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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 Come and visit the BPP Learn Online free at www.bpp.com/acca/learnonline for exam tips, FAQs and syllabus 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 e-mail address that they will supply. Alternatively, call +44 (0)20 8740 2222 (or your local training centre if outside the London area) and ask for a tutor for this paper to speak to you or to call you back within 24 hours. Feedback The success of BPP's courses has been built on what you, the students tell us. At the end of the course for each subject, you will be given a feedback form to complete and return. If you have any issues or ideas before you are given the form to complete, please raise them with the course tutor or relevant head of centre. If this is not possible, please email ACCAcoursesfeedback@bpp.com. (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
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