ATe
INTERNATIONAL
ACCA
PAPER 3.6
ADVANCED CORPORATE REPORTING (INTERNATIONAL)
publisher.
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INTRODUCTION
This Study System has been specifically written for The Chartered Association of Certified Accountants Part 3 examination, Paper 3.6 Advanced Corporate Reporting (International). Itprovides comprehensive coverage of the core syllabus areas and is designed to be used interactively with the ATC system of tuition providing you with the knowledge, skill and confidence to succeed in your ACCA studies.
SYLLABUS Aim
To ensure that candidates can exercise judgement and technique in corporate reporting matters encountered by accountants and can react to current developments or new practice.
Objectives
On completion of this paper candidates should be able to:
• explain and evaluate the implications of an accounting standard or proposed accounting standard for the content of published financial information • explain and evaluate the impact on the financial statements of business
decisions
• explain the legitimacy and acceptability of an accounting practice proposed by a company
• prepare financial statements for complex business situations
• analyse fmancial statements and prepare a report suitable for presentation to a variety of users
• evaluate current practice in the context needs of users and the objectives of financial reporting
• evaluate current developments in corporate reporting in the context of their practical application, implications for corporate reporting, and the underlying conceptual issues and
• demonstrate the skills expected in Part 3.
POSITION OF THE PAPER IN THE OVERALL SYLLABUS
This paper is the final assessment of the candidates' skills in the area of corporate reporting. The paper builds on the technical skills studied in Paper 1.1 Preparing Financial Statements and Paper 2.5 Financial Reporting by requiring candidates to demonstrate the high level technical and evaluatory skills expected of an accountant.
Syllabus content
1 The International Accounting Standard Board's (IASB) regulatory framework a International Accounting Standards, Exposure Drafts, Discussion Papers,
Standard Interpretation Committee pronouncements including accounting for equity and liabilities, assets, provisions and contingencies, segments, related parties, fmancial instruments, taxes, leases, retirement benefit costs. Also International Financial Reporting Standards.
b The content of the IASC's regulatory framework in a given range of practical situations
c The problems with the current and proposed changes to the IASC's regulatory framework including measurement and recognition issues.
d The impact of current and proposed regulations on the financial statements of the entity.
e The effect of business decisions and proposed changes in accounting practice by the entity on the financial statements.
f The legitimacy of current accounting practice and its relevance to users of corporate financial statements.
2 Preparation ofthe financial statements ofcomplex business entities
a The financial statements of complex groups including vertical and mixed groups.
b Group cash flow statements.
c Accounting for group reorganisations and restructuring including demergers, take-overs and group schemes.
d Accounting for foreign currency transactions and entities. 3 Preparation ofreports for external and internal users
a Appraisal of financial and related information, the purchase of a business entity, the valuation of shares and the reorganisation of an entity.
b Appraisal of the impact of changes in accounting policies and the regulatory framework on shareholder value.
c Appraisal of the business performance of the entity including quantitative and qualitative measures of performance and the potential for corporate failure. d The assessment of the impact of price level changes and available methods of
valuation on business decisions and performance.
4 Current issues and developments
a The accounting impact of environmental, cultural and social factors on the entity.
b The impact of the content offmancial statements on users including changes in design and content of interim and year-end fmancial statements and alternate ways of communicating results to users.
c Proposed changes in the structure of national and international regulation and the impact on global harmonisation and standardisation.
d The applicability of the lASC's regulatory framework to small and medium sized entities.
e Current developments in corporate reporting. 5 Ethical considerations
a Ethics and business conduct. Excluded topics
The following topic is specifically excluded from the syllabus:
• lAS 30 Disclosure in Financial Statements ofBanks and Similar Financial Institutions.
Key areas of the syllabus Key topic areas are as follows:
• group accounting, group cash flow statements and foreign currency translation
• discussion papers, exposure drafts and recent International Accounting Standards
• problems with current International Accounting Standards and the impact of changes therein on the entity
• preparation of reports in an advisory capacity including share valuation, and purchase of a business
• changes in organisational structure, reconstructions, demergers, etc. • the potential for business failure and problems with the business including
financial analysis, corporate failure prediction and measurement of corporate performance
The main thrust of the syllabus will be the preparation of a set of group fmancial statements, advising clients on current standards and changes therein, reporting business performance including environmental and social reporting and corporate governance, and appraising current issues. Itis important to realise that other areas of the syllabus will be also examined but they are not considered as important.
Approach to examining the syllabus
The examination is a three hour paper divided into two sections.
Section A will normally comprise one compulsory question on group financial statements including group cash flows and foreign currency translation. This question will be technically demanding and could have a discursive element in it.
Section B will comprise four questions out of which candidates should select three questions. These questions will involve advising, discussing and reporting on issues and topics in corporate fmancial reporting.
The questions will view the subject matter from the perspective of the preparer of financial statements and from the perspective of the accountant as an advisor. Invariably a technical understanding of the subject matter will be required and candidates will have to apply their knowledge to given cases and scenarios.
Advice as to current and future reporting requirements and their impact on reported corporate performance will be an important element of these questions. Additionally current issues and developments in fmancial reporting will be examined on a discursive basis.
Number of marks Section A: One compulsory question
Section B: Choice of3 from 4 questions (25 marks each)
Additional information
25 75 100
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.
The Study Guide provides more detailed guidance on the syllabus. Examinable documents are listed in the Exam Notes section of the Student Accountant.
EXAMINATION TECHNIQUE Time allocation
• Divide your time in proportion to the marks on offer. To allocate your time multiply the marks for each question by 1.7 minutes. If you allocate 1.8 minutes per mark you will find that at the end of the exam you need a couple more minutes!
e.g. 25 mark question should take you 25x 1.7=43 minutes • Stick to this time allocation.
• The first marks are the easiest to gain in each question, so don't be tempted to overstep the time allocation on one question to tidy up a complicated answer, start the next question instead. Numerical questions
• Before starting a computation, picture your route. Do this by jotting down the steps you are going to take and imagining the layout of your answer.
• Set up a pro-forma structure to your answer before working the numbers.
• Use a columnar layout if appropriate. This helps to avoid mistakes and is easier for the marker to follow.
• Include all your workings and cross-reference them to the face of your answer.
• A clear approach and workings will help earn marks even if you make an arithmetic mistake. • If you do spot a mistake in your answer,itisnot worthwhile spending time amending the
consequent effects of it. The marker of your script willnot punish you for errors caused by an earlier mistake.
• Don't ignore marks for written recommendations or comments based upon your computation. These are easy marks to gain.
• If you could not complete the calculations required for comment then assume an answer to the calculations. As long as your comments are consistent with your assumed answer you can still pick up all the marks for the comments.
Case Study/Scenario based questions
• Read the requirements carefully to identify Instruction e.g. "outline, discuss ..." Content eg "the factors, the advantages " VehiclelFormat eg "report, memo, letter " Addressee eg "the board, the accountant " • Read the scenario quickly to identify
• Read the scenario again slowly and actively
o
highlighting key points, oro
noting implications in the margin, ando
noting points on a plan of your answer.• Draw together your technical knowledge and the points from the scenario. Do this by thinking and rearranging your plan, before you write up your answer.
Written questions Planning
• Read the requirements carefully at least twice to identify exactly how many points you are being asked to address.
• Jot down relevant thoughts on your plan
• Give your plan a structure which you will follow when you write up the answer. Presentation
• Use headings, indentation and bullet points to give your answer structure and to make it more digestible for the marker.
• Use short paragraphs for each point that you are making. • Use "bullet points" where this seems appropriate.
• Separate paragraphs by leaving at least one line of space between each one. Style
• Long philosophical debate does not impress markers. Concise, easily understood language scores marks.
• Lots of points briefly explained tends to score higher marks than one or two points elaborately explained.
• Imagine that you are a marker, you would liketosee a short, concise answer which clearly addresses the requirement.
Session Page
1 GAAP and the IASB 0101
2 International issues 0201
3 Framework for the preparation and presentation of financial statements 0301
4 Substance over form 0401
5 lAS 1 Presentation of fmancial statements 0501
6 lAS 8 Accounting policies, changes in accounting estimates and errors 0601
7 lAS 18 Revenue 0701
8 lAS 11 Construction contracts 0801
9 lAS 16 Property, plant and equipment 0901
10 lAS 23 Borrowing costs 1001
11 lAS 20 Accounting for government grants & disclosure of government assistance 1101
12 lAS 17 Leases 1201
13 lAS 38 Intangible assets 1301
14 lAS 40 Investment properties 1401
15 lAS 41 Agriculture 1501
16 lAS 36 Impairment of assets 1601
17 lAS 37 Provisions, contingent liabilities and contingent assets 1701
18 lAS 12 Income taxes 1801
19 lAS 32 and lAS 39 Financial instruments 1901
20 lAS 19 Employee benefits 2001
21 IFRS 2 Share-based payments 2101
22 Regulatory framework 2201
23 Group accounts - Revision of basics 2301
24 lAS 22 Goodwill 2401
25 Group accounts - More complex groups 2501
26 Group accounts - Disposals 2601
27 Group accounts - Piecemeal acquisition 2701
28 lAS 28 Investments in associates 2801
29 lAS 31 Interests in joint ventures 2901
30 lAS 21 The effects of changes in foreign exchange rates 3001
31 Changes in organizational structure 3101
32 Share valuation 3201
Session 36 37 38 39 40 41 42 43
lAS 33 Earning per share lAS 14 Segment reporting
IFRS 5 Non-current assets held for sale and discontinued operations lAS 10 Events after the balance sheet date
lAS 24 Related parties
lAS 34 Interim financial reporting Corporate reporting issues
IFRS 1 First-time adoption ofIntemational Financial Reporting Standards Index Page 3601 3701 3801 3901 4001 4101 4201 4301 4401
SESSION 00 Introduction Syllabus
Aim Objectives
Position of the paper in the overall syllabus Syllabus content
Excluded topics
Key areas of the syllabus
Approach to examining the syllabus Additional information
Examination technique Time allocation Numerical questions
Case Study/Scenario based questions Written questions
SESSION 01 GAAP and the IASB
1 GAAP
1.1 What is GAAP? 1.2 Sources of GAAP
1.3 Role of statute and standards
2 International Federation of Accountants (IFAC) 2.1 What is it? 2.2 Membership 2.3 Technical committees 2.4 Accounting v auditing 3 ThelASB 3.1 What is it? 3.2 Objectives 3.3 Structure
4 International fmancial reporting standards (IFRSs) 4.1 Importance
4.2 Development of lASs 4.3 Interpretation of lASs
4.4 Benchmark and allowed alternative treatments 4.5 Scope and application
4.6 Authority
5 The big GAAP/little GAAP debate 5.1 The debate
5.2 Difficulties 5.3 Arguments for 5.4 Arguments against
6 International fmancial reporting interpretations committee (SIC). 6.1 Background 6.2 Approach iii iii iii iii iii iv v v vi vi vii vii vii vii viii 0102 0102 0102 0102 0103 0103 0103 0103 0104 0104 0104 0104 0104 0106 0106 0106 0106 0107 0107 0107 0108 0108 0108 0109 0109 0110 0110 0110
7 Relationship ofIASC with other bodies 7.1 Intergovernmental bodies
7.2 National standard setting bodies (NSSBs)
8 G4+ 1 GROUP SESSION 02 International issues 1 International harmonisation 1.1 Introduction 1.2 Environmental factors 1.3 General comment 2 Advantages of harmonisation
2.1 Multinational enterprises (MNEs) 2.2 Multinational accounting firms 2.3 Investors
2.4 Others
3 Barriers to harmonisation 4 Progress on harmonisation
4.1 IASB
4.2 The IOSCO project
4.3 Growth of importance of lASs
4.4 Problems associated with the further adoption of lASs 5 The role of other organisations in harmonisation
5.1 European Union directives 5.2 Others
6 lAS vs national alternatives SESSION 03
Framework for the preparation and presentation of fmancial statements 1 Purpose and Status
1.1 Purpose 1.2 Scope
1.3 Financial statements 1.4 Application
1.5 Users and their information needs 2 The Objective of Financial statements
2.1 Financial position, performance and changes in fmancial position 3 Underlying Assumptions
3.1 Accrual basis 3.2 Going concern
4 Qualitative Characteristics of Financial statements 4.1 Principal qualitative characteristics
4.2 Understandability 4.3 Relevance 4.4 Reliability 4.5 Comparability
5 Elements of fmancial statements 5.1 Defmitions 5.2 Recognition 5.3 Measurement bases 0112 0112 0112 0113 0202 0202 0202 0203 0204 0204 0204 0204 0205 0205 0206 0206 0206 0207 0207 0208 0208 0208 0209 0302 0302 0302 0302 0303 0303 0304 0304 0305 0305 0305 0305 0305 0305 0306 0306 0307 0307 0307 0308 0309
6 Concepts of capital and capital maintenance 6.1 Concepts of capital
6.2 Concepts of capital maintenance and the determination of profit SESSION 04
Substance over form 1 Why substance matters
1.1 Introduction
1.2 Recognition of assets and liabilities 2 Reporting the substance of transactions
2.1 Objective
2.2 Recognition and derecognition 3 Examples
3.1 Consignment inventory
3.2 Sale and repurchase agreements 3.3 Quasi subsidiaries
3.4 Factoring of debts SESSION 05
lAS 1 Presentation of financial statements 1 Introduction
1.1 Objective
1.2 General purpose financial statements 1.3 Application
2 Financial Statements 2.1 Representation
2.2 Objectives of financial statements (see the Framework) 2.3 Components
2.4 Supplementary statements 3 Overall considerations
3.1 Fair presentation and compliance with lASs 3.2 Emphasis
3.3 Departure from lAS 3.4 Going Concern
3.5 Accrual basis of accounting 3.6 Consistency of presentation 3.7 Materiality and aggregation 3.8 Offsetting
3.9 Comparative information 4 Structure and Content
4.1 "Disclosure"
4.2 Identification of fmancial statements 4.3 Reporting date and period
4.4 Terms used 5 Balance Sheet
5.1 The current/non-current distinction
0309 0309 0309 0402 0402 0402 0402 0402 0402 0403 0403 0405 0407 0408 0503 0503 0503 0503 0503 0503 0504 0504 0504 0505 0505 0505 0505 0506 0506 0507 0507 0508 0508 0508 0508 0509 0509 0509 0510 0510
6 Income Statement 0514
6.1 Presentation of income statement items 0514
6.2 Structure of the income statement 0515
7 Statement of Changes in Equity 0517
7.1 A separate statement 0517
7.2 Function 0517
7.3 Structure of notes 0518
7.4 Items which are taken directly to equity 0520
8 The G4+ 1 Position Paper on reporting fmancia1 performance 0521
8.1 What is Performance Reporting? 0521
8.2 Scattered Information about Performance 0521
8.3 Recycling 0522
8.4 Why have 2 statements? 0522
8.5 The G4+ 1 Position Paper Proposals 0522
8.6 IASB position 0523
9 Notes to the financial statements 0523
9.1 Structure 0523
9.2 Disclosure of accounting policies 0524
9.3 Key sources of estimation uncertainty 0524
9.4 Other disclosures 0524
10 IASC discussion paper - business reporting on the internet 0524
SESSION 06
lAS 8 Accounting policies, changes in accounting estimates and errors
1 Background 0602
1.1 Performance 0602
1.2 Disaggregation 0602
1.3 Reporting aspects of performance 0603
2 Introduction 0604
2.1 Scope 0604
2.2 Defmitions 0604
3 Accounting policies 0605
3.1 Selection and application 0605
3.2 Consistency of accounting policies 0606
3.3 Changes in accounting policy 0606
3.4 Disclosure 0607
4 Changes in accounting estimate 0610
4.1 Introduction 0610
4.2 Accounting treatment 0610
4.3 Disclosure 0610
5 Prior period errors 0611
5.1 Introduction 0611
5.2 Accounting treatment 0611
SESSION 07 lAS 18 Revenue 1 Introduction 1.1 Scope 1.2 Defmitions 1.3 Measurement of revenue 1.4 Disclosure 2 Sale of goods 3 Rendering of services
4 Interest, royalties and dividends 5 specific examples
5.1 Sale of Goods
5.2 Specific examples - Rendering of Services
5.3 Specific examples - Interest, Royalties and Dividends SESSION 08
lAS 11Construction contracts
0702 0702 0702 0702 0703 0703 0704 0706 0706 0706 0709 0711 1 Introduction 0802 1.1 Scope 0802 1.2 Defmitions 0802 1.3 Key issues 0802 1.4 Revenue 0803 1.5 Contract costs 0803 1.6 Exam comments 0804
2 Recognition and measurement 0804
2.1 The rules 0804
2.2 Calculations 0806
2.3 Recognition 0808
3 Presentation and disclosure 0809
SESSION 09
lAS 16 Property, plant and equipment 1 Introduction 1.1 Scope 1.2 Exclusions 1.3 Defmitions 2 Recognition 2.1 Criteria
3 Initial Measurement at cost 3.1 Components of cost 3.2 Exchange of assets 4 Subsequent Costs 4.1 Running costs 4.2 Part replacement 0902 0902 0902 0902 0903 0903 0903 0903 0904 0904 0904 0904
6 Revaluations 0905 6.1 Fair value 0905 6.2 Frequency 0906 6.3 Accumulated Depreciation 0906 6.4 Increase/decrease 0906 7 Depreciation 0908 7.1 Accounting standards 0908 7.2 Depreciable amount 0908
8 Recovery of Carrying Amount 0909
8.1 Impairment 0909
8.2 Compensation 0909
9 Derecognition 0909
9.1 Accounting treatment 0909
9.2 Derecognition date 0910
10 IFRS 5 disposal of non-current assets and presentation of discontinued operations 0910
10.1 Reasons for issuing the standard 0910
10.2 Main features of the standard 0911
11 Disclosure 0912
11.1 For each class 0912
11.2 Others 0912
11.3 Items stated at revalued amounts 0913
11.4 Encouraged 0913 12 Non - depreciation 0913 12.1 Background 0913 12.2 Arguments employed 0914 12.3 lAS 16 0914 SESSION 10
lAS 23 Borrowing costs 1 Introduction 1.1 Recognition 1.2 Arguments 1.3 Scope 1.4 Defmitions 2 Benchmark treatment 2.1 Recognition 2.2 Disclosure
3 Allowed alternative treatment 3.1 Recognition
3.2 Borrowing costs eligible for capitalisation 3.3 Commencement of Capitalisation 3.4 Suspension of Capitalisation 3.5 Cessation of Capitalisation 3.6 Disclosure 4 Consistency of treatment 1002 1002 1002 1002 1003 1003 1003 1003 1003 1003 1004 1006 1007 1007 1007 1007
SESSION 11
lAS 20 Accounting for government grants& disclosure of government assistance
1 Introduction 1102 1.1 Scope 1102 1.2 Defmitions 1102 2 Government grants 1103 2.1 Criteria 1103 2.2 Forgivable loans 1103
2.3 Broad approaches to accounting treatment 1103
2.4 lAS 20 treatment 1104
2.5 Non-monetary government grants 1104
2.6 Presentation of grants related to assets 1104
2.7 Presentation of grants related to income 1105
2.8 Repayment of government grants 1105
3 Government Assistance 1105
3.1 Defmition 1105
3.2 Excluded from government grants but are included as government assistance 1106
3.3 Issue 1106
3.3 Loans at nil or low interest rates 1106
4 Disclosure 1106
4.1 Matters 1106
5 SIC - 10: Government assistance - No specific relation to operating activities 1106 SESSION 12
lAS 17 Leases
1 Introduction 1202
1.1 Traditional accounting for leases (pre lAS 17) 1202
1.2 Problem 1202
1.3 Overview 1202
1.4 Scope 1202
1.5 Defmitions 1203
2 Type of arrangement 1205
2.1 Lease classification; 2 types 1205
2.2 Risks and rewards of ownership 1205
2.3 Indicators 1205
2.4 Terms of the lease 1206
2.5 Comment on classification 1206
2.6 Land and buildings 1206
2.7 SIC-27: Evaluating the Substance of Transactions Involving the Legal Form
of a Lease 1207
3 Lessee accounting for a finance lease 1210
3.1 Principles 1210
3.2 Rentals in arrears 1211
3.3 Rentals in advance 1213
3.4 Disclosures - finance leases 1216
5 Lessor accounting for a finance lease 5.1 Background
5.2 Recognition
5.3 Allocation of finance income
5.4 Disclosure in respect of fmance leases 6 Lessor accounting for an operating lease 7 Sale and leaseback transactions
7.1 Background
7.2 Sale and leaseback as finance lease 7.3 Sale and leaseback as an operating lease 8 G4+1 discussion Paper on Leases
SESSION 13
lAS 38 Intangible assets 1 IntroductiontolAS 38
1.1 Scope 1.2 Defmitions 1.3 Defmition criteria
2 Recognition and initial measurement 2.1 General criteria
2.2 Initial measurement - cost 2.3 Subsequent expenditure
3 Internally generated intangible assets 3.1 Internally generated goodwill 3.2 Other internally generated assets
3.3 Specific recognition criteria for internally generated intangible assets 3.4 Recognition of expenses and costs
4 Measurement after recognition 4.1 Cost model
4.2 Revaluation model 4.3 Active markets
4.4 Accounting entries on revaluation 5 Usefullife
5.1 Factors
5.2 Finite useful lives 5.3 Indefinite useful lives 6 Impairment and derecognition
6.1 Impairment losses 6.2 Retirements and disposals 7 Disclosure
7.1 Intangible assets 7.2 Revaluations
7.3 Research and development expenditure
1220 1220 1220 1220 1220 1221 1222 1222 1222 1224 1226 1302 1302 1302 1303 1304 1304 1305 1311 1312 1312 1312 1312 1315 1317 1317 1317 1318 1318 1321 1321 1322 1327 1327 1327 1327 1328 1328 1332 1332
SESSION 14
lAS 40 Investment properties 1 Introduction
1.1 Objective 1.2 Scope 1.3 Defmitions
2 Recognition and measurement 2.1 Rule
2.2 Initial Measurement 2.3 Meaning of cost
2.4 Expenditure after initial recognition 3 Measurement after recognition
3.1 Fair value model
3.2 Exceptional circumstances 3.3 The cost model
3.4 Transfers 3.5 Disposals 3.6 Change in method 4 Disclosure SESSION 15 lAS 41 Agriculture 1 Introduction 1.1 Objective 1.2 Scope 1.3 Defmitions 1.4 Commentary
2 Recognition and measurement 2.1 Recognition
2.2 Measurement 2.3 Commentary 2.3 Gains and losses
2.4 If fair value cannot be determined 3 Government grants
4 Presentation and disclosure 4.1 Presentation
4.2 Disclosure SESSION 16
lAS 36 Impairment of assets 1 Introduction
1.1 Objective of the standard 1.2 Defmitions 2 Basic rules 1402 1402 1402 1402 1403 1403 1403 1403 1404 1404 1404 1406 1406 1406 1406 1407 1409 1502 1502 1502 1502 1503 1503 1503 1503 1504 1505 1505 1506 1507 1507 1507 1602 1602 1602 1603
3 Measurement of recoverable amount 3.1 General principles
3.2 Fair value less costs to sell 3.3 Value in use
4 Cash-generating units 4.1 Basic concept
4.2 Allocating shared assets 5 Accounting for impairment loss
5.1 Basics
5.2 Allocation within a cash-generating unit 6 Subsequent review
6.1 Basic provisions
6.2 Reversals of impairment losses 7 Disclosure
7.1 For each class of assets 7.2 Segment reporting
7.3 Material impairment losses recognised or reversed SESSION 17
lAS 37 Provisions, contingent liabilities and contingent assets 1 Introduction
1.1 Objective 1.2 Scope 1.3 Defmitions
1.4 The relationship between provisions and contingent liabilities 2 Recognition
2.1 Recognition of provisions 2.2 Recognition issues
2.3 Contingent assets and liabilities 3 Measurement 3.1 General rules 3.2 Specific points 4 Changes in provisions 5 IFRIC 1 5.1 Scope 5.2 Issue 5.3 Consensus 5.4 Transition
6 Application of the rules to specific circumstances 6.1 Future operating losses
6.2 Onerous contracts
6.3 Specific application - Restructuring 7 Provisions for repairs and maintenance
7.1 Refurbishment Costs - No Legislative Requirement 7.2 Refurbishment Costs - Legislative Requirement 8 Disclosures 1607 1607 1608 1610 1613 1613 1615 1618 1618 1619 1621 1621 1622 1623 1623 1624 1624 1702 1702 1702 1702 1704 1704 1704 1705 1708 1708 1708 1709 1709 1709 1709 1710 1710 1711 1712 1712 1712 1713 1715 1715 1716 1717
SESSION 18 lAS 12 Income taxes
1 Introduction 1802
1.1 Overview 1802
1.2 Scope 1802
1.3 Defmitions 1802
1.4 Recognition of current tax liabilities and current tax assets 1803
1.5 Accounting for withholding tax 1803
2 Deferred taxation - introduction 1804
2.1 Underlying problem 1804
3 Deferred taxation - The concept illustrated 1805
3.1 Scenario 1805
3.2 Analysis - balance sheet approach 1806
3.3 After the company has accounted for deferred tax the financial statements
will be as follows 1807
4 Accounting for deferred taxation - basics 1808
4.1 Introduction 1808
4.2 Calculation of the balance sheet amounts 1808
4.3 Jargon 1809
5 Accounting for deferred tax - detailed rules 1813
5.1 Recognition of deferred tax liabilities 1813
5.2 Recognition of deferred tax assets 1815
5.3 Accounting for the movement on the deferred tax balance 1817
6 Complications 1818
6.1 Rates 1818
6.2 Change in rates 1819
6.3 SIC 21 - Income Taxes - Recovery of Revalued Non-Depreciable Assets 1820 6.4 SIC 25 - Income Taxes - Changes in the Tax Status of an Entity or its
Shareholders 1821
7 Business Combinations 1822
7.1 Introduction 1822
7.2 Temporary differences arising on the calculation of goodwill 1823 7.3 Temporary differences arising due to the carrying amount of the investment
and the tax base 1824
7.4 Inter company transactions 1826
8 Presentation and disclosure 1827
8.1 Presentation 1827
8.2 Disclosure 1827
9 Appendix 1829
SESSION 19
lAS 32 and lAS 39 Financial instruments 1 Background 1.1 Traditional accounting 1.2 Financial instruments 1.3 History 1902 1902 1902 1902
3 Definitions 1905
3.1 From lAS 32 1905
3.2 From lAS 39 1906
4 Presentation (lAS 32) 1908
4.1 Liabilities and equity 1908
4.2 Settlement in own equity instruments 1909
4.3 Offset 1910
4.4 Interest, dividends, losses and gains 1911
4.5 Compound instruments 1911
4.6 Contingent settlement provisions 1912
4.7 Treasury shares 1913
5 Disclosure (lAS 32) 1913
5.1 Rules 1913
5.2 Illustrative notes - Nokia 1918
5.3 ED7 Financial Instruments: Disclosures 1922
6 Recognition (lAS 39) 1922
6.1 Initial recognition 1922
6.2 Examples 1923
6.3 Embedded derivatives 1923
7 Derecognition 1924
7.1 Derecognition of a fmancia1 asset 1924
7.2 Derecognition of a fmancia1liability 1926
8 Measurement (lAS 39) 1926
8.1 Initial measurement of fmancia1 assets and fmancial1iabi1ities 1926
8.2 Fair value considerations 1927
8.3 Subsequent measurement of financia11iabilities 1927
8.4 Subsequent measurement of financial assets 1927
9 Hedging 1928 9.1 lAS 39 defmitions 1928 9.2 Hedging instruments 1929 9.3 Hedged items 1929 10 Hedge accounting 1929 10.1 Background 1929
10.2 Fair value hedges 1930
10.3 Cash flow hedges 1932
SESSION 20
lAS 19 Employee benefits
1 Introduction 2002
1.1 Key problem 2002
1.2 Objective 2002
1.3 Scope 2002
1.4 Defmitions 2002
2 Short term employee benefits 2004
2.1 Types 2004
2.2 Accounting for short-term employee benefits 2004
3 Post retirement benefits 2004
4 Defined contribution schemes 2005
4.1 Introduction 2005
4.2 Accounting for defined contribution schemes 2005
4.3 Recognition and Measurement 2005
5 Accounting for defined benefit schemes 2006
5.1 Introduction 2006
5.2 Accounting for defined benefit schemes 2007
5.3 Amendment to lAS 19 2015
6 Sundry guidance 2016
6.1 Actuarial Valuation Method 2016
6.2 Discount Rate 2016
6.3 Regularity 2016
7 Past Service Cost 2017
8 Disclosure 2018
SESSION 21
IFRS 2 Share-based payments
1 Share-based payments 2102
1.1 Need for a standard 2102
1.2 Key issues 2102
1.3 Objective of IFRS 2 2102
1.4 Scope 2103
1.5 Effective date 2103
2 Definitions 2103
2.1 Share-based payment transaction arrangement 2103
2.2 Types of transactions 2104 3 Recognition 2105 3.1 On receipt or acquisition 2105 4 Measurement 2105 4.1 Fair value 2105 4.2 Equity-settled transactions 2105
4.3 Granting of equity instruments 2106
4.4 Indirect measurement 2111
4.5 Valuation technique 2111
4.6 Cash-settled transactions 2112
5 Disclosures 2112
5.1 Purpose 2112
5.2 Nature and extent of schemes in place 2112
5.3 How fair value was determined 2113
5.4 Effect of expenses arising 2114
SESSION 22
Regulatory framework 1 Introduction
1.1 Defmitions
1.2 Accounting for subsidiaries in separate financial statements 1.3 Truth and fairness
2 Inclusions
2.1 Parent and control
2.2 SIC-12: Consolidation - Special Purpose Entities
2202 2202 2202 2202 2203 2203 2204
3 Sundry provisions ofIAS 27 3.1 Results of intra-group trading 3.2 Accounting year ends 3.3 Accounting policies
3.4 Date of acquisition or disposal 4 Exemption from preparing group accounts
4.1 Rule 4.2 Rationale 5 Disclosure 5.1 lAS 27 disclosures 5.2 IFRS 3 disclosures 6 Transitional provisions
6.1 Previously recognised goodwill
6.2 Previously recognised negative goodwill 6.3 Previously recognised intangible assets SESSION 23
Group accounts - Revision of basics I The issue 1.1 Background 1.2 Defmitions 1.3 Rule 1.4 Types of consolidation 2 Conceptual background
3 The technique - consolidated balance sheets 4 Question approach
4.1 Specific steps 5 Unrealised profit
5.1 Background
5.2 The group suffers the whole charge
5.3 The group shares the charge with the minority interest where appropriate. 5.4 Exception
5.5 Deferred tax
6 Consolidated income statements 6.1 Control and ownership 6.2 Unrealised profits on trading 6.3 Non current asset transfers 6.4 Mid-year acquisitions SESSION 24 lAS 22 Goodwill I Goodwill 1.1 Purchase method 1.2 Defmition 1.3 Features of goodwill
2 Fair value of purchase consideration Solution I
3 Identifiable assets and liabilities 3.1 Introduction 3.2 Provisions 3.3 Contingent liabilities 2206 2206 2206 2206 2207 2207 2207 2208 2208 2208 2209 2212 2212 2212 2212 2302 2302 2302 2302 2302 2303 2303 2304 2304 2306 2306 2306 2306 2307 2309 2310 2310 2310 2310 2311 2402 2402 2402 2402 2403 2404 2405 2405 2405 2405
4 Fair value of the identifiable assets and liabilities 4.1 General guidelines
4.2 Provisional accounting 4.3 Subsequent adjustments
5 Accounting for the revaluation in the accounts of subsidiary entitys 5.1 Exam complication
5.2 How is the revaluation accounted for? 6 Accounting for goodwill
6.1 Positive goodwill
6.2 Excess ofacquirer's interest over cost 7 Discussion topics
7.1 Should an asset be recognised at all? 7.2 Impairment review vs amortisation SESSION 25
Group accounts - More complex groups
2406 2406 2407 2408 2410 2410 2410 2413 2413 2413 2414 2414 2416 1 Types of structure 2502
2 Status of the investment 2503
2.1 Status is always based on control 2503
2.2 In the above illustration P effectively owns 2503
3 Technique 2503
3.1 There are 2 possible approaches to consolidations involving sub subsidiaries. 2503
3.2 Direct technique 2504
3.3 Sub subsidiary 2505
3.4 Sub associate 2507
3.5 Timing of acquisitions 2508
3.6 D shaped groups 2508
3.7 Income statement consolidations 2509
SESSION 26
Group accounts - Disposals 1 Introduction
1.1 Accounting issues 2 Disposal possibilities
3 Treatment in parent's own accounts 4 Treatment in group accounts
4.1 Summary
4.2 Consolidated income statement - "pattern of ownership" 4.3 Consolidated income statement - Profit / loss on disposal 5 Deemed disposals
5.1 Background
5.2 Accounting treatment - Income statement 5.3 Accounting treatment - Balance sheet 6 Demergers 6.1 Accounting issues 6.2 Treatment by P Inc 2602 2602 2602 2603 2603 2603 2604 2605 2612 2612 2612 2613 2618 2618 2619
SESSION 27
Group accounts - Piecemeal acquisition 1 Piecemeal acquisitions
1.1 Introduction
2 Trade investment becoming a subsidiary 3 Trade investment becoming an associate 4 Increase in stake in subsidiary
5 Associate becoming a subsidiary 5.1 Introduction
5.2 Consolidated balance sheet 5.3 Consolidated income statement SESSION 28
lAS 28 Investments in associates 1 Equity accounting
1.1 Background 1.2 Scope 1.3 Defmitions
1.4 Significant influence
1.5 Separate fmancia1 statements 2 Accounting treatment
2.1 Relationship to a group 2.2 Basic rule
2.3 Equity accounting
2.4 Treatment in a consolidated balance sheet 2.5 Treatment in a consolidated income statement 2.6 Recognition of losses
2.7 Accounting policies and year ends 2.8 Impairment
2.9 Exemptions to equity accounting 3 Inter-company items with an associate
3.1 Inter-company trading 3.2 Dividends
3.3 Unrea1isedprofit 4 Disclosure
4.1 Investments in associates 4.2 Using the equity method SESSION 29
lAS 31 Interests in joint ventures 1 lAS 31
1.1 Scope 2 Joint ventures
2.1 Defmitions
2.2 Forms ofjoint venture 2.3 Characteristics
3 Jointly controlled operations 3.1 Description
3.2 Presentation and accounting
2702 2702 2703 2703 2704 2707 2707 2707 2707 2802 2802 2802 2803 2803 2804 2804 2804 2804 2804 2805 2810 2812 2813 2813 2814 2815 2815 2815 2816 2817 2817 2817 2902 2902 2902 2902 2903 2903 2904 2904 2904
4 Jointly controlled assets 4.1 Description
4.2 Presentation and accounting 5 Jointly controlled entities
5.1 Description
5.2 Presentation and accounting
5.3 Transactions between venturer and a joint venture
5.4 SIC-13: Jointly Controlled Entities - Non-Monetary Contributions by Venturers
5.5 Exemptions to proportionate consolidation and equity methods 5.6 Separate fmancial statements of a venturer
5.7 Reporting the interests of an investor 5.8 Ceasing to be a venturer in a joint venture 6 Disclosure
6.1 Contingencies 6.2 Interests
7 Consolidation methods - Summary SESSION 30
lAS 21The effects of changes in foreign exchange rates 1 Accounting issues
1.1 Introduction 1.2 Key issues 1.3 Scope 1.4 Defmitions
2 Individual company stage
2.1 Accounting treatment - basic transactions 3 Exceptions to the basic rules
3.1 Net investment in a foreign operation 4 Consolidated financial statements
4.1 Nature of exchange difference 4.2 Identifying the functional currency 5 Foreign operation - (closing rate method)
5.1 Presentation currency 5.2 Supplementary information
5.3 lAS21Foreign currency translation 5.4 Calculation of exchange difference 5.5 Goodwill
6 Foreign associates
7 Disposal of foreign operation 8 Disclosure
9 SIC - 7; Introduction of the Euro SESSION 31
Changes in organizational structure 1 Corporate reconstruction 2908 2908 2908 2909 2909 2910 2913 2914 2915 2916 2916 2916 2916 2916 2917 2918 3002 3002 3002 3002 3002 3003 3003 3006 3006 3007 3007 3008 3009 3009 3009 3009 3010 3011 3014 3014 3015 3015 3102
2 Purchase of own shares 2.1 Legal background 2.2 Creditors buffer 2.3 Accounting rules 3 Distributable profit 3.1 What is a distribution? 3.2 Meaning of realised
3.3 Revaluations can have a number of impacts on distributable profits. SESSION 32
Share valuation I Reasons
2 Methods
2.1 Introduction
2.2 Asset based methods 2.3 Earnings based methods 2.4 Dividends based
3 Regulatory environment (using the uk as an example) 3.1 City code on takeovers and mergers
3.2 Monopolies& Mergers Commission SESSION 33
Analysis and interpretation I Accounting issues 2 Users and user focus
2.1 Introduction 2.2 Investors 2.3 Employees 2.4 Lenders
2.5 Suppliers and other creditors 2.6 Customers
2.7 Government and their agencies 2.8 Public
3 Interpretation of financial statements 3.1 Use of ratios 3.2 Limitations of ratios 3.3 Influences on ratios 3.4 Accounting policies 3.5 Business factors 3.6 Other indicators 4 Accounting ratios 5 Performance 5.1 Significance 5.2 Key ratios 5.3 Commentary 6 Short term liquidity
6.1 Significance 6.2 Key ratios 6.3 Commentary 3108 3108 3108 3109 3110 3110 3110 3111 3202 3202 3202 3202 3203 3203 3204 3204 3204 3302 3302 3302 3303 3304 3305 3305 3306 3306 3306 3306 3306 3306 3307 3308 3308 3309 3309 3310 3310 3310 3312 3312 3312 3312 3313
7 Long term solvency 3314 7.1 Significance 3314 7.2 Key ratios 3314 7.3 Commentary 3315 8 Efficiency 3317 8.1 Significance 3317 8.2 Key ratios 3317 8.3 Commentary 3318 9 Investors' ratios 3319 9.1 Significance 3319 9.2 Key ratios 3319 9.3 Commentary 3320 10 Creative accounting 3321 10.1 Introduction 3321
11 Corporate failure prediction models 3322
11.1 Altman 3322
11.2 Argenti 3323
11.3 Problems associated with using the models 3323
12 Trend analysis 3324
12.1 Introduction 3324
12.2 Specific cost and price indices 3324
12.3 General price indices 3324
13 Interpretation technique 3325
SESSION 34
lAS 7 Cash flow statements
1 Scope 3402
1.1 Applies to all entities 3402
1.2 Importance of cash flow 3402
1.3 Benefits of cash flow information 3402
1.4 Defmitions 3402
2 Presentation of a Cash Flow Statement 3403
2.1 Classification 3403
3 Reporting Cash Flows from Operating Activities 3404
3.1 Direct method 3404
3.2 Indirect method 3404
3.3 Techniques 3404
4 Reporting Cash Flows from Investing and Financing Activities 3405
4.1 Separate reporting 3405
4.2 Investing activities 3405
4.3 Financing 3407
5 Components of Cash and Cash Equivalents 3407
5.1 Reconciliation 3407
6 Proforma 3408
6.1 Direct method 3408
6.2 Indirect method 3409
6.3 Notes to the cash flow statement 3409
8 Additional disclosures
8.1 Analysis of cash and cash equivalents 8.2 Major non cash transactions
8.3 Cash and cash equivalents not held by the group 8.4 Reporting futures, options and swaps
8.5 Voluntary disclosures
9 Further considerations - interpretation of cash flow statements 9.1 Introduction
9.2 Illustration 9.3 Comments SESSION 35
The effects of changing prices 1 Introduction
1.1 Limitation of historical cost accounting 1.2 Holding gains
1.3 Conclusions
1.4 Effects oflower inflation 2 Design of systems of accounts
2.1 Purpose 2.2 Defmition 2.3 3 decisions 2.4 Combinations 2.5 Double entries 3 Current purchasing power
3.1 Background
3.2 Specific adjustments
4 Current cost accounts - ocm version 4.1 Background
4.2 Specific adjustments
6 lAS 29 - Financial Reporting in Hyperinflationary Economies 6.1 The problem
6.2 Solution
6.3 Historical Cost Financial Statements - balance sheets 6.4 Historical Cost Financial Statements - Income Statement 6.5 Gain or Loss on Net Monetary Position
6.6 Current Cost Financial Statements 6.7 Taxes
6.8 Cash Flow Statement 6.9 Corresponding Figures
6.10 Consolidated Financial Statements
6.11 Economies Ceasing to be Hyperinflationary 6.12 Disclosures 3417 3417 3417 3418 3418 3418 3419 3419 3420 3421 3502 3502 3502 3503 3503 3504 3504 3504 3504 3506 3507 3508 3508 3508 3509 3509 3509 3511 3511 3511 3511 3512 3512 3512 3513 3513 3513 3513 3513 3513
SESSION 36
lAS 33 Earning per share I Introduction
1.1 Earnings performance 1.2 Scope
1.3 Defmitions
2 Basic earnings per share (EPS) 3 Basic EARNINGS
3.1 Which earnings?
4 Basic weighted average number of ordinary shares 4.1 Partly paid shares
4.2 Issues for consideration
4.3 Issues of shares where no consideration is received 5 Multiple capital changes
6 Diluted eps 6.1 Purpose 6.2 Method 6.3 Options 7 Order of dilution 7.1 Background 7.2 Method
7.3 Contracts that may be settled in sharesChyba! Zalozka nenidefinovana, 8 Disclosure
SESSION 37
lAS 14 Segment reporting I Introduction
1.1 Purpose 1.2 Scope 1.3 Defmitions 2 Reporting
2.1 Primary versus secondary 2.2 Business segments 2.3 Geographical segments 2.4 Usual basis 2.5 Reportable segments 2.6 Disclosures 2.7 Analysis of revenue 2.8 Analysis of assets 2.9 Sundry disclosures 3 Illustration 3602 3602 3602 3602 3603 3603 3603 3603 3603 3604 3604 3608 3609 3609 3609 3613 3615 3615 3615 3617 3617 3702 3702 3702 3702 3705 3705 3705 3705 3706 3706 3707 3707 3707 3707 3708
SESSION 38
IFRS 5 Non-current assets held for sale and discontinued operations 1 Introduction
1.1 Reasons for issuing IFRS 5 2 Definitions
2.1 Component of an entity 2.2 Disposal group
2.3 Discontinued operation 3 Held for sale classification
3.1 Defmitions
3.2 Held for sale non-current assets 3.3 Abandoned non-current assets 3.4 ~easurement
3.5 Changes to a plan of sale 4 Presentation and disclosure
4.1 Purpose
4.2 Discontinued operations 4.3 Continuing operations
4.4 Held for sale non-current assets SESSION 39
lAS 10 Events after the balance sheet date
3802 3802 3802 3802 3802 3803 3804 3804 3804 3806 3806 3807 3807 3807 3807 3808 3809 1 Introduction 3902 1.1 Objective 3902 1.2 Scope 3902 1.3 Defmitions 3902
2 Recognition and Measurement 3902
2.1 Adjusting events 3902
2.2 Non adjusting events 3903
2.3 Dividends 3903
2.4 Going Concern 3903
3 Disclosure 3904
SESSION 40
lAS 24 Related parties 1 Introduction
1.1 Scope 1.2 Defmitions
1.3 Parties deemed not to be related 2 The Related Party Issue
2.1 Affect on reporting enterprise
2.2 Methods for pricing related party transactions 3 Disclosure
3.1 Situations where related party transactions may leadtodisclosures 3.2 Disclosure required 3.3 Aggregation 4002 4002 4002 4003 4003 4003 4004 4004 4004 4004 4007
SESSION 41
lAS 34 Interim fmancial reporting
1 Scope
2 Content of an interim Financial Report 2.1 Minimum Components
2.2 Condensed Balance Sheet 2.3 Condensed Income Statement 2.4 Condensed Cash Flow Statement 2.5 Changes in Equity
2.6 Selected Note Disclosures 3 Recognition and Measurement
3.1 General comment 3.2 Tax charge 3.3 Use of Estimates SESSION 42
Corporate reporting issues
1 Operating and financial review (OFR)
1.1 Background 1.2 OFR in the UK 2 Corporate governance
2.1 Defmition
2.2 Corporate governance in other countries 2.3 Cadbury Report
2.4 Hampel Report 2.5 The way ahead 3 Sarbanes - oxley
3.1 Background 3.2 Main requirements SESSION 43
IFRS 1 First-time adoption of International Financial Reporting Standards 1 Introduction
1.1 Background 1.2 Objective 1.3 Scope 1.4 Defmitions
1.5 Stages in transition to IFRSs 1.6 Transition overview 4102 4102 4102 4102 4102 4102 4103 4103 4104 4104 4104 4104 4202 4202 4202 4204 4204 4204 4204 4205 4206 4207 4207 4207 4302 4302 4302 4302 4303 4304 4305
2 Opening IFRS balance sheet
2.1 Recognition and measurement principles 2.2 Exemptions from other IFRSs
2.3 Property, plant and equipment 2.4 Business combinations 2.5 Employee benefits
2.6 Cumulative translation differences 2.7 Compound fmancial instruments 2.8 Assets and liabilities of subsidiaries
2.9 Designation of previously recognised fmancial instruments 2.10 Share-based payment transactions
2.11 Insurance contracts
2.12 Decommissioning liabilities
2.13 Mandatory exceptions to retrospective application 3 Presentation and disclosure
3.1 Explanation of transition 3.2 Reconciliations
3.3 Other disclosures 4 Practical matters
4.1 Overview
4.2 Making the transition
INDEX 4306 4306 4306 4307 4307 4310 4311 4311 4311 4311 4312 4312 4313 4315 4316 4316 4316 4316 4320 4320 4321
GAAP
OVERVIEW Objectives
• To describe the concept ofGAAP.
• To describe the objectives ofthe International Accounting Standards Board (IASB) and its relationship with other bodies and the development, scope and use of International Accounting Standards (lASs).
• What is GAAP? • Sources ofGAAP
• Role ofstatute and standards L...---r---' INTERNATIONAL FEDERATION OF ACCOUNTANTS • What is it? • Membership • Technical committees • Accountingvauditing THEIASB • What is it? • Objectives • Structure L...---r---' BIG GAAP VS LITTLEGAAP DEBATE INTERNATIONAL FINANCIAL REPORTING STANDARDS RELATIONSHIP OFIASCWITH OTHER BODIES • The debate • Difficulties • Arguments for • Arguments against • Importance • Development • Interpretation
• Benchmark and allowed alternative treatments • Scope and application • Authority
• Intergovernmental bodies • National standard setting
bodies INTERNATIONAL FINANCIAL REPORTING INTERPRETATIONS COMMITEE • Background • Approach G4+ I GROUP
1 GAAP
1.1 What is GAAP?
• GAAP (Generally Accepted Accounting Principles) is a term used to describe how financial statements are prepared in a given environment.
• GAAP is a general term.
o
UK GAAP, US GAAP, lAS GAAP are more specific statements. • The term mayor may not have legal authority in a given country.• Itis a dynamic concept.Itchanges with time in accordance with changes in the business environment.
1.2 Sources of GAAP • Regulatory Framework
The body of rules and regulations, from whatever source, which an entity must follow when preparing accounts in a particular country for a particular purpose. eg:
o
Statuteo
Accounting standards - Statements issued by professional accounting bodies which lay down rules on accounting for different issues. e.g.:International Accounting Standards/lnternational Financial Reporting Standards
Financial Reporting Standards (U.K.) Financial Accounting Standards (U.S.A.). • Other sources
o
lASs - In countries where these have not been adopted they have an influence on local standards because the provisions of the lAS will be considered by the local standard setting bodyo
Best practice - Methods of accounting developed by companies (industry groups) in the absence of rules in a specific area.(e.g. oil exploration costs).1.3 Role of statute and standards • Varies from country to country
o
Some countries have a very legalistic approach to drafting financial statements. The legal rules are detailed and specific and the system is often geared to the production of a profit figure for taxation purposes.o
Some countries adopt an approach where statute provides a framework ofregulation and standards then fill in the blanks. e.g. in the UK. Statute Companies Acts 1985 and 1989
Note:The legislation ofEU member states is based on EU directives
o
Some countries have little in the way of statute and rely largely onstandards e.g. the USA
Note:Although there is no accounting statute as such in the USA there is a body of the federal government called the Securities and Exchange
Commission (SEC) which oversees the accounting regulations issued by the profession. The SEC can veto accounting treatments and demand regulation to be enacted in new areas. Companies in the USA probably face the most highly regulated environment in the world.
2 INTERNATIONAL FEDERATION OF ACCOUNTANTS (IFAC) 2.1 What is it?
• IFAC is a non-profit, non-governmental, non-political organisation of accountancy bodies that represents the worldwide accountancy profession.
• Its' mission is to develop and enhance the profession to provide services of consistently high quality in the public interest.
2.2 Membership
• Accountancy bodies recognised by law or consensus within their countries. • Membership in IFAC automatically includes membership in the International
Accounting Standards Board (IASB). 2.3 Technical committees
• International Auditing Practices Committee (IAPC) - issues International Standards on Auditing (ISAs).
• Forum on Ethics - publishes a Code of Ethics for Professional Accountants.
• Others
o
Educationo
Financial and Management Accountingo
Public Sectoro
Information Technologyo
Membership.2.4 Accountingv auditing
Accounting Auditing
•
The classification and recording of•
Objective is to express an opinion actual transactions in monetary terms. whether the financial statements are•
The presentation and interpretation of prepared, in all material respects, in the results of transactions. accordance with a financial reportingframework.
3 THEIASB
3.1 What is it?
• The IASB was called the International Accounting Standards Committee (lASe) until April 2001.
• The IASC was an independent private sector body and was set up in1973.Itis the sole body having responsibility and authority to issue pronouncements on
international accounting standards.
• Ithas a very wide membership. As at March2001 it had 153 member associations from 112 countries representing over 2,000,000 accountants.
3.2 Objectives
• To develop, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require high quality, transparent and comparable information in financial statements and other fmancial reporting to help participants in the worlds capital markets and other users make economic decisions
• To promote the use and rigorous application of those standards, and
• To bring about convergence of national accounting standards and lASs to provide high quality solutions.
3.3 Structure 3.3.1 lJvervie1V TRUSTEES
I
I
I
I
STANDARDS INTERNATIONALADVISORY BOARD FINANCIAL
COUNCIL REPORTING
INTERPRETATIONS COMMITTEE
3.3.2 Trustees
• 19 individuals from diverse geographical and functional backgrounds. • The trustees will:
o
appoint the members of the:Board
Standing advisory council
Standing interpretations committee
o
monitor the IASB's effectivenesso
secure fundingo
approve the IASB' s budgetso
have responsibility for constitutional change. 3.3.3 Board• 14members appointed by the trustees.
• The board has complete responsibilities for all technical matters including:
o
preparation and issue ofIASso
preparation and issue of exposure draftso
setting up procedures for reviewing comments received on documents published for commento
issue bases for conclusions.3.3.4 Standards advisory council
• About 45 members all appointed by the trustees.
• The council provides a forum for participation by organisations and individuals with an interest in international financial reporting.
• Will meet at least 3 times a year. • The council will
o
advise the board on agenda decisions and prioritieso
pass on views of the council members on the major standard setting projects4 INTERNATIONAL FINANCIAL REPORTING STANDARDS (lFRSs)
4.1 Importance
• Ultimately, IASs will form the basis of international financial reporting. • The IASC concentrated on essentials. Itendeavoured nottomake lASs so
complex that they cannot be applied effectively on a worldwide basis. 4.2 Development of lASs
Only for major projects
Issued by a simple majority of the board
•
Draft statement of principles or discussion document
L - ----,- - - ' .
Published for all standards
Issued on approval by 8 out of 14 board members Exposure draft
---.---_1:
International Accounting Standard
• Issued on approval by 8 out of 14 board members
• Since the IASB took over the role of the IASC in 2001, all new standards are issued as International Financial Reporting Standards (lFRSs). Standards issued by the IASC were International Accounting Standards (lASs). Both terms are
acceptable to mean accounting standards in general. 4.3 Interpretation of lASs
• Steps taken by the IASC to achieve consistent interpretation include
o
comparability and improvements project - resulted in the revision of 13 IASs. "Alternative accounting treatments" (see below) were reduced or eliminated and disclosure requirements reviewed in the context of the Framework -see later session 3o
publication of draft statement of principles - to make IASB intentions clearo
issue of a newsletter "Insight" - provides regular updates and explains technical decisionso
issue of interpretations by the Standing Interpretations Committee (SIC), renamed International Financial Reporting Interpretations Committee (lFRlC).4.4 Benchmark and allowed alternative treatments
• Where IASs permit two accounting treatments for like transactions and events
o
one is often designated thebenchmarktreatmento
the other is theallowed alternativetreatment.• The advantage of allowing two treatments (in cases where there is an allowed alternative) is that it increases the acceptability of the standard.
• The disadvantage is that it reduces the comparability of fmancial statements. • Dilly IAS 23Borrowing Costsnow has a benchmark and allowed alternative
treatment, all other standards have been revised to eliminate the benchmark and allowed alternative.
• However, some standards still have options available, ie IAS 16Property, Plant and Equipmentallows assets to be valued either using a cost or revaluation model. 4.5 Scope and application
• lASs apply to the published financial statements of any commercial, industrial or business reporting entity (whether public or private sector).
• lASs apply to both separate and consolidated financial statements.
• Any limitation on the applicability of specific IASs is made clear in the lAS. • lASs are not intended to apply to immaterial items.
• An IAS applies from a date specified in the standard and is not retroactive unless indicated to the contrary. (Note: this is often the case!)
Exclusions
• Non-business aspects of public sector entities. • Private sector not-for-profit (NFP) entities. 4.6 Authority
• lASs do not override local regulations governing the issue of financial statements in a particular country.
• Neither the IASB nor the accountancy profession has the power to enforce international agreement or to require compliance.
5 THE BIG GAAPILITTLE GAAP DEBATE
5.1 The debate
• There has been a consensus for a long time that reporting requirements are biased towards larger companies, and ignore the needs of small companies.
• Compliance places a burden on small companies. This burden includes:
o
the cost of considering whether a particular standard is applicable to the entity,o
the cost of assembling the information,o
the cost of auditing the information, ando
the loss of commercial advantage arising from increased disclosure.• The issue of the application of accounting standardsto small companies has been the subject of numerous studies in the UK and around the world. The debate has revolved around whether accounting standards should apply equally to all financial statements that purport to present a true and fair view, or whether small companies should be exempted from the need to comply with certain standards.
5.2 Difficulties
• Difficulties include:
o
the choice of a method of determining which companies should be allowed exemption from the general GAAP, ando
the choice of which accounting rules such companies should be exempt from.• In considering how to distinguish between categories of companies a number of factors could be used including:
o
the extent to which there is public interest in an entity,o
its complexity, the separation of ownership and control, ando
its size. (It has been recognised that while size is not the most important factor, it is the easiest to apply).• The Accounting Standards Board in the UK has introduced a modified GAAP for certain companies based on size. They have chosen size as the easiest to apply. This has met with an amount of criticism, most commentators feeling that the separation of ownership would be a more useful criterion.
5.3 Argumentsfor
• The purpose of a set of accounts is to communicate with these users. However, for a simple concern, some of the complex rules that are in force today may serve to hinder communication and not aid it.
• The complex calculations, the quantity of disclosure and the technical terminology called for by accounting standards may serve to make the accounts of small companies incomprehensible to their users.
• The owners of public companies are not generally involved in managing the business. For this reason, a relationship of accountability exists between owners and managers. This is not the case for owner managed entity's.
• In short standards fail to take adequate account of the needs of the users.
o
The users of public companies' financial statements include:existing and potential shareholders, loan creditors,
fmancial analysts and advisers, the financial press,
employees.
o
The users of small companies' fmancial statements include:owner-managers, bankers, and taxauthorities.
• The recent developments in international standard setting have been driven by the desire to achieve endorsement by IOSCO. The requirements of the newer standards are not necessarily appropriate to smaller entities.
5.4 Arguments against
• Empirical research has not found that small companies find complying with accounting standards a matter for concern.
• Small entities normally have very few major accounting issues that need to be addressed, simply because of their size.Inpractice, this means that many of the lASs have negligible impact on the small company.
• For companies already in existence, accounts formats with full disclosure will already be in place.
6 INTERNATIONAL FINANCIAL REPORTING INTERPRETATIONS COMMITTEE (SIC).
6.1 Background
• This committee was reconstituted in December 2001 to take over the role of the Standing Interpretations Committee (SIC). The SIC was founded in April 1997 with the objective of developing conceptually sound and practicable interpretations of lASs to be applied on a global basis where the standards are silent or unclear. • Itis made up of a team of accounting experts from 13 countries appointed by the
IASC.
6.2 Approach
• The SIC uses the approach described in lAS 8 i.e.:
o
making analogies with the requirements and guidance in International Accounting Standards dealing with similar and related issues,o
applying the defmitions, recognition and measurement criteria for assets, liabilities, income and expenses set out in the IASC Framework, ando
taking into consideration the pronouncements of other standard settingbodies and accepted industry practices to the extent, but only to the extent, that these are consistent with international GAAP.
• The interpretations were originally issued as SIC 1, SIC 2 etc
• After approval by the board the interpretations become part of the IASC's authoritative literature. The pronouncements have the same status as an lAS.
6.3 Changes
• The IASB has renamed this committee and the interpretations that they produce. The committee is now known as the International Financial Reporting
Interpretations Committee (IFRIC) and they will now be issuing IFRIC's. All SIC's currently in existence will still be known as SIC's but any new interpretation will be known as IFRIC 1, IFRIC 2 etc.
6.4 SICslIFRICs in issue (as examinable documents)
• The following interpretations are in issue as at November 2004
SIC (Relating to) Title Examinable
and contained in session
SIC-7 IAS21 Introduction of the Euro 30
SIC -10 IAS20 Government assistance - No specific relation to operating 11 activities
SIC -12 IFRS3&lAS 27 Consolidation - Special purpose entities 23
SIC -13 IAS 31 Jointly controlled entities - Non-monetary contributions by 29 venturers
SIC - 15 IAS 17 Operating leases - incentives 12
SIC -21 IAS 12 Income taxes - Recovery of revalued non depreciable assets 18 SIC -25 IAS 12 Income taxes - Changes in the tax: status of an entity or its 18
shareholders
SIC -27 IAS 17 Evaluating the Substance of Transactions in the Legal Form ofa 12 lease
SIC -29 IAS 1 Disclosure - Service Concession Arrangements 5
SIC - 31 IAS 18 Revenue - Barter Transactions Involving Advertising Services 7
SIC - 32 IAS 38 Intangible Assets - Website Costs 13
IFRlC-l IAS 37 Changes in Existing Decommissioning, Restoration and Similar 17 Liabilities
7 RELATIONSIDP OF
rxsc
WITH OTHER BODIES 7.1 Intergovernmental bodies• Those concerned with improvement and harmonisation of financial statements include:
o
the European Commission,o
the Working Group on Accounting Standards of the Organisation for Economic Co-operation and Development (OECD working group),o
the United Nations Intergovernmental Working Group of Experts onInternational Standards of Accounting and Reporting (UN ISAR group). 7.2 National standardsetting bodies (NSSBs)
• The European Commission and the United States Financial Accounting Standards Board (FASB).
o
participate in IASC consultative groups, ando
attend board meetings.• IASC, FASB and the Federation des Experts Compatables Europeens (FEE) organise an international conference of standard setting bodies.
• Representatives ofNSSBs are invited to discuss EDs and develop papers. • IASC representatives have visited more than 45 NSSBs to discuss matters of
8 G4+1GROUP
• This is a group of standard setters made up of the standard setting bodies from Australia, Canada, New Zealand, UK and USA with observers from the lASC. The objective of the group was to promote International harmonisation by the
identification and discussion of major issues in international reporting. Together the six standard setting bodies have significant influence on international accounting.
• The members share the following objectives:
o
To provide quality accounting standards for the primary purpose of providing information useful to capital market participants,o
To seek common solutions to financial reporting issues, ando
To seek a common conceptual framework.• The members further their common objectives by:
o
Analysis and discussion of fmancial reporting issues,o
Exchanging ideas and approaches, ando
Pursuing projects that have the potential to align financial reporting standards across member jurisdictions.• They have released discussion papers on the following areas (amongst others);
o
Business combinations(See session 29)Recommends doing away with pooling ofinterests
o
Leasing(See session 12)Recommends the capitalisation ofall non cancellable leases
o
Reporting financial performance(See session 5)Recommends the replacing income statement and the statement of changes in equity with a "A statement ofcomprehensive income".
o
Joint ventures and similar arrangements(See session 28)Recommends the use ofequity accounting (not proportionate consolidation) for reporting interests in joint ventures.
o
Share based payments(see session21)FOCUS
You should now be able to:
• discuss the nature of the changing role of the IASB;
• describe the applicability of lAS's, IFRS's for small companies;
• discuss the solutions to differential financial reporting both nationally and internationally.
OVERVIEW Objectives
• To discuss the advantages and disadvantages of harmonisation.
• To explain the reconciliation of profits obtained under different GAAPs.
INTERNATIONAL HARMONISATION ADVANTAGES OF HARMONISATION BARRIERS TO HARMONISATION PROGRESS ON HARMONISATION
THE ROLE OF OTHER ORGANISATIONS IN HARMONISATION lAS vs. NATIONAL ALTERNATIVES • Introduction • Environmental factors • General comment
• Multinational enterprises (MNEs) • Multinationalaccountingjlrms • Investors
• Others
• lASE
• The IOSeO project
• Growth ofimportance oflASs • Problems associated with the further
adoption oflASs
• European Union directives • Others
1 INTERNATIONAL HARMONISATION 1.1 Introduction
• There has been a strong tendency to globalisation in recent years resulting in the formation of increased numbers of larger multinational companies. • Operating divisions of such companies are subject to different reporting rules
in each country.
1.2 Environmental factors
• The form of financial statements is influenced by the environment in the jurisdiction.
• Environmental factors which influence accounting (and auditing) practices include:
