ACCA P2 CLMN December 2012 exam Current issues Presenter – Tom Clendon 1

Format – 15 minutes & 3 hours Section A - No choice - 50 marks 35 marks group numbers 25 marks of Para 1 = sub 1, Para 2 = sub 2 10 marks accounting adjustment (FI) Must lay out your answer Comprehensive income statement or s of fp or cash flow 15 marks = ethics OPPIC & accounting issue 2

Section B 2 from 3 Make the choice in the reading time Q2 / Q3 – accounting standards Depth & application Financial instruments Q4 Current issues 3

Management Commentary Practice statement issued December 2010 Objective is to assist management to provide a useful management commentary Not mandatory A context to supplement & interpret Past present & future Words rather than numbers! Audit review not audited 4

Principles of the MC Provide management’s perspective Objectives & strategies Forward orientated Relevant & faithful Clear & straight forward Focussed on material issues 5

Elements of the MC Nature of the business Management’s objectives & strategies Significant - resources, risks, relationships Results KPIs 6

IFRS13 Fair Value Measurement Why ? USA joint project single source Does not extend use Does not apply to leases or share based payments FV can apply on initial measurement, recurring basis, on a non-recurring basis 7

FVM - definition “The price that could be received to sell an asset (or paid to transfer a liability) in an orderly transaction between market participants at the measurement date.” i.e. market based approach Highest and best Pre – transaction costs ignore (not a feature of the asset) 8

FVM – hierarchy of inputs Level 1 – observable in an active market e.g. listed coy shares – FVTP&L / PF Assets Level 2 – observable in an inactive market or for similar items e.g. property Level 3 – unobservable inputs e.g. deferred consideration / PV FCF Liabilities 9

FVM Financial assets have to be initially measured at FV, one is bought for $100 cash when it has a FV of $150. Possible ? Yes – RPT or bargain Accounting is … gain of $50 10

FVM Acquired, with the intention to trade, a $100m zero coupon bond at par that is redeemable at a premium of $21m in two years time, effective rate of interest being 10%. At year one end interest rates are now 5%. Show the accounting 11

FVM At end of year one FV of the asset = 115 CV of the asset = 110 Difference to i/s = 5 gain 12

IFRS10 Consolidated Financial Statements Why? USA joint project to prevent “off balance sheet finance” i.e. the non consolidation of highly geared controlled entities Principles based approach to control Power over the investee; exposure, or rights, to variable returns, the ability to use its power to affect the amount of the returns 13

Is there control ? Consider the size of the holding and the dispersion of holdings 48% investment? Options? (potential voting rights) Contract? 14

Leases IAS17 requires a classification between finance & operating Based on a judgment as to whether substantially all risks & rewards pass Finance = asset, liability, depreciation & finance cost Operating = operating cost 15

Problem with IAS17 Similar items are dealt with differently Results in an all or nothing approach Classification is subjective Creates opportunity for creative accounting Lessees can account for long term leases being as operating – off balance sheet finance Conflict with the framework – liability & faithful representation (complete) 16

Solution Create a single model – cease the classification process – treat all leases the same Adhere to the framework approach – assets & liabilities – recognition criteria In future recognise all obligations created by leases – liabilities on balance sheet 17

Consider Lessee, asset life of ten years, cash price $100,000, two year lease, rentals in arrears $10,000 per annum, interest rates 10% ? Accounting per IAS17 ? Accounting per proposals 18

Solution IAS 17 = Operating lease, rental expense, no obligations recognised on the s of fp Proposal = Liability to recognise being the obligation to make the lease payments Measure at FV (PV of FCF), capitalise the future benefits Income statement charged with finance cost (unwinding of the discount) & depreciation 19

Framework Base, map, principles, framework, foundation, constitution, ideas, theory, Leads to coherent & consistent standards Identifies – purpose of reporting, user groups, useful information, reporting entity, contents, elements, recognition, measurement issues Why? USA joint project 20

What’s new? Useful information has two fundamental characteristics Relevant Capable of making a difference Predictive / confirmatory 21

What’s new Useful information has two fundamental characteristics Faithful representation Complete Neutral Free from error Reliable / substance over form / objective 22

What’s new Useful information has four enhancing characteristics 1.Comparability 2.Verifiability 3.Timeliness 4.Understandability 23