The Institute of Chartered Accountants in England and Wales

CORPORATE REPORTING
Advanced Stage

For exams in 2013

Study Guide

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Contents

1 2 3 4 5 6

Introduction Aim of the papers & specification grid Study guide Skills assessment guide Technical knowledge Key resources

1 3 4 31 34 37

1 Introduction
1.1 What is the Advanced Stage?
Structure and progression
The Advanced Stage of the ACA qualification is designed to ensure that candidates are able to integrate and apply their technical, professional and ethical skills in a variety of business environments. The diagram below shows the five modules which form the basis of the Advanced Stage. The Advanced Stage is comprised of two technical integration modules and the Case Study. The two technical integration modules will be examined in a business scenario context which draws together a number of different areas of technical knowledge.

The Professional Stage consists of knowledge modules and application modules. The knowledge modules introduce the core technical knowledge and skills required by a chartered accountant. The application modules further develop and assess practical application of technical knowledge and skills. The technical knowledge acquired at the Professional Stage is developed to an advanced level and integrated in a broader range of business scenarios in the Advanced Stage technical integration modules. The application of technical knowledge in these modules requires an appreciation of the typical issues and problems facing businesses and their relationship to corporate reporting, assurance and taxation. A greater depth of business and financial analysis will be required to understand the implications and risks arising from the business issues. New technical topics are introduced in the technical integration modules, that are not dealt with elsewhere in the syllabus. A deeper level of technical ability is expected of candidates across the entire ACA syllabus to reflect the greater financial and business awareness needs of trainee chartered accountants approaching qualification. This is reflected particularly in assessing candidates proficiency and ability to integrate knowledge and skills both within and across technical subjects in a range of complex business scenarios. Candidates will also be required to apply professional knowledge using more advanced skills in the technical integration modules. These professional skills are then examined to a greater extent in the final

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ACA module: the Case Study. This module requires higher level cognitive skills, analytical and evaluative skills and emphasises the importance of communication and articulation skills.

Assessment
The two technical integration modules will be examined using traditional paper based assessments. Each paper based exam will be 3.5 hours in length. These exams will contain questions requiring the integration of knowledge both within technical disciplines and across technical disciplines. Questions integrated across all subject streams are an essential step towards the Case Study but will generally have more structure and guidance than those at the Case Study. The Case Study will continue in its present format of a four hour written exam with advance information provided to candidates ahead of the exam and impact information issued in the exam, containing the Case Study requirements.

Flexibility
There are no regulations stipulating the order in which candidates must attempt the technical integration modules. The Case Study must be the final module attempted and can only be attempted in the final year of a training contract. There is no restriction on the number of attempts permitted at each advanced stage module.

Open Book Policy

Candidates may take any written or printed material into the exam hall subject to practical space restrictions.

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2 Aim of the papers and specification grid

2.1 Module aim
The aim of the Business Reporting paper is: To ensure that candidates can apply analysis techniques, technical knowledge and professional skills to resolve real-life compliance issues faced by businesses. Candidates may be put, for example, in the role of a preparer of financial statements, or other corporate reports such as on sustainability and corporate responsibility, an advisor or in an assurance role facing business issues where there are reporting implications. Compliance issues relating to taxation will also feature in this module. Candidates will be required to use professional judgement to identify and evaluate alternatives and determine the appropriate solution(s) to compliance issues, giving due consideration to the commercial impact of their recommendations. The aim of the Business Change paper is: To ensure that candidates can provide technical advice in respect of issues arising in business transformations, mergers, acquisitions, alliances and disposals. Candidates will be required to analyse and interpret both external and internal financial and nonfinancial data in order to plan for change and provide advice. In undertaking this analysis candidates will be expected to evaluate the impact of stakeholder influences on the data, including the impact of choice of reporting policies. Taxation and practical business techniques are particularly important in this module, where business techniques include aspects of business strategy, business finance, performance management and costing. There will also be financial reporting, assurance, ethical and legal implications to be considered when developing and assessing strategic and business plans.

2.2

Specification grid
This grid is a general guide as to the subject matter within this module and assessment coverage over a period of time. BR Weighting (%) 5 10 20 30 30 40 30 40 0 BC Weighting (%) 5 10 25 35 10 20 15 25 30 35

Ethics and law Taxation Audit and assurance Corporate reporting Business analysis

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3 Study guide
3.1 Help yourself study for your ACA exams
The right approach
1 Develop the right attitude Believe in yourself Remember why you're doing it Yes, there is a lot to learn. But thousands have succeeded before and you can too. You are studying for a good reason: to advance your career.

Focus on the exam Read through the Syllabus in this guide This tells you what you are expected to know.

The right method See the whole picture Keeping in mind how all the detail you need to know fits into the whole picture will help you understand it better. The Practical significance and Working context to each chapter in the study guide put the material into context. The Learning objectives and Section overviews in the Study Manual show you what you need to grasp.

Use your own words

To absorb the information (and to practise your written communication skills), you need to put it into your own words. Take notes. Answer the questions in each chapter. Draw mindmaps. Try 'teaching' a subject to a colleague or friend.

Give yourself cues to jog your memory

The Study Manual uses bold to highlight key points. Try colour coding with a highlighter pen. Write key points on cards.

The right recap Review, review, review Regularly reviewing a topic in summary form can fix it in your memory. The Study Manual helps you review in many ways. Each Chapter Summary will help you to recall that study session. The Self-test actively tests your grasp of the essentials. Go through the Examples in each chapter a second or third time.

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3.2

Study cycle
The best way to approach the Study Manual is to tackle the chapters in order. We will look in detail at how to approach each chapter below but as a general guide, taking into account your individual learning style, you could follow this sequence for each chapter. Key study steps Step 1 Topic list Step 2 Introduction Activity This topic list is shown in the contents for each chapter and helps you navigate each part of the book; each numbered topic is a numbered section in the chapter. The practical significance and working context sections for each chapter set out in this study guide give you the big picture in terms of the context of the chapter. The Examination context guidance shows what the examiners are looking for and tells you why the topics covered in the chapter need to be studied. Section overviews give you a quick summary of the content of each of the main chapter sections. They can also be used at the end of each chapter to help you review each chapter quickly. Proceed methodically through each chapter, particularly focusing on areas highlighted as significant in the chapter introduction or study guide. Take brief notes, if you wish. Don't copy out too much. Remember that being able to record something yourself is a sign of being able to understand it. Your notes can be in whatever format you find most helpful lists, diagrams, mindmaps. Work through the examples very carefully as they illustrate key knowledge and techniques. Check yours against the suggested solutions, and make sure you understand any discrepancies. Review it carefully, to make sure you have grasped the significance of all the important points in the chapter. Use the Self-test to check how much you have remembered of the topics covered. Ensure you have ticked off the Learning objectives.

Step 3 Section overviews Step 4 Explanations Step 5 Note taking Step 6 Examples Step 7 Answers Step 8 Chapter summary Step 9 Self-test Step 10 Learning objectives

Moving on...
When you are ready to start revising, you should still refer back to the Study Manual. As a source of reference (you should find the index particularly helpful for this). As a way to review (the Section Overviews, Examination Context, Chapter Summaries and Self-test questions help you here).

Remember to keep careful hold of the Study Manual you will find it invaluable in your work.

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Essential points

As a professional accountant, you will need to prepare both year end and interim financial reports. Chapter 1 addresses two standards: IAS 1 Presentation of Financial Statements and IAS 34 Interim Financial Reporting. IAS 1 terminology

Financial markets constantly require up-to-date corporate information. Reporting frequency has increased, with interim reporting playing an important role in the corporate reporting cycle.

Presentation of other comprehensive income Amended purpose of statement of changes in equity Form and content of interim reports, use of estimates Guiding principles in the preparation of interim statements UK GAAP is largely on its way out except for very small companies

You have studied IAS 1 in depth in your earlier stages. IAS 1 was revised in 2011, and a brief discussion of the revision is included for completeness, although the standard came out to late to be examinable in 2012. IAS 34 Interim Financial Reporting (a new topic at Advanced Level) lays down the principles and guidelines for the production of interim reports.

The preparation of interim financial statements may present a number of challenges. It is common for some business arrangements, such as supply pricing agreements, bonus schemes, taxation and overhead allocation, to be based on annualised approaches. The measurement and presentation of such information may therefore be complex.

Stop and think

What is the purpose of presenting a statement of comprehensive income?

You should note that the guiding principle of IAS 34 is that an entity should use the same recognition and measurement principles in its interim statements as it does in its annual financial statements.

What are the challenges presented in the preparation of interim financial reporting?

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Inventories can often be the most significant current asset on an entity's statement of financial position. As a professional accountant you may need to value inventory, including work-in-progress in service industries. You may need to exercise judgement as to whether an asset is capitalised or not and assess impairment for both tangible and intangible noncurrent assets. They address the reporting of assets, impairment, liabilities, provisions and contingencies and events after the reporting period These are likely to be examined in an integrated way with other areas at Advanced Level. Revise the main principles and attempt the interactive questions. Go back to your earlier studies if you have a problem answering these. Use the Self-test questions for further revision.

Chapters 2 and 3 give a brief revision of standards covered in great detail in terms of content and application at professional level.

The reporting of assets has been covered in great detail at Professional level and the current chapter revises that material. IAS 16 sets out the accounting treatment for property, plant and equipment except where another Standard requires or permits otherwise. Other Standards may therefore be required to be applied in conjunction with IAS 16. These include IAS 2 Inventories and IAS 40 Investment Property where there is a change in use of an asset or at different stages in an asset's life.

The valuation of inventory involves the exercise of management's judgement which includes determination of cost and consideration of valuation policies, to ensure that it is not stated at an amount above that which is realisable. In addition, whether an asset is capitalised or not, the value attributed to it and how it is depreciated or not has a significant impact on the statement of financial position, equity and profits of a company. These in turn affect analysts' measures of return and gearing, which are used as a basis for making investment decisions.

Stop and think

How do we assess impairment?

How are impairment losses accounted for?

IFRS 13 Fair Value Measurement is discussed briefly to give you an overview. It is not examinable in 2013, but you will need it later in your working life. Revenue recognition is covered by IAS 18, but this is being revised.

What types of intangibles can be revalued?

Non-current assets held for sale are covered by IFRS 5 Non-current Assets held for sale and Discontinued Operations. Biological assets are reported in accordance with IAS 41 Agriculture and mineral rights, mineral reserves and similar non-regenerative resources are covered by IFRS 6 Exploration for and Evaluation of Mineral Resources. These are covered in Chapter 13.

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IAS 10 Events After the Reporting Period

Chapters 2 and 3 give a brief revision of standards covered in great detail in terms of content and application at professional level. They address the reporting of assets, impairment, liabilities, provisions and contingencies and events after the reporting period (previously known as post balance sheet events). These are likely to be examined in an integrated way with other areas at Advanced Level. Revise the main principles and attempt the interactive questions. Go back to your earlier studies if you have a problem answering these. Use the Self-test questions for further revision.

You should be aware of the interrelationships between standards which are significant in answering questions. You will have covered these at Professional level and will encounter them through the illustrations and questions in this chapter.

Regardless of how quickly the financial statements are published after the end of the year subsequent events and transactions can be so significant that they need to be considered for either disclosure or adjustment or (in extreme situations) for their effect on the underlying principle of going concern. You will be required to identify circumstances in which provisions will be required and when contingent liabilities or contingent assets should be recognised.

In a working environment you will have to assess transactions and events taking place after the reporting period and advise how these should be accounted for or disclosed. You will need to identify the appropriate cut-off date which will depend on the process of authorisation and the reporting entity's jurisdiction.

IAS 37 Provisions, Contingent Liabilities and Contingent Assets

IAS 37 has strengthened the required treatment of provisions in this area which is now more objective and restrictive. Provisions need to be recognised on the basis of obligations rather than management intentions.

Stop and think

What type of events could be classified as adjusting or non-adjusting respectively?

What type of events could affect the underlying principle of going concern?

Why should the date on which the financial statements were authorised be disclosed?

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How should an error that is highlighted in the period of review up to the authorisation date be dealt with?

How should an entity deal with an error that was identified after the financial statements have been authorised?

Under what circumstances should a provision be recognised? What is the relationship between a provision and a contingent liability?

When should a contingent asset be recognised?

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In a working context you may have to decide on the classification of a lease and may need to review contractual arrangements to determine whether these contain a lease. You may also have to account for borrowing costs and government grants. Revise the topic through interactive questions and ensure you understand the different scenarios relating to sale and leaseback. You will later encounter sale and leaseback transactions again in practical real life situations in Chapter 16 on financial analysis.

Lease finance is a common route to acquiring operating assets. The classification of leases is a particularly sensitive issue for corporate entities. If leases are capitalised, financial gearing will increase and this may have adverse consequences on other key ratios, such as return on capital employed and interest cover and the level of perceived risk may increase.

You will have covered IAS 17 Leases in great detail in your earlier studies, including sale and leaseback transactions.

You will have covered most of the material on IAS 17 Leases at Professional Stage. This chapter deals with some further issues and IFRIC 4.

Sale and leaseback arrangements can provide entities with capital funding by releasing capital caught up in the business for investment in other core opportunities.

The evaluation of leases and the lease-buy decision are covered in the Business Analysis Study Manual. The taxation of leases is covered in the Taxation Study Manual and needs to be understood to determine any deferred tax implications of leases under IAS 12. Tax cash flows are also important in determining the commercial merits of a lease in Business Analysis. You will have covered both IAS 23 Borrowing Costs and IAS 20 on government grants in your earlier studies.

Stop and think

Why is the classification of leases important when analysing financial statements?

It is important to understand the related accounting requirements to appreciate how such transactions may lead to a boost in profits, reduction in assets and consequent improvement in return on asset ratios. Note the requirements of IFRIC 4 which you will not have encountered in earlier studies.

Why is the unguaranteed residual value of a leased asset important?

Why do companies enter into sale and leaseback transactions?

Revise IAS 20 and IAS 23 through interactive questions and go back to earlier material if necessary.

Essential points

Determining whether an arrangement contains a lease Government grants Borrowing costs

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The detailed qualitative and quantitative disclosures required by IFRS 7 are intended to provide to the users of financial statements an understanding of the significance of financial instruments for the entity's position and performance and an analysis of the risks to which the entity is exposed and how it manages them. You will need to prepare detailed disclosures for financial instruments and establish the correct presentation of preference shares and convertible instruments between debt and equity. Chapter 5 covers the presentation and disclosure requirements of IAS 32 and IFRS 7. Although you will have a detailed knowledge of IAS 32 from earlier studies, the importance of this topic cannot be underestimated. Make sure you understand the issues relating to the accounting of compound financial instruments. Look in particular at the qualitative disclosures required by IFRS 7 for each type of risk.
Essential points

All areas of IAS 32 were examinable at Professional level although only the basic areas of IFRS 7 were covered at that stage. This chapter provides an overview of IAS 32 and addresses in more detail the requirements of IFRS 7.

Stop and think

What is the significance of the classification of convertible stock between debt and equity?

Accounting for compound financial instruments Accounting for different types of preference shares Significance of financial instruments disclosures or financial position and disclosure Quantitative disclosures Qualitative disclosures Credit risk and change in value

Why was it necessary to issue a detailed standard on disclosures?

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The use of financial instruments by business for funding, investment and risk management purposes is an essential part of operations. Examples of financial instruments include the use of foreign currency to purchase assets from abroad, debt instruments such as debentures or convertible corporate bonds and derivative instruments such as swaps, options, and futures. Work through the summary of material covered in earlier studies as this is a complex topic. Make sure you are familiar with the accounting treatment of financial assets and liabilities by going through the overview before moving onto section 2 on recognition and derecognition. Note the accounting treatment of transaction costs in section 3.3 of this chapter.

In a working environment you will have to account for financial assets and liabilities including derivatives and embedded derivatives and identify the appropriate treatment when recognition and derecognition criteria are met.

Chapter 6 builds on knowledge brought forward from earlier studies and takes the areas of recognition, derecognition and measurement of financial instruments further.

You will have been introduced to the recognition and measurement of financial instruments at professional level. In this chapter we address further aspects of recognition and measurement and cover embedded derivatives. The characteristics of derivative instruments referred to in this chapter such as call and put options have been addressed in your Business Analysis Study Manual. Essential points Recognition and derecognition of financial assets Accounting for regular way purchases Trade date accounting Settlement date accounting

Financial instruments, especially derivatives can significantly change the risk profile of organisations. Therefore the IASB requires that fair value measurement is used for some financial assets and liabilities.

Stop and think

How are transaction costs recognised?

What are the derecognition rules for assets and liabilities?

Work carefully through section 4 on derivatives including all the worked examples, interactive questions and illustrations.

How are impairment losses recognised?

What instruments qualify as derivatives for accounting purposes?

Study carefully the section on embedded derivatives noting their key characteristics and the required accounting.

What is the accounting treatment of derivatives?

IAS 39 derecognition criteria Factoring Sale and repurchase agreements Securitisations Treatment of transaction costs Embedded derivatives IFRS 9 as a current issue. Note in particular the need where relevant, to separate the host instrument from the embedded derivative. (This will change for financial assets when IFRS 9 comes into force.)

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In a working environment you may have to test hedging transactions to establish whether these qualify for hedge accounting, to prepare the necessary documentation and implement the accounting treatment. Chapter 7 is perhaps the most complex and demanding in this text and likely to take you the longest to study. Study carefully the three types of hedges and work through all worked examples and interactive questions. Do the Self-test for further practice. The hedge criteria are very important and could be tested in an integrated question as part of the auditing of controls and documentation relating to derivatives. Ensure you are able to assess and explain hedge effectiveness. (The treatment of hedging will be simplified when IFRS 9 comes into force.) Essential points

The characteristics of derivatives referred to in this chapter have been covered in the Business Analysis Study Manual.

Types of hedging relationships Cash flow hedge Fair value hedge Hedge of a net investment in a foreign operation Hedge criteria Hedge effectiveness

Most entities which are exposed to various financial risks employ hedging techniques to reduce fluctuations in the value or cash flows of financial instruments. Hedge accounting attempts to reflect the economic aspects of hedging in the accounting treatment of such relationships. The hedge accounting requirements of the international accounting standards require the recording of strategies and measurement of the effectiveness of the hedges. Entities must, therefore, develop and maintain systems, processes and documentation. Entities will normally undertake a cost/benefit analysis to determine whether or not to undertake hedging strategies and hedge accounting

Stop and think

What is hedge accounting?

What is a hedged item?

What is a hedging instrument?

What is the difference between the different types of hedges?

What are the qualifying criteria for hedge accounting?

How is hedging effectiveness measured?

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Employee benefit costs can be a very significant proportion of total revenue. You will need to be able to account for a range of employment benefits. You will need to be able to apply the requirements of IAS 19 to the relatively straightforward defined contribution plans and the vastly more complex defined benefit plans. Employee benefits is one of two chapters addressing employee remuneration. It is a new and complex topic to which you will need to devote a significant amount of time.

Share-based employee benefits are excluded from IAS 19 as these are dealt with in IFRS 2 Share-based Payment. IAS 19 refers to the need for an entity to recognise or disclose information in relation to contingent liabilities as required by IAS 37. These contingencies may arise: As termination benefits in a redundancy plan, or Where the entity shares the risks of actuarial losses or shortfalls of other entities in multi-employer plans. IAS 24 Related Party Disclosures requires information to be disclosed about key management personnel compensation which includes all benefits as defined by IAS 19 and IFRS 2.

Whereas accounting for short-term benefits presents few if any, problems, the cost of long-term and postemployment benefits, which include pension plans, medical benefits and life insurance is difficult to estimate. This is because the entity's obligation depends on factors such as life expectancy, future wage and benefit rates and investment returns over a very extended future period. For the latter you will need to rely on the expertise of actuaries which will be critical to the ability to properly account for defined benefit plan costs. Section 3 addresses post employment benefits. Note the two types, defined contribution (section 4) and defined benefit (section 5) pension schemes. The accounting for defined benefit schemes is by far the more complex of the two. Section 5 addresses the most challenging concepts in the chapter. IAS 19 was revised and simplified in 2011. Although the revision was too late to be examinable in 2012, we have included a summary of the changes for completeness. The main change is the abolition of the corridor method: all actuarial gains and losses will go through other comprehensive income. Section 1 gives a summary of the types of benefits that the standard addresses. Note that the accounting for short-term employee benefits (covered in section 2) is relatively straightforward.

Although IAS 19 Employee Benefits sets detailed accounting and disclosure requirements to ensure that all pension plans are accounted for and presented in a consistent manner, the underlying assumptions in the estimation process are highly subjective.

Pension deficits are an important consideration in mergers and acquisitions as venture capitalists and private equity providers regard these as equivalent to taking on additional debt in the statement of financial position. In the UK, the pensions regulator imposes a duty on trustees to require substantial assets up front in the event of a leveraged buy-out where pension benefits need to be safeguarded.

IAS 2 Inventories allows the cost of relevant personnel including short-term employee benefits under IAS 19 to be included in inventories, effectively the work-in progress of service-based entities.

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Stop and think

What are the main types of short-term, long-term and post-employment benefits?

What is the difference between defined benefit and defined contribution schemes for post-employment benefits?

IAS 16 Property, Plant and Equipment allows directly attributable costs of employee benefits arising directly from the construction or acquisition of property, plant and equipment to be included in the cost of initial recognition. IFRS 3 Business Combinations requires that in a business combination, an entity recognises assets and liabilities arising from post-employment benefits in accordance with IAS 19.

Why is the accounting for the defined benefit scheme far more difficult than the defined contribution scheme?

Why do we have to disclose key assumptions and methods used in the accounting for defined benefit pension schemes?

Why is the concept of expense smoothing allowed by IAS 19 considered controversial?

What are the accounting complications of post-retirement benefits other than pensions?

IAS 19 contains offset criteria for employers with more than one plan where some are in surplus and others in deficit which closely follow those of IAS 32 Financial Instruments: Presentation. IAS 19 requires plan assets to be valued at their fair value which is defined as in IAS 39 Financial Instruments: Recognition and Measurement. IAS 19 has been revised you wont be tested on the detail but should have an overview

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Essential points Short term employee benefits Post employment benefits Defined contribution plans Defined benefit plans Defined benefit plans Investment risk Actuarial risk Pension surplus or deficit Current service cost Interest cost Actuarial gains and losses Plan assets Corridor method to be abolished and so less important for the exam than previously. IAS 19 revisions as a current issue

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In major capital markets the potential gains that senior management can achieve through share-based payment transactions are so significant that they may dwarf other elements of remuneration packages. In a working environment you may have to assess the effect of granting stock options as a remuneration policy on the entitys financial statements and advise on how these should be reported and disclosed. It is important for its impact on performance and the potential dilution of EPS. Note the three types of share-based payment recognised by the standard and the importance of vesting conditions. Chapter 9 Share-based Payment is another new topic at Advanced Level. It is highly topical and its adoption has not been without controversy.

To estimate the fair value of options, IFRS 2 requires the use of an option pricing model, although the Standard does not specify which model should be used. Option pricing, suitable models and the inputs or parameters to these models are covered in your Business Analysis Study Manual. IAS 24 Related Party Disclosures requires an entity to disclose the consideration given to key management personnel in terms of all share-based transactions.

Before the publication of IFRS 2 there was no requirement to include an expense in profit or loss for this kind of remuneration. This resulted in entities that offered low cash salaries but large quantities of share-based compensation recording low costs in their performance statements. By comparison, entities operating in a more stable and mature industry where cash-based remuneration was the norm recorded higher employee costs in the performance statement.

Stop and think

If the granting of equity instruments does not require the entity to part with assets why should a charge be recognised in profit or loss?

Under IAS 12 Income Taxes, the cumulative expense associated with share-based payment transactions gives rise to a deductible temporary difference as it is fully expensed in advance of being recognised for tax purposes. Essential points

Why has this been a controversial standard polarising views at the highest political level?

What is the impact of share-based payments on earnings per share?

Share-based payment transactions Equity-settled Cash-settled With a choice of settlement

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What is the impact in the statement of financial position?

Vesting conditions Market based Non-market based Modifications to equity instruments Determining the fair value of equity instruments use of models

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10

In a working context you will have to account for acquisitions, disposals and business combinations such as investments in associates, joint ventures, or consolidations of subsidiaries. You will have covered the standards revised in this chapter in your earlier studies. Pay particularly attention calculation of goodwill including the non-controlling interest Work through the examples and interactive questions to ensure you understand the key principles. Essential points Subsidiaries Associates Joint Ventures Investments Step acquisitions Part-disposals You may also be required to prepare consolidated statements of cash flows, which are likely to include the effect of acquisitions and disposals. You must also ensure that you understand the calculations required for step acquisitions and disposals again these differ from those seen previously. Revise the principles relating to consolidated statements of cash flows and return to your earlier studies if necessary.

Business combinations are becoming increasingly complex. The nature of purchase consideration and the legal form of such transactions are often driven by financial and tax features. Structures are carefully modelled to ensure that transactions optimise postacquisition earnings as well as meeting corporate strategic objectives.

You will have covered all the Standards revised in this chapter at Professional Stage, although not necessarily in the level of detail required for Corporate Reporting.

Consolidated statements of cash flows IFRSs 10 to 12 as a current issue

Users should carefully review the disclosures included in the financial statements regarding business combinations. In the year that a business combination has taken place, the financial results of the acquired entity will be . Extensive disclosures allow users of the financial statements to understand the effect of the combination on the group's operations during the period. This improves the predictive value of the financial information.

Stop and think

IFRSs 10 to 12 revise the definition of control and the treatment of joint arrangements, and also change the required disclosures. A summary is given for completeness, but they were published too late for the 2012 examination.

Why are business combinations becoming increasingly complex?

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11

IAS 21 The Effects of Changes in Foreign Exchange Rates

Covers IAS 21 The Effects of Changes in Foreign Exchange Rates and IAS 29 Financial Reporting in Hyperinflationary Economies IAS 21 is another complex standard you will not have covered in earlier studies. You must understand the difference between monetary and nonmonetary items in section 1 of the chapter. Note the significance of the functional currency in section 2 and how this is determined.

The management of foreign exchange risk is an important aspect of business operations. Importing and exporting goods introduces foreign exchange risk and results in earnings volatility with reporting implications on earnings and cash flow.

In a working context you may have to establish the functional currency, determine the accounting treatment of exchange differences on monetary and non-monetary items and translate the financial statements for consolidation purposes. You may also be required to use or prepare inflation adjusted figures.

An entity's financial statements whose functional currency is the currency of a hyperinflationary economy must be restated under IAS 29 Financial Reporting in Hyperinflationary Economiesprior to translation into a different presentation currency.

It is essential that translation processes are undertaken on a consistent basis to ensure comparability of financial statements.

IAS 29 Financial Reporting in Hyperinflationary Economies

IAS 12 Income Taxes applies to the associated tax effects of foreign currency transactions. In reporting exchange differences on monetary items the hedge accounting provisions of IAS 39 overrule the requirements of IAS 21. Essential points Monetary items

Note the accounting requirements for reporting of foreign transactions, consolidation of foreign subsidiaries and goodwill and fair value adjustments. An awareness of the scope of IAS 29 Financial Reporting in Hyperinflationary Economies is required. This chapter also covers the impact of foreign currency on statements of cash flows.

In recent years levels of general inflation in G7 and developed countries have been low, so the management and reporting of inflationary price rises has not been a major challenge to investors and the users of financial statements.

Non-monetary items Functional currency Determining functional currency Indications of functional currency Translation of financial statements Foreign currency and consolidation

The measurement and use of inflationadjusted figures is essential to understand business performance. The adjustments to financial statements are not simple, and it requires a substantial learning process by preparers and users of financial statements to implement and understand the end result.

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Stop and think

What are the primary and secondary indicators of functional currency?

Re-state Monetary assets/liabilities Non-monetary assets/liabilities Items of income/expenses Gain/loss on net monetary items

At what rate are foreign currency transactions recognised initially and how are outstanding monetary and non-monetary items at the reporting date translated?

What is the accounting treatment of exchange differences on monetary and non-monetary items?

How are an entity's financial statements translated from its functional into a presentation currency?

Foreign currency cash flows Transactions in foreign currency Foreign subsidiaries Reporting translation differences

How is the statement of comprehensive income translated for consolidation purposes and where are exchange differences reported in the consolidated financial statements?

How are foreign cash flows reported in the statement of cash flows?

How are inflationary price rises managed and reported in the financial statements?

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12

Taxation is a major expense for business entities and has a direct effect on cash flow and performance. In a working context you may have to identify deferred tax assets and liabilities arising out of deductible and taxable differences and report and present these as appropriate in the financial statements. You must understand the concept of temporary differences and how these give rise to deferred tax. Go through the examples very carefully. Ensure that you follow the steps relating to the recognition and measurement of deferred tax. Study the presentation and disclosure requirements Chapter 12 Income Taxes gives a brief overview of the material that you have covered at professional level on current tax and goes on to address the complex and new topic of deferred tax.

Corporate income taxes are a means by which governments provide incentives for companies to act in a particular way, for example beneficial tax credits to encourage research and development and allowances to encourage investment. Therefore, although taxable profit is based on accounting profit, there are often important differences. Accounting for these types of differences is the major emphasis of this chapter.

The recognition of a business combination in accordance with IFRS 3 Business Combinations may lead to temporary differences arising. IAS 27 Consolidated and Separate Financial Statements can lead to deferred tax balances in the consolidated financial statements where the accounting treatment may differ from the tax treatment in the individual company financial statements of the subsidiaries.

Stop and think

How does deferred tax arise and how is it measured?

The revaluation of property, plant and equipment under the allowed alternative treatment of IAS 16 Property, Plant and Equipment leads to temporary differences arising. Essential points Taxable temporary differences Deductible temporary differences Tax base of assets and liabilities Determining the deferred tax balance

How may deferred tax arise in group accounting or when non-current assets are revalued?

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Study Period Working context Approach

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Syllabus links and essential points

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Deferred tax and revalued asset Deferred tax and business combinations

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IAS 40 Investment Property

Entities also invest in property for the potentially attractive returns that are available from capital gains and rental income. Measuring such investment properties as a series of out-of-date historic costs is not an appropriate reflection of volatility caused by changes in property values. You will have detailed knowledge of IAS 40 Investment Property both in terms of content and application from your earlier studies. This is likely to be tested at Advanced Stage is in an integrated way with other standards. You need to be aware of the scope and basic application principles of the other standards in this chapter which you are encountering for the first time at Advanced level.

You will need to be able to identify investment properties and apply the appropriate recognition and measurement criteria. You may also need to understand and apply the effect that a change in use will have. Chapter 13 deals with the following industry specific standards, IAS 40, IAS 41, IFRS 4 and IFRS 26.

You will have covered IAS 40 Investment Property at Professional stage. This is the first time that you encounter IAS 41 Agriculture, IFRS 4 Insurance Contracts, and IAS 26 Accounting and Reporting by Retirement Benefit Plans. Essential points Further aspects of recognition Cost model Fair value model Agricultural activities Exploration for mineral resources Insurance contracts Accounting for retirement benefit plans

IAS 41 Agriculture

The reporting of financial performance and position in the agricultural sector poses a number of challenges. Working in the context of extractive industries you will need to make judgments on the appropriate capitalisation of expenditure.

Since the use of a historic cost model was not seen as wholly appropriate for accounting for agricultural activity, the IASB issued IAS 41 Agriculture based on a fair value model.

Working in the context of the agricultural sector you will need to distinguish between biological assets and agricultural produce; apply market-based measures for valuing biological assets and agricultural produce; recognise assets and produce and account for the gains and losses arising.

IFRS 6 Exploration for and Evaluation of Mineral Resources

Entities such as those in the oil and gas industry follow a wide range of practices for the accounting of exploration and evaluation expenditure.

In a working context you may be required to identify an insurance contract; understand the various forms that an insurance contract may take and set out the disclosure requirements which, in particular, help to explain the risks associated with an insurance contract.

IFRS 6 permits entities to continue with their previous accounting policies provided the resulting information is relevant and reliable.

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IFRS 4 Insurance Contracts

IFRS 4 Insurance Contracts attempts to provide a framework within which a common set of reporting principles are set out to provide relevant information that will assist a user's understanding of the entity's financial statements.

IAS 26 Accounting and Reporting by Retirement Benefit Plans

Retirement benefit plans (otherwise called 'pension schemes', 'superannuation schemes' or 'retirement benefit schemes') are collectively, financially significant as major suppliers of funds for corporate financing.

Stop and think

Why do entities hold investment properties?

What are the financial reporting challenges in the recognition and continued measurement of investment properties?

How do we distinguish between biological assets and agricultural produce?

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Study Period Working context Approach

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Syllabus links and essential points

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What are the issues relating to insurance contracts that need to be considered in setting out the reporting principles?

Why is the reporting of relevant and timely information by retirement benefit plans important?

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Earnings per share (EPS) is one of the most commonly used performance measures worldwide. Moreover, it is also a component in the price earnings ratio which is a key summary statistic in business valuation. IAS 33 Earnings per Share seeks to provide guidance to ensure a consistent basis is followed so that a meaningful comparison can be made over time. As a professional accountant, you will need to calculate basic earnings per share and diluted earnings per share where applicable. You will also need to appreciate the significance of additional EPS figures and how these may be calculated to provide a more stable performance measure. Advanced level addresses further aspects of dilution including the effect of options. Chapter 14 addresses IAS 33 Earnings per Share. You will have had a working knowledge of IAS 33 from earlier studies including the calculation of basic and diluted earnings per share (EPS).

Where an entity has preference shares in issue these will be classified as debt or equity according to their terms as required by IAS 32 Financial Instruments: Presentation which you will have already studied at Professional level. Employee share options which can lead to dilution of EPS are covered by IFRS 2 Share-based Payment. These are briefly addressed in this chapter and covered in more detail in Chapter 9. Essential points Basic EPS Impact of preference shares Diluted EPS Convertibles and diluted EPS Options and diluted EPS Contingently issuable shares

In addition to basic EPS, IAS 33 requires a diluted figure which takes into account the existence of convertible instruments already issued that could increase the number of shares. Additional EPS figures are often reported by entities based on what they consider to be sustainable earnings. These are intended to provide a more realistic measure of future performance.

Stop and think

What is the impact of bonus issues, rights issues and share consolidations on EPS?

What is the impact of convertibles, options and contingently issuable shares on EPS?

Why are additional EPS measures often disclosed?

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15

External users of financial statements rely on the limited disaggregation provided as a result of the requirements of accounting standards such as the disclosure of discontinued operations and segmental information. Chapter 15 starts with IFRS 8 Operating Segments. The rest of the chapter gives a revision of IAS 8, IFRS 1, IFRS 5, IAS 24 and the IFRS for Small and Medium-Sized Entities. Essential points Segment reporting In a working context you will need to identify and present information on reportable segments, identify and disclose related party transactions and apply the requirements of a number of standards that have been covered at Professional Stage such as accounting for revenue, changes in accounting policies, and discontinued operations. You will have acquired a thorough knowledge in your earlier studies both of their subject matter and their application and how in providing disaggregated information they enhance the reporting of performance. You need to note the importance of these standards when you study the final chapter on financial statements analysis.

With the exception of IFRS 8 Operating Segments you will have covered all the material in this chapter at Professional Level.

Listed entities often operate in a range of geographical and business markets, each of which provides different risks and rewards for an entity. Segmental information is therefore important.

Changes in accounting policies Changes in accounting estimates, and errors Discontinued operations Related party transactions Definition of a related party Disclosable transactions

Stop and think

Why is segment reporting an important aspect of reporting financial performance?

How should a reportable segment be determined?

How does disaggregation of data help facilitate the assessment of a companys performance?

How do standards such as IFRS 5 and IFRS 8 help provide disaggregated information to users of financial statements?

Governance, the Directors Report and Reporting for Small Entities are topics you have covered in earlier studies and in your auditing text. This chapter gives a brief summary of the reporting aspects.

Small and medium-sized entities - Less guidance than full IFRS - Written in clear English - Some choices available in full IFRS omitted - Topics not relevant omitted - Fewer disclosures. - IFRS for SMEs

What is the significance in terms of the companys performance of disclosing related party transactions?

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16

The information that is provided by a company to its shareholders forms the basis for the formation of ideas about the prospects of the company. Financial analysis assesses the quality of this information and helps stakeholders make decisions. This chapter brings together elements of your study from your whole text, aspects of Business Analysis and a significant amount of your earlier study on financial ratios. Make sure you are familiar with the financial rations covered in earlier studies. As a professional accountant you need to appreciate the importance of disaggregated information as a basis for financial analysis, performance evaluation and decision making. You should be aware of the difficulties in interpreting financial information as a result of the flexibility afforded by certain standards and the potential misrepresentation of such information. Note the significance of financial analysis in assessing the quality of information provided to stakeholders and in helping form decisions. Section 10 has a number of miscellaneous current issues, included for completeness Essential points Financial ratios

Stop and think

The material is based on the ratios, financial analysis as well as all the standards and their application as covered at professional level. It also draws on the additional aspects of IFRS covered in this book and builds on knowledge gained in the Business Analysis Study Manual.

What are the main types of creative accounting, and how can accounts be restated?

Business strategy analysis Industry analysis Accounting analysis Accounting distortions Creative accounting How we can improve the quality of financial information forecasting

What are the main financial ratios and what are the main accounting issues involved in their construction and application?

How do we forecast financial statements and analyse the impact of business decisions on the value of a company?

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4 Skills assessment guide

4.1 Introduction
As a Chartered Accountant in the business world, you will require the knowledge and skills to interpret financial and other numerical and business data, and communicate the underlying issues to your clients. In a similar way to the required knowledge, the ACA syllabus has been designed to develop your professional skills in a progressive manner. These skills are broadly categorised as: Assimilating and using information Structuring problems and solutions Applying judgement Drawing conclusions and making recommendations

4.2

Assessing your professional skills

The work experience requirements for students provide a framework to develop appropriate work experience, completion of which is essential in order to qualify for membership. Work experience is also an essential component for examination preparation. The work experience framework is built around five key skills: Business awareness being aware of the internal and external issues and pressure for change facing an organisation and assessing an organisations performance. Technical and functional expertise applying syllabus learning outcomes and where appropriate, further technical knowledge to real situations. Ethics and professionalism recognising issues, using knowledge and experience to assess implications, making confident decisions and recommendations. Professional judgement making recommendations and adding value with appropriate, targeted and relevant solutions. Personal effectiveness developing, maintaining and exercising skills and personal attributes necessary for the role and responsibilities.

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The examinations, and in particular the Advanced Stage, embrace all of these skills. The link between work experience and the examinations is demonstrated by the skills development grids produced by the examiners. This will help students see that their practical knowledge and skills gained in the workplace feed back into the exam room and vice-versa.

4.3

Assessment grids
The following pages set out the learning outcomes for Corporate Reporting that are addressed under each of the four skills areas. In addition, for each skills area, there is a description of: The specific skills that are assessed How these skills are assessed

Using these grids will enable you to determine how the examination paper will be structured and to consider whether your knowledge of Corporate Reporting is sufficiently strong to enable you to apply it in the required manner.

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5 Technical knowledge
The table contained in this section shows the technical knowledge covered in the ACA Syllabus by module. For each individual standard the level of knowledge required in the relevant Professional Stage module and at the Advanced Stage is shown. The knowledge levels are defined as follows: Level D An awareness of the scope of the standard. Level C A general knowledge with a basic understanding of the subject matter and training in its application sufficient to identify significant issues and evaluate their potential implications or impact. Level B A working knowledge with a broad understanding of the subject matter and a level of experience in the application thereof sufficient to apply the subject matter in straightforward circumstances. Level A A thorough knowledge with a solid understanding of the subject matter and experience in the application thereof sufficient to exercise reasonable professional judgement in the application of the subject matter in those circumstances generally encountered by Chartered Accountants. Key to other symbols: the knowledge level reached is assumed to be continued

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FINANCIAL REPORTING
Advanced Stage A A A D D A A A D A A A D D A C C 35 Professional Stage

Accounting

Financial Accounting

Title

Preface to International Financial Reporting Standards Conceptual Framework for Financial Reporting IAS 1 Presentation of Financial Statements IAS 2 Inventories IAS 7 Statement of Cash Flows IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors IAS 10 Events after the Reporting Period IAS 11 Construction Contracts IAS 12 Income Taxes IAS 16 Property, Plant and Equipment IAS 17 Leases IAS 18 Revenue IAS 19 Employee Benefits IAS 20 Accounting for Government Grants and Disclosure of Government Assistance IAS 21 The Effects of Changes in Foreign Exchange Rates IAS 23 Borrowing Costs IAS 24 Related Party Disclosures IAS 26 Accounting and Reporting by Retirement Benefit Plans IAS 27 Consolidated and Separate Financial Statements IAS 28 Investments in Associates IAS 29 Financial Reporting in Hyperinflationary Economies IAS 31 Interests in Joint Ventures IAS 32 Financial Instruments: Presentation IAS 33 Earnings per Share IAS 34 Interim Financial Reporting IAS 36 Impairment of Assets IAS 37 Provisions, Contingent Liabilities and Contingent Assets IAS 38 Intangible Assets IAS 39 Financial Instruments: Recognition and Measurement IAS 40 Investment Property IAS 41 Agriculture IFRS 1 First-Time Adoption of IFRS IFRS 2 Share-based Payment IFRS 3 Business Combinations IFRS 4 Insurance Contracts IFRS 5 Non-current Assets Held for Sale and Discontinued Operations IFRS 6 Exploration for and Evaluation of Mineral Resources IFRS 7 Financial Instruments: Disclosures IFRS 8 Operating Segments IFRS 9 Financial Instruments IFRS for SMEs

C B C B

A A A A B A A

A A A

B B

B A B C

B B

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Financial Reporting
A C A A A A A A A B A A B A B A B A

Current issues
A number of the Chapters in this Study Manual cover current developments in the relevant financial reporting area. For example, IAS 39 is being replaced by IFRS 9, and there are proposals for changes to the rules on revenue recognition. These areas are not examinable because they were not in force at the April 2012 cut-off date for examinations in 2013. However, as a professional you need to be aware of what these issues are, and of the problems with current accounting treatments.

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6 Key Resources
STUDENT SUPPORT TEAM T +44 (0)1908 248 250 E studentsupport@icaew.com STUDENT WEBSITE icaew.com/students student homepage icaew.com/exams exam applications, deadlines, regulations and more icaew.com/cpl credit for prior learn/exemptions icaew.com/examresources examiner's comments, syllabus, past papers, study guides and more icaew.com/examresults exam results TUITION If you are receiving structured tuition, make sure you know how and when you can contact your tutors for extra help. If you arent receiving structured tuition and are interested in classroom, online or distance learning tuition, take a look at our tuition providers in your area on icaew.com/exams ONLINE STUDENT COMMUNITY The online student community allows you to ask questions, gain study and exam advice from fellow ACA and CFAB students and access our free webinars. There are also regular Ask an Expert and Ask a Tutor sessions to help you with key technical topics and exam papers. Access the community at icaew.com/studentcommunity THE LIBRARY & INFORMATION SERVICE (LIS) The Library & Information Service (LIS) is ICAEW's world-leading accountancy and business library. You have access to a range of resources free of charge via the library website, including the catalogue, LibCat. icaew.com/library

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