosure Purpose Discontinued operations Continuing operations Held for sale non-current assets 3110 Session 32 IAS 10 Events After the Balance Sheet Date 1 Introduction Objective Scope Definitions Recognition and measurement Adjusting events Non-adjusting events Dividends Going concern Disclosure Authorisation Updating Non-adjusting events 3206 Accountancy Tuition Centre (International Holdings) Ltd 2005 (xxvii)

33 CONTENTS Sample Session 33 IAS 24 Related Party Disclosure 1 Scope of IAS Scope Parties deemed not to be related Definitions Related party Related party transaction Control Significant influence Joint control The related party issue Effect on reporting entity Disclosure Examples of situations Disclosure required Aggregation 3307 Session 34 IAS 34 Interim Financial Reporting 1 Introduction Objective Scope Definitions Content of an interim financial report Minimum components Consolidation Condensed balance sheet Condensed income statement Condensed cash flow statement Changes in equity Selected note disclosures Recognition and measurement General principles Tax charge Use of estimates Application examples 3408 Accountancy Tuition Centre (International Holdings) Ltd 2005 (xxviii)

34 CONTENTS Sample Session 35 IFRS 1 First-time Adoption of International Financial Reporting Standards 1 Introduction Background Objective Scope Definitions Stages in transition to IFRSs Transition overview Opening IFRS balance sheet Recognition and measurement principles Exemptions from other IFRSs Property, plant and equipment Business combinations Employee benefits Cumulative translation differences Compound financial instruments Assets and liabilities of subsidiaries Designation of previously recognised financial instruments Share-based payment transactions Decommissioning liabilities Mandatory exceptions to retrospective application Presentation and disclosure Explanation of transition Reconciliations Other disclosures Practical matters Overview Making the transition 3522 Index Accountancy Tuition Centre (International Holdings) Ltd 2005 (xxix)

35 CONTENTS Sample Accountancy Tuition Centre (International Holdings) Ltd 2005 (xxx)

36 SESSION 4 ACCOUNTING POLICIES Overview Objective To explain the need for guidance on reporting performance. To prescribe the criteria for selecting and changing accounting policies. To account for changes in accounting policies, changes in accounting estimates and the correction of errors. REPORTING PERFORMANCE Information Disaggregation Relevant standards on the reporting of performance IAS 8 ACCOUNTING POLICIES CHANGES IN ACCOUNTING ESTIMATES ERRORS Definition Definition Selection and Examples application Accounting treatment Consistency of Disclosure accounting policies Definition Accounting treatment Disclosures CHANGES IN ACCOUNTING POLICY What? When? How? Disclosure Accountancy Tuition Centre (International Holdings) Ltd

37 SESSION 4 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 1 Reporting performance 1.1 Information The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions. The economic decisions that are taken by users of financial statements require an evaluation of the ability of an entity to generate cash and cash equivalents and of the timing and certainty of their generation. Information about the performance of an entity, in particular its profitability, is required in order to: assess potential changes in the economic resources that it is likely to control in the future; predict the capacity of the entity to generate cash flows from its existing resource base; and form judgements about the effectiveness with which the entity might employ additional resources. Information about variability of performance is important in this respect. 1.2 Disaggregation In order to make economic decisions, users of financial statements need to understand the make-up of figures in as much detail as possible. There is therefore a tendency in financial reporting towards providing information about the composition of figures. Commentary Information may be analysed on the face of the statements or in the notes. For example: Disclosure of material and unusual items which are part of ordinary activities; Information on discontinued operations; Segment reporting. Commentary Users can use such information to make better quality forecasts in respect of the entity. Accountancy Tuition Centre (International Holdings) Ltd

38 SESSION 4 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 1.3 Relevant standards on the reporting of performance IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors IAS 1 Presentation of Financial Statements IAS 14 Segment Reporting IAS 7 Cash Flow Statements IFRS 5 Non-current Assets Held for Sale and Discontinued Operations 1.4 IAS 8 The standard sets out: Criteria for selecting and applying accounting policies; Classification of material items; How to account for: changes in accounting policies; changes in accounting estimates; and the correction of errors. 2 Accounting policies 2.1 Definition These are specific principles, bases, conventions, rules and practices adopted by an entity in preparing and presenting financial statements. 2.2 Selection and application Applicable standards and interpretations must be applied considering any relevant implementation guidance issued by the IASB. Commentary Accounting policies set out in IFRSs need not be applied ONLY when the effect of applying them is immaterial. If there is no applicable Standard or Interpretation, management uses its judgement to develop and apply an accounting policy resulting in information with the qualitative characteristics of: relevance; and reliability; faithful representation; substance over form; neutrality; prudence; and completeness. Accountancy Tuition Centre (International Holdings) Ltd

39 SESSION 4 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS In making such judgements management should consider: Standards and Interpretations dealing with similar and related transactions; then the definitions and recognition criteria and measurement concepts set out in the Framework; also recent pronouncements of other standard-setting bodies that use a similar conceptual framework; and accepted industry practice. Commentary This may be thought of as a GAAP hierarchy. An accepted industry practice that conflicts with any IASB pronouncement (including the Framework) cannot be judged suitable. Illustration 1 Kitty has recently purchased a Van Gogh painting to display in their client reception area, with the hope it will lead to more contracts and that the painting will appreciate in value. There is no specific accounting standard that deals with this type of asset, but IAS 40 Investment Property does deal with a particular type of asset that is held for capital appreciation. It would therefore seem appropriate to use IAS 40 as justification to value the painting at fair value at each balance sheet date. 2.3 Consistency of accounting policies Accounting policies must be applied consistently for similar items unless a Standard or Interpretation requires or permits categorisation of items. When categorisation is required or permitted the most appropriate accounting policy is selected and applied consistently to each category. Illustration 2 IAS 2 Inventories requires that inventory be valued at lower of cost and net realisable values. In identifying cost it allows alternative cost formulas; first-in first-out and weighted average. The same cost formula must be applied to similar items of inventory, but a different cost formula can be applied to a different classification of inventory. Illustration 3 IAS 23 Borrowing Costs allows certain borrowing costs to be included in the cost of a qualifying asset. If the capitalisation policy is selected then borrowing costs relating to ALL qualifying assets must be capitalised. Accountancy Tuition Centre (International Holdings) Ltd

40 SESSION 4 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 3 Changes in accounting policy 3.1 What? The first time application of an accounting policy to newly occurring items (or items that were previously immaterial) is not a change. Adopting the revaluation model of IAS 16 Property, Plant and Equipment where the cost model has been followed previously is a change of accounting policy. Commentary However, it is accounted for as a revaluation under IAS 16 and not as a change in accounting policy under IAS When? The same accounting policies must be applied within each period and from one period to the next unless a change: is required by a Standard or Interpretation; or Commentary A mandatory change. would result in the financial statements providing more relevant and reliable information. 3.3 How? Commentary A voluntary change New Standard or Interpretation If a new Standard is issued the transitional provisions of that standard will be applied to any change of accounting policy. Commentary For example, IFRS 2 Share-based Payment is effective for annual periods beginning on or after 1 January The standard applies to share options granted after 7 November 2002 that have still to vest after the effective date. If a new Standard does not have transitional provisions, or the change in policy is voluntary, the change is applied retrospectively. Commentary Early application of a Standard or Interpretation is not a voluntary change. Accountancy Tuition Centre (International Holdings) Ltd