Corporate Reporting
Paper P2 (International)
Course Notes
ACP2CN07 (INT)
P2 Corporate Reporting (International)
Study Programme
Page
Introduction to the paper and the course............................................................................................................... (ii)
1
2
3
4
5
6
The financial reporting framework .............................................................................................................. 1.1
Professional and ethical duty of the accountant .......................................................................................... 2.1
Home study chapter: Environmental and social reporting ........................................................................... 3.1
Non-current assets ...................................................................................................................................... 4.1
Employee benefits....................................................................................................................................... 5.1
Income taxes ............................................................................................................................................... 6.1
End of Day 1 – refer to Course Companion for
7
8
9
10
11
Home Study
Progress test 1
Financial instruments................................................................................................................................... 7.1
Share-based payment ................................................................................................................................. 8.1
Provisions, contingencies and events after the balance sheet date............................................................ 9.1
Related parties .......................................................................................................................................... 10.1
Leases....................................................................................................................................................... 11.1
End of Day 2 – refer to Course Companion for
Home Study
Progress test 2
Course exam 1
12
13
14
15
Revision of basic groups ........................................................................................................................... 12.1
Complex groups ........................................................................................................................................ 13.1
Changes in group structures ..................................................................................................................... 14.1
Continuing and discontinued interests....................................................................................................... 15.1
End of Day 3 – refer to Course Companion for
16
17
18
19
20
21
Home Study
Progress test 3
Foreign transactions and entities............................................................................................................... 16.1
Group cash flow statements...................................................................................................................... 17.1
Performance reporting............................................................................................................................... 18.1
Current developments ............................................................................................................................... 19.1
Reporting for specialised entities............................................................................................................... 20.1
Home study chapter: Implications of changes in accounting regulation on
financial reporting ...................................................................................................................................... 21.1
End of Day 4 – refer to Course Companion for
Home Study
Progress test 4
Course exam 2
22
23
24
Answers to Lecture Examples ................................................................................................................... 22.1
Question and Answer bank ....................................................................................................................... 23.1
Appendix: Pilot Paper questions................................................................................................................ 24.1
Don't forget to plan your revision phase!
•
•
•
•
Revision of syllabus
Testing of knowledge
Question practice
Exam technique practice
BPP provides revision courses, question days,
mock days and specific material to assist you in
this important phase of your studies.
(i)
INTRODUCTION
Introduction to Paper P2 Corporate Reporting (International)
Overall aim of the syllabus
To apply knowledge, skills and exercise professional judgement in the application and evaluation of financial
reporting principles and practices in a range of business contexts and situations.
The syllabus
The broad syllabus headings are:
A
B
C
D
E
F
G
H
The professional and ethical duty of the accountant
The financial reporting framework
Reporting the financial performance of entities
Financial statements of groups of entities
Specialised entities
Implications of changes in accounting regulation on financial reporting
The appraisal of financial performance and position of entities
Current developments
Main capabilities
On successful completion of this paper, candidates should be able to:
•
•
•
•
•
•
•
•
Discuss the professional and ethical duty of the accountant
Evaluate the financial reporting framework
Advise on and report the financial performance of entities
Prepare the financial statements of groups of entities in accordance with relevant accounting standards
Explain report issues relating to specialised entities
Discuss the implications of changes in accounting regulation on financial reporting
Appraise the financial performance and position of entities
Evaluate current developments
Links with other papers
Corporate Reporting
(P2)
Advanced Audit &
Assurance (P7)
Financial Reporting
(F7)
Financial Accounting
(F3)
This diagram shows where direct (solid line arrows) and indirect (dashed line arrows) links exist between this
paper and other papers that may precede or follow it.
The financial reporting syllabus assumes knowledge acquired in paper F3 Financial Accounting and Paper F7
Financial Reporting and develops and applies this further and in greater depth.
(ii)
INTRODUCTION
Assessment methods and format of the exam
Examiner: Graham Holt
The examination is a three-hour paper. Requirements may ask for reports to be prepared, as well as for
numbers to be calculated.
Format of the Exam
Section A
Marks
Compulsory
50
Section A will be scenario-based and will deal with the preparation of
consolidated financial statements including group cash flow statements and
ethical and social issues in financial reporting.
Section B
Two from three 25-mark questions
50
Section B will normally comprise two questions which will be scenario or case
study-based (covering a range of standards and syllabus topics) of which one
question will usually be of an essay style, often encompassing current
developments in corporate reporting.
100
(iii)
INTRODUCTION
Course Aims
Achieving ACCA's Study Guide Outcomes
A
The professional and ethical duty of the accountant
A1 Professional behaviour and compliance with accounting standards
Chapter 1
A2 Ethical requirements of corporate reporting and the consequences of unethical
behaviour
Chapter 1
A3 Social responsibility
Chapter 1
B
The financial reporting framework
B1 The contribution and limitations of financial statements in meeting users' and capital
markets' needs
Chapter 2
B2 The applications, strengths and weaknesses of an accounting framework
Chapter 2
B3 Critical evaluation of principles and practices
Chapter 2
C
Reporting the financial performance of entities
C1 Performance reporting
Chapter 19
C2 Non-current assets
Chapter 3
C3 Financial instruments
Chapter 6
C4 Leases
Chapter 10
C5 Segment reporting
Chapter 19
C6 Employee benefits
Chapter 4
C7 Income taxes
Chapter 5
C8 Provisions, contingencies and events after the balance sheet date
Chapter 8
C9 Related parties
Chapter 9
C10 Share-based payment
Chapter 7
D
Financial statements of groups of entities
D1 Group accounting including cash flow statements
Chapters 11-12,
16
D2 Continuing and discontinued interests
Chapter 14
D3 Changes in group structures
Chapter 13
D4 Foreign transactions and entities
Chapter 15
(iv)
INTRODUCTION
E
Specialised entities
E1
Financial reporting in specialised, not-for-profit and public sector entities
Chapter 20
E2
Reporting requirements for small- and medium-sized entities (SMEs)
Chapter 20
F
Implications of changes in accounting regulation on financial reporting
F1
The effect of changes in accounting standards on accounting systems
Chapter 21
F2
Proposed changes to accounting standards
Chapter 21
G
The appraisal of financial performance and position of entities
G1 The creation of suitable accounting policies
Chapter 19
G2 Analysis and interpretation of financial information and measurement of performance
Chapter 19
H
Current developments
H1 Environmental and social reporting
Chapter 17
H2 Convergence between national and international reporting standards
Chapter 18
H3 Comparison of national reporting requirements
Chapter 18
H4 Current reporting issues
Chapter 18
(v)
INTRODUCTION
Classroom tuition and Home study
Your studies for BPP consist of two elements, classroom tuition and home study.
Classroom tuition
In class we aim to cover the key areas of the syllabus. To ensure examination success you will to spend private
study time reinforcing your classroom course with question practice and reviewing areas of the Course Notes
and Study Text.
Home study
To support you with your private study BPP provides you with a Course Companion which helps you to work at
home and aims to ensure your private study time is effectively used. The Course Companion includes a Home
Study section which breaks down your home study by days, one to be covered at the end of each day of the
course. You will find clear guidance as to the time to spend on various activities and their importance.
You are also provided with progress tests and two course exams which should be submitted for marking as they
become due.
These may include questions on topics covered in class and home study.
BPP Learn Online
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health check.
ACCA Forum
We have thriving ACCA bulletin boards at www.bpp.com/accaforum. Register and discuss your studies with
tutors and students.
Helpline
If you have any queries during your private study simply contact your class tutor on the telephone number or
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outside the London area) and ask for a tutor for this paper to speak to you or to call you back within 24 hours.
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If you have any issues or ideas before you are given the form to complete, please raise them with the course
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If this is not possible, please email
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(vi)
INTRODUCTION
Key to icons
Question practice from the Study Text
This is a question we recommend you attempt for home study.
Real world examples
These can be found in the Course Companion.
Section reference in the Study Text
Further reading is needed on this area to consolidate your knowledge.
(vii)
INTRODUCTION
(viii)
The financial reporting
framework
Syllabus Guide Detailed Outcomes
Having studied this chapter you will be able to:
•
Evaluate the consistency and clarity of corporate reports.
•
Assess the insight into financial and operational risks provided by corporate reports.
•
Discuss the usefulness of corporate reports in making investment decisions
•
Evaluate the 'balance sheet' and 'fair value' models adopted by standard setters.
•
Discuss the use of an accounting framework in underpinning the production of accounting standards.
•
Assess the success of such a framework in introducing rigorous and consistent accounting standards.
•
Identify the relationship between accounting theory and practice.
•
Critically evaluate accounting principles and practices used in corporate reporting.
Exam Context
In Section B of the exam there will always be a discussion question and this could be based on some of the topics
covered in this chapter. The examiner could also ask you to discuss accounting treatments, or to criticise existing
Standards in the light of the Framework in some of the more practical questions in this section.
Qualification Context
The basic issues in this chapter, of accounting principles and the Framework were introduced in the Fundamentals level
Paper F7 Financial Reporting. At this level you will be expected to have a greater depth of understanding of these
areas.
Business Context
The debates over the usefulness of corporate reports and the respective advantages and disadvantages of the balance
sheet and fair value models are very much live arguments currently both within the standard-setting bodies and the
wider business and investment community. The fair value model is particularly controversial, especially among smaller
entities.
1.1
1: THE FINANCIAL REPORTING FRAMEWORK
Overview
The financial reporting
framework
Contribution and limitations
of financial statements
Applications, strengths and
weaknesses of an accounting
framework
1.2
Revenue recognition
1: THE FINANCIAL REPORTING FRAMEWORK
1
Contribution and limitations of financial statements
Contributions
1.1
The usual definition of the role of financial statements is that they are designed to provide
useful information for a range of users. The existence of accounting standards, and the
increasing harmonisation of these standards internationally is seen as improving the
consistency and clarity of financial statements.
Clarity and usefulness of financial statements is considered to have improved due to:
(a)
The growth in narrative reporting as discussed in Chapter 1, allowing users a
greater insight into the risks faced by companies, both financial and operational,
and the policies they are implementing to address these.
(b)
Increasing use of fair values in recent accounting standards. Fair values are
generally seen as being more relevant than historical balance sheet values for
investors assessing the position and performance of companies.
Limitations
1.2
Despite the improvements brought about by recent standards it can still be argued that there
are limitations to the usefulness of financial statements. These include:
(a)
All information within financial statements is historical.
(b)
All IASB standards are developed with the 'capital markets of the world' as the
perceived primary user. This is seen as limiting their usefulness in the context of
smaller entities.
(c)
There are arguments over the usefulness of fair values themselves. It is generally
accepted that fair values that are based on market values of liquid assets are relevant
and reliable. There is no such general acceptance of hypothetical calculations of fair
values for assets where no actual market value exists. In these cases difficulties arise
due to the variety of assumptions that can be used. The complexity of the models
used for these valuations can also detract from the understandability of the resulting
information.
(d)
Different users of financial statements will have different needs. Even within
'investors' it could be argued that a fixed income investor may be more interested in
the proceeds that could realised from the sale of an asset, while an equity investor
may be more interested in the cash spent on acquiring an asset in order to calculate
return on capital invested.
Disclosures
1.3
One answer to the conflicting needs of users and other limitations in the usefulness of
financial statements is to increase the amount of disclosure. For example, if management
disclose all the assumptions and inputs into valuation models used investors can reassess
the values independently.
1.3
1: THE FINANCIAL REPORTING FRAMEWORK
2
Chapter 1
Section 4.1-4.3
Application, strengths and weaknesses of an
accounting framework
Fair presentation and compliance with IFRSs
2.1
'Fair presentation' is the term used in IAS 1 Presentation of Financial Statements equivalent
to the concept of 'true and fair view'.
2.2
In order to achieve fair presentation, an entity must comply with:
•
International Financial Reporting Standards. These comprise:
–
–
–
•
International Financial Reporting Standards
International Accounting Standards
Interpretations originated by the IFRIC or the former SIC; and
The Framework for the Preparation and Presentation of Financial Statements.
The IASB's Framework
2.3
The Framework consists of seven sections:
(a)
The objective of financial statements
‘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.’
This section discusses the ways financial statements provide information about the
financial position, performance and changes in financial performance and why it is
necessary.
(b)
Underlying assumptions
Financial statements are prepared based on the following assumptions:
(i)
(ii)
(c)
Accruals basis
Going concern.
Qualitative characteristics of financial statements
The four principal qualitative characteristics are as follows:
(i)
(ii)
(iii)
(iv)
Understandability
Relevance
Reliability
Comparability.
Within reliability, faithful representation, substance over form, neutrality, prudence and
completeness should be followed. Materiality is detailed as being a factor in
relevance.
1.4
1: THE FINANCIAL REPORTING FRAMEWORK
(d)
The elements of financial statements
Asset
A resource controlled by an entity as a result of past events and from
which future economic benefits are expected to flow to the entity.
Liability
A present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits.
Equity
The residual interest in the assets of an entity after deducting all its
liabilities.
Income
Increases in economic benefits during the accounting period in the form
of inflows or enhancements of assets or decreases of liabilities that
result in increases in equity, other than those relating to contributions
from equity participants.
Expenses Decreases in economic benefits during the accounting period in the form
of outflows or depletions of assets or increases of liabilities that
result in decreases in equity, other than those relating to distributions
to equity participants.
(e)
Recognition of the elements of financial statements
An item that meets the definition of an element should be recognised if:
•
it is probable that any future economic benefit associated with the item will flow
to or from the entity; and
•
the item has a cost or value that can be measured with reliability.
Consequently, in accordance with the Framework, in order for an item to be
recognised in the financial statements, the following questions need to be answered:
(1)
Is the item one of the elements of financial statements?
↓
(2)
Is it probable that economic benefits associated with the item will flow to or
from the entity?
↓
(3)
(f)
Can the item be measured with reliability?
Measurement of the elements of financial statements
Defines different bases of measurement of the elements of the financial statements
including specifically:
(i)
(ii)
(iii)
(iv)
historical cost;
current cost:
realisable value; and
present value.
Historical cost is the basis most commonly used.
(g)
Concepts of capital and capital maintenance
Discusses alternative capital maintenance concepts and determination.
1.5
1: THE FINANCIAL REPORTING FRAMEWORK
Application of an accounting framework
2.4
Main uses
•
•
•
Defines the concepts underpinning the production of new Standards
Provides a common base for the evaluation of current Standards
Source of accounting treatment where there is no Standard (IAS 8 – see Chapter 18)
Strengths and weaknesses of an accounting framework
2.5
Strengths
•
•
Allows Standards to be developed on a consistent basis
Can protect Standard-setters from political interference
Weaknesses
•
It is open to question whether a single framework can be appropriate to the needs of
all users of financial statements
•
It is not clear that the existence of a framework makes the task of preparing and
implementing standards any easier than it would be without a framework.
3
Revenue recognition (IAS 18)
3.1
Classes of revenue:
•
Sales of goods
•
Rendering of services
•
Interest
•
Royalties
•
Dividends.
Sales of goods
3.2
Criteria for revenue recognition:
(a) Transfer to buyer of significant risks and rewards of ownership.
(b) Entity retains no continuing managerial involvement nor effective control over the
goods sold.
(c) Revenue can be measured reliably.
(d) Probable that the economic benefits associated with the transaction will flow to the
seller.
(e) Costs incurred in the transaction can be measured reliably.
Rendering of services
3.3
Criteria for revenue recognition:
(c)-(e) as above
+
Stage of completion can be measured reliably
Measurement
3.4
Revenue recognised ⇒ Fair value of consideration received or receivable.
Discount if material.
1.6
1: THE FINANCIAL REPORTING FRAMEWORK
Specific guidance
3.5
Type
Revenue recognised:
Consignment sales
• When goods are sold to third party
Sale and repurchase
agreements
• Only when risks and rewards of ownership transferred
(even though legal title may have been transferred)
Subscriptions to
publications
• On a straight line basis over the period in which the
items are despatched (when items are of similar value in
each period)
• On the basis of sales value despatched in relation to
estimated total sales value of the subscription (when
items vary in value)
Instalment sales
(consideration receivable in
instalments)
• Present value at date of sale. Interest element
recognised as earned
Real estate sales
• Normally when legal title passes to the buyer
• If the seller is obliged to perform any significant acts
after transfer of title ⇒ as the acts are performed
Installation fees
• By reference to the stage of completion of the
installation (unless incidental to sale of the product ⇒
when goods sold)
Servicing fees included in
the price of the product
• Over period during which service is performed
Advertising commissions
• When advertisement or commercial appears before the
public
Admission fees from artistic
performances, banquets etc
• When event takes place
Initiation, entrance and
membership fees
• If membership only ⇒ when no significant uncertainty
as to collectability
• If entitles member to services/publications etc ⇒ on
basis that represents timing, nature and value of
benefits provided
Fees from development of
customised software
• By reference to stage of completion of development,
including completion of services provided for postdelivery service support
Licence fees and royalties
• In accordance with the substance of the agreement, e.g.
straight line over the life of the agreement
• Immediately where the substance is a sale, e.g. a noncancellable contract where the licensee can exploit the
rights freely
1.7
1: THE FINANCIAL REPORTING FRAMEWORK
Lecture example 1
(Each part) Exam standard for 3-4 marks
(a)
Realbuild operates in the house building sector and currently does not report under IFRS.
In the market in which Realbuild operates, the custom is to sign a contract which includes a
completion date when funds are transferred and the keys passed to the buyer. Realbuild's
accounting policy is to recognise revenue on signing the contract. Where there is still
building work to be completed, Realbuild delays revenue recognition until the completion of
the work.
(b)
BCN Productions is a film production house. The company licences one of its new films to a
distributor in a foreign country over which BCN Productions has no control. The film is
expected to appear before the public over a period of six months and BCN Productions
intends to recognise the revenue over this period.
(c)
KSoft is a start-up company that will develop bespoke software systems for corporate
clients. The company's policy is to invoice fixed amounts which include the software
development and fees for ongoing post-delivery support while the new software system is
implemented. KSoft intends to recognise the revenue for both elements on installation of
the software.
Required
Advise the directors as to the acceptability of the above accounting policies for revenue recognition
under IAS 18 Revenue.
Solution
1.8
1: THE FINANCIAL REPORTING FRAMEWORK
4
Chapter summary
4.1
Q11 Tree
Section
Topic
Summary
1
Contributions and
limitations of financial
statements
Financial statements are designed to provide clear and
consistent information that is useful for a wide range of
users. However, there are limitations to how useful the
information can be to any one specific user.
2
Applications, strengths
and weaknesses of an
accounting framework
The Framework establishes the objectives and
principles underlying financial statements and
underlies the development of new Standards.
3
Revenue recognition
(IAS 18)
Revenue recognition is also determined by the
principle of substance.
Revenue from sale of goods is recognised when
criteria establishing whether the risks and rewards of
ownership are transferred and the Framework
recognition criteria are met.
Revenue from services is recognised when the
Framework recognition criteria are met by reference
to the stage of completion of the service. Where the
outcome cannot be estimated reliably, revenue is
only recognised to the extent of expenses incurred
expected to be recovered, consistent with the
treatment of construction contract revenue.
1.9
1: THE FINANCIAL REPORTING FRAMEWORK
END OF CHAPTER
1.10