Yes a tee aS Le i Hee U1] inate Ht tia ey BLL \\\ \i\ \ XY ZA \ \ \ \ \ \\ \ . \) \) ‘\ \ \ \ \ yx ‘ «\ ‘i Wy \ yr \N \ i i \ a \\ Approved Workbook Strategic Business Reporting — International & UK (SBR — INT & UK) For exams in September 2019, December 2019, March 2020 and June 2020 Free access to eBook & additional digital content Valid for both paper- and computer-based examsHow do | access my free eBook? To access your eBook digital version of the BPP Workbook, follow the instructions on the Exam Success Site below. Once you've logged on the first time, you can read the eBook on your computer, and then use the BPP eBooks app on your smartphone or tablet. BPP eBooks offer an intuitive interface, enabling you to highlight and comment on the content. You can download and read your eBook offline and sync it across your devices. The eBook digital version of the BPP Workbook for Strategic Business Reporting contains the following additional content: + Essential reading + Further question practice and solutions + Glossary of key terms To access your free eBook, please go to: Sette + Register (first time only) and reply to the confirmation email. + Log in using your rei + Click on the ACTIVATE A PRODUCT button. Select Exam Success Site, then select the title you wish to access. istered username and password. + Enter the code below when prompted. You will only have to do this once for each exam you are studying. How do | access the additional digital content? ‘To maximise your chances of succeeding in your exams, we've put together a suite of exclusive ACCA resources. Our Exam Success Site provides you with an exam debrief, past exam, examining team commentary as well as extra resources designed to focus your efforts on exams and study methods. To access the Exam Success Site, please follow the instructions above. What if I’m taking the SBR UK variant? SBR UK variant students can access the UK Supplement to this Workbook via the Exam Success Site link above. ACCA Approved Content Provider {As the first accredited publisher of ACCA materials, BPP Learning Media has set the benchmark for producing exceptional study materials for students and tutors alike. This Workbook has been reviewed by the ACCA examining team and has been written by our in-house authors with industry and teaching experience who understand what is required for exam success.ee ACCA Strategic Business Reporting Workbook For exams in September 2019, December 2019, March 2020 and June 2020Second edition 2019 ISBN: 9781 5097 2345 4 Provious ISBN 9781 5097 1648 7 elSBN 9781 5097 2349 2 British Library Cataloguing-in-Publication Data ‘A catalogue record for this book Is avaliable from the Betsh Library Published by BPP Learning Media Ud BPP House, Aldine Place 142-144 Uxbridge Road london W12 BAA ‘wun bpp.com/leorningmedian Printed in Chino [vor ang mia pid ig de | vow Son pope ale tor ocebl sustainable sources, | All igh ceserved. 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Contac he ERS Feundoon for fithr datos The IFRS Foundation logo, the IASB logo, the IFRS for ‘SMEs logo, the "Hexagon Device", “IFRS Foundation”, JFRS", "AS, "TASB", “IFRS for SMES", “ASS, “IERS*, FRSs", “Intemationcl Accounting Standards ond “Intrrational Financial Reporing Standards", “IFRIC™ SIC" ond “IFRS Taxonomy" are Trade Marks ofthe |FRS Foundation, Further detail of he Teade Mocks including details of countries where the Teade Marks ore registered or applied for are availabe from the Licensor on requeet @ESIFRSContents Helping you to pass Introduction to the Essential Reading Introduction to Strategic Business Reporting (SBR) Essential skills areas 1 The financial reporting framework Professional and ethical duty of the accountant Revenue Non-current assets Anon Employee benefits SKILLS CHECKPOINT 1: Approaching ethical issues 6 Provisions, contingencies and events after the reporting period 7 Income taxes 8 Financial instruments 9 Leases 10 Share-based payment SKILLS CHECKPOINT 2: 11 Basic groups 12 Changes in group structures: step acquisitions 13 Changes in group structures: disposals and group reorganisations 14 Non-current assets held for sale and discontinued operations jesolving financial reporting issues 15 Joint arrangements and group disclosures 16 Foreign transactions and entities 17 Group statements of cash flows SKILLS CHECKPOINT 3: Applying good consolidation techniques 18 Interpreting financial statements for different stakeholders SKILLS CHECKPOINT 4: Interpreting financial statements 19 Reporting requirements of small and medium-sized entities 20 The impact of changes and potential changes in accounting regulation SKILLS CHECKPOINT 5: Creating effective discussion Appendix 1 - Activity answers ‘Appendix 2 - Essential reading* Further question practice* Further question practice solutions* Glossary* Bibliography Mathematical tables Index Contents iv vi viii 21 43 59 87 107 123 137 161 195 215 241 259 287 307 333 349 361 383 409 427 467 ‘487 501 517 535 “Note. Sections marked with an asterisk are available in the digital eBook version of the Workbook, accessed via the Exam Success Site (see inside cover for details) some BDHelping you to pass BPP Learning Media - ACCA Approved Content Provider ‘As an ACCA Approved Content Provider, BPP Learning Media gives you the opportunity to use study materials reviewed by the ACCA examining team. By incorporating the examining team's comments cand suggestions regarding the depth and breadth of syllabus coverage, the BPP learning Media Workbook provides excellent, ACCA-approved support for your studies. These materials are reviewed by the ACCA examining team. The objective of the review is to ensure thot the material properly covers the syllabus and study guide outcomes, used by the examining team in setting the exams, in the appropriate breadth and depth. The review does not ensure that every eventuality, combination or application of examinable topics is addressed by the ACCA Approved Content. Nor does the review comprise o detailed technical check of the content as the Approved Content Provider has its own quality assurance processes in place in this respect. The PER alert Before you can qualify as an ACCA member, you not only have to pass all your exams but also fulfil «a three-year practical experience requirement (PER). To help you to recognise areas of the syllabus that you might be able to apply in the workplace to achieve different performance objectives, we have introduced the 'PER alert’ feature {see the section below). You will find this feature throughout the Workbook to remind you that what you are learning to pass your ACCA exams is equally useful fo the fulfilment of the PER requirement. Your achievement of the PER should be recorded in your online My Experience record. Chapter features Studying can be a daunting prospect, particularly when you have lots of other commitments. This Workbook is full of useful features, explained in the key below, designed to help you to get the most out of your studies and maximise your chances of exam success. Key to icons & Key term Central concepts are highlighted ond clearly defined in the Key terms feature. Lh Key terms are also listed in bold in the Index, for quick and easy reference. a PER alert This feature identifies when something you are reading will also be useful for your PER requirement (see ‘The PER alert’ section above for more details) Stakeholder perspective selzrae In the SBR exam, you may be asked to tackle an issue from the perspective of penpecve stakeholder, such os an investor, preparer or lender. This feature highlights «reas in each chapter which may be of particular interest to stakeholders. PER alan Link to the Conceptual Framework g I Venere _ SBR requires an indepth knowledge of the IASB's Conceptual Framework as it Cencopne] sels out the concepls on which IFRSs are based. This feature identifies links fromewerk between areas of specific Standards and the Conceptual Framework cme 2D%} Ieroducon Illustration Illustrations walk through how fo apply key knowledge and techniques step by step. Activity Activities give you essential practice of techniques covered in the chapter. Exer Exercises suggest tasks which can be done to further your understanding. Essential reading Links to the Essential reading are given throughout the chapter. The Essential reading is included in the free eBook, accessed via the Exam Success Site {s08 inside cover for details on how to access this) Knowledge diagnostic Summary of the key learning points from the chapter. At the end of each chapler you will find a Further study guidance section. This contains suggestions for ways in which you can continue your learning and enhance your understanding. This can include: recommendations for question practice from the Further question practice and solutions, to test your understanding of the topics in the chapter; suggestions for further reading which can be done, such as technical articles, ond ideas for your own researchIntroduction to the Essential reading The digital eBook version of the Workbook conisins additional content, selected to enhance your studies. Consisting of revision materials, activities (including practice questions and solutions) and background reading, itis designed to aid your understanding of key topics which are covered in the main printed chapters of the Workbook. The Essential reading section of the eBook also includes further illustrations of complex areas. To access the digital eBook version of the BPP Workbook, follow the instructions which can be found on the inside cover; you'll be able to access your eBook, plus download the BPP eBook mobile app con multiple devices, including smartphones and tablets, ‘A summary of the content of the Essential reading is given below, eer ens 1 The financial * Revision of the important principles in IAS 1 Presentation of Financial | reporting Statements | framework | Influences on ethics Social responsibility ond businesses Managing ethics within organisations 2 Professional and ethical duty of the accountant 4 Noncurrent assets Further reading regarding componentisation and overhauls of assets under IAS 16 Property, Plant and Equipment + Further reading regarding acceptable methods of amortisation under IAS 38 Intangible Assets Concepts and principles of employee benefits costs 5 Employee benefits ‘+ Explanation and comparison of defined benefit, defined contribution | | | cand multiemployer benefits plons | + Illustration of how to apply the asset ceiling test | + llustration of contributions and benefits paid other than at the end of the reporting period 6 Provisions, '* Provisions recognition and measurement revision and activities conlingencies and | ¢ IAS 10 Events Affer the Reporting Period examples evenis fier the | ¢ — Examstandard activity reporting period 7 Income taxes * Current tax — revision of material covered in Financial Reporting © Deferred tax — revision of material covered in Financial Reporting 8 Financial © Further detail on: instruments = Definitions | | ~ Derecognition 19 Leases ‘+ Revision of lessee accounting, including lease identification examples, separating lease components, remeasurement and sale | and leasebackSeen een Inwoducfon 10 Share-based payment 11 Basic groups 12 Changes in group structures: step acquisitions 13 Changes in group | structures: disposals and group reorganisations | | 14 Non-current assets | held for sale and discontinued operations 15. Joint | arrangements and | | group disclosures 1 | 16 Foreign transactions and entities 17 Group statements of cash flows 18 Interpreting financial statements for different stakeholders 19 Reporting requirements of small and mediumsized entities 20 The impact of changes and potential changes in accounting regulation BPP Background to IFRS 2 Share-based Payment Further detail on share-based payments amongst group eniilies Activities on vesting conditions for further practice "Further detail on non-controlling interests Further detail on investment to associate step acquisitions | Further de = Group profit or loss on disposal - Deemed disposals = Group reorganisations Discontinued operations comprehensive aclivity Joint arrangements ~ further detail on determining the existence of a contractual arrangement for joint control Discussion of changes in functional currency Revision of single company statement of cash flows Revision of ratio analysis Revision of basic and diluted earnings per share, presentation and significance Further detail on preparing group statement of cash flows Further detail on the Global Reporting Initiative guidelines, environmental and social reporting, management commentary and segment reporting Further detail on the background to and consequences ofthe IFRS for ‘SMEs Practical issues when managing the transition to IFRS — |Introduction to Strategic Business Reporting (SBR) Overall aim of the syllabus This exam requires students to discuss, apply and evaluate the concepis, principles and practices that underpin the preparation and interpretation of corporate reporis in various contexts, including the ethical assessment of managements’ stewardship and the information needs of a diverse group of stakeholders SBR UK Supplement This Workbook is based on International Financial Reporting Standards {IFRS} only. Students siting the UK GAAP variant of the SBR exam can access an additional free online UK supplement which covers UK accounting standards, providing relevant illustrations and examples, and should be used in conjunction with the IFRS Workbook, The Supplement can be found on the Exam Success Site; for details of how to access this, see the inside cover of the Workbook. Brought forward knowledge The Strategic Business Reporting syllabus assumes knowledge acquired in earlier ACCA papers: Financiol Accounting (FA) and Financial Reporting (FR). This knowledge is developed and applied in Strategic Business Reporting and is therefore vitally important. IFit has been some time since you studied FR or if you were exempted from the FR exam as a result of having o relevant degree, they we recommend that you revise the following topics before you begin your SBR studies: Tangible non-current assets Intangible assets Impairment of assets Leasing Statements of cash flows Financial statement formats Noncurrent assets held for sale and discontinued operations ‘Accounting policies and prior period adjustments Provisions, contingent liabilities and contingent assets Income taxes Financial instruments The consolidated statement of financial position The consolidated statement of profit or loss and other comprehensive income The syllabus The broad syllabus headings are: Fundamental ethical and professional principles The financial reporting framework Reporting the financial performance of a range of entities Financial statements of groups of entities Interpreting financial statements for different stakeholders The impact of changes and potential changes in accounting regulation 7™moOo> BPPMain capabilities On successful completion of this exam, you should be able to: A Apply fundamental ethical and professional principles to ethical dilemmas and discuss the consequences of unethical behaviour B Evaluate the appropriateness of the financial reporting framework and critically discuss changes in accounting regulation © Apply professional judgement in the reporting of the fina performance of a range of entities Note. The learning outcomes in Section C of the syllabus can apply to single eniiies, groups, public sector entiies and noHfor-profitentiies (where appropriate) D Prepare the financial stalements of groups of entities Interpret financial statements for different stakeholders: Communicate the impact of changes and potential changes in accounting regulation on financial reporting Links with other exams Strategic Business > need Audit Reporting (SBR) ‘and Assurance . (AAA) incial Reporting (FR) Financial ‘Accounting (FA) The diagram shows where direct (solid line arrows) and indirect (dashed line arrows} links exist between this exam and other exams preceding oF Following it The SBR syllabus assumes knowledge acquired in Financial Accounting and Financial Reporting and develops and applies this further and in greater depth Achieving ACCA's Study Guide Learning Outcomes This BPP Workbook covers all the SBR syllabus learning outcomes. The tables below show in which chapter(s} each area of the syllabus is covered a Fundamental ethical and professional principles A1 Professional behaviour and compliance with accounting standards | Chapter 2 A2__ Ethical requirements of corporate reporting and the consequences of | Chapter 2 unethical behaviour B The financial reporting framework B1 The applications, strengths and weaknesses of an accounting framework | Chapter 1 oon PED :a Reporting the financial performance of a range of entities C1 Revenue Chapter 3 2 Noncurrent assets | Chapter 4 3 Financial instruments | Chapter 8 CA leases OO | Chapter : - €5 Employee benefits Chapter 5 6 Incometes Chapter 7 7 Provisions, contingencies and events after the reporting period Chapter 6 8 Sharebased payment Chapter 10 [9 Fair value measurement Chapters 4, 8 | C10. Reporting requirements of small and medium-sized entities (SMEs) Chapter | | C11 Other reporting issues Chapters 4, 9, jo | Financial statements of groups of entities p2 D3 D4 [El reoreting finan E1 Analysis ond interpretation of financial information and measurement | Chapter 18 | Group accounting including statements of cash flows Associates and joint arrangements Changes in group structures Foreign transactions and entities statements for different stakeholders of performance 18 | Chapters 11, (14-17 | Chapters 11, 15 | Chapters 12, 13 Chapter 16 Ed the impact of changes and potential changes in accounting regulation || Chapter 20 Discussion of solutions fo current issues in financial reporting ‘| The complete syllabus and study guide can be found by visiting the exam resource finder on the ACCA website: www.accaglobal.com BPPIreducon The Exam Computer-based exams With effect from the March 2020 sitfing, ACCA have commenced the launch of computer-based exams (CBEs) for this exam with the aim of rolling out into all markels internationally over a short period. Paperbased examinations (PBE) will be run in parallel while the CBEs are phased in. BPP materials have been designed to support you, whichever exam option you choose, For more information on these changes and when they will be implemented, please visit the ACCA website. Approach to examining the syllabus The Strategic Business Reporting syllabus is assessed by a 3 hour 15 minute paper-based exam. The pass mark is 50%, All questions in the exam are compulsory, It examines professional competences within the business reporting environment, You will be examined on concepts, theories and principles, and on your ability to question and comment on proposed accounting treatments. You should be capable of relating professional issues to relevant concepts and practical situations, The evaluation of alternative accounting practices and the identification and prioritisation of issves will be a key element of the exam. You will need to exercise professional and ethical judgement, and integrate technical knowledge when addressing business reporting issves in a business coniext You will be required to adopt either a stakeholder or an external focus in answering questions and to demonstrate personal skills such as problem solving, dealing with information and decision making. You will also have to demonstrate communication skills ‘appropriate to the scenario. The paper also deals with specific professional knowledge appropriate to the preparation and Presentation of consolidated and other financial statements from accounting dato, to conform with accounting standards. The ACCA website contains a useful explanation of the verbs used in exam questions. See: 'What is the examiner asking?" available at www.accaglobal.com/uk/en/student/sa/study- skills/questions.himleae cy ig Section Two compulsory scenariobased questions, totolling 50 marks 50 A Question 1: (incl. wo | ‘© Based on the financial statements of group entities, or exiracts professional | | thereof (syllabus area D) marks) | | «Also likely to require consideration of some financial reporting | issves (syllabus area C) | Numerical specs of group accountng will be @ maximum of 25 marks | © Discussion and explanation of numerical aspects will be | | required | | Question 2: | | © Consideration of the reporting implications and the ethical | implications of specific events in a given scenario | | Two professional marks will be awarded tothe ethical issues question. jon Two compulsory 25-mark questions 50 Questions: | fined 2 | * May be scenario, case-study, or essay based | ee | + Will contain both discursive and computational elements oe * Could deal with any aspect of the syllabus | © Will always include either a full or part question that requires | | the appraisal of financial and/or nonfinancial information | {rom either the preparer’s or another stakeholder’s perspective | Two professional marks will be awarded to the question that requires | 100 Current issues The current issues element of the syllabus (Syllabus area F] may be examined in Section A or B but ill not be a full question. It is more likely to form part of another question. BPP LeARWNG MEDIAAnalysis of past exams The table below shows when each element of the syllabus has been examined and the section in which the element was examined for the specimen and September and December 2018 exams. Cen) perros eee ee ed Cos cc ed meh Fundamental ethical and professional pri 2 Professional behaviour and compliance A A AL A ‘with accounting standards 2 Ethical requirements of corporate reporting A A AA ‘and the consequences of unethical behaviour The financial reporting framework ‘The applications, strengths and weaknesses. AB. A 8 | AB of an accounting framework Reporting the financial performance of a range of entities Revenue 8 8 Aa Non-current assets | AB AB AB Financial instruments A A Leases B Employee benefits =A Income toxes A 8 Provisions, contingencies ond events after A 8 the reporting period Share-based payment Fair value measurement 8 119 [Reporting requirements ofsmalland = | medium-sized entities (SMEs) 4,9, 18 Other reporting issues iL / 8 Financial statements of groups of _ entities 11, 14-17 |Group accounting including statements of cash flows 12,13 |Changes in group structures | 11,15 Associates and joint arrangements | J oa A | | 16 Foreign transactions and entities LEARN MEDIACe ed Cred exam] exam2 2018 2018 (18 |Analysis and interpretation of financial |information and measurement of | performance |The impact of changes and potential |changes in accounting regulation | | 120 Discussion of solutions to current issues in. AB 8 | AB | AB | financial reporting | | IMPORTANT! The table above gives a broad idea of how frequently major topics in the syllabus are examined. it should not be used to question spot and predict, for example, that Topic X will not be examined because it came up two sittings ago. The examining team's reports indicate that they are well aware that some students try to question spot. They avoid predictable patterns and may, for example, examine the same topic two sitiings in a row, particularly if there has been a recent change in legislation.Ineducion Essential skills areas to be successful in Strategic Business Reporting We think there are three areas you should develop in order to achieve exam success in Strategic Business Reporting: These are shown in the diagram (2) Specific Strategic Business Reporting skills below. (1) Knowledge application } (3) Exam success skills @ eer secs sis @ sercscsonsis Specific SBR skills These are the skills specific to SBR that we think you need fo develop in order fo pass the exam. In this Workbook, there are five Skills Checkpoints which define each skill and show how it is applied in answering a question. A brief summary of each skill is given below. Skill 1: Approaching ethical issues Question 2 in Section A of the exam will require you to consider the reperting implications and the ethical implications of specific events in a given scenario. The two Section B questions could deal with any aspect ofthe syllabus. Therefore, ethics could feature in this part of the exam too. Given that ethics will feature in every exam, it is essential that you master the appropriate technique for approaching ethical issues in order to maximise your mark. BPP recommends @ step-by-step technique for approaching questions on ethical issues: STEP! Work out how many minutes you have to answer the question. STEP! Read the requirement and analyse it. STEP! Read the scenario, identify which IAS or IFRS may be relevant, whether the proposed accounting treatment complies with that IAS or IFRS, and any threats to the fundamental ethical principles. STEP Prepare an answer plan using key words from the requirements as headings. STEP! Write up your answer using key words from the requirements as headings. 88 886 Skills Checkpoint 1 covers this techni in detail through application to an exam-standard question.Skill 2: Resolving financial reporting issues Financial reporting issues are highly likely to be tested in both sections of your SBR exam, so it is essential that you master the skill for resolving financial reporting issues in order to maximise your chance of passing the exam. The basic approach BPP recommends for resolving financial reporting issues is very similar to the one for ethical issues. This consistency is important because in Guestion 2 of the exam, both will be tested together. [STEP( 1 )) Work out how many minutes you have to answer the question. [STEP( 2) Read the requirement and analyse it, identifying sub-requirements [STEP( 3) Read the scenario, identifying relevant IFRSs and how they should be applied to the scenario. [STeP( 4 )) Prepare on answer plan ensuring that you cover each ofthe issues raised inthe scenario. (SteP( 5 )) Write up your answer using separate headings for each item inthe scenario, Skills Checkpoint 2 covers this technique in detail through application to an examstandard question Skill 3: Applying good consolidation techniques Question 1 of Section A of the exam will be based on the financial statements of group entities, or extracts thereof. Section B of the exam could deal with any aspect of the syllabus so it is also possible that groups feature in Question 3 or 4. Good consolidation technique is therefore essential when answering both writen and numerical aspects of group questions. Skills Checkpoint 3 focuses on the more challenging technique for correcting errors in group financial statements that have already been prepared. A step-by-step technique for applying good consolidation techniques is oulined below. STEP! Work out how many minutes you have to answer the question. STEP Read the requirement for each part of the question and analyse it, identifying sub-requirements, STEP Read the scenario, identify exactly what information has been provided and what you need to do with this information. Identify which consolidation workings/adjustments may be required STEP! Draw up a group structure. Make notes in the margins of the question as to which consolidation working, adjustment or correction to error is required. Do not perform any detailed calculations at this stage. 8 88E Write up your answer using key words from the requirements os headings (if preparing narrative). Perform calculations first, then explain, Remember that marks will be available for a discussion of the principles underpinning any calculations, [3 3 mi 3 Skills Checkpoint 3 covers this technique in detail through application to an exam-standard question. " net Qlnoduetion Skill 4: Interpreting financial statements Section B of the SBR exam will contain two questions, which moy be scenario or case-study or essoy based and will contain both discursive and computational elements. Section B could deal with any aspect ofthe syllabus but will always include either o full question, or part of « question that requires appraisal of financial or nonfinancial information from either the preparer’s and/or another stokeholder's perspective. Two professional marks will be awarded to the question in Section B that requires analysis. Given that appraisal of financial and nonfinancial information will feature in Section B of every exam, itis essential that you have mastered the appropriate technique in order to maximise your chance of passing the SBR exam. A step-by-step technique for performing financial analysis is outlined below. STEP’ Work out how many minules you have to answer the question STEP’ Read and analyse the requirement STEP Read and analyse the scenario. [STEP| Prepare an answer plan STEP Write up your answer. E8500 Skills Checkpoint 4 covers this technique in detail through application fo an examstandard question. Skill 5: Creating effective discussion More marks in your SBR exam will relate to writen answers than numerical answers. It is very fempting to only practise numerical questions, as they are easy to mark because the answer is right ‘or wrong, whereas writien questions are more subjective and a range of different answers will be given credit. Even when aitempting written questions, it is tempting to write a brief answer plan and then look at the answer rather than writing © full answer to plan. Unless you practise writen questions in full to time, you will never acquire the necessary skills to tackle discussion questions. The basic five steps adopted in Skills Checkpoint 4 should olso be used in discussion questions. Steps 2 and 4 are particularly important for discussion questions. You will definitely need to spend a third of your time reading and planning. Generating ideas ot the planning stage to create o comprehensive answer plan will be the key to success in this style of question, Skills Checkpoint 5 covers this technique in detail through application to an examstandard question. Exam success skills Passing the SBR exam requires more than applying syllabus knowledge and demonstrating the specific SBR skills; it also requires the development of excellent exam technique through question practice, We consider the following six skills to be vital for exam success. The Skills Checkpoints show how each of these skills can be applied in the exam. BPP eiExam success skill Managing information Questions in the exam will present you with a lot of information. The skill is how you handle this information to make the best use of your time. The key is determining how you will approach the ‘exam and then actively reading the questions Advice on developing Managing information Approach The exam is 3 hours 15 minutes long. There is no designated ‘reading! time at the start of the exam, however, one approach that can work well isto start the exam by spending 10-15 minutes carefully reading through all of the questions to familiarise yourself with the exam paper Once you feel familiar with the exam paper consider the order in which you will attempt the questions; always attempt them in your order of preference. For example, you may want to leave to last the question you consider fo be the most difficult IF you do take this approach, remember to adjust the time available for each question appropriately ~ see Exam success skill 6: Good time management IF you find that this approach doesn’t work for you, don't worry ~ you can develop your own technique, Active reading You must take an active approach to reading each question. Focus on the requirement first, underlining key verbs such as ‘prepare’, ‘comment’, ‘explain’, ‘discuss', 1o ensure you answer the question properly. Then read the rest of the question, underlining and annotating important and relevant information, and making notes of any relevant technical information you think you will need. Exam success skill 2 Correct interpretation of the requirements The active verb used offen dictates the approach that written answers should take (eg ‘explain’, ‘discuss’, ‘evaluate'). It is important you identify and use the verb to define your approach. The correct interpretation of the requirements skill means correctly producing only what is being asked for by a requirement. Anything not required will not earn marks. Advice on developing correct interpretation of the requirements This skill can be developed by analysing question requirements and applying this process: Step 1 Read the requirement Firstly, read the requirement a couple of times slowly and carefully and highlight the active verbs. Use the active verbs to define what you plan to do. Make sure you identity any subvequirements Step 2 Read the rest of the question By reading the requirement first, you will have an idea of what you are looking out for as you read through the case overview and exhibits. This is a great lime saver ‘and means you don't end up having fo read the whole question in ful You should do this in an active way ~ see Exam success skill 1: Managing Information, i BPPStep 3 Read the requirement again Read the requirement again to remind yourself of the exact wording before starting your written answer. This will capture any misinierpretation of the requirements or any missed requirements entirely. This should become a habit in your approach and, with repeated practice, you will find the focus, relevance and depth of your answer plan will improve. Exam success skill 3 ‘Answer plant structure and logic This skill requires the planning of the key ospecls of an answer which accurately and completely responds to the requirement. Advice on developing Answer planning: Priorities, structure and logic Everyone will have a preferred style for an answer plan. For example, it may be a mind map, bullet pointed lisls or simply annotating the question paper. Choose the approach that you feel most comfortable with, or, if you are not sure, try out different approaches for different questions until you have found your preferred style. For a discussion question, annotating the question paper is likely to be insufficient. It would be betier Jo draw up a separate answer plan in the format of your choosing (eg a mind map or bulletpointed lists). For a groups question, you will typically spend less time planning than for a discussion question. You should aim to draw up the group structure. Then, rather than drawing up a formal plan, the best use of your time is to annotate the question paper margins noting which group working, adjustment or correction of error will be required Exam success skill 4 Efficient numerical analysis This skill ims to maximise the marks awarded by making clear fo the marker the process of arriving att your answer. This is achieved by laying out an answer such that, even if you make a few errors, you can sill score subsequent marks for follow-on calculations. It is vital that you do not lose marks purely because the marker cannot follow what you have done Advice on developing Efficient numerical analysis This skill can be developed by applying the following process: Step 1 Use a standard proforma working where relevant If answers can be laid out in a standard proforma then always plan to do so. This will help the marker to understand your working and allocate the marks easily. It wil ‘also help you to work through the figures in a methodical and time-efficient way. Step 2 Show your workings Keep your workings as clear and simple as possible and ensure they are cross: referenced to the main part of your answer, Where it helps, provide brief narrative ‘explanations to help the marker understand the steps in the calculation, This means that if a mistake is made you do not lose any subsequent marks for follow-on calculations. Step 3 Keep moving! It is important fo remember that, in an exam sitvation, it is difficult to get every number 100% correct. The key is therefore ensuring you do not spend too long on any single calculation. If you are struggling with a solution then mcke a sensible assumption, stote it and move on. BPP =xam success skill § Effective writing and presentation Written answers should be presented so that the marker can clearly see the points you are making, presented in the format specified in the question. The skill is to provide efficient written answers with sufficient breadth of points that answer the question, inthe right depth, in the fime available. Advice on developing Effective writing and presentation Step 1 Use headings Using the headings ond sub-headings from your answer plan will give your answer structure, order and logic. This will ensure your answer links back to the requirement and is clearly signposted, making it easier for the marker to understand the different points you are making. Underlining your headings will also help the marker Step 2 Write your answer in short, but full, sentences Use short, punchy sentences with the aim that every sentence should say something different and generate marks. Write in full sentences, ensuring your style is professional. Step 3 Do your calculations first and explanation second Questions offen ask for an explanation with suitable calculations. The best approach is to prepare the calculation first but present it on the bottom half of the page of your answer, or on the next page. Then add the explanotion before the colculation. Performing the calculation first should enable you to explain what you have done. Good time management This skill means planning your time across all the requirements so that all tasks have been attempted at the end of the 3 hours 15 minutes available and actively checking on time during your exam. This is $0 that you can flex your approach and prioritise requirements which, in your judgement, will generate the maximum marks in the available time remaining, Advice on developing Good time management The exam is 3 hours 15 minutes long, which translates to 1.95 minutes per mark. Therefore a 10-mark requirement should be allocated a maximum of 20 minutes to complete your answer before you move on fo the next task. At the beginning of a question, work out the amount of ime you should be spending on each requirement and write the finishing fime next to each requirement on your ‘exam paper. If you take the approach of spending 10-15 minutes reading and planning at the start of the exam, adjust the fime allocated to each question accordingly; eg if you allocate 15 minutes to reading, then you will have 3 hours remaining, which is 1.8 minutes per mark Keep an eye on the clock ‘Aim to ottempt all requirements, but be ready to be ruthless and move on if your answer is not going cs planned. The challenge for many is sticking to planned timings. Be aware this is difficult to achieve in the early stages of your studies and be ready to let this skill develop over time If you find yourself running short on time and know that a full answer is not possible in the time you have, consider recreating your plan in overview form and then add key terms and details as time allows. Remember, some marks may be ovailable, for example, simply stating a conclusion which you don't have time to justify in full Ps . oo POtrodtion Question practice is @ core part of learning new topic areas. When you praclice questions, you should focus on improving the Exam success skills ~ personal to your needs - by obtaining feedback or through a process of selkassessment BPP LEARNING MEDIAThe financial reporting framework Learning objectives (On completion of his chapter, you should be able to: syllabus reference no. | | | i | | Discuss the importance of the Conceptual Framework for Financial Reporting in Bio) | underpinning the production of accounting standards. | Discuss the objectives of financial reporting, including disclosure of information, Bib) | that can be used fo help assess management's stewardship of the entity's | resources and the limitations of financial reporting. | I | | Discuss the nature of the qualitative characteristics of useful financial information. BI). Explain the roles of prudence and substance over form in financial reporting. Bi(d) | Discuss the high level of measurement uncertainty that can make financial Bile} information less relevant. | Evaluate the decisions made by management on recognition, derecognition ond. Bit) ‘measurement. | Critically discuss and apply the definitions of the elements of financial statements Big) | and the reporting of items in the statement of proft or loss and other comprehensive income. | Discuss the impact of current issues in corporate reporting including. The | following examples are relevant to the current syllabus: | 1. The revised Conceptual Framework for Financial Reporting Exam context File) The 1ASB's Conceptual Framework for Financial Reporting underpins International Financial Reporting Standards and is fundamental to the SBR exam. You are expected to be able to apply the principles in the Conceptual Framework to accounting issues, such as an accounting issue where no IFRS currently exists.Chapter overview Dee ir) eee 1. Fair presentation 2.The and compliance Framework for with IFRS Financial Reporting 2 BPP LEARNING MEDIA1: The Bnancilveporing hemewerk 1 Fair presentation and compliance with IFRSs ‘Fair presentation’ is the term used in |AS 1 Presentation of Financial Statements equivalent to the concept of rue and fair view! Essential reading Chapter | of the Essential Reading {available in Appendix 2 of the digital edition of the Workbook} contains revision of the important principles in IAS 1 Presentation of Financial Statements, including further discussion on the requirements in IAS 1 relating to other comprehensive income In order to achieve fair presentation, on entity must comply with (IAS 1: para. 15): * Inlernational Financial Reporting Standards (IFRSs, IASs and IFRIC Interpretations) ©The Conceptual Framework for Financial Reporting. 2 The Conceptual Framework for Finan 2.1 Introduction | Reporting A conceptual framework is a statement of generally accepled theorelical principles which form the frame of reference for financial reporting. These theoretical principles provide the basis for the IASB's development of new accounting standards and the evaluation of those already in existence. The financial reporting process is concerned with providing information that is useful in the business and economic decisionmaking process. Therefore a conceptual framework will form the theoretical basis for determining which events should be accounted for, how they should be measured and how they should be communicated to the user. Although it is theoretical in nature, a conceptual framework for financial reporting has highly practical inal aims. 2.2 Revised Conceptual Framework The Conceptual Framework for Financial Reporting (referred to throughout this Workbook «5 the ‘Conceptual Framework! or the ‘revised Conceptual Framework’) was revised and [porgraphrfrence reissued in 2018. The revision follows criticism that the previous Conceptual Framework _|houghow is ‘econ fro the was incomplete, and out of date and unclear in some areas. eveed Concepnal The revised Conceptual Framework now includes: feeder New definitions of elements in the financial statements (flonan ony You Guidance on derecognition el Considerable guidance on measurement + High-level concepts for presentation and disclosure You are net expected to know the requirements of the 2010 Conceptual Framework for the SBR exam. 2.3 Purpose The purpose of the Conceptual Framework is to (para. SP1.1) + Assist the IASB to develop IFRSs that are based on consistent concepts; She ws expec his | «Assist preparers of accounts to develop accounting policies in cases where there is no” |sivaton lobo | IFRS applicable to @ particular transaction, or where a choice of accounting policy re 7 exists; and ‘© Assist all parties to understand and interpret IFRS. BPP 3The instances in which a preparer will use the Conceplual Framework to develop an accounting policy are expected fo be rare, Therefore the Conceptual Framework will primarily be used by the IASB to develop IFRSs. 2.4 Content ‘The Conceptual Framework is divided into chapters: [Gispien Lend 2) |ctcssinfrmation Chapter 1 The objective of general purpose financial reporting ] pride! general Toc Choplee 2 Gualiative characteristics of useful financial information | enhanced if hese characteristics «Tima . Understandability are maximised BPP 5 EARNING MEDIA@) Key term Key ten Understandability Enhancing qualitative characteristics cannot make information usetul ifthe information is irrelevant or if tis not a faithful representation Comparabi Comparability: Comparability is the qualitative characteristic that enables users to identify ond understand similarities in, and differences among, items (para. 2.25) The disclosure of accounting policies is particularly important here. Users must be able to distinguish between different accounting policies in order to be able to make a valid comparison of similar items in the accounts of diferent entities. When an enlity changes an accounting policy, the change is applied retrospectively so that the results from one period fo the next can still be usefully compared. Comparabiliy is not the same as uniformity. Accounting policies should be changed if the change vill result in information that is celiable and more relevant, of where the change is required by an IFRS. Verifiability: Verifiability helps assure users that information faithfully represents the economic phenomena it purports lo represent. Verifiability means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a parlicular depiction is a faithful representation (para. 2.30). Information can be verified to a model or formula or by direct observation, such as undertaking an inventory count. Independent verification, such as a valuation by a specialist, is also useful. Timeliness Timeliness: Timeliness means having information available to decision-makers in time to be capable of influencing their decisions. Generally, the older information is the less useful (para. 2.33) ible information. There is a balance between timeliness and the provision of |F information is reported on a timely basis when not all aspects of the transaction are known, it may not be complete or free from error. Conversely, if every detail of a transaction is known, it may be too late to publish the information because it has become irrelevant. The overriding consideration is how best to satisfy the economic decisionmaking needs of the users. Understandability: Classifying, characterising and presenting information clearly and concisely makes it understandable (para. 2.34) Financial reports are prepared for users who have a reasonable knowledge of business and economic activities and who review and analyse the information diligently (para, 2.36) 2.6.4 Cost constraint (paras. 2.39-2.43) The benefits of reporting information should justify the costs incurred in reporting it.1: The nancial repering framework 2.7 Chapter 3: Financial statements and the reporting entity 2.7.1 Financial statements To provide financial information about the reporting entity's assets, ese liabilities, equity, income and expenses that is useful lo users of financial fines statements in assessing the prospects for future net cash inflows to Pee the reporting entity and in assessing management's stewardship of the entity's economic resources (para. 3.2]. Useful financial information is presented in (para. 3.3): {0} The statement of financial position (SOFP] by recognising assets, liabilities and equity {b] The statement of profit or loss and other comprehensive income (SPLOCI) by recognising income and expenses {ec} Other statements and notes by presenting and disclosing information about: The nature of recognised items and associated risks The nature of unrecognised assets and liabilities and associated risks Cash flows Transactions with equity holders ‘Methods, assumptions and judgements used to estimate omounts presented or disclosed Financial statements are: Prepared for: Presented from: Normally prepared on the ‘A period of time +The perspective of the assumption that an enfity is 0 With comparative reporting entity os.a whole || going concern and will information + Not from the perspective of |} continue in operation for the Include information about a particular group of users || foreseeable fuure transactions ater the reporting date if necessary (paras. 3.4-3.7) 2.7.2 The reporting entity (paras. 3.10-3.14) & Reporting entity: A reporting entity is an entity thot is required, or chooses, to prepare financial satements. A reporting entily can be a single entity or a portion of an entity or can comprise more thon one entity. A reporting entity is not necessarily a legal entity (para. 3.10}. Key erm nscale! Parent and its subsidiories mm | Consolidated financial statements Parent (as a single entity) — Unconsoldsted fnoncol stotem Two or more entities not all Combined financial statements linked by parentsubsidiary (these are rare and will not be relationship examined in SBR} BPP > LeARWING MEDIAKey tem & Where a reporting entity is not a legal entity or a group linked by parentsubsidiary relationships, then the boundary of a reporting entity is driven by the information needs of the users of the reporting entity's financial statements. 2.8 Chapter 4: The elements of financial statements CICo CC o v v ea vy Asset Liability Equity A present economic A present obligation _The residual resource controlled by the of the entity to interest in the entily as a result of past transfer an economic assets of the enfily events. resource as a result of after deducting all its past events. liabilities ‘An economic resource is o {ie claims that do not right thot has the meet the definition of potential to produce « liability) economic benefits (para. 4.2) Economic benefits include (para. 4.16) + Cash flows, such as returns on investment sources + Exchange of goods, such as by trading, selling goods, provision of services + Reduction or avoidance of liabilities, such as paying loans ‘An essential characteristic of « liability is that the entity has an obligation. Obligation: A duty or responsibility that the entity has ne practical ability to avoid (para. 4.29). ‘A present obligation exists as ai result of past events if the entity hos already obtained economic benefits or laken an action, and as a consequence, the entily will or may have to transfer «an economic resource that i! would not otherwise have had to Iransfer (para. 4.43). Mlustration 2 IFRS 16 Leases requires a lessee to recognise a rightotuse asset for each lease they enter into (with limited exceptions). A rightofuse asset is consistent with the definition of an asset in the Conceptual Framework: as a result of entering into the lease agreement (past event), the lessee can direct the use of the leased asset (control) in the course of business in order to direclly or indirectly generate ‘economic benefits. IFRS 16 also requires the recognition of a lease liability, equivalent to the present value of future lease payments. The lease liability meets the Conceptual Framework definition of « liability: the lessee has a responsibility (present obligation) os a result of entering into the lease agreement (past event) to pay the lease rentals (transfer of economic benefits) as they become due. ; anne ee1: The Fnncil reporting komewerk Pence cs Pee atte Pore Income Expenses Increases in assets, of Decreases in assels, or decreases in liabiliies, that increases in liabilities, that resul in increases in resul in decreases in equity, other than those ‘equity, other than those relating to contributions from relating to distributions to holders of equity claims holders of equity claims (pora. 4.2) Different transactions generate income and expenses with different characteristics. Showing information about income and expenses with different characteristics separately can help users to understand the entity's financial performance. Contributions from owners are not income and distributions to owners are not expenses. 2.9 Chapter 5: Recognition and derecognition 2.9.1 Recognition process [BB | Recognition: Recognition is he process of captring for inclusion in the statement of nancial position or the statement(s) of financial performance an item that meets the definition of one of the Kev’ | elements of financial statements—an asset, a liability, equity, income or expenses (para. 5.1). The elements and the SOFP and SPLOC! are linked by recognition, os follows: Assels minus liabilities equal equity Income minus expenses | Changes in equity Contributions from holders of equity claims minus istributions to holders of equity claims SOFP ot end of reporting period Assets minus liabilities equal equity (para. 5.4) BPI °The statements are linked because of the use of double entry bookkeeping: recognising one item requires the recognition or derecognition of one or more other items. Eg Recognise atthe same tine (I o, eS eee ee ees Debit expenses Credit asset or 2.9.2 Recognising an element (paras. 5.6-5.8) ‘An item is recognised in the financial statements if (o} The item meets the definition of an element (asset, lability, income, expense or equity); and (b) Recognition of that element provides users of the financial statements with information that is useful, ie with * Relevant information about the element + A faithful representation of the element Recognition is subject to cost constraints: the benefits of the information pro «an element should justify the costs of recognising that element. Mlustration 3 The previous Concepival Framework required an element to be recognised if (bo) The item could be measured with reliobiliy. However, these criteria were not applied consistently within IFRSs. For example, different standards use different levels of probability in determining when elements should be recognised, Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, one of the criteria for recognising a provision is that outflows should be probable. However, contingent consideration (in respect of a business combination under IFRS 3 Business Combinations) is recognised whether or not itis probable. Instead the level of uncertainty is taken into account in the measure of fair value. IAS 37 also requires a provision to be reliably measurable before it can be recognised. Some parts of IAS 19 Employee Benefits also include the reliable measurement criterion. However, other IFRSs do not include this criterion The revised Conceptual Framework recognition criteria removes the probability and reliability criteria and replaces it with recognition of an element if that recognition provides users with relevant | information that is a faithful representation of that element. While this will not remove the | inconsistencies in recognition criteria that currently exis! across IFRSs, it does provide a basis for both | | the 1ASB to consider when developing new standards and revising existing standards and for | preparers to consider when developing accounting policies for which no accounting standard exists, (a) The inflow or outflow of future economic benefits was probable; and 2.9.3 Derecog! ion — Derecognition normally occurs (para. 5.26) [eae ie oes 1 + Foran asset - when control is lost + Fora liability - when there is no longer a present obligation The requirements for derecognition aim to faithfully represent both (para. 5.27): (o) Any assels and liabilities retained after derecognition; ond (b) The change in the enfily’s assels and liabilities as a result of derecognition. To give a faithful representation, it may also be necessary to provide explanatory information and/or to present separately related income/expenses and retained components in the financial statements 10 BPP1: The Feacilsapering komewerk 2.10 Chapter 6: Measurement The Conceplual Framework describes the different measurement bases used in IFRSs |The or 0 ‘and the factors to consider in selecting @ measurement basis. IFRSs use a mixed ( Sccnronon:Roerto tho measurement approach, which means thot different measurement bases ore echnical ace used for different classes of elements. This is opposed to a single measurement basis |Mestranenf writs by Ihe SBR exornng tom, in which all items are measured using the same basis, eg all items are measured at |ovistle niin Son fair value, The IASB believes (para. BC6.10} that a mixed measurement approach [Resouces secon ofthe provides the most useful information to primary users of financial statements. [ACCA website | Ther ore several areos of Individual IFRSs specify which particular measurement basis should be used in most circumstances. The measurement principles in the Conceptual Framework will therefore mainly be used by the IASB to develop Standards. However, preparers of financial statements can use the measurement principles to help them choose a measurement basis where o choice is offered in a Standard. 2.10.1 Measurement bases There are two main measurement bases: . Historical cost; and . ‘Current value (which includes fair value, value in use, fulfilment value and current cost). Historical cost for an asset is the cost that was incurred when the asset was acquired or created and, for a liability, is the value of the consideration received when the liability was incurred. Historical cost is updated as the asset is consumed or as the liability is settled. Additionally, if an asset carried ot historical cost suffers an impairment loss, the historical cost carrying amount of the asset is adjusted to reflect that impairment loss. Current value uses information available cat the reporting date to update the carrying amounts of assets and liabilities. (a) Fair value: Fair valve is the price that would be received to sell an asset, or paid to transfer a cms| ability, in an orderly transaction between market participants at the measurement date (para. 6.12 "| and IFRS 13: Appendix A*), | Value in use: Value in use is the present value of the cash flows, or other economic benefits, that | an entity expects to derive from the use of an asset and from its ulimate disposal (para. 6.17}. Fulfilment value: Fulfilment value is the present value of the cash, or other economic resources, | that an entity expects fo be obliged to transfer as it fulfils « liability (para. 6.17) | Current cost of an asset: The current cost of an asset is the cost of an equivalent asset at the measurement date, comprising the consideration that would be paid at the measurement date plus | the transaction costs that would be incurred at that date (para. 6.21) | Current cost of liability: The current cost of a liability isthe consideration that would be | received for an equivalent liability at the measurement date minus the transaction costs that would be | incurred at that date (para. 6.21) Value Measurement. | * The definition of fair value in the Conceptual Framework is consistent with that in IFRS 13 Fair ‘Current cost and historical cost are both entry values, they ‘reflect prices in the market in which the entity would acquire the asset or would incur the liability’ (para. 6.21). Fair value, value in use and fulilment value ore exit values. Foir valve reflects the perspective of market participants, whereas valve in use and fulfilment value reflect entity-specifie assumptions (para. 6.19] BPP LEARNING MEDIA2.10.2 Factors to consider in selecting a measurement basis (1) Nature of information provided (paras. 6.23-6.42) Different information is produced by applying a different measurement basis to the same asset {or other element). So it is important to consider what information is produced by a measurement basis in both the statement of financial position and the statement of profit or loss. Which one is more important will depend on the particular circumstances. Summary of information about assets provided by particular measurement bases ete eau Pore aes Ce Cee cig or loss UTE TUtc-iR<-C19) Historical cost (including transaction | Not recognised, except to reflect an costs), to the extent unconsumed or | impairment {for financial assets— uncollected, and recoverable income and expenses from chang estimated cash flows) Price that would be received to sell the asset (without deducting transaction costs on disposal) Piel Reflected in income and expenses from changes in fair value Present value of future cash flows from the use of the asset and from its | from changes in valve in use ulimote disposal (after deducting present value of transaction costs on disposal) | Nolte Current cost (including transaction Income and expenses reflecting the costs), to the extent unconsumed or | effect of changes in prices (holding uncollected, and recoverable gains and holding losses) (Reed 2] Usefulness of information provided To be useful, the information provided by a measurement basis must be relevant and a faithful representation. PO CLC cet cd How the asset/liability contributes to future cash flows, eg historical cost ‘or current cost is likely to provide relevant information for assets (eg property, plant ‘and equipment) which indirectly contribute to future cash flows when used in combination with other assets. The characteristies of the asset or liability (and related income/expense}, eq if the value of an asset is subject to market fluctuations then fair value may be more relevant than historical cost. (pora. 6.49) P League MEDIA1: The fnnciol reporting Fomework eee Pec a — Measurement inconsistency. Using Measurement uncertainty, which different measurement bases for related arises when a measure must be estimated ‘assets and liabilities can resul in and cannot be determined by observing measurement inconsistency (accounting prices in an active market. High levels of mismatch). More useful information may be measurement uncertainty may resul provided by selecting the same measurement information that is not a faithful basis for related assets and lil representation, (para. 6.58) Usually, the most efficient way of applying the fundamental qualitative characteristics in order to select o measurement basis is to follow the steps given in section 2.6.2. (3) Other factors * Gost constraint: do the benefils of the information provided by the selected measurement basis jsiiy the costs? (para. 6.64) + Enhancing qualitative characteristics: eg consistently using the same measurement basis aids comparability, verifiability is enhanced by using measures that can be independently corroborated (paras. 6.65, 6.68) 2.11 Chapter 7: Presentation and disclosure Effective communication of information in financial statements makes information more contributes to a faithful representation of financial position and performance and enhances understandability and comparability of information. Effective presentation and disclosure requires (para. 7.2: Focusing on presentation Classifying information and disclosure objectives by grouping similar items information appropriately and principles rather ‘and separating dissimilar 0 that it is not obscured than on rules items by unnecessary detail or excessive aggregation 2.11.1 Profit or loss and other comprehensive income (paras. 7.16-7.19) The statement of profit or loss is the primary source of information about an entity's performance. In developing Standards, the IASB will, in principle, require all income and expenses to be included in the statement of profit of loss. However, in exceptional circumstances, the IASB may decide that income or expenses arising from a change in the current value of an asset or liability should be clossified as other comprehensive income (OCI). This will only be the case where it provides more relevant information or a more faithful representation. Similarly, in principle, OCI is reclassified to profit or loss in a future period when doing so results in the provision of more relevant information or o more faithful representation. However, if for some items there is no clear basis for determining when the appropriaie future period would be, the IASB may, in developing Standards, decide that specific items of OCI should not be reclassified BPP 3Sioteholder perspecive 2.11.2 Stakeholder perspective Investors tend to focus their analysis on profit and loss rather than OCI, and many accounting ratios cre calculated using profit or loss for the year, rather than total comprehensive income. As such, the classification of income and expenses as profit or loss or os OCI can potentially have a significant effect on how an investor perceives the performance of the entity ‘A common misconception is that profit or loss is for realised gains and losses, and OCI for unrealised. However, this distinction is itself controversial and therefore of limited use in determining the profit or loss versus OCI classification, It could be argued that OCI is defined in opposition to profit or loss — that is, items that are not profit or loss ~ or even that it has been used as a ‘dumping ground’ for items that entities do not wish to report in profit or loss. Reclassification from OCI has been said to compromise the reliability of both profit or loss and OCI In 2015, as a result of a joint outreach investor event, the IASB was asked to define what financial performance is, clarify the meaning and importance of OCI and how the distinction between profit or loss and OCI should be made in practice (IFRS Foundation, 2015, p3, 5). The revised Conceptual Framework does go some way to address these issues, however, it does not define the concepts of profit or loss so some of these questions remain unanswered. 2.12 Chapter 8: Concepts of capital and capital maintenance The concept of capital maintenance links the concepts of capital and the concepts of profit: © The measurement of profit depends on the method used to valve capital. * Profit is only generated if the capital at the end of the reporting period is greater than that at the start, ie only inflows of assels in excess of amounts needed to maintain capital are profits. Two concepts (poras. 8.1-8.9): + Capital refers to the net assets or equity Capital refers to the productive of the entity capacity of the entity. + Profit is made ifthe financial amount of Requires the use of the current cost net assels at the end of the reporting basis of measurement. period is greater than the financial amount atthe start, after excluding contributions from, and distributions to, owners. Profit is made if the operating capability at the end of a reporting period is greater than that at the start, ie over and above increases due to changes in prices. = If primary users ore concerned mainly with the maintenance of nominal invested capital, then the financial concept of capital should be used. Most entities adopt @ financial concept of capital. + I primary users are concerned mainly with the operating capability of the entity, « physical concept of capital should be adopted. 4 BPI LEARNING MEDIA1: The finan reporting Fomewerk 2.13 Current IFRSs and the revised Conceptual Framework All existing IFRSs were written before the revised Conceptual Framework was issued (although some, such as IFRS 16 leases, were under development at the same time as the revised Conceptual Framework). As such there are inconsistencies between the Standards and the Concepival Framework in terms of the definitions and other criteria used For example, IAS 38 Intangible Assets retains the 2010 Conceptual Framework definition of an asset which specifies that future economic benefits are expected to flow to the entity. In the revised Conceptual Framework, an asset is a right with the potential to produce economic benefits. This is not problematic in this instance becouse: (1) The criteria in IAS 38 are more specific than those in the Conceptual Framework, and are therefore not inconsistent with it (2) The Concepival Framework is not an IFRS and does not override the requirements of an IFRS {including IAS 38). The 2010 Conceptual Framework definitions of assets and liabilities are also retained in IAS 37 Provisions, Contingent Liabilities and Contingent Assets and IFRS 3 Business Combinations. Illustration 4 Cryptocurrenci Cryptocurrencies are a form of digital currency which de not exist in physical form, Bitcoin and Ethereum are two of he best known crypiocurrencies. ~ background Cryptocurrencies have had a disruptive effect on traditional banking systems as they are not controlled by a central bank in the same way as conventional currencies. This lack of control has led to dramatic fluctuations in the value of cryptocurrencies as they are lraded and exchanged around the world, Cryptocurrencies work in similar way to conventional currencies in as much that they can be used | to pay for (and to receive payments for) goods and services purchased online. Transactions made | using cryptocurrencies make use of blockchain technology, which helps to ensure that all | transactions made between participants are verified and recorded. | Accounting for eryptocurrencies ‘accounting standards dealing with an issue, accountants should develop an accounting policy | There are no accounting standards that specifically deal with cryptocurrencies. When there are no | relating fo the matter that can be applied and disclosed. | In developing the policy, IAS 8 Accounting Policies, Accounting Estimates and Errors requires that the directors consider the following hierarchy: (a) IFRSs dealing with similar issues (b) The Conceptual Framework (c)__ The most recent pronouncements of other national GAAPs based on a similar conceptual framework and accepted industry practice Current practice The current discussion on eryptocurrencies from professional bodies and accountancy firms focuses ‘on which IFRS can be applied to this area. They generally agree that cryptocurrencies: * Do not meet the definition of cash (per IAS 32 Financial Instruments: Presentation, they are not a ‘medium of exchange! as they are not generally accepted as legal tender) BPP 5| + Donot meet the definition of financial assels {as they do not give a contractual right to receive cosh or other financial assets) * Donot have any physical substance and therefore cannot be any form of tangible assets (although for commodity broker-raders they may meet the definition of inventories but this is beyond the scope of SBR} | + Ate therefore probably intangible assets. Cryptocurrencies appear fo meet the criteria in | AS 38 Intangible Assets in that they are identifiable, they are non-monetary (as they do not result in fixed or determinable amounts of money) and do not have physical substance. | A recent report by EY commented that: 'The nuanced, constantly evolving nature of the crypto-asset | phenomenon, coupled with the lack of relevant formal accounting pronouncements, presents complex | challenges for preparers of financial information." (2018, p15) The challenges presented by this area of accounting are complex and the current discussion focuses cn applying existing IFRSs rather than applying the Conceptual Framework. This is expected as the ASB anticipates the use of the Conceptual Framework by a preparer to develop an accounting | policy to be rare. Ethics note Ethics is @ key aspect of the syllabus for this paper. Ethical issues con be examined in any part of the paper and at least one question will include ethical issues for discussion. A revision of ethical | principles from ACCA's Code of Ethics and Conduct is covered in Chapter 2 ~ Professional and ethical duty of the accountant, You need to be alert for accounting treatments that may be being used to achieve o particular accounting effect euch as overstating revenve, proft or assets] Some potential ethical issues that could come up include: | © Misuse of "true and fair override’ (IAS 1) when it is not appropriate to use it + Application of Conceptual Framework principles which result in a different accounting treatment fo thet required by a Standard (the Standard always takes precedence)|The Fnoncal poring remawork Polite) eed 1. Fair presentation and compliance Sea ac jl In order to achieve fair presentation, on eniy must | comply wit | + lnverotionelFinencal Reporting Standards (FRSs,IASs cond IFRIC Interpretations}, +The Concept! Framework for Financial Reporting 2. The Conceptual Framework for Financial Reporting Purpose of the Conceptual Framework: ‘+ Assist ASB o develop FRSs tha ore bosed on consent concepts ‘+ Assist preparers to develop accountng policies in cases where there i no applicable IFRS or whe policy exists; ond ‘+ Assist al inthe understonding ond interpretation of IFRS Content 1. The objective of general purpose financial reporting "To provide financial information cbou! the reporting ently that is uiefl to existing ond potential investors, lenders ond other creditors in making decisions about providing resources to the enity’ 2. Qualitative characterises of usehl financial information + Fundamental qualitative characteristics: relavance ond faihfl representation + Enhancing qualitative characarisics: comparably, verfikiliy, timelines, undersondbilty ‘+ Subject o cost constraint 3. Financial statements and the repodting entity ‘+ Objective of financial stlements: "To provide financial information about the reporting eniy’s asses, liabilies, equity, income ond expenses that is useful io users of financial statements in assessing the prospects for future net cash inflows to he reporing enty and in assessing management's stewardship ofthe entity's economic resources! + Going concern is assumed ‘+ Reposting entity can be part ofan enti, « single ently or ¢ group of entities 4. The elements of financial stalomenis ‘+ Asset: 'a present economic resource controlled by the ently asa result of past events! ‘+ Lichiliy:'c present obligation of he entity fo transfer an economic resource os © res of past events’ + Economic resource: 'e Fight that has he petential fo produce economic benefits! + Income: creases in asses, or decroases in liailios, hat result in inereaises in equity, char thon those relating © cortibutons fom holders of equity coins! + Expenses: Decrease in assy, or increases in liabilities, that cost reletng to cistibuions to holders of equiy claims’ 5. Recognition and derecognition Recognise an asset, ably, income, expense or equity when: 1. ltmeets the definition of on element 2. provides relevant information that iso faithful representation ot cos! hat does not cuweigh benefits Derecognise: + An asset wheo control is lost + Alliability when there is ne longer o present obligation 6. Meosurement + May be ot = Hisrical cost = Current valve includes fir value, value in vse, fulfilment value and curent cos!) Foctots to consider in selecting « measurement bass/bases + Nature of information provided by the basis ‘+ Must be useul- relevant and faithful representation + Alto consider cost condkint ond enhancing quate characterises he ©) v decreases in equity, other thon those. wom ED)1: The Francialreparting omework Des Fair presentation and compliance IFRSs | Im order to achieve fair presentation, an entity must comply with: + Iniernational Financial Reporting Standards (IFRSs, IASs and IFRIC Interpretations) * The Conceptual Framework for Financial Reporting The Conceptual Framework The Conceptual Framework establishes the ebjectives and principles underlying financial statements and underlies the development of new standards. The purpose of the Conceptual Framework isto: © Assist IASB fo develop IFRSs that are based on consistent concepts ‘+ Assist preparers to develop accounting polici cor where a choice of policy exists; and in cases where there is no applicable IFRS © Assist all in the understanding and interpretation of IFRSs The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. Useful information is information that is relevant and a faithful representation of what it purports to represent. ‘An element should be recognised in the financial statements when: 1. Itmeets the definition of an element 2. Itpprovides relevant information that iso faithful representation at a cost that does not ‘outweigh benefits A recognised element should be derecognised when: © Control of an asset is lost ‘There is no longer a present obligation for a liability Elements may be measured at historical cost or current value, as specified in each particular IFRS, The IASB will consider certain factors when determining the most appropriate measurement basis for « Standard. BPP ° LEARNING MEDIAFurther study guidance Further reading You should make fime to read the following arlicles which were written by a member of the SBR ‘examining team. They ore available in the study support resources section of the ACCA website: Profit, loss and other comprehensive income Concepts of profit or loss and other comprehensive income Bin the clutter (Reducing disclosures) ‘Measurement www.accaglobal.com 20 wenn EDProfessional and ethical duty of the accountant Learning objectives ‘On completion of this chapter, you should be able to: syllabus reference no. ‘Appraise and discuss the ethical and professional issues in advising on corporate Alla) reporting. ‘Assess the relevance and importance of ethical and professional issues in Allb) | complying with accounting standards. Appraise the potential ethical implications of professional and managerial A2la) decisions in the preparation of corporate reports ‘Assess the consequences of not upholding ethical principles inthe preparation of | A2(b) corporate reports. Identify related parties and assess the implications of related party relationships in Ale) the preparation of corporale reports. Discuss and apply the judgements required in selecting and applying accounting ciiid) policies, accounting for changes in estimates and reflecting corrections of prior period errors. Exam context Ethical issues will always be tested in Section A Question 2 of the exam, which will cover @ number of scenarios. Two professional marks are allocated to this question. However, ethics could also feature in any question in the exam. |AS 24 Related Party Disclosures aims to improve the quality of information provided by published ‘accounts and also to strengthen their stewardship roles. Related parties could also come up outside the context of ethics os port of a Section B scenario question. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors was covered in your earlier ies. However, given the importance of ethics to the SBR exam, we set it in the context of ethical mas in financial reporting,Chapter overview Professional and ethical Cree 1. Professional and 3. Accounting carer 2. Related parties ‘and prior period errors 2 BPP LEARNING MEDIA2: Profesionol and ethical dy ofthe aecourion! 1 Professional and ethical issues 1.1 What are ethics? Ethics are a code of moral principles that people follow with respect to what is right or wrong. Ethical principles are no! necessarily enforced by law, although the law incorporates moral judgements, (Murder is wrong ethically, and is also punishable legally.) 1.2 Ethical principles in corporate reporting ACCA's Code of Ethics and Conduct identifies the fundamental principles most relevont to ‘accountants in business involved in corporate reporting (ACCA Rulebook, 2018: p.273}). eee eee Integrity To be straightforward and honest in all professional and business relationships Objectivity Not to allow bias, conflict of interest or undve influence of others to override _ professional or business judgements Professional To maintain professional knowledge and skill atthe level required to ensure competence and that a client or employer receives competent professional service based on due care current developments in practice, legislation and techniques and act diligently aand in accordance with applicable technical and professional standards, Confidentiality | To respect the confidentiality of information acquired as a result of | professional and business relationships and, therefore, not disclose any such information to third parties without proper and specific authority, unless there is a legal or professional right or duty to disclose, nor use the information | forthe personal advantage of he professional accountant or third partes Professional To comply with relevant laws and regulations and avoid any action that behaviour | discredits the profession 1.3 Threats to the fundamental principles ACCA's Code of Ethics and Conduct identifies the following categories of threats to the fundamental principles (ACCA Rulebook, 2018: p.275). Ait Cray Selfinterest A financial or other interest wi judgement or behaviour. inappropriately influence the accountants Seltreview The accountant will not appropriately evaluate the results of a previous judgement made or service performed by themselves or others within their firm, on which the accountant will rely when forming a judgement as part of providing a current Advocacy A threat that the accountant promotes a client's or employer's position to the point that their objectivity is compromised. Familiarity Due to a long or close relationship with a client or employer, the accountant will be 100 sympathetic to their interests or to accepting of heir work Intimidation | The accountant will be deterred from acting objectively because of acl or perceived pressures, including attempts to exercise undue influence over the accountant BPP 23Where the above threats exist, appropriate safeguards must be put in place to eliminate or reduce them to an acceptable level. Safeguards against breach of compliance with the ACCA Code include: (o) Safeguards created by the profession, legislation or regulation (eg corporate governance) (b} Sofeguards within the client/the accountancy firm's own syslems and procedures, (] Educational training and experience requirements for entry into the profession, together with Continuing professional development 1.4 Ethical considerations in jancial reporting In preparing financial statements or advising on corporate reporting, © variety of ethical problems may arise: (c) Professional competence is clearly a key issue when decisions are made about accounting treatments and disclosures. Company directors and their advisers have @ duty to keep up to date with developments in IFRSs and other relevant regulations. Circumstances that may threaten the ability of accountants in these roles to perform their duties with the appropriate degree of professional competence and dve care include: + Insufficient time + Incomplete, restricted or inadequate information + Insulficient experience, training or education + Inadequate resources, (b) Objectivity and integrity may be threatened in a number of ways: + Financial interests, such as profitrelated bonuses or share options ‘+ Inducements to encourage unethical behaviour ACCA's Code of Ethics ond Conduct identifies that accountants may be pressurised, either exiernally or by the possibility of personal gain, to become associaied with misleading information. The Code clearly states that members should not be associated with reports, returns, communications or other information where they believe that the information: © Contains a materially misleading statement; Contains statements or information furnished recklessly; © Hos been prepared with bias; or © Omls or obscures information required to be included where such omission or obscurity ‘would be misleading, 1.4.1 IAS 1 and fair presentation ACCA's Code of Ethics and Conduct forbids members from being associated with ‘misleading’ information, but IAS 1 Presentation of Financial Statements goes further, and requires that an entity must ‘present fairly’ ils financial position, financial performance and cash flows. ‘Present fairly’ is explained as representing faithfully the effects of transactions. In general terms this will be the case if IFRS is adhered to. IAS 1 states thot departures from international standards are only allowed: + Inextremely rare cases; or * Where compliance with IFRS would be so misleading as to conflict with the objectives of financial statements as set out in the Conceplual Framework, that is, to provide information ‘cbout financial position, performance and changes in financial position that is useful to « wide range of users.2: Profesional and ical dot of the accountant IAS 1 expands on this principle as follows: + Compliance with IFRS should be disclosed. + Financial statements can only be described as complying with IFRS if they comply with all the requirements of IFRS. * Use of inappropriate accounting policies cannot be rectified either by disclosure or explanatory material ‘Compliance! is necessary, but not sufficient for fair presentation. ‘Fairness’ is an ethical concept, directed at giving the users of financial statements the opportunity fo see the full picture of an entity's position and performance. 1.5 Framework for decisions ACCA has developed an overall framework to help its members make ethical decisions in a wide range of circumstances: ‘What is the real issue? ) ss ore er rnmratantnmnmmeacemeene st oe ¥ Are there threats to compliance with the fundamental principles? | ¥ oe ox ‘Are the threats cleerly significant? + ‘Are there safeguards thot will) climinate the threats or reduce them to an acceptable level? } ¥ Can you face yourself in the mirror? CS j Mlustration 1 Ethical issues ()_ ACCA's Code of Ethics and Conduct identifies a number of threats to its fundamental ethical principles. Jake has been put under significant pressure by his manager to change the conclusion of a report he has written which reflects badly on the manager's performance. Required Which ethical threat is Jake facing? BPI 25FER cle (b] Which of the following might (or might be thought to) affect the objectivity of providers of professional accounting services? | Failure to keep up to date with continuing professional development (CPD) A personal financial interest in the client's affairs negligent or reckless with the accuracy of the information provided to the client | Solution (2) The answer is intimidation, as indicated by ‘significant pressure'. (b) Failure to keep up to date with CPD | : A personal financial interest in the client's offairs mz Being negligent or reckless with the accuracy of the information provided to the cleat A personal financial interes in the client's affairs will affect objectivity. Failure to keep up to date on continuing professional development is an issue of professional competence, while providing inaccurate information reflects upon professional integrity. | Performance objective 1 of the PER requires you to oct with integrity, objectivity, professional competence and due care and confidentiality. You can apply the knowledge you gain in this chapter to help you full this objective. 1.6 Exam scenarios The exam may present you with a scenario, typically containing an array of detail much of which is potentially relevant. The problem, however, will be one or other of two basic types. fo} A manager/superior has requested an employee/subordinate to perform an action which is ‘not justified by accounting standards or is not morally acceptable For example, the Managing Director (A) wants the Financial Accountant (8) to make a change in accounting policy (C), where this is not justified by IAS 8 (0). (b} Alternatively, the problem may be that the Managing Director has already performed an action which is not justified by accounting standards or is not morally acceptable, an employee or external auditor has discovered this action and is now required to respond appropriately to the issue. 6 BPP2: Profesional and ethical diy ofthe eccouton! llustration 2 Takeover Your Finance Director has asked you fo join a team that is planning a takeover of one of your ‘company's suppliers. An old schoo! friend works as an accountant for the supplier. The Finance Director knows this, and has asked you to try and find out ‘anything that might help the takeover succeed, but it must remain secre!” Solution ‘There are three issues here. | First, you have a conflict of interest as the Finance Director wants you to keep the takeover a secret, but you probably feel that you should tell your friend what is happening as it may affect their job. | Second, the Finance Director is asking you to deceive your friend. Deception is unprofessional behaviour and is in breach of your ethical guidelines. The situation is presenting you with two conflicting demands. Its worth remembering that no employer can ask you to break your ethical rules. | Finally, the request to break your own ethical guidelines constitutes unprofessional behaviour by the | Finance Director. You should weigh up whether blowing the whistle internally would prove effective; | if not, consider reporting them to their relevant professional body. Activity 1: Ethical issues ( Kelshall iso public limited company. The current year end is 31 December 20X5. The Finance Director is remunerated with a profitrelated bonus and share appreciation rights. (Share appreciation rights mean that the director will become eniiled to future cash payment based on the increase in the enliy's share price from a specified level over a specified period of ime.) Kelshall owns a significant number of owner-occupied properties which historically have been held under the revaluation model. Recently, due to an economic downium, property prices have been falling. The Finance Director is proposing to switch from the revaluation model fo the cost model Shorlly before the year end, the CEO of Kelshall, who holds a large number of share options, mentioned to the Finance Director that he was hoping to relire within the next year and was hoping to maximise Kelshall's share price by his retirement date. Required ) Discuss the view that the board of directors should be remunerated with profitrelated pay and shore-based payment to align directors! and stakeholders" interests. {b) Discuss whether the Finance Director of Kelsholl would be acting ethically if he revised the accounting policy for its properties from the revaluation model to the cost model. {c) Discuss whether the CEO's comment to the Finance Director is ethical and what action, if any, the Finance Director should take Solution BPP1.7 The role of moral philosophy and theory in eft 1.7.1 Ethical theories Manton te theories ely if rlvort nf ernest obo prosieal (c} Do ethics change over time and place? Snr. + Ethical relativism = YES (ethics vary between different ages & different communities) + Ethical absolutism = NO [some courses of action are always right, others are always wrong) For example, a total ban on meateating would be ethically absolutist, while allowing it where the animal has been reared in a ‘cruelty-ree' environment would be ethically relativst (b) Lawrence Koblberg's thought processes people use when making ethical decisions From less ‘ethically developed’ individuals to more ‘ethically developed’ individuals {You should act ethically because you'll be punished if you don't. {i} You should act ethically because your country's laws say you should. (ii) You should act ethically because it's always right to do so, no matter what the consequences and cosis are fo you personally. (Kohlberg, 1981) 1.7.2 Influences on ethics {@) Individual factors ‘Age and gender Notional and cultural beliefs Education and employment Psychological factors How much influence individuals believe they have Personal integrity Moral imagination (level of awareness of variety of moral consequences of actions) (b) Situational factors * Issuerelated factors — nature of issue and how it is viewed in the organisation © Contextrelated factors ~ expectations and demands that will be placed on people working in an organisation (eg systems of reward, authority, bureaucracy, work roles, organisational culture) Essential reading See Chapter 2 section 1 of the Essential Reading, available in Appendix 2 of the digital edition of | the Workbook, for more detail on influences on ethics. | 2 BPI2: Proesional ond hicl dt of he accountnt 1.2.3 Social responsibility and businesses Some argue that the only social responsibility of a business is to maximise shareholder wealth because: + If the business is owned by the shareholders the assets of the company are, ullimately, the shareholders" property. It is for the shareholders to determine how their assets should be used, and they would generally wish ito be used fo maximise their returns. + Maximising wealth is the best way that society can benefit from a business's activities, eg increasing tax revenue. (On the other hand, good corporate citizenship may be good for business performance because of the attitude of other stakeholders: + Customers may prefer fo buy from a company that is perceived as being socially responsible. + Employees may prefer to work for such @ company. * Investors may prefer such a company, as shown by the existence of ethical funds. * Constructive engagement with the community/country in which a business operates may result in it being seen as a good long-term investment. Essential reading See Chapter 2 section 2 of the Essential Reading, available in Appendix 2 of the digital edition of the Workbook, for more detail on social responsibility and businesses. 1.2.4 Ethics in organisations Organisations contain a variety of ethical systems: + Personal ethics (eg from upbringing, religious beliefs, political opinions, personality) + Professional ethics [eg ACCA's Code of Ethics and Conduch + Orgonisational culture (eg ‘customer fist) + Orgenisotion systems (eg ethics may be contained in a formal code reinforced by ‘values’ statement} 1.2.5 Approaches to managing ethics within organisations (o) Compliance based approach This ensures that the company acts within the letter of the law and that violations are prevented, detected and punished. {b) _ Integrity-based approach Wider remit than compliance based approach. This combines concern for the law with emphasis on managerial responsibility for ethical behaviour. See Chapter 2 section 3 of the Essential Reading, available in Appendix 2 of the digital edition of the Workbook, for more detail on managing ethics within organisations and an additional question on ethical issues. 22 Related parties 2.1. Related parties Related party relationships and transactions are a normal feature of business. However, there is a general presumption that transactions reflected in financial statements have been carried out on an arm's length basis, unless disclosed otherwise ‘Arm's length means on the same terms as céuld have been negotiated with an external party, in ‘which each side bargained knowledgeably and freely, unaffected by any relationship between them. Identifying the related party relationship will be more important in your exam than long lists of disclosures, so there is no shortcut to learning the definition of related party. koum| financial statements (the ‘reporting entity’) a | Related party (IAS 24): A person or entity that is related to the entity that is preparing its | [a] Aperson or a close member of that person's family is related to a reporting entity if that | person: (i) Has control or joint contrel over the reporting entity; (i) Has significant influence over the reporting entity; or {ii) 1s a member of the key management personnel of the reporting enlty or of a parent of the reporting entity. (b) An entity is related to a reporting entity if any of the following conditions apply: {i) The entity and the reporting entity are members of the same group (which means | that each parent, subsidiary and fellow subsidiary is related fo the others) | | (i) One entity is an associate* oF joint venture” of the other entity (or an associate or icint venture of a member of a group of which the other entity is a member). |i) Both entities ore joint ventures* of the same third party. | venture" of @ third entity and the other entity is an | liv) One entity iso j associate of the third entity. the reporting entity or an entity related to the reporting entity. (vi) The entity is controlled or jointly controlled by a person identified in (a) | (vil) A person identified in (a)(]) has significant influence over the entity or is @ member | of the key management personnel of the entiy (or of a parent of the entity) | | (vii) The entity, or any member of a group of which itis « part, provides key management personnel servi reporting enity 5 fo the reporting ently or the parent of the | | (v)_ The entity is a post-employment benefit plan for the benefit of employees of either | including subsidiaries of the associate or joint venture {IAS 24: para. 9) 20Stokeholder perpectve 2: Profesionel and ethical diy ofthe acount Close members of the family of a person are defined (IAS 24: para. 9) as ‘those family members who may be expected lo influence, or be influenced by, that person in their dealings with the entity and include: That person's children and spouse or domestic partner; Children of that person's spouse or domestic partner; and Dependants of that person or that person's spouse or domestic partner." In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form. — 2.2 Not related parties is there contol or influence The following are not related parties (IAS 24: para. 11): (a) Two entities simply because they have a director or other member of key management personnel in common, or because & member of key management personnel of one eniity has significant influence over the other enlity; Two venturers simply because they shore joint control over a joint venture: (i) Providers of finance; {ii) Trade unions; (iii) Public utilities; and {iv Deparments and agencies of a government; simply by virtue of their normal dealings with an entity {even though they may affect the freedom of action of an entity or porticipate in its decisionmaking process); and ‘A customer, supplier, franchisor, distributor, or general agent with whom an entity transocts a significant volume of business, simply by virtue of the resulting economic dependence 2.3 Disclosure IAS 24 requires an entity to disclose the following: (a) (b) (e) The name of its parent ond, if different, the ultimate controlling party irrespective of whether there have been any transactions. Total key management personnel compensation (broken down by category) If the entity has had related party transactions: (i) Nature of the related party relationship {i) Information about the transactions and outstanding balances, including commitments and bad and doubtful debts necessary for users to understand the potential effect of the relationship on the financial statements No disclosure is required of intragroup related party transactions in the consolidated financial statements. Items of @ similor nature may be disclosed in aggregate except where separate disclosure is necessary for understanding purposes. 2.3.1 Stakeholder perspective IFRS Practice Statement 2 Making Materiality Judgements makes it clear that disclosure is not required if the information provided by that disclosure is not mater I. That is, it will not influence the decisions made by primary users on the basis of information provided in the financial statements. Determining whether information is material involves judgement. Practice Statement 2 provides guidance for preparers of financial statements in making this judgement, which includes assessing both quantitative and qualitative factors and the interaction between them. This guidance is applicable to all IFRSs, including those that provide a list of 'minimum disclosures’, such as IAS 24, See Chapter 20 for further details and examples. BPP a LEARNING MEDIA2.4 Government-related entities (paras. 24-26) IF the reporting entity is a government-related entity (je a government hos control, joint control cr significant influence over the entity], an exemption is available from full disclosure of transactions, outstanding balances and commitments with the government or with other entities related to the same government However, if the exemption is applied, disclosure is required of: (a) The name of the government and nature of the relations! {b) The nature and amount of each individually significant transaction (plus a qualitative or quantitative indication of the extent of other transactions which are collectively, but not individually, significant) ity 2: Related parties (1) Leoval is @ private manufacturing company that makes car parts. Itis 90% owned by Cavell a listed entity. Cavelli is a long-established company controlled by the Grassi family through an agreement which pools their voting rights. Leoval regularly provides parts at morket price fo another company in which Francesca Cincetfi has a minority (23%) holding. Francesca Cincetti is the wife of Roberto Grassi, one of the key Grassi family shareholders that controls Cavell Leoval advances inlerestiree loans to its employees in order for them to purchase annual season fickels to get to work. The loan repayment is deducted in 12 instalments from the employees’ salaries. Cavelli charges Leoval an annual management services fee of 20% of profit before tax (before ‘accounting for the fee). 30% of Leoval’s revenue comes from transactions with @ major car maker, Piat Leoval provides a defined benefit pension plan for ils employees based on 2% of final salary for each year worked. The plan is currently overfunded and so Leoval has not made any contributions during the current year. ‘Assume that all the above transactions are material in both Leoval's separate financial statements and consolidated financial statements. Required Explain whether disclosures are required by Leoval for each of the above pieces of information by IAS 24 Related Party Disclosures. Solution 22 BPP2: Profesional ond eicl dt of the accountant Activity 3: Related parties (2) Discuss whether the following events would require disclosure in the financial statements of the RP Group, a public limited company, under IAS 24 Related Party Disclosures. The RP Group, merchant bankers, has a number of subsidiaries, associates and joint ventures in its group structure. During the financial year to 31 October 20X9 the following events occurred: (o) RP agreed to finance a management buyout of a group company, AB, a limited company. In addition to providing loan finance, RP has retained a 25% equity holding in AB ond has a main board director on the board of AB. RP received management fees, interest payments and dividends from AB. (b) On 1 July 20X9, RP sold a wholly owned subsidiary, X, a limited company, to Z, a public limited company. During the year RP supplied X with secondhand office equipment and X leased its factory from RP. The transactions were all contracted for at market rates. (c) The postemployment benefit plan of RP is managed by another merchant bank. An invesiment manager of the RP postemployment benefit plan is also a non-executive director of the RP Group and received an annual fee for his services of $25,000. RP pays $16m per annum into the plan and occasionally transfers assets into the plan. In 20X9, property, plant and equipment of $10m were transferred into the plan and a recharge of adminiskrative costs of $3m was made. BPP 2a Key tem 3 Accounting policies, estimates and prior period errors 1 Accounting policies | Accounting policies: The specific principles, bases, conventions, rules and practices applied by | an entity in preparing and presenting financial statements (IAS 8: para. 5). IAS 8 requires that an enfly selects its accounting policies by applying the relevant IFRS (IAS 8: para. 7) Some standards permit « choice of accounting policies (eg cos! and revaluation models). In the absence of an IFRS covering a specific transaction, other event or condition, management uses its judgement to develop an accounting policy which results in information that is relevant to the economic decisionmaking needs of users and reliable, considering in the following order WAS 8: para. 10} (a) _IFRSs dealing with similar and related issues; (b) The Conceptual Framework definitions of elements of the financial statements and recognition criteria; and (€] The most recent pronouncements of olher national GAAPs based on a similar conceptual framework and accepted industry practice (providing the treatment does not conflict with extant IFRSs or the Conceptual Framework). A change in accounting policy is only permitted if the change [IAS 8: pra. 14): + Isrequired by an IFRS; or ‘+ Results in financial statements providing reliable and more relevant information The accounting treatment for a change in accounting policy is |AS 8: para. 19, 22) Prior period adjustment * Adjust opening balance (apply new policy of each affected retrospectively unless component of equity | transitional provision of | 4 2 | IFRS specifies otherwise) esr ones 3.2 Accounting estimates As a result of the uncertainties inherent in business activities, many items in financial statements cannot be measured with precision but can only be estimated, Estimation involves judgements based on the latest reliable information (IAS 8: para. 32) For example, estimates may be required of (IAS 8: para. 32): © Bad debis; * Inventory obsolescence; © The fair value of financial assets or financial libilities; + The useful lives of, or expected pattern of consumption of the future economic benefits embodied in, depreciable assets; and * Warranty obligations. Change in accounting estimate: An adjustment of the carrying amount of an asset or a liabi cr the amount of periodic consumption of an asset, that results from the assessment of the present status of, and expected future benefits and obligations associated with assets and liabilities. (IAS 8 para. 5} a BPP2: Profesional and ethical dey of he acounion! "An estimate may need revision if changes occur in the circumstances on which the estimale wos based or as a result of new information or more experience. By is nature, the revision of an estimate does not relate to prior periods and is not the correction of an error." (IAS 8: para. 34) The accounting treatment for a change in accounting estimate is (IAS 8: para, 36-38): * Adjust in the period of change (and in future Apply the change — periods ifthe change prospectively >» affects both) | # No prior period adjustment 3 Prior period errors IB) Prior period errors: Omissions from, and misstatements in, the entity's financial statements for one or kKeyein | ™OF® prior periods arising from a failure to use, oF misuse of, reliable information that: (a) Was available when the financiol statements for those periods were authorised for issue; and (b] Could reasonably be expected fo have been obtained and token into account in the preparation and presentation of those financial statements. (IAS 8: para. 5} They may arise from (0) Mothematical mistakes {b) Mistakes in opplying accounting policies (c) Oversights (d)__ Misinterpretation of facts (e} Fraud 3.3.1 Accounting treatment ‘An entity corrects material prior period errors retrospectively in the first set of financial statements authorised for issue alter their discovery by: (o} Restating comparative amounts for each prior period presented in which the error occurred; (b) (Ifthe error occurred before the earliest prior period presented) restating the opening balances of assels, liabilities and equity for the earliest prior period presented; and (€)__ Including any adjustment to opening equity as the second line of the statement of changes in equity. Where it is impracticable to determine the period specific effects or the cumulative effect of the error, the entity corrects the error from the earliest period/date practicable {and discloses that fact) 3.4 Creative accounting While sill following IFRS, there is scope in choice of accounting policy and use of judgement in accounting estimates to select the accounting treatment that presents the financial statements in the best light rather than focusing on the most relevant and reliable accounting policy or estimate jing of transactions may be delayed/speeded up to improve results + Profit smoothing through choice of accounting policy eg inventory valuation * Classification of items eg expenses versus non-current assets * Revenue recognition ps early recognition jes eg through adopting an aggressive accounting policy of When the directors select and adopt the accounting policies and estimates of an entity, they need to apply the principles in ACCA's Code of Ethics and Conduct. BPP 35Activity 4: Revising accounting policies and estimates Required Which of the following could be considered unethical reasons for revising accounting policies or estimates? Tick the options which could be perceived to be unethical, giving reasons for your choice. Ce Ol om ee ray (Tick) 19 the useful life of an asset because large profits on disposal in recent dicate that the previous estimated life was too short Reducing the allowance for doubtful debls from 5% to 3% of trade receivables to mee! forecast profi targels | Not equity accounting for an associate in the current year because the Finance Director failed to realise a relationship of significant influence in the prior year Classifying redeemable preference shares as equity to meet the gearing and interest cover loan covenants | Reclontiying an axpers rom cost el wales io advivioertive emperaen to align | the entity's accounting policy to other entities operating in the same industry 3.5 Exposure draft: ED 2018/1 Accounting Policy Changes The IASB has proposed limited scope amendments to IAS 8. The amendments are intended to facilitate voluntary changes in accounting policies that result from agenda decisions published by the IFRS Interpretations Committee. 3.5.1 Background ‘The IFRS Interpretations Committee considers issues raised by stakeholders relating to the application of IFRSs. After considering on issue, the IFRS Interpretations Commitee offen publishes an ‘agenda decision’ with explanatory material regarding the issue. The aim of the explanatory material is to facilitate consistency in the application of an IFRS, As agenda decisions are not authoritative, enlities are not required fo change their accounting policies in response, but can do so voluntarily. 3.5.2 Amendment IAS 8 currently specifies that a change in accounting policy should be applied retrospectively, as if it had always been in place, except where it is impracticable to do so. Retrospective application can be a timeconsuming and difficult task. Therefore to encourage voluntary changes in accounting policy as a result of an agenda decision, the IASB proposes that retrospective application need not be applied, subject to a cost-benefit analysis Therefore, for a change in accounting policy due to an agenda decision, if the cost of retrospective application outweighs the benefit, the new policy must be applied prospectively. BPP 62: Profesional and ical duty of the aecourtant 3.5.3 Issues Potential issues with the proposed amendments include the following (a) Although agenda decisions have nonmandatory status, in practice they are treated os mandatory. Many securities regulalors view an accounting policy which is not in agreement with an agenda decision os no longer acceptable. The proposed amendments may exacerbate this sitvation {b) A fundamental issue with agenda decisions is that they are viewed as immediately effective This presents significant problems if an agenda decision is published close to on eniily's reporting date. The proposed amendments do not address this issue (]___ There is no concepivel basis for treating voluntary changes in accounting policy resulting from agenda decisions differently to other voluntary changes in accounting policy. (d} Conducting a cost-benefit analysis is potentilly as onerous as applying an accounting policy retrospectively and is inherently subjective ‘A common view among stakeholders” in responding to the ED is that instead of amending IAS 8, the IASB should address the underlying issue of the status and effective date of agenda decisions, *See IFRS.org Exposure Draft and comment letiers ~ Accounting policy changes (IAS 8) Ethics note This chapter inroduced the concept of ethical principles and illustrated some of the ethical dilemmas you could come across in your exam and in practice. You are likely to meet ethics in the context of ‘manipulation of financial statements. Whereas in this chapter the issues were mainly limited to topics you have covered in your earlier studies, you will come across ethical issves in connection with more ‘advanced topics, such as foreign subsidiaries. The common thread running through each ethical dilemma is generally that someone with power, for example a company director, wants you to deviate from IFRS in order to present the finan statements in a more favourable light. The answer will always be that this should be resisted, but in ‘each case it must be argued with reference to the detail of the IFRS in question, not justin terms of general principles.Chapter summary Professional and ethical Creed 1. Professional and ethical issues 2. Related parties ane Sei + Not rloted {see next page) portios Ethical principles in Complying with accounting Morality and ethics corporate reporting standards nical ACCA Code of Ethics and Ethical problems on preparing FS/ Ethical relativism va ethical obsoltism Conduct ‘advising on corporate reporting: = Ethics does vs does not change + Objectvi + Duty of professional competence: overtime pee is v Uk wat Kohiberg's ethical thought process: negrry, {1) Act ethically because punished ‘+ Professional = Incomplete/ 7 if do not ‘competence and due inadequate information (2) Act ethically because law says so core = Insufficient trai 1/experience (3) Act ethically because it is right to ‘+ Confidentiality = Inadequate resources oe ea a lvences on ethics: ‘+ Professional behaviour © _Threals to fundamental principles: eyelyeial eeee ee aenevicel on — Selfinterest fit ~ Selfreview Framework for eee, machin = Familiarity Gas ‘What isthe real issue? sce eG shareholder wealth for J ‘+ Prohibition of essociation with reports booth shoreholders and ‘Aro there threats to that ther stakeholders. compliance with Be je nclerclyy madeira — Alternative view: business fundamental principles? DF Ghana Hane performance can be 4 Gentes rect mouneton ‘enhanced by good ‘Are the threats significant® - Ave biased ‘corporate citizenship 4 = Omit/obscure information Ethical systems in ‘Ace there safeguards that organisations: will eliminate them/ = Personal ethics reduce them to an - Professional ethics ‘ecceplable level? + Con you face yourself in the mirror? 2 = Organisational culture = Orgenisation's systems Managing ethics in ‘organisations: = Compliancebased ‘approach = Integritybased approach @2. Related parties Related party ‘A person (or close fmily member if hat person: (i) Has control or joint control (over the reporting entity); (i) Hos significant influence; or (ii) 1s key management personnel of the entity oF of is director indirect parents ‘An entity if (i) Amember of the same group (each porert, subsidiary and fellow subsidiary is toloted) (i) One entity is on associate*/joint venture" ofthe othor (ii) Both enities are joint ventures* of the same third party (vl One entity is « joint venture’ of a third entity ond the other ently is on ‘associate of the third entity. (V)_ ttis0 postemployment benefit plan for employees of the reporting ‘ontity/related entity (vil is controlled or jointly controlled by ‘ony person identified cbove (vi) A person wih contl/joint contol has ‘significant influence over or is key management personnel of he entity (er of parent of the entity) (vil It (or anciher member ofits group] provides key management personnel ‘services tothe reporting enity (orto is potent) * including subs of the associote joint venture Not related parties (c) Two entities simply becouse they have director/key manager in commen (b) Two ventures simply becouse they share joint Revenue = fee or commission * Indicators that an entity controls the goods or services before transfer and therefore is a principal include (para. B37}: (6) The entity is primarily responsible for fulfilling the promise to provide the specified good or service; (6) The entity has inventory risk; and {c]__ The entity has discretion in establishing the price for the specified good or service. Non-efundable |» ‘Fit is an advance payment for future goods and services, recognise uphront foes revenue when future goods and services provided (para. 849) BPP 83Mlustration 3 Principal vs agent considerations {This example is adapted from IFRS 15: illustrative example 45.) Fancy Goods Co (FG) operates a website that enables customers fo purchase goods from a range of suppliers, The suppliers set the price that is to be charged and deliver directly to the customers, who | have paid in advance. FG's website facilitates payment by customers and the entity is entitled to | commission of 5% of the sales price. | FG has no further obligation tothe cuslomer afer crranging forthe products fo be supplied. | Required | Discuss whether FG is a principal or an agent. | | Solution | | The following points are relevant: | | + The supplier is primarily responsible for fuliling a customer order rather than FG; FG is not | obliged to provide goods if the supplier fails to deliver to the customer. © FG does not have inventory risk at ony time, as it does not deal with inventories at all | © FG does not establish prices. FG is therefore acting os an agent and should recognise revenue equal to the omounts received as commission. 4: Right of retu! On 31 December 20X7, Lansdale sold Product X to a customer for $12,100 payable 24 months after delivery. The customer obtained control of the product at contract inception. However, the contract permits the customer to return the product within 90 days. The product is new and Lansdale has no relevant historical evidence of product returns or other available market evidence. The cash selling price of Product X is $10,000, which represents the omount that the customer would pay upon delivery of the same product sold under otherwise identical terms and conditions as at conkract inception. The cost of the product to Lansdale is $8,000, Required Advise Lansdale on how to account for the above transaction, Solution 4 BPP3: Revenue Ethics note Ethics is o key aspect of the syllabus for this paper. Ethical issues will definitely be examined in the second question of Section A of the exam, but could also feature in any question. Therefore you need to be alert fo any threats to the fundamental principles of ACCA's Code of Ethics and Conduct when ‘approaching every question. For exomple, pressure to achieve a particular revenue figure could lead to deliberate cllempis to moripulate revenue by: ‘+ Recognising revenue too early, eg by recognising revenue over time when it should be recognised ot o point in time ‘© Recognising deposits from customers as revenue when they are not entitled to until the related performance obligation is satisfied * Recognising revenue from sales with a right of return before the right of return has expired + Recognising gross revenue rather than commission when acting as on agent Sales contracts can be complex. Time pressure and/or lack of training and experience could therefore lead to errors in the accounting. BPP 55 LEARNING MEDIA1. Revenue recognition (IFRS 15) (1) Identify contract with customer Contract = an agreement hot creates enforceable Fight and obligations (2] Identify performance obligation(s) For distinct goods or services {ie can benefit on own ‘orwith cher really available resources) (3) Determine transaction price “Amount to which enily expects to be entitled = Discount o PV {no required if <1 year) Include variable consideration if highly probable significant reversal wil not crise (probabily- weighted expected volue or mos likely amour) (4) Allocate transaction price to performance obligations Boxed on standolone selling prices (5) Recognise revenue when (or as) performance obligation satisfied When good/service transfered (= when/os customer obtains conto) L Satsloction of performance cblgation overtime (o} The customer simultaneously receives and consumes ihe benefits provided; or (b) The performance ereates/enhances an asset that the customer controls as ‘ereated/enhanced or {c]_The performance does not create an asset ‘with an alternative use ond the enty hes on ‘enforceable right to payment for performance completed Satisfaction of performance obligation ot o point in fine: Indicotors of wonsfer of contol of on asset: {a] Entiy has © present right to payment (6) Customer has legal ttle 0 the osset {c) Eniiy hos transferred physical possession (3) Customer hos the significant risks and rewards of ownership (ol The customer has accepted the asset + Incremental costs of obtaining o contact ‘+ Recognised os asso if expected fo be recovered Cost ofl a contact: ‘+ Recognised 0s an asset and omortsed if costs = Conbe specifically identified: = Generate/enhance resources used io satisty performance obligation; and = Are expected fo be recovered. sé Chapter summary 2. Specific guidance in IFRS 15 ‘+ Sole with right of return ~ recognise revenue for ‘amount of consideration that ently expects to be ‘enfiled to loxclude goods expected to be returned}, «refund lilly end on asset for right © recover prodvels on song refund lability + Werronties: LD) Treat os separate performance obligotion if ‘customer has option fo purchase warranty separately {2} Account for warranty in accordance with IAS 97 if customer does not have option 10 purchase warranty separately {8) Ifswarronty provides customer with service in addition to complying wih specifications, promised service is a performance obligation + Principal versus agent (1) Ifeniy conkls goods or service before transfer to customer, enity = principal revenue = gross ‘amount of consideration) (2) Ifenity rranges for goods or services to be provided by onother pory, enity = ogent {revenve = fe oF commission) + Nontefundable fees - if itis an odvance payment for future goods ond services, recognise revenue ‘when fre goods and services provided ot)3: Revenue Dae RC Uri 1. Revenue recognition (IFRS 15) | IERS.15 establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer, In the SBR exam, itis important to apply the approach in IFRS 15 to the spe given. Specific guidance in IFRS 15 fic scenario * Sale with right of return — recognise revenue for amount of consideration that entity expects to be entitled to (exclude goods expected to be relurned), a refund liability and can asset for right fo recover products on settling refund liability + Warranties: (1] Treat as separate performance obligation if customer has option to purchase warranty separately (2) Account for warranty in accordance with IAS 37 if customer does not have option to purchase warranty separately (3) Fw spec © Principal versus agent ranty provides customer with service in addition to complying with tions, promised service is « performance obligation (1) entity controls goods or service before transfer to customer, entity = principal {revenue = gross amount of consideration} (2) _Ifentity arranges for goods or services to be provided by another party, enfily = agent (revenue = fee or commission) | | © Nonrefundable fees - if itis an advance payment for fulure goods and services, recognise revenue when future goods and services provided BPP 7Further study guidance Question practice Now tty the question below from the Further question practice bank: QI Revenve Recognition Further reading You should make time to read the following articles which were written by a member of the SBR examining team. They are available in the study support resources section of the ACCA website: Revenue revisited ~ Parts 1 and 2 veww.accaglobal.com BPP sa LEARNING MEDIANon-current assets Learning objectives On completion of this chapter, you should be able to: Syllabus reference no. Discuss and apply the recognition, derecognition and measurement of C2lo) noncurrent assets including impairments and revalvations. Discuss and apply the accounting treatment of investment properties including C2{e) classification, recognition, measurement and change of use. Discuss and apply the accounting treatment of intangible assets including the c2\d) criteria for recognition and measurement subsequent fo acquisition. Discuss and apply the accounting treatment for borrowing costs. C2le} Discuss and apply the definitions of fair value’ measurement and ‘active le) morket. Discuss and apply the ‘fir valve hierarchy c9(b) Discuss and apply the principles of highest and best use, most advantageous Iq) and principal market. Explain the circumstances where an enfiy may use a valuation technique. c9\d) Discuss and apply the accounting for, and disclosure of, government grants and cli) other forms of government assistance. Discuss and apply the principles behind the intial recognition and subsequent 11) it of cal asset oF agricultural produce. Exam context Non-current ossels could be tested in any part of the SBR exam, either as part of a question in Section A or B, or as a whole question in Section B. This chapter builds on the knowledge of the standards relevant to non morket capitalisation Internal impoirmen! indicators ~ Obsolescence/damage = Significant internal adverse changas Q ~ Performance worse than expected | + Impairment loss where: | recoverable amount (RA) < carrying | amount = RAs higher of FV less costs Volve in use of disposal = CFF PV Xe hig X X Yaw X = ec o x (CGUs: (1) Test individual CGUs (2} Test group of CGUs including: Unallocated goodwill = Unallocated corporate assets np Before loss Goodwill = XM) Other assets XM x Affer . be pe > Fair value measurement (IFRS 13) "The price that would be received to sell an asset or paid to transfer a liability in en orderly transaction between markst participants ot the measurement date’ Feit volue is after transport costs, but before transaction costs Marketbased measure [ie use ‘ssumptions market participants would use), not entity specific Hierarchy for inputs to valuation techniques: (1) Unadjusted quoted prices {active markel) for identical items {2) Inputs other than quoted prices that can be observed directly {prices) or indirectly (derived from prices) {3} Unobservable inputs Multiple markets, use FY in: {1) Principal morket {if there is one} (2) Most advantageous morket {io the best one after both transaction and transport costs) Nonfinancial assets: highest and best use that is physically possible, legally permissible and financially feasible FY ofa lability (example: Expected value of cash flows Thitehpacty contractor mark-yp Inflation adjusiment Risk premium (re diff cash flows) be oe Pe oe De 3 De Discount to PV oe @)Intangible assets (IAS 38) Identifiable non-monetary assets ‘without physical substance ‘An ascot is idonioble if (o} iis separable; or {bo} arises from contractual /legel rights Recognise when: Probable that future economic ‘benefits wil flow tothe ently The cos! ofthe asset can be meosured reliably Initial measurement: Purchased Cost (as IAS 16) Internally generated: Copal Probable future economic bens Intention to complete & use/sell ‘asset Resources adequate ond evailebe to complete & se /sel Ability 10 use/sell, Techical feasibility Expenditure con be measured reliobly Never capitalised: Internally generated brands, mastheods, publishing Hes & ‘customer its, startup costs, rrining, advertising, relocations/reorgonisatons ‘tor recognition, choice of Amortisation Impairment: charge fis! © OC! = Cost model: as 1AS 16 = Reveluation model: revaluation only by reference to an aclve market Finite usell fe: Systematic bosis over vse life (Ul) Indefinite UL: ot least annual impoiement teats (for any rovaluation sup) thon P/L BPP 5. Investment property (IAS 40) Property held to earn rentals or for capital opprecation or both rather than fr: ‘+ Use in the production or supply of goods oF sarvicas 0: for ‘edministative purposes; or ‘+ Sole in he ordinary course of business Recognise when: ‘+ Probable hat futvre economic bonis will ow to the enti, 1+ The cost ofthe osset con be measured reliably Initial measurement: + Cost = Purchase price = Directly otributable expenditure ‘Alter recognition, choice of ‘+ Cost model: as IAS 16 unless hold fr sale (FRS 5] or loosed (RS 16) © Fair value model: Mork value at yeor end, gain/loss in PAL, not apreciated Impairment: chorge to P/ 7. Borrowing costs (IAS 23) + Copitle: = Funds borowed special. ‘octual borrowing costs less income on temporary investment of funds = Funds borrowed generally: weighted overage borrowing costs excl specific borrowing costs) x weighted overage expenditure. ‘+ Cease capitalisation when ready for imended use ‘= Suspend if development interrupted lfor on extended peri A: Noneutent ote Government grants (IAS 20) + Recagnited when 'ectonably certain! condition met (NB: diferent Conceptual Framework + Grants e ase = Deferred income; or = Reduce carrying amount + Grant income: In P/L when expense recognised FOr income; or (Reduce related expen Annual impairment tests req for: + Goodwil + Intangibles not yet ready for use * forges with ndefint useul Impairment loss: DR OCI (& Revaluation surplus) Fist revelved) DR PA CR Goodwill of CGU (First) CR Other ostesprovata Impairment loss reversals: '* Permitted where RA increases * Opposite double entry + Cannot reverte above lower of: = mR = Carrying amount if no impairment occurred ~ Goodwill never reversed 8. Agriculture (IAS 41) Biological asset: A living animal or plant Agricultural produce: The horvsied produc of the ently’ biclogizalastee (Bearer plants accounted for under IAS 16) Recognise when: + Controlled os 0 result of past events + Probable future economic benefits; ‘and ‘+ Foir value or costcan be measured reliably Measurement: Biological assets: FV less costs 1 sell Agricultural produce: ‘At the point of harvest: FY les costs fo sell (becomes IAS 2 cos! Thereaker ~ ot inventoriesPee ee ok eran 7 eu Property, plant and equipment (IAS 16) Property, plant and equipment can be accounted for under the cos! model (depreciated) or revaluation model (depreciated revalued amounts, gains recognised in other comprehensive income} Impairment of assets (IAS 36) Impairment losses occur where the carrying amount of an asset is above its recoverable amount. Impairment losses ore charged first to other comprehensive income (re any revaluation surplus relating to the assei) and then to profit or loss | Where cath flows cannot be measured separately, the impairment losses are calculated by reference to the eash-generating unit. Resulling impairment losses are allocated first against any goodwill and then pro-rata to other assets Fair value measurement (IFRS 13) IFRS 13 treats all assets, lial 5 and an entity's own equity instruments ina consistent way. A fair value hierarchy is used fo establish fair valve, using observable inputs as for as possible as fair valve is a market-based measure. Intangible assets (IAS 38) Intangible assets can also be accounted for under the cost model or revaluation model, but only intangibles with an active market can be revalued Intangible assets are amortised over their useful lives (normally to a zero residval value) unless they have an indefinite useful life (annual impairment tests required) Investment property (IAS 40) Investment property can be accounted for under the cast model or ihe fair value model (not depreciated, gains and losses recognised in profit or loss). Government grants (IAS 20) Government grants are recognised when there is reasonable assurance that the conditions will be sotisfied and the grant will be received. Granls are normally presented as deferred income aand recognised in profit or loss fo match against related costs. Grants relating fo assels can either be presented in deferred income or deducted from the carrying amount of the asset. Borrowing costs (IAS 23) Borrowing costs relating to qualifying assets (those which necessarily take a substantial period of ime to be ready for use/sale] must be capitalised. This includes both specific and general borrowings of the company. Agriculture (IAS 41) Biological assets and agricultural produce at the point of harvest are measured at fair value less costs to sell, with changes reporied in profit or loss. BPPA: Nomeurrnt assets Tame pare ota Question practice Now try the questions below from the Further question practice bank: @4 Camel Telecom QS Acquirer Q6 Lambda Q7 Kalesh Q8 Burdock 9 Epsilon Q10 Zenzi Further reading There are articles on the ACCA website, writen by the SBR examining team, which are relevant to the topics studied in this chapter and which you should read: ‘+ Exam support resources section of the ACCA website IFRS 13 Fair Valve Measurement * CPD section of the ACCA website IAS 36 impairment of assets (2009) IAS 16 property plant and equipment (2009) IAS 16 and componentisation (2011) How to measure fair value (2011) All change (changes to !AS 16, 38 and IFRS 11) (2014) as BPI LEARN MEDIAEmployee benefits Learning objectives On completion ofthis chapter, you should be able to: syllabus reference no. Discuss and apply the accounting treatment of shortterm and longterm employee c5(a) benefits and defined contribution and defined benefit plans. ‘Account for gains and losses on setlements and curtailment. ‘Account for the "Asset Ceiling’ test and the reporting of actuarial (remeasurement) C5le) gains and losses. Discuss the impact of current issues in Corporate reporting. The following File) examples are relevant to the current syllabus: 4. Defined benefit plan amendments, curtailment or settlement Exam context Employee benefits include shortterm benefits such as salaries, and longterm benefits such as pensions. This topic is not covered in Financial Reporting and so will be new to you at this level. In the SBR exam, employee benefits could feature in any section, and may be a whole or part-question.Chapter overview Ms pee? vehi Pee Perro Sere oy Post-employment benefits | | 2. Defined contribution plans 3. Defined benefit plans 4, Criticisms of IAS 19 and current developments a ne REDKey terms 5: Employee benehis 1 Short-term benefits 1.1 Introduction to employee benefits Employee Peed Shorterm Postemployment Other longterm | Termination benefits benefits Tenet | IAS 19 Employee Benefits covers four distinct types of employee benefit. However, only shortterm and post-employment benefits are exominable Accounting for shortterm employee benefit costs tends to be quite straightforward, because they are simply recognised as an expense in the employer's financial statements of the current period. Accounting for the cost of deferred employee benefits is much more difficult because of the large amounts involved, as well as the long time scale, complicated estimates and uncertainties. Essential reading | See Chapter 5 section | of the Essential Reading for background reading on the conceptual nature of employee benefit costs and the principles underlining the accounting. This is available in Appendix 2 of he digital edition of the Workbook 1.2 Short-term benefits Employee benefits: All forms of consideration given by an entity in exchange for service rendered by employees or for the termination of employment Short-term benefits: Employee benefits (other than termination benefits) that are expected to be setiled wholly before 12 months after the end of the annual reporting period in which the employees render the related service. (IAS 19: para. 8) Shortterm benefits include items such as (IAS 19: para. 9} (c] Wages, sclaries and social security contributions (b} Paid annual leave and paid sick leave (c)__Profitsharing and bonuses (d)_ Non-monetary benefits (eg medical core, housing, cars and free or subsidised goods or services) Shortterm employee benefits are recognised as a liability and an expense when an employee has rendered service during an accounting period, ie on an aceruals basis. Shortterm benefits are net discounted to presont value. BPP fo1.3 Short-term paid absences We ore concerned wih poymens by he company, ‘Accumulating paid absences. = —= Accumulating paid absences are those that con be carried forward for use in future periods if the current period's entitlement is not used in full (eg holiday pay}. The expected cost of any unused entitlement that can be carried forward or paid in lieu of holidays is recognised as an acerual at the year end. ~ ame —Yesve worked more thon you should on ful poy, but nxt yor you al fork fon you shold on al oy Non-accumulating paid absences Nomaccumulating absences cannot be carried forward (eg maternity leave or military service). Therefore they are only recognised as an expense when the absence oeeurs (/AS 19: para. 11). ity 1: Short-term benefits (1) Plyman Co has 100 employees. Each is eniiled fo five working days’ of paid sick leave for each year, and unused sick leave can be carried forward for one year. Sick leave is token on a LIFO basis (ie first out of the current year's entitlement and then out of any balance brought forward). ‘As ot 31 December 20X8, the overage unused entitlement is two days per employee. Plyman Co expects (based on pas! experience which is expected fo continue) that 92 employees will take five days or fewer sick leave in 20X9 and the remaining eight employees will lake an average of six and @ half days each Required State the required accounting for sick leave. Solution 2: Short-term benefits (2) The salaried employees of an entity are eniilled to 20 days' paid leave each year. The entitlement accrues evenly over the year and unused leave may be carried forward for one year. The holiday year is the same as the financial year. At 31 December 20X4, the enlity had 2,200 salaried employees and the average unused holiday entilement was 4 days per employee. Approximately 6% of employees leave without taking their entiflement and there is no cash payment when an employee leaves in respect of holiday entitlement. There are 255 working days in the year and the total annual salary cost is $42 milion. No adjustment has been made in the financial statements for the above and there was no opening accrval required for holiday entitlement Required Discuss, with suitable computations, how the leave that may be carried forward is treated in the financial statements for the year ended 31 December 20X4. 7 vane SEED5: Employee benefits Solution 1.4 Profit-sharing and bonus plans ‘An entity recognises the expected cost of profitsharing and bonus payments when, and only when (WAS 19: para, 19-24): (c) The entity has o present legal or constructive obligation to moke such poyments as a result of past events; ond (b] Areliable estimate of the obligation can be made. ‘A present obligation exists when and only when the entity has no realistic alternative but to make payments Illustration 1 Profit-sharing plan Moore Co runs @ profit sharing plan under which it pays 3% of ils net profit forthe year to is ‘employees if none have left during the year. Mooro Co estimates that this will be reduced by stoft turnover to 2.5% in 20X9. Required Which costs should be recognised by Mooro Co for the profit share? Solution 1.5 Post-employment benefits Postemployment benefits are employee benefits which are payable ater the completion of ‘employment. ty lt ae benefits Defined contribution Defined benefit | plans plans J BPP a LEARNING MEDIA(o] Defined contribution plans + Egannual contribution = 5% salary + Future pension depends on the value of the fund (b) Defined benefit plans Final sola + Egannual pension = — Y 5. years worked 60 + Future pension depends on final salary and years worked The accounting for the Iwo different types of plan are very different. It is important that you decide on the nature of the plan before attempling to account for it A pension plan will normally be held in a form of irst separate from the sponsoring employer. Although the directors of the sponsoring company may also be trustees of the pension plan, the sponsoring company and the pension plan are separate legal entities that are accounted for separately. Sponsoring ‘employer Pays contributions Auber waved scheme separate fund from panier ara the company itself | Pays pensions in future in accordance 7 vith the plan's rules Pensioners Qe Essential reading See Chapter 5 section 2 of the Essential Reading for a further exploration of the conceptual differences between defined contribution and defined benefit plans, further definitions, and for a discussion of molf-employer plans. This is available in Appendix 2 of the digital edition of the Workbook 2 Defined contribution plans Defined contribution plans: Postemployment benefit plans under which an entity pays fixed contributions info a separate ently (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to ‘employee service in the current and prior periods. (JAS 19: para. 8) Keyan. 2.1 Accounting treatment The obligation for each year is shown as an expense for the period (disclosed in a note) and in the statement of financial position to the extent that it has not been paid. These are easy to account for, « the cost of the pension contribution is always made under the control of the sponsoring employer (IAS 19: paras. 51-52),5: Employes benef Activity 3: Defined contribution plans ‘Mouse, a public limited company, agrees to contribute 5% of employees’ total remuneration into postemployment plan each period, In the year ended 31 December 20X9, the company paid total salaries of $10.5 million. A bonus of $3 million based on the income for the period was paid to the employees in March 2070. The company had paid $510,000 into the plan by 31 December 20X9. Required Calculate the total profit or loss expense for postemployment benefils for the year and the accrual which will appear in the statement of financial position at 31 December 20X9. Solution 3 Defined benefit plans Defined benefit plans: Postemployment benefit plans other than defined contribution plans. (IAS 19: para, 8) Key om Introduction Typically, a separate plan is established into which the company makes regular payments, as advised by an aetuary. This fund needs fo ensure that it has enough assels to pay fulure pensions to pensioners. The entity records the pension plan assels (at fair value) and liabilities (at present value) in its own books os it bears the pension plan's risks and benefits, so in substance, if net in legal form, it owns the assets and owes the liabilities. 3.2 Complexity Accounting for defined benefit plans is much more complex than for defined contribution plans becaus (a) The future benefits (arising from employee service in the current or prior years) cannot be measured exactly, but whatever they are, the employer will have to pay them, and the liability should therefore be recognised now. To measure these future obligations, itis necessary to use actuarial assumptions (b) The obligations payable in future years should be valued, by discounting, on a present value basis, This is because the obligations may be settled in many years' time, (c]__ If actuarial assumptions change, the amount of required contributions to the fund will change, cand there may be acivarial {remeasuremen!} gains or losses. A contribution into a fund in any period will not equal the expense for that period, due fo remeasurement gains or losses. BPP 33,3 Measurement of plan obligation 3.3.1 Projected unit credit method IAS 19 requires the use of the projected unit credit method which sees each period of service as giving rise to on additional unit of benefit entitlement and measures each unit separately to build up the final liability (obligation). The accumulated present value of (discounted) future benefits will incur interest over fime, and an interest expense should be recognised These calculations are complex and would normally be carried out by an actuary. In the exam, you will be given the figures. Ir i: 3.3.2 Actuarial assumptions [> Actuarial assumptions are needed to estimate the size of the future (post-employment) benefits that will be payable under a defined benefits scheme. The main categories of actuarial ‘assumptions are: 1 helps caeulte the val ofthe plan abligaton «Demographic assumptions, eg mortality rates before and alter retirement, the rate of employee turnover, early retirement + Financial assumptions, eg future salary rises Actuarial assumptions made should be unbiased and based on market expectations. (AS 19: paras. 75-76) 3.3.3 Discounting - current service cost The benefits eared must be discounted to arrive at the present value of the defined benefit obligation. The increase during the year in this obligation is called the current service cost which is shown as an expense in profit or loss. In effect, the current service cost is the increase in total pensions payable as a result of continuing to ‘employ your staff for another year. ‘The discount rate used is determined by reference to market yields at the end of the reporting period on high quality corporate bends (or government bonds for currencies for which no deep market in high quality corporate bonds exists). The term of the bonds should be consistent with that of the postemployment benefit obligations. AS 19: para. 120) 3.3.4 Compounding - interest cost The obligation must be compounded back up each year reflecting the fact that the benefits are cone period closer to settlement. This increase in the obligation is called interest cost ond is also shown as an expense in profit or loss. Discount Current Increase in service cost Service (annual pension performed DEBIT Current service cost (P/l) payments _/ i ; CREDIT Present valve of obligation ~ <, I | Now Year Death DEBIT Net interest cost (P/U) CREDIT Present value of obligation % BPP5: Employes benefis 3.3.5 Remeasurements of plan obligation Remeasurement gains or losses may crise due to differences between the year-end actuarial valuation of the defined benefit obligation and its aecounting value. They are made up of changes in the present valve of the obligation resulting from * Experience adjustments (the effects of differences between the previous actuarial assumptions cand what has actually occurred); and [ S19 views them a bit Uke @ uation, se they go to OC © The effects of changes in actuarial assumptions: Remeasurement gains ond losses are recognised in other comprehensive income [‘liems that will not be reclassified to profit or loss!) in the period in which they occur. 3.4 Measurement of plan assets The sponsoring employer needs fo set aside investments during the accounting period fo cover the pension liability. To meet the IAS 19 criteria {and protect the pensioners!) they must be held by an entity legally separate from the reporting entity, Plan assets are (IAS 19: paras. 113-115}: * Assets such as stocks and shares, held by a fund that is legally separate from the reporting entity, which exists solely to pay employee benefits * Insurance policies, issued by an insurer that is not a related party, the proceeds of which can only be used to pay employee benefits Interest income is opplied to the asset ond netted against the interest cost on the defined benefit obligation. The resuling net interest cost (or income) on the net defined benefit liability (or asset) is recognised in profit or loss and represents the financing effect of paying for benefits in advance or in arrears. Difference between actual return and amounts in net interest Compound: = remeasurement recognised in OCI DEBIT Fair value plan assets CREDIT Net interest cost for income) (P/1) I. .\ LX ~fV Increase in Service / / f \ f annual pension performed / / payments i V j I t t+ + Now Yeor Contributions: Retirement Death end DEBIT Fair valve plan assels CREDIT Company cosh 3.4.1 Remeasurements of plan assets The value of the investments will increase over time. This is called the return on plan assets ond is defined os interest, dividends and other income derived from the plan assets together with realised and unrealised gains or losses on the plan assets, less any costs of managing pion astets and tax payable by the plan itself. The difference between the return on plan assets and the interest income referred to above included in net interest on the net defined benefit liability (or asset) is a remeasurement and is recognised in other comprehensive income (‘Items that will not be reclassified to profit or loss')3.5 Past service cost Past service cost is the increase or decrease in the present value of the defined benefit obligation for ‘employee service in prior periods, resulting from: A plan amendment (the introduction or withdrawal of, or changes to, a defined benefit | es plan); or Wein (b) A curtailment (a significant reduction by the entity in the number of employees covered by \b wich the plan}. worked is Past service cost is recognised os an adjustment to the obligation and as an expense (or income) at |“¥ised the earlier of the following dates: person poyoble. (o} When the plan amendment or curtailment eceurs; or “ (b) When the entity recognises related restructuring costs {in accordance with IAS 37) or termination benefits. (IAS 19: pora. 99) For example: ‘An amendment is made to the plan which improves benefits for plan members. ‘An increase to the obligation (and expense] is recognised when the amendment occurs: DEBIT Profit or loss x CREDIT Present value of defined benefit obligation x (b) Discontinuance of an operation, so that employees’ services are terminated earlier than expected A reduction in the obligation [and income) is recognised at the same time as the termination benefits are recognised DEBIT Present value of defined benefit obligation x CREDIT Profit or loss x 3.6 Summary of IAS 19 requirements eee Net interest cost + Interest applied to b/d obligation and assets (ond netted in profit or loss DEBIT Net interest cost (P/l) (x% x b/d. | * lon amendment, cutaimet or etement in | obligation) ‘eering pte, ners fe rencining Pad | crept py dined bal obligation using the discount rate used to remecsure (SoFF) obligation/asset, and +The interest on assets is ime apportioned for | DEBIT Plan assets (SOFP) [x% x b/d contributions less benefits paid in the period (i assets} they occur throughout the year rather than at | CREDIT _ Net interest cost (P/1) the start or end of the year]. The interest on obligations is also time apportioned for benefits paid in the period‘5: Employee benelis ra Current service cost * Increase in the present valve of he obligation resulting from employee service in the current period + Colculated using actuarial assumptions at DEBIT Current service cost (P/U) beginning of reporting period. CREDIT PV defined benefit obligation «If plan amendment, curtailment or settlement in (SOFP) reporting period, current service cost for remainder of reporting period calculated using actuarial assumptions used to remeasure obligation/asse. Past service cost Increase in obligation: * Change in PV obligation for employee service | DEBIT Past service cost (P/l) in prior periods, resulting from a plan CREDIT PV defined benefit obligation ‘amendment or curtailment (SOFP) «Charged or credited immediately to profit or | Decrease in obligation: loss DEBIT PV defined benefit obligation {SOFP) CREDIT Past service cost (P/l) Contributions * Into the plan by the company DEBIT Plan assets (SOFP) * As advised by actuary CREDIT =Company cash Benefits DEBIT PV defined benefit obligation {SOFP) Actual pension payments mad Seen eee eee CREDIT Plan assets (SOFP) Remeasurements Arising from annual valuations of obligation cond assets ‘© On obligation, differences between actuarial | Recognise all changes due to assumptions and actual experience during the | femeasurements in other comprehensive period, or changes in actuarial assumptions income + Onassets, differences between actual return on plan assets and amounts included in net interest Disclose deficit or surplus in accordance with the Standard See Activity 4lustration 2 Defined benefit plan ‘Angus operates a defined benefit scheme for its employees but has yet to record anything for the current year except to expense the cash contributions which were $18 million. The opening position was a net liability of $45 million which is included in the non-current liabilities of Angus in its draft financial statements. Current service costs for the year were $15 million and interest rates on good quality corporate bonds fell om 8% at the start of the year to 6% by 31 March 20X8. In addition, a payment of $9 million was made out of the cash of the pension scheme in relation to employees who left the scheme. The reduction in the pension scheme liability as a result of the curtailment ‘was $12 million, The actuary has assessed that the scheme is in deficit by $51 million as at 31 March 20X8. Required Calculate the gain/loss on remeasurement of the defined benefit pension net liability of Angus os at 31 Merch 20X8, and slate how this should be treated. Solution The loss on remeasurement is colculated as $8.4 million (W) and should be recognised in other comprehensive income for the year. Working: Net lability Opening net liability Net interest cost ($45m x 8%) Current service cost Gain on curtailment (§12m ~ $9m) | Cash contributions into the scheme Loss on remeasurement (8) | Closing net liability Aci De ed benefit plans Lewis, a public limited company, has a defined benefit plan for its employees. The present value of the fulure benefit obligations at 1 Jonuary 20X7 was $1,120 million and the fair valve of the plan cossets was $1,040 million Further dota concerning the year ended 31 December 20X7 is as follows: $m ‘Current service cost 76 Benefits paid to former employees 88 Contributions paid to plan 94 Present value of benefit obligations at 31 December 1,222 7. As valued by Feir value of plan assels at 31 December 1,132 profasstnal cenerion Interest cost (gross yield on ‘blue chip' corporate bonds): 5% On 1 January 20X7 the plan was amended to provide additional benefits with effect from that date The present value of the additional benefits at 1 January 20X7 was calculated by actuaries at $40 milion *% BPP