ACCA P2 (International)

Course Overview

GROUP ACCOUNTING BASIC GROUPS

Statement of financial position standard workings

Group structure

Retained earnings

Net assets

Noncontrollin g interests

Goodwill

Statement of comprehensive income standard workings

Group structure

Retained earnings b/fwd

Net assets at aqn

Noncontrolling interests

Goodwill

Consoln schedule

Accounting for associates

Group structure Share of retained earnings at each SOFP date

Not part of group for consolidation

Net assets at aqn

Share of profit for the year in SOCI Share of net assets at SOFP date

Goodwill

Accounting for joint ventures

Jointly controlled operations

Jointly controlled entities

Jointly controlled assets

COMPLEX GROUPS

DISPOSALS AND GROUP REORGANISATIONS

Full disposal of subsidiary or associate

Partial disposal of subsidiary

Reasons for reorganisations

Seek listing on public exchange

Reverse acquisition

Disposal of subsidiary

Demerger

Divisionalisati on

GROUP ACCOUNTING FOREIGN CURRENCY

Foreign currency

Functional currency
Currency of the primary economic environment

Presentation currency
Currency in which financial statements are presented

Foreign currency individual transactions

Principle use rate ruling at transaction date

Gain/loss on retranslation to SOCI

May use average rate for SOCI transactions

Monetary items retranslated at SOFP date

Nonmonetary items left at historic rate

GROUP STATEMENT OF CASHFLOWS

Proforma statement of cash flows per IAS 7

$ Operating activities Profit before tax Add: interest payable Less: Income from associate Adjust for noncash items dealt with in arriving at operating profit: Add: depreciation Add: loss on impairment Add: loss on disposal of noncurrent assets Add: increase in provisions $ X X (x) Investing activities Payments to purchase NCA Receipts from NCA disposals Cash paid to acquire subsidiary (net of cash balances acquired) Cash proceeds from subsidiary disposal (net of cash balances disposed) Dividend received from associate Interest received X Net cash flow from investing activities Financing activities Proceeds from share issue Proceeds from loan or debenture issue Cash repayment of loans or debentures Finance lease repayments Equity dividend paid Dividend paid to NCI Net cash flow from financing activities Change in cash and equivalents for the year Cash and equivalents brought forward Cash and equivalents carried forward (X) X (X) X X X(X) X X (X) (X) (X) (X) X(X) X(X) X(X) X(X)

X X X X X (X) (X) (X)

Changes in working capital: Increase in inventory Increase in receivables Decrease in payables Cash generated X Interest paid Taxation paid Net cash generated from operating activities

(X) (X) X

THE PROFESSIONAL AND ETHICAL DUTY OF THE ACCOUNTANT

ACCA/IFAC Code of Ethics

Confidential ity

Professiona l behaviour

Objectivity

Competenc e and due care

Integrity

THE FINANCIAL REPORTING FRAMEWORK

Financial Reporting Framework

PERFORMANCE REPORTING

Examples of off-balance sheet financing

Consignmen t inventory

Quasisubsidiaries

Receivables factoring

Sale and repurchase

Earnings per share IAS 33

Basic calculation

Issue at full price

Bonus issue

Rights issue

Diluted earnings per share

Convertible shares & stock

Conditional right to acquire shares

Employee shares schemes

Partly paid shares

Warrants & options

EMPLOYEE BENEFITS

Employee benefits IAS 19

SHARE-BASED PAYMENT

How fair value is determined

SEGMENT REPORTING

RELATED PARTIES

Related parties IAS 24

NON-CURRENT ASSETS & INVENTORIES

Inventories (IAS 2)
Inventories are measured at the lower of cost and net realisable value.
Cost includes all purchase costs, conversion costs and other costs incurred in bringing the inventories to their current condition and location. Net realisable value is the expected selling price less the estimated costs of completion and sale.

LEASES

Leases - IAS 17
Leases are classified as either finance leases or operating leases at inception (normally the date of the lease agreement).
A finance lease transfers substantially all the risks and rewards incidental to ownership of an asset. An operating lease is a lease other than a finance lease. Whether a lease is a finance lease or an operating lease depends on the substance of the agreement.

Sale and leaseback under an operating lease

FINANCIAL INSTRUMENTS

IFRS 9 - financial assets recognition and measurement

Impairment of financial assets

Financial assets at fair value through profit or loss - the accounting treatment includes accounting for the effect of any impairment. Financial assets at fair value through other comprehensive income the effect of any impairment is taken to other comprehensive income. Financial assets at amortised cost need annual assessment of whether there is evidence of impairment if so, do impairment test

Derivatives
A derivative is a financial instrument with the following characteristics:
Its value changes in response to the change in a specified interest rate, security price, commodity price, foreign exchange rate or similar variable. It requires little or no initial investment relative to other types of contract that havea similar response to changes in market conditions. It is settled at a future date.

Derivatives
Derivatives include the following types of contract: Forward contracts Futures Swaps Options Measure at fair value through P&L unless part of a designated formalised hedging arrangement

Financial instruments hedge accounting

Hedging is a method of managing risk by designating one or more hedging instruments so that their change in fair value is offset, in whole or in part, to the change in fair value or cash flows of a hedged item. A hedged item is an asset or liability that exposes the entity to risk. A hedging instrument is a designated derivative whose fair value or cash flows are expected to offset changes in fair value or future cash flows of the hedged item.

Financial instruments - hedging

PROVISIONS

IAS 37 specific guidance

Events After the Reporting Period IAS 10

TAX

NON FINANCIAL REPORTING

SPECIALISED ENTITIES & SPECIALISED TRANSACTIONS

Small and medium-sized entities (SME)

A SME is typically defined as: owner-managed by a relatively small group of shareholders, relatively small in terms of revenues generated and assets and liabilities under control of the entity, relatively small number of employees, undertake less complex transactions.

IFRS for SME

Issued by the IASB in July 2009 and adopted by many countries subsequently. Provides a framework for preparation of financial statements for eligible entities. Substantially reduced financial reporting compliance burden in comparison with full IFRS compliance.

IFRS for SME

Omitted subject matter from IFRS for SME: EPS Interim reporting Segmental reporting Assets held for sale

IFRS for SME

Simplified reporting under IFRS for SME: R&D always expensed Goodwill amortised over 10 years No revaluation of PP&E Finance costs never capitalised

IFRS for SME

Expected benefits of adoption: Improved comparability for users of accounts of SME. Reduced financial reporting compliance costs for preparers of accounts. IFRS for SME may provide a platform for progression towards adoption of full IFRS GAAP as entities grow.

Entity reconstructions
Corporate profile where reconstruction may be appropriate: Accumulated trading losses. Arrears of unpaid debenture interest. No equity dividends paid in recent years, and no immediate prospect of this situation changing. Lack of investor and market confidence in the entity.

Entity reconstructions
Why would reconstruction be supported by stakeholders? Providers of finance, secured and unsecured, may have little or no prospect of full repayment. Equity providers may have little or no prospect of return of capital upon liquidation, or dividend under the prevailing circumstances.

Entity reconstructions
Capital reduction scheme will reduce the number of equity shares in issue and/or the nominal value per share in issue, without involving creditors. Reconstruction schemes may involve creditors giving up some of their right to priority of repayment, or waiving their right of repayment in exchange for new rights; e.g.issue of equity shares

ADOPTION OF IFRS

Adoption of IFRS
Benefits of harmonisation:
Multi-national entities are able to prepare financial information on a consistent basis, making preparation and consolidation of financial information more efficient. Investors can make comparison between companies more easily. International economic groupings (e.g. the EU) can work more effectively if there is harmonisation of accounting practices.

First-time adoption of IFRS

First-time adoption of IFRS

CURRENT ISSUES

Current issues
Convergence of IFRS & US GAAP Recently revised or amended standards:
IFRS 8 Segment reporting IFRS 9 Financial instruments IAS 24 related parties definition

Current issues
Other developments include:
Improved conceptual framework Credit risk in liability management Fair value measurements Revenue recognition in contracts with customers Preliminary views on financial statement presentation - other comprehensive income Preliminary views on financial statement presentation - discontinued operations Termination benefits

Current issues
Other developments include (contd): Rate regulated activities Leases Financial instruments impairment Financial instruments - hedging Financial instruments derecognition Liabilities - IAS 37 amendment Management commentary

ASSESSING FINANCIAL PERFORMANCE AND POSITION

Ratio Analysis
Matters to consider:
Profitability Liquidity Solvency/gearing Investors Trend analysis Non-financial performance indicators Relevant business and commercial issues

Ratio Analysis
Matters to consider:
Recognition of assets and liabilities. Ensure consistency of definitions for comparability. Evaluate impact of accounting policies on ratios calculated. Evaluate impact of related party relationships on ratios calculated. Evaluate impact of creative accounting on ratios calculated.