Professional Examinations. Paper P2 (INT and UK) Corporate Reporting EXAM KIT

Transcription

1 Professional Examinations Paper P2 (INT and UK) Corporate Reporting EXAM KIT

2 PAPER P2 (INT AND UK) : CORPORATE REPORTING British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. Published by: Kaplan Publishing UK Unit 2 The Business Centre Molly Millar s Lane Wokingham Berkshire RG41 2QZ ISBN: Kaplan Financial Limited, 2015 Printed and bound in Great Britain The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials. All rights reserved. No part of this examination may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing. Acknowledgements The past ACCA examination questions are the copyright of the Association of Chartered Certified Accountants. The original answers to the questions from June 1994 onwards were produced by the examiners themselves and have been adapted by Kaplan Publishing. We are grateful to the Chartered Institute of Management Accountants and the Institute of Chartered Accountants in England and Wales for permission to reproduce past examination questions. The answers have been prepared by Kaplan Publishing. ii

3 CONTENTS Page Index to questions and answers Analysis of past papers Exam technique Paper specific information Kaplan s recommended revision approach Kaplan s detailed revision plan Technical update v xi xiii xv xix xxiii xxvii Section 1 Practice questions 1 UK GAAP focus questions Answers to practice questions 119 UK GAAP focus answers December 2014 exam questions Answers to December 2014 exam questions 465 iii

4 PAPER P2 (INT AND UK) : CORPORATE REPORTING Key features in this edition In addition to providing a wide ranging bank of real past exam questions, we have also included in this edition: An analysis of all of the recent new syllabus examination papers. Paper specific information and advice on exam technique. Our recommended approach to make your revision for this particular subject as effective as possible. This includes step by step guidance on how best to use our Kaplan material (Complete text, pocket notes and exam kit) at this stage in your studies. Enhanced tutorial answers packed with specific key answer tips, technical tutorial notes and exam technique tips from our experienced tutors. Complementary online resources including full tutor debriefs and question assistance to point you in the right direction when you get stuck. You will find a wealth of other resources to help you with your studies on the following sites: UK GAAP Focus The Examiner has indicated that, for the purposes of this exam, International Financial Reporting Standards (IFRS) are the main accounting standards examined in the preparation of financial information. The majority of the UK syllabus examination paper will be the same as the international paper, which is based on IFRS. The UK paper will also test some differences between UK GAAP and the IFRS for small and medium entities. There could be a focus on legal requirements, rather than accounting standard requirements. It is anticipated that the differences will account for no more than 20% of the UK P2 paper. UK syllabus students should refer to the list of examinable documents for the UK examination which identifies the main areas of difference between the IFRS for small and medium entities and UK GAAP and the extent to which those differences are examinable at P2. This document is available on the ACCA web site at To assist UK syllabus students, additional questions and answers based on examinable UK content are included within this Exam Kit. Quality and accuracy are of the utmost importance to us so if you spot an error in any of our products, please send an to mykaplanreporting@kaplan.com with full details. Our Quality Co-ordinator will work with our technical team to verify the error and take action to ensure it is corrected in future editions. iv

5 INDEX TO QUESTIONS AND ANSWERS INTRODUCTION Note that the majority of the questions within the kit are past ACCA exam questions, the more recent questions (from 2005) are labelled as such in the index. Many of the old ACCA questions within this kit have been adapted to reflect the current style of paper and also the latest examinable documents. If changed in any way from the original version, this is indicated in the end column of the index with the mark (A). The pilot paper is included at the end of the kit. The final question of this pilot paper has been replaced because the subject matter covered, and the style of the coverage, is not reflective of current examinable documents or exam style. KEY TO THE INDEX PAPER ENHANCEMENTS We have added the following enhancements to the answers in this exam kit: Key answer tips All answers include key answer tips to help your understanding of each question. Tutorial note All answers include more tutorial notes to explain some of the technical points in more detail. Top tutor tips For selected questions, we walk through the answer giving guidance on how to approach the questions with helpful tips from a top tutor, together with technical tutor notes. These answers are indicated with the footsteps icon in the index. v

6 PAPER P2 (INT AND UK) : CORPORATE REPORTING ONLINE ENHANCEMENTS Timed question with Online tutor debrief For selected questions, we recommend that they are to be completed in full exam conditions (i.e. properly timed in a closed book environment). In addition to the examiner s technical answer, enhanced with key answer tips and tutorial notes in this exam kit, online you can find an answer debrief by a top tutor that: works through the question in full points out how to approach the question how to ensure that the easy marks are obtained as quickly as possible, and emphasises how to tackle exam questions and exam technique. These questions are indicated with the clock icon in the index. Online question assistance Have you ever looked at a question and not know where to start, or got stuck part way through? For selected questions, we have produced Online question assistance offering different levels of guidance, such as: ensuring that you understand the question requirements fully, highlighting key terms and the meaning of the verbs used how to read the question proactively, with knowledge of the requirements, to identify the topic areas covered assessing the detail content of the question body, pointing out key information and explaining why it is important help in devising a plan of attack With this assistance, you should then be able to attempt your answer confident that you know what is expected of you. These questions are indicated with the signpost icon in the index. Online question enhancements and answer debriefs are available on MyKaplan: vi

7 INDEX TO QUESTIONS AND ANSWERS SECTION A-TYPE QUESTIONS Group financial statements Page number Question Answer Past exam (Adapted) 1 Marchant (P/L and OCI - disposal) Jun 14 (A) 2 Angel (Statement of cash flows) Dec 13 (A) 3 Trailer (SFP complex group) Jun 13 (A) 4 Minny (SFP complex group) Dec 12 (A) 5 Robby (SFP step acquisition) Jun 12 (A) 6 Traveler (SFP share transactions) Dec 11 (A) 7 Rose (SFP forex) Jun 11 (A) 8 Jocatt Group (Statement of cash flows) Dec 10 (A) 9 Ashanti (P/L and OCI disposal) Jun 10 (A) 10 Grange (SFP share transactions) Dec 09 (A) 11 Bravado (SFP step acquisition) Jun 09 (A) 12 Warrburt (Statement of cash flows) Dec 08 (A) 13 Ribby, Hall and Zian (SFP forex) Jun 08 (A) 14 Andash (Statement of cash flows) Dec 06 (A) 15 Parsley (P/L and OCI - forex) Memo (SFP and P/L and OCI forex) Zambeze (Statement of cash flows) SECTION B-TYPE QUESTIONS Reporting standards 18 Aspire Jun Minco Jun Havanna Dec 13 (A) 21 Bental Dec 13 (A) 22 Verge Jun Janne Jun Coate Dec 12 (A) 25 Blackcutt Dec 12 (A) 26 William Jun 12 (A) 27 Ethan Jun Decany Dec Scramble Dec 11 vii

8 PAPER P2 (INT AND UK) : CORPORATE REPORTING 30 Lockfine Jun 11 (A) 31 Alexandra Jun Margie Dec Greenie Dec Cate Jun 10 (A) 35 Seltec Jun 10 (A) 36 Key Dec Aron Jun Marrgrett Dec Norman Jun 08 (A) 40 Macaljoy Dec Wader Jun 07 (A) 42 Router Jun 07 (A) 43 Egin Jun 06 (A) 44 Tyre Jun 06 (A) 45 Prochain Jun Panel Dec 05 (A) 47 Vident Jun Artwright Lucky Dairy Shires Property Construction Boomerang Essay style questions 52 Debt and equity Jun 14 (A) 53 Zack Dec Lizzer Jun Jayach Dec 12 (A) 56 IFRS for SME Applied Dec 10 (A) 57 Holcombe Jun Corporate Reporting Dec Management Commentary Revenue Recognition Impairment of Financial Assets Impairment of Non-financial Assets Integrated Reporting Conceptual Framework viii

9 INDEX TO QUESTIONS AND ANSWERS UK GAAP focus Page number Question Answer Past exam (Adapted) 65 Joey Dec 14 (A) 66 Katye Dec Trailer Jun 13 (A) 68 IFRS for SME and FRS Dec 10 (A) 69 Herbie ix

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11 ANALYSIS OF PAST PAPERS The table below summarises the key topics that have been tested in the most recent P2 INT exams (up to December 2014). The questions and answers in this edition of the exam kit have been amended, where appropriate, to reflect changes to the style of the exam and also the latest examinable documents. The December 2014 exam questions and answers from the INT P2 paper are included in Sections 3 and 4 of the exam kit. Where a past examination question is not included in this edition of the exam kit, it is indicated with an (E). Dec 11 Jun 12 Group financial statements Consolidated SP/L Q1 Consolidated SFP Q6 Q5 Q4 Q3 Group cash flow statement Q2 Foreign subsidiary Complex group Q4 Q3 Step acquisition Q5 Q3 Loss of control in the year Q1 Equity transfer in the year Q6 Q1 Joint arrangement Q5 Reporting standards Framework & accounting principles IAS 1 IAS 2 IAS 7 Q24 IAS 8 Q22 IAS 10 Q22 IAS 12 Q27 Q24 Q18 IAS 16 Q22 IAS 17 Q26 Q25 Q23 Q20 IAS 19 Q26 IAS 20 Q24 Q22 IAS 21 Q24 Q18 IAS 23 IAS 24 IAS 27 Q28 Dec 12 Jun 13 Dec 13 Jun 14 Dec 14 xi

12 PAPER P2 (INT AND UK) : CORPORATE REPORTING IAS 28 Dec 11 Jun 12 IAS 32/IFRS 7/IFRS 9 Q29 Q27 Q21 Q18 IAS 33 IAS 36 Q29 Q27 Q25 IAS 37 Q26 Q25 Q22 Q19 IAS 38 Q29 Q19 Dec 12 Jun 13 IAS 40 Q25 Q23 IAS 41 IFRS 1 IFRS 2 Q26 IFRS 3 Revised Q26 Q21 IFRS 5 Q23 Q20 Q19 IFRS 8 IFRS 10/11/12 Q24 IFRS 13 IFRS 15 (previously IAS 18) Q24 Q22 Q20 Q19 IFRS for SME Entity reconstructions Group reorganisations Essay question Revenue IAS 37 amendments Fair value (IFRS 13) Disclosures (incl. IFRS 7) Accounting policies (IAS 8) Debt or equity (IAS 32) Impairment (IAS 36) Q28 E E Q55 Q22 Q23 Q54 Dec 13 Q53 Jun 14 Q52 Dec 14 xii

13 EXAM TECHNIQUE Use the allocated 15 minutes reading and planning time at the beginning of the exam: read the questions and examination requirements carefully, and begin planning your answers. Please note that it is prohibited to write in the answer booklet during the reading time. Divide the time you spend on questions in proportion to the marks on offer: there are 1.8 minutes available per mark in the examination within that, try to allow time at the end of each question to review your answer and address any obvious issues Whatever happens, always keep your eye on the clock and do not over run on any part of any question! If you get completely stuck with a question: leave space in your answer book, and return to it later. Stick to the question and tailor your answer to what you are asked. pay particular attention to the verbs in the question. If you do not understand what a question is asking, state your assumptions. Even if you do not answer in precisely the way the examiner hoped, you should be given some credit, if your assumptions are reasonable. You should do everything you can to make things easy for the marker. The marker will find it easier to identify the points you have made if your answers are legible. Written questions: Your answer should have: a clear structure, including headings and paragraphs to provide focus Be concise and stay on topic. You will score no marks if you do not answer the question. Computations: It is essential to include all your workings in your answers method marks are available Many computational questions require the use of a standard format: e.g. standard formats for financial statements. Be sure you know these formats thoroughly before the exam and use the layouts that you see in the answers given in this book and in model answers. Reports, memos and other documents: Some questions ask you to present your answer in the form of a report, a memo, a letter or other document. Make sure that you use the correct format there could be easy marks to gain here. xiii

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15 PAPER SPECIFIC INFORMATION THE EXAM FORMAT OF THE EXAM Number of marks Section A: 1 compulsory question 50 Question 1: Group accounts and discussion including ethics Section B: choice of two from three available 25 marks each Question 2: Mixed transactional 25) Question 3: Mixed transactional 25) 50 Question 4: Essay style - discussion 25) 100 Total time allowed: 3 hours plus 15 minutes reading and planning time. Note that: Question 1 will focus on preparation of group financial statements for 35 marks. There may also be an additional element, such as calculation of the gain or loss on disposal of a subsidiary. The remainder of the question is likely to be discursive, perhaps based upon the appropriateness of a particular accounting treatment within the group accounts and will require application of ethical and professional principles to information within the question. Question 1 is also likely to require technical knowledge of reporting standards to be applied as part of the consolidation exercise. Questions 2 and 3 are likely to be multi-transactional questions. They will often be presented in the form of a scenario with an entity in the final stages of preparing their annual financial statements, with technical issues still to resolve. This may also include use of incorrect accounting treatments which will require identification, correction and explanation. Questions 2 and 3 are likely to require both quantitative and qualitative assessment of information provided, perhaps with a summary of corrected or adjusted amounts to include in the financial statements. Discursive explanation of relevant issues will be required and may be in the form of a report or memorandum. Question 4 is invariably an essay-style question, usually comprising a current issue or a theoretical or conceptual issue for discussion. This may include a relatively small computation element. The importance of awareness of current issues in accounting cannot be emphasised too much, including knowledge of articles from Student Accountant. Note that, for paper P2, two professional marks are available for each question in section B of the examination. As only two from the three available questions must be attempted, a maximum of four professional marks are available per examination. You must answer each part of the question to be awarded the full two marks. PASS MARK The pass mark for all ACCA Qualification examination papers is 50%. xv

16 PAPER P2 (INT AND UK) : CORPORATE REPORTING UK GAAP FOCUS The Examiner has indicated that up to 20% of an examination paper may comprise specific UK GAAP content. This could consist of an individual question or elements of more than one question from either or both sections of the examination paper. It may comprise of discursive and/or numerical content and requirements, and will test the differences between UK standards and IFRS for small and medium entities. Note that the UK syllabus examination paper will be denominated in dollars (identified as $); this Exam Kit adopts the same notation and style for UK syllabus content. READING AND PLANNING TIME Remember that all three hour paper based examinations have an additional 15 minutes reading and planning time. ACCA GUIDANCE ACCA guidance on the use of this time is as follows: This additional time is allowed at the beginning of the examination to allow candidates to read the questions and to begin planning their answers before they start to write in their answer books. This time should be used to ensure that all the information and, in particular, the exam requirements are properly read and understood. During this time, candidates may only annotate their question paper. They may not write anything in their answer booklets until told to do so by the invigilator. KAPLAN GUIDANCE As there is some choice in Section B, there is a decision to make regarding which one of the optional questions to drop, together with the decision of which order you should attempt the questions. Therefore, in relation to P2, we recommend that you take the following approach with your reading and planning time: Skim through the whole paper, assessing the level of difficulty of each question. Write down on the question paper next to the mark allocation the amount of time you should spend on each part. Do this for each part of every question. Decide which optional question to drop and the order in which you think you will attempt each question: This is a personal choice and you have time on the revision phase to try out different approaches, for example, if you sit mock exams. A common approach is to tackle the question you think is the easiest and you are most comfortable with first. Others may prefer to tackle the longest questions first, or conversely leave them to the last. Psychologists believe that you usually perform at your best on the second and third question you attempt, once you have settled into the exam, so not tackling the bigger Section A questions first may be advisable. xvi

17 PAPER SPECIFIC INFORMATION It is usual however that student tackle their least favourite topic and/or the most difficult question in their opinion last. Whatever your approach, you must make sure that you leave enough time to attempt all questions fully and be very strict with yourself in timing each question. For each question in turn, read the requirements and then the detail of the question carefully. Always read the requirement first as this enables you to focus on the detail of the question with the specific task in mind. For computational questions: Highlight key numbers/information and key words in the question, scribble notes to yourself on the question paper to remember key points in your answer. Jot down proformas required if applicable. For written questions: Take notice of the format required (e.g. letter, memo, notes) and identify the recipient of the answer. You need to do this to judge the level of financial sophistication required in your answer and whether the use of a formal reply or informal bullet points would be satisfactory. Plan your beginning, middle and end and the key areas to be addressed and your use of titles and sub-titles to enhance your answer. For all questions: Spot the easy marks to be gained in a question and parts which can be performed independently of the rest of the question. For example, noting relevant reporting standards and unusual accounting treatments, laying out basic proformas correctly etc. Make sure that you do these parts first when you tackle the question. Don t go overboard in terms of planning time on any one question you need a good measure of the whole paper and a plan for all of the questions at the end of the 15 minutes. By covering all questions you can often help yourself as you may find that facts in one question may remind you of things you should put into your answer relating to a different question. With your plan of attack in mind, start answering your chosen question with your plan to hand, as soon as you are allowed to start. Always keep your eye on the clock and do not over run on any part of any question! DETAILED SYLLABUS The detailed syllabus and study guide written by the ACCA can be found at: xvii

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19 KAPLAN S RECOMMENDED REVISION APPROACH QUESTION PRACTICE IS THE KEY TO SUCCESS Success in professional examinations relies upon you acquiring a firm grasp of the required knowledge at the tuition phase. In order to be able to do the questions, knowledge is essential. However, the difference between success and failure often hinges on your exam technique on the day and making the most of the revision phase of your studies. The Kaplan complete text is the starting point, designed to provide the underpinning knowledge to tackle all questions. However, in the revision phase, pouring over text books is not the answer. Kaplan Online progress tests help you consolidate your knowledge and understanding and are a useful tool to check whether you can remember key topic areas. Kaplan pocket notes are designed to help you quickly revise a topic area, however you then need to practice questions. There is a need to progress to full exam standard questions as soon as possible, and to tie your exam technique and technical knowledge together. The importance of question practice cannot be over-emphasised. The recommended approach below is designed by expert tutors in the field, in conjunction with their knowledge of the examiner and their recent real exams. The approach taken for the fundamental papers is to revise by topic area. However, with the professional stage papers, a multi topic approach is required to answer the scenario based questions. You need to practice as many questions as possible in the time you have left. OUR AIM Our aim is to get you to the stage where you can attempt exam standard questions confidently, to time, in a closed book environment, with no supplementary help (i.e. to simulate the real examination experience). Practising your exam technique on real past examination questions, in timed conditions, is also vitally important for you to assess your progress and identify areas of weakness that may need more attention in the final run up to the examination. In order to achieve this we recognise that initially you may feel the need to practice some questions with open book help and exceed the required time. The approach below shows you which questions you should use to build up to coping with exam standard question practice, and references to the sources of information available should you need to revisit a topic area in more detail. xix

20 PAPER P2 (INT AND UK) : CORPORATE REPORTING Remember that in the real examination, all you have to do is: attempt all questions required by the exam only spend the allotted time on each question, and get them at least 50% right! Try and practice this approach on every question you attempt from now to the real exam. EXAMINER COMMENTS We have included the examiner's comments to many examination questions in this kit for you to see the main pitfalls that students fall into with regard to technical content. However, too many times in the general section of the report, the examiner comments that students had failed due to: misallocation of time running out of time and showing signs of spending too much time on an earlier question and clearly rushing the answer to a subsequent question. Good exam technique is vital. xx

21 KAPLAN S RECOMMENDED REVISION APPROACH THE KAPLAN PAPER P2 REVISION PLAN Stage 1: Assess areas of strengths and weaknesses Review the topic listings in the revision table plan below Determine whether or not the area is one with which you are comfortable Comfortable with the technical content Not comfortable with the technical content Read the relevant chapter(s) in Kaplan s Complete Text Attempt the Test your understanding examples if unsure of an area Attempt appropriate Online Progress Tests Review the pocket notes on this area Stage 2: Practice questions Follow the order of revision of topics as recommended in the revision table plan below and attempt the questions in the order suggested. Try to avoid referring to text books and notes and the model answer until you have completed your attempt. Try to answer the question in the allotted time. Review your attempt with the model answer and assess how much of the answer you achieved in the allocated exam time. xxi

22 PAPER P2 (INT AND UK) : CORPORATE REPORTING Fill in the self-assessment box below and decide on your best course of action. Comfortable with question attempt Not comfortable with question attempts Only revisit when comfortable with questions on all topic areas Focus on these areas by: Reworking test your understanding examples in Kaplan s Complete Text Revisiting the technical content from Kaplan s pocket notes Working any remaining questions on that area in the exam kit Reattempting an exam standard question in that area, on a timed, closed book basis Note that: The footsteps questions give guidance on exam techniques and how you should have approached the question. The clock questions have an online debrief where a tutor talks you through the exam technique and approach to that question and works the question in full. Stage 3: Final pre-exam revision We recommend that you attempt at least one three hour mock examination containing a set of previously unseen exam standard questions. It is important that you get a feel for the breadth of coverage of a real exam without advanced knowledge of the topic areas covered just as you will expect to see on the real exam day. Ideally this mock should be sat in timed, closed book, real exam conditions and could be: a mock examination offered by your tuition provider, and/or the pilot paper in the back of this exam kit, and/or the last real examination paper (available shortly afterwards on MyKaplan with enhanced walk through answers and a full tutor debrief ). xxii

23 KAPLAN S DETAILED REVISION PLAN Topic Complete Text Chapter Pocket note Chapter Questions to attempt Tutor guidance Date attempted Self assessment The financial reporting framework 1 1 Q55 Q57(a) Ensure that you are able to define, discuss and apply the elements of financial statements as identified in The Framework. It is also important to know and be able to apply the rules and definitions in IFRS 13 Fair Value Measurement. The professional and ethical duty of the accountant 2 2 Q1(c) Q2(c) Ensure that you can apply the ACCA Code of Ethics to a practical scenario. Appraisal of financial performance and position 3 3 Q3(b) Q52 This is likely to be asked as part of a question, and may also require consideration of other accounting issues. Reporting financial performance Performance reporting 3, 4 3, 4 Q20 Q22 This could include revenue recognition per IFRS 15, plus discontinued activities and non-current assets held for sale per IFRS 5 Non-current assets 5 5 Q6 Q45 Q49 There are several reporting standards within this heading. In particular, the accounting requirements of IAS 16, IAS 36 and IAS 38 are regularly examined. xxiii

24 PAPER P2 (INT AND UK) : CORPORATE REPORTING Foreign currency transactions and subsidiaries 6 17 Q18 Q15 Leases 7 6 Q20 Q23 Q57(b) Ensure that you know how to account for exchange differences arising on overseas transactions within an individual company s financial statements. Ensure that you can classify and explain the differences between finance and operating leases per IAS 17 and that you can account for sale and leaseback transactions. Employee benefits 8 7 Q40(a) Ensure that you understand how to account for defined benefit and defined contribution schemes per IAS 19. Share-based payment 9 7 Q27 Ensure that you understand how to Q47 account for both cash-settled transactions and equity-settled transactions per IFRS 2. Provisions and events after the reporting period Financial instruments 11 9 Q Q40(b) Ensure that you know when a legal or constructive obligation arises per IAS 37, and can apply the definition of an adjusting and non-adjusting event per IAS 10. Ensure that you understand and can Q35 apply recognition, measurement and classification rules relating to financial Q48 instruments per IAS 32 and IFRS 9. xxiv

25 KAPLAN S DETAILED REVISION PLAN Income taxes Q34 Q46 The main focus is likely to be deferred tax, with recognition of temporary differences to create deferred tax assets and liabilities per IAS 12. Segment reporting 13 3 Q39 Ensure that you can define a reportable segment per IFRS 8 and apply the definition to information provided. Related parties 14 3 Q43 Ensure you can identify related parties per IAS 24, and the implications for any transactions which they may enter into. Changes in accounting regulation and reporting Specialised entities and specialised transactions 15, 17 11, 13 Q30 Q Q50 Q56 Current issues Q60 Q61 Ensure that you know how to account for the first-time adoption of IFRS. The growing importance of integrated reporting is also likely to be a key topic. Ensure that you understand accounting issues associated with SMEs, as well as the reasons for, and the accounting treatment of, an entity reconstruction. Regularly review the IASB web site for current developments, together with the ACCA web site for articles relevant to paper P2. xxv

26 PAPER P2 (INT AND UK) : CORPORATE REPORTING Group financial statements Basic groups Ensure that you understand the standard workings required for subsidiaries in group financial statements, as well as key definitions per IFRS 10, IFRS 11 and IFRS 12. Complex structures Q3 Ensure that you understand how control Q4 is exercised in complex structures, and the impact upon standard workings required. Changes in group structure Foreign currency subsidiaries Statements of cash flows 21, 23 16, 18 Q1 Q5 Q Q7 Q Q2 Q8 Ensure that you know how to account for transactions where control is either gained, lost or retained. Ensure that you know how to consolidate a foreign subsidiary in accordance with IAS 21. Ensure that you know the format of a statement of cash flows per IAS 7 and can deal with changes in group structure within the statement. Note that not all of the questions are referred to in the programme above. We have recommended an approach to build up from the basic to exam standard questions. The remaining questions are available in the kit for extra practice for those who require more questions on some areas. xxvi

27 TECHNICAL UPDATE Since 1 September 2013, there have been some additions and amendments to the P2 examinable documents. The key issues are summarised below. IFRS 9 FINANCIAL INSTRUMENTS Although parts of IFRS 9 had been issued previously, the IASB has added a new business model in relation to financial asset accounting. New sections on impairments and hedge accounting have also now been issued. The key new content is summarised below: Financial assets Investments in equity Investments in equity instruments (such as an investment in the ordinary shares of another entity) are normally measured at fair value through profit or loss. It is possible to designate an equity instrument as fair value through other comprehensive income, provided that the following conditions are complied with: the equity instrument must not be held for trading, and there must have been an irrevocable choice for this designation upon initial recognition of the asset. Investments in debt Financial assets that are debt instruments can be measured in one of three ways: An investment in a debt instrument is measured at amortised cost if: The financial asset is held within a business model whose aim is to collect the contractual cash flows The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. An investment in a debt instrument is measured at fair value through other comprehensive income if: The financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. An investment in a debt instrument that is not measured at amortised cost or fair value through other comprehensive income will be measured at fair value through profit or loss. Financial asset impairments Definitions Credit loss: The difference between all contractual cash flows that are due to an entity in accordance with the contract and all the cash flow that the entity expects to receive (i.e. all cash shortfalls), discounted at the original effective interest rate Expected credit losses: The weighted average of credit losses with the respective risks of a default occurring as the weights. xxvii

28 PAPER P2 (INT AND UK) : CORPORATE REPORTING Lifetime expected credit losses: The expected credit losses that result from all possible default events over the expected life of a financial instrument. 12-month expected credit losses: The portion of lifetime expected credit losses that represent the expected credit losses that result from default events on a financial instrument that are possible within the 12 months after the reporting date. Loss allowances Loss allowances must be recognised for financial assets that are debt instruments and which are measured at amortised cost or at fair value through other comprehensive income. If the credit risk on the financial asset has increased significantly since initial recognition then the loss allowance should be equal to the lifetime expected credit losses. If the credit risk on the financial asset has not increased significantly since initial recognition, the loss allowance should be equal to 12-month expected credit losses. The loss allowance should always be measured at an amount equal to lifetime credit losses for trade receivables and contract assets (recognised in accordance with IFRS 15 Revenue from Contracts with Customers) if they do not have a significant financing component. Adjustments to the loss allowance are charged (or credited) to the statement of profit or loss. Hedge accounting Criteria Under IFRS 9, hedge accounting rules can only be applied if the hedging relationship meets the following criteria: The hedging relationship consists only of eligible hedging instruments and hedged items At the inception of the hedge there must be formal documentation identifying the hedged item and the hedging instrument The hedging relationship is effective If the hedged item is a forecast transaction, then the transaction must be highly probable. Accounting treatment of a fair value hedge At the reporting date: The hedging instrument will be remeasured to fair value The carrying amount of the hedged item will be adjusted for the change in fair value since the inception of the hedge. The gain (or loss) on the hedging instrument and the loss (or gain) on the hedged item will be recorded: in profit or loss in most cases, but in other comprehensive income if the hedged item is an investment in equity that is measured at fair value through other comprehensive income. Accounting treatment of a cash flow hedge For cash flow hedges, the hedging instrument will be remeasured to fair value at the reporting date. The gain or loss is recognised in other comprehensive income. However, if the gain or loss on the hedging instrument since the inception of the hedge is greater than the loss or gain on the hedged item then the excess gain or loss on the instrument must be recognised in profit or loss. xxviii

29 TECHNICAL UPDATE IFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS IFRS 15 adopts a five step process to revenue recognition: (1) Identify the contract A contract is an agreement between two or more parties that creates enforceable rights and obligations. A contract can be agreed in writing, verbally, or through other customary business practices. (2) Identify the separate performance obligations within a contract Performance obligations are promises to transfer distinct goods or services to a customer. The distinct performance obligations within a contract must be identified. (3) Determine the transaction price The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. Amounts collected on behalf of third parties (such as sales tax) are excluded. If the consideration promised in a contract includes a variable amount, an entity must estimate the amount that the entity will be entitled to in exchange for satisfying the performance obligations. The estimated amount of variable consideration can only be included in the transaction price if it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty is resolved. (4) Allocate the transaction price to the performance obligations in the contract The total transaction price should be allocated to each performance obligation in proportion to stand-alone selling prices. The best evidence of a stand-alone selling price is the observable price of a good or service when the entity sells that good or service separately in similar circumstances and to similar customers. (5) Recognise revenue when (or as) a performance obligation is satisfied. For each performance obligation identified, an entity must determine at contract inception whether it satisfies the performance obligation over time or satisfies the performance obligation at a point in time. An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognises revenue over time, if one of the following criteria is met: the customer simultaneously receives and consumes the benefits provided by the entity s performance as the entity performs the entity s performance creates or enhances an asset (for example, work in progress) that the customer controls as the asset is created or enhanced, or the entity s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date. For a performance obligation satisfied over time, an entity recognises revenue over time by measuring the progress towards complete satisfaction of that performance obligation. xxix

30 PAPER P2 (INT AND UK) : CORPORATE REPORTING If a performance obligation is not satisfied over time then it is satisfied at a point in time. The entity must determine the point in time at which a customer obtains control of a promised asset. The following are indicators of the transfer of control: The entity has a present right to payment for the asset The customer has legal title to the asset The entity has transferred physical possession of the asset The customer has the significant risks and rewards of ownership of the asset The customer has accepted the asset. xxx

31 Section 1 PRACTICE QUESTIONS SECTION A-TYPE QUESTIONS GROUP FINANCIAL STATEMENTS 1 MARCHANT (JUNE 14 EXAM) Walk in the footsteps of a top tutor The following draft financial statements relate to Marchant, a public limited company. Marchant Group: Draft statements of profit or loss and other comprehensive income for the year ended 30 April Marchant Nathan Option $m $m $m Revenue Cost of sales (312) (65) (36) Gross profit Other income Administrative costs (15) (9) (12) Other expenses (35) (19) (8) Operating profit Finance costs (5) (6) (4) Finance income Profit before tax Income tax expense (19) (9) (5) Profit for the year Other comprehensive income revaluation surplus 10 Total comprehensive income for year

32 PAPER P2 (INT AND UK) : CORPORATE REPORTING The following information is relevant to the preparation of the group statement of profit or loss and other comprehensive income: 1 On 1 May 2012, Marchant acquired 60% of the equity interests of Nathan, a public limited company. The purchase consideration comprised cash of $80 million and the fair value of the identifiable net assets acquired was $110 million at that date. The fair value of the non-controlling interest (NCI) in Nathan was $45 million on 1 May Marchant wishes to use the full goodwill method for all acquisitions. The share capital and retained earnings of Nathan were $25 million and $65 million respectively and other components of equity were $6 million at the date of acquisition. The excess of the fair value of the identifiable net assets at acquisition is due to non-depreciable land. Goodwill has been impairment tested annually and as at 30 April 2013 had reduced in value by 20%. However at 30 April 2014, the impairment of goodwill had reversed and goodwill was valued at $2 million above its original value. This upward change in value has already been included in above draft financial statements of Marchant prior to the preparation of the group accounts. 2 Marchant disposed of an 8% equity interest in Nathan on 30 April 2014 for a cash consideration of $18 million and had accounted for the gain or loss in other income. The carrying value of the net assets of Nathan at 30 April 2014 was $120 million before any adjustments on consolidation. Marchant accounts for investments in subsidiaries using IFRS 9 Financial Instruments and has made an election to show gains and losses in other comprehensive income. The carrying value of the investment in Nathan was $90 million at 30 April 2013 and $95 million at 30 April 2014 before the disposal of the equity interest. 3 Marchant acquired 60% of the equity interests of Option, a public limited company, on 30 April The purchase consideration was cash of $70 million. Option s identifiable net assets were fair valued at $86 million and the NCI had a fair value of $28 million at that date. On 1 November 2013, Marchant disposed of a 40% equity interest in Option for a consideration of $50 million. Option s identifiable net assets were $90 million and the value of the NCI was $34 million at the date of disposal. The remaining equity interest was fair valued at $40 million. After the disposal, Marchant exerts significant influence. Any increase in net assets since acquisition has been reported in profit or loss and the carrying value of the investment in Option had not changed since acquisition. Goodwill had been impairment tested and no impairment was required. No entries had been made in the financial statements of Marchant for this transaction other than for cash received. 4 Marchant sold inventory to Nathan for $12 million at fair value. Marchant made a loss on the transaction of $2 million and Nathan still holds $8 million in inventory at the year end. 5 The following information relates to Marchant s pension scheme: $m Plan assets at 1 May Defined benefit obligation at 1 May Service cost for year ended 30 April Discount rate at 1 May % Re-measurement loss in year ended 30 April Past service cost 30 April The pension costs have not been accounted for in total comprehensive income. 2

33 PRACTICE QUESTIONS : SECTION 1 6 On 1 May 2012, Marchant purchased an item of property, plant and equipment for $12 million and this is being depreciated using the straight line basis over 10 years with a zero residual value. At 30 April 2013, the asset was revalued to $13 million but at 30 April 2014, the value of the asset had fallen to $7 million. Marchant uses the revaluation model to value its non-current assets. The effect of the revaluation at 30 April 2014 had not been taken into account in total comprehensive income but depreciation for the year had been charged. 7 On 1 May 2012, Marchant made an award of 8,000 share options to each of its seven directors. The condition attached to the award is that the directors must remain employed by Marchant for three years. The fair value of each option at the grant date was $100 and the fair value of each option at 30 April 2014 was $110. At 30 April 2013, it was estimated that three directors would leave before the end of three years. Due to an economic downturn, the estimate of directors who were going to leave was revised to one director at 30 April The expense for the year as regards the share options had not been included in profit or loss for the current year and no directors had left by 30 April A loss on an effective cash flow hedge of Nathan of $3 million has been included in the subsidiary s finance costs. 9 Ignore the taxation effects of the above adjustments unless specified. Any expense adjustments should be amended in other expenses. Required: (a) (i) Prepare a consolidated statement of profit or loss and other comprehensive income for the year ended 30 April 2014 for the Marchant Group. (30 marks) (b) (ii) Explain, with suitable calculations, how the sale of the 8% interest in Nathan should be dealt with in the group statement of financial position at 30 April (5 marks) The directors of Marchant have strong views on the usefulness of the financial statements after their move to International Financial Reporting Standards (IFRSs). They feel that IFRSs implement a fair value model. Nevertheless, they are of the opinion that IFRSs are failing users of financial statements as they do not reflect the financial value of an entity. Required: (c) Discuss the directors views above as regards the use of fair value in IFRSs and the fact that IFRSs do not reflect the financial value of an entity. (9 marks) Marchant plans to update its production process and the directors feel that technology-led production is the only feasible way in which the company can remain competitive. Marchant operates from a leased property and the leasing arrangement was established in order to maximise taxation benefits. However, the financial statements have not shown a lease asset or liability to date. 3