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Summary of key provisions of IAS & IFRS which may be relevant to ACCA financial reporting and audit papers for 2013 examinations
Note you may want to refer to your ACCA Paper F7 Financial Reporting and P2 Corporate Reporting study materials for further detailed information. Note you should not rely upon this document for knowledge and understanding of all aspects of these reporting standards and other examinable documents; rather they should be used as an aid or as a prompt to your studies.

2010 Conceptual Framework for Financial Reporting Relevant for both F7 Financial Reporting and P2 Corporate Reporting Objectives: Meets the needs of a range of users Financial performance as per SOCI Financial position as per SOFP reporting entity: Separate legal entity Commercial substance of corporate group qualitative characteristics: fundamental characteristics of relevance and faithful representation enhancing characteristics of comparability, verifiability, timeliness and understandability elements of financial statements: Assets rights to future economic benefits as a result of a past transaction or event Liabilities future obligations to transfer economic benefits as a result of a past transaction or event Equity residual interest in an entitys assets after deduction of all liabilities Income the increase in economic benefits during an accounting period Expanses decreases in economic benefits during an accounting period recognition in financial statements: Recognise if it meets the definition of an element of the financial statements, it is probable that there will be an inflow or outflow of economic benefits and it can be reliably measured. measurement in financial statements Usually historical cost or fair value, but could be present value or amortised cost presentation of financial information useful to users of FS Primary statements plus disclosure notes accounting for interests in other entities Single company, associate and joint venture, subsidiary and group

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Note that the Conceptual Framework for Financial Reporting was published in September 2010 and becomes an examinable document for 2012 examinations. There is little change so far in comparison with the previous framework document in effect, definitions etc have been carried forward to the 2010 Framework document, although there has been some change re qualitative characteristics. Note also that the 2010 Framework is part of a long-term convergence project between the IASB and US FASB, so the above content may change at some future date.

IAS 1 Presentation of financial statements Provides formats for classification and presentation of financial information Identifies components of financial statements Note items of OCI must now be classified as either items that may be reclassified to profit or loss in future periods, or those items which will not be reclassified in future periods

IAS 2 - Inventories Valued at lower of cost and fair value less selling costs (i.e. NRV) for each separate item or product Include all costs of getting item or product to current location and condition

IAS 7 Statement of cash flows Standard format choice between direct or indirect method indirect normally used Three standard headings = operating, investing and financing within standard heading, items can be in any order Normally begin operating activities with profit before tax and adjust for non-cash items

IAS 8 Accounting policies, changes in accounting estimates and errors Accounting policies should be appropriate and relevant, be consistently applied and be disclosed Changes in estimates are taken to SOCI e.g. change in depreciation method or revised estimate of NRV Changes in accounting policy and fundamental errors should be accounted for as a Prior Period Adjustment to re-state the opening position and comparative information

IAS 10 Events after the reporting period Definition those events between SOFP date and date of approval of financial statements Adjusting events those which provide additional evidence of the situation existing at the SOFP date e.g. insolvency of major debtor notified shortly after the reporting date Non-adjusting events those which do not provide evidence of the situation at the SOFP date e.g. share issue after the reporting date. Disclose only, but may become adjusting event if going concern basis threatened.
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IAS 11 - Construction contracts This is not relevant for paper P2 Long-term defined as contract straddling two or more accounting periods Recognise foreseeable losses prudent Recognise element of attributable profit matching

IAS 12 Income Taxes Tax on company income charge in SOCI and recognise as a liability Deferred tax based upon full provision at reporting date: Permanent differences ignored Temporary differences in accounting and tax treatment accounted for, e.g. Depreciation charge and tax allowances on PPE Share options annual expense and allowed for tax when exercised Defined benefit pension plans annual charge and contributions allowed for tax Need to consider recoverability of deferred tax assets asset ceiling limit Note 2011 revision re investment property measured at fair value

IAS 16 Property, plant & equipment Initial measurement cost directly attributable to bringing the asset into working condition; now compulsory to capitalise finance costs. Capitalise subsequent expenditure which enhances economic benefits of the asset. May be revalued take revaluation to revaluation reserve; continue to depreciate asset over remaining expected useful life. Disclose name, date and qualifications of valuer. Commence depreciation when asset available for use and charge to reflect economic benefits consumed during the period May be possible not to charge depreciation if it is immaterial due to very long expected useful life of asset and/or high residual values. If this is the case, asset to be maintained to a high standard and is unlikely to suffer from economic or technical obsolescence. Refer also to IAS 36 impairment of assets.

IAS 17 - Leases Operating lease any lease not a finance lease hire charges to IS on straight-line basis Finance lease: substantially all of economic useful life of asset and transfer of risks and rewards to less capitalise asset and liability at FV depreciation charge and finance cost charged to SOCI Sale and leaseback transactions: Operating leaseback derecognise asset and recognise gain or loss on disposal Finance leaseback: defer gain or loss on disposal and amortise over lease term recognise finance lease asset and finance lease obligation account for annual depreciation charge and finance costs in IS
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IAS 18 Revenue Revenue should be recognised in the period to which it relates When has revenue been earned? o When risks and rewards have been transferred o When work or service has been substantially delivered or performed o Upon identification of a critical point in a commercial relationship

IAS 19 (revised) Employee benefits Not in F7 Financial Reporting syllabus Contentious due to application of definition of liability per Framework Substantial revision in 2011 Defined contribution scheme recognises annual cost of pension contribution Defined benefit scheme: Net interest component charged to profit or loss in the year apply discount rate to net obligation at start of year includes increase in plan assets due to passage of time service cost component charged to profit or loss in the year current year service cost past service costs recognised in full when announced gains and losses on curtailments and settlements part of service cost remeasurement component taken to other comprehensive income in the year actuarial gains and losses on plan assets and plan obligation income and gains/losses on plan assets, other than included as part of net interest component Short-term employee benefits wages and salaries, benefits-in-kind etc on accruals basis Termination benefits recognise when there is a commitment to make such payments Other long-term employee benefits account for in similar way to defined benefit plans

IAS 20 Accounting for government grants Match revenue grants against expense to which they relate Match capital grants with assets to which they relate two possibilities account for gross cost of asset and deferred income on SOFP preferred treatment as it provides more information account only for net cost of asset on SOFP

IAS 21 The effects of changes in foreign exchange rates Not in F7 Financial Reporting syllabus. Use exchange rate ruling at date of transaction to record in FS Non-monetary items (e.g. NCA, inventory) are not restated Monetary items are re-translated at SOFP rate with gain or loss to PorL

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Group FS: Calculate goodwill in functional currency with annual retranslation at closing rate Translate SOFP at closing rate Translate SOCI at average rate Exchange gains and losses on retranslation of a foreign operation: Net assets (opening net assets plus profit for year) Goodwill Total exchange gain/loss on retranslation taken to OCI for the year Group share of exchange gain/loss on retranslation included in equity on SOFP

IAS 23 Borrowing costs Compulsory to capitalise borrowing cost during construction of a non-current asset Part of convergence between IAS/US GAAP

IAS 24 Related party disclosures Not in F7 Financial Reporting syllabus Definition of a related party Entities under common control or influence directors key staff able to control or influence transactions and/or their terms employee defined benefits scheme persons connected with any of the above Must disclose existence of related parties, plus transactions and terms

IAS 27 (revised) Separate financial statements Applies if consolidated financial statement not prepared disclose why Disclose basis upon which subsidiaries, associates and joint arrangements have been accounted for in these financial statements

IAS 28 (revised) Investment in associates and joint ventures Associate - able to exert significant influence, but not control, another entity Joint venture unanimous decision-making and entitled to share of net assets from JV entity Indicated by 20%-50% of equity shares in another entity Consider if another entity owned (say) 70% - they would have outright control IFRS 10 recognises that may still have influence, even if another has control Equity accounting in group FS: share of profit after tax for the year in SOCI cost plus share of profits/losses since gaining influence

Tony Sweetman Kaplan Publishing & Kaplan Financial December 2012

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IAS 32 - Financial Instruments Presentation IAS 39 - Financial Instruments Recognition and Measurement IFRS 7 Financial Instruments Disclosures IFRS 9 - Financial Instruments Use definitions of asset and liability per Framework to classify financial instruments according to commercial substance Returns on financial instruments in SOCI to be classified on consistent basis as financial instrument on SOFP Split compound or hybrid instruments into liability and equity elements at inception. Classification of financial assets per IFRS 9: Fair value through PorL (FVTPorL) is normal default classification for all financial assets Includes derivatives for speculation and financial assets held for trading Fair value through other comprehensive income (FVTOCI) can only apply to equity instruments only upon initial recognition any impairment losses part of OCI movement in year no recycling of impairment losses or of gains/loss on subsequent disposal Financial assets measured at amortised cost must pass two tests: business model test asset held to collect contractual cash flows contractual cash flows characteristics test cash flows consist solely of payment of interest and capital. if either test failed, must be measured as FVTPorL if at amortised cost, subject to annual impairment review Financial liabilities classification of financial liabilities per IFRS 9 as either: FVTPorL (like financial assets), includes derivatives for speculation and financial liabilities held for trading Other financial liabilities at amortised cost (if not at FVTPorL) Note can still opt to measure liabilities at FVTPorL to eliminate or reduce financial mismatch Hedging currently still dealt with by IAS 39: Must be formally documented at inception Must be regularly reviewed to ensure still effective FV hedge take changes in FV of hedged item and hedge instrument (i.e. derivative) to PorL Cashflow hedge take changes in FV of hedge instrument (i.e. derivative) to OCI.

IAS 33 Earnings per share EPS = Profit after tax, NCI and pref dividends Weighted average no. of equity shares Consider: o Market issue at full price calculate weighted ave no of equity shares in issue o Bonus issue free shares treat as if had always been in issue and restate comparative o Rights issue treat partly as bonus issue and partly as issue at full market price o Diluted EPS convertible debt and share option schemes

Tony Sweetman Kaplan Publishing & Kaplan Financial December 2012

IAS 34 Interim financial reporting Not in F7 Financial Reporting syllabus. May be required by local law or listing regulations Include condensed SOFP with comparative dated at end of previous financial year-end. Include condensed SOCI, plus cumulative for year to date, plus comparatives Include condensed SOCIE plus statement of cash flows, plus comparatives for each statement Include selected explanatory notes including any change in accounting policy or significant adjustments from interim to annual financial statements

IAS 36 Impairment of assets Definition reduction in recoverable amount below carrying value in the FS Normally charge to PorL. If asset previously revalued, first set impairment against revaluation reserve for that asset, with any residual amount taken to PorL. May apply to individual asset, collection of assets or income(cash) generating unit If IGU includes goodwill, then gross up net or proportionate goodwill to get total CV of IGU, then apply impairment test any impairment is then first allocated against goodwill. If there are several IGUs within a business (e.g. subsidiary), then two-stage impairment test required: First on each individual IGU Then on business as a whole Cannot write down an individual asset to an amount lower than its recoverable amount. Normally only expected to perform impairment review if there is indication that asset(s) may be impaired Compulsory impairment review required annually: IFRS 3 goodwill on acquisition Financial assets

IAS 37 Provisions, contingent liabilities and contingent assets Provision is a liability which has uncertainty regarding the exact amount to be paid and/or the timing of such payments It is the minimum unavoidable obligation and may be discounted to PV for long-term provisions May be the result of a legal or constructive obligation It will exclude: Future operating losses Relocation and retraining of existing employees Periodic repairs Statements of future intention Contingent liability a possible obligation arising from a past event which will only be confirmed by the outcome of one or more future uncertain events

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IAS 38 Intangible assets Assets without physical substance which entity has the right to control and from which it derives economic benefits Apply either cost model or valuation model Valuation model: Any increase in valuation taken to OCI and equity on SOFP requires that there is an active market for that asset rarely the case Cost model normally adopted If finite useful life, then amortise commence when asset is available for use. If infinite life, or cannot reliably estimate finite life, then recognise at cost or valuation with annual impairment review. Research and development costs dealt with by IAS 38 Compulsory capitalisation if definition of development costs met Otherwise immediate write-off to PorL

IAS 40 Investment property Definition development completed, held for investment potential and may be rented on arms length basis to non-group member. Use cost model if so account for as IAS 16 and depreciate over expected useful life Use valuation model: no depreciation charged and keep valuation up to date increase or decrease in valuation taken to PorL

IFRS 1 First-time adoption of International Financial Reporting Standards Not in F7 Financial Reporting syllabus Recognise assets and liabilities per Framework document and applicable IAS/IFRS Measure assets and liabilities per applicable IAS/IFRS Derecognise assets and liabilities that do not comply with IAS/IFRS Re-state comparative year(s) Provide reconciliation between old SOFP and opening IAS/IFRS SOFP

IFRS 2 Share-based payment Not in F7 Financial Reporting syllabus Equity settled recognise equity reserve and PorL charge each year, pro-rated over vesting period. Use FV of option at grant date and estimate at each reporting date the expected number of options likely to vest. Cash settled recognise liability and PorL charge each year, pro-rated over the vesting period. Use FV of SAR at each reporting date and estimate at each reporting date the number of SARs likely to vest.

Tony Sweetman Kaplan Publishing & Kaplan Financial December 2012

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IFRS 3 Revised Business combinations Part of convergence between IFRS and US GAAP Costs incurred as part of acquisition are now charged to PorL. Need to estimate FV of any contingent and deferred consideration at acquisition date Choice of goodwill accounting: o Proportionate or net basis group share of goodwill only o Gross or full goodwill method goodwill for business as a whole o Choice made an acquisitionby-acquisition basis Goodwill is a permanent intangible non-current asset subject to annual impairment review Account for subsidiary recognition and derecognition only when control is acquired or lost Account for any residual holdings at FV at date of transaction Any disposal where control retained is a transaction between equity holders

IFRS 5 Non-current assets held-for-sale and discontinued activities Comply with all following conditions to be classified as held for sale: o Must be a commitment to sell o Must be immediately available o Must be in current condition o Must be at realistic price o Must be actively marketed o Thus expect to be disposed of within 12 months Perform impairment review and reclassify out of non-current assets Cannot be held for sale in group FS if sale is to another group member Separate disclosure of discontinued operation in SOCI defined as a component of a business which has either been disposed of or is classified as held for sale and: o represents a separate major line of business or geographical area of business o is part of a single co-ordinated plan to dispose, or o is a subsidiary acquired exclusively with a view to sale.

IFRS 8 Operating segments Not in F7 Financial Reporting syllabus Identify segment if it accounts for 10% or more of any one of: o Total profits earned by segments o Total losses incurred by segments o Assets o Gross (Internal plus external) revenues generated Minimum disclosure to account for 75% of external revenues, or need to disclose additional segments Segments based upon internal reporting and decision-making lines within the entity

Tony Sweetman Kaplan Publishing & Kaplan Financial December 2012

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IFRS 10 Consolidated financial statements Elements of control: o Power over the investee o Exposure, or rights to, variable returns o Ability to use that power Subject to periodic review to determine whether control acquired/lost or continues Definition recognises that it may be possible for one entity to have control, whilst another has significant influence, in a third entity. Potential voting rights (e.g. share options and convertible loans) must be capable of being exercised. Protective rights (e.g. able to approve issue of new debt or equity capital) normally only apply in specified circumstances and are limited in application not usually indicative of control. Silos able to exercise control over a defined and ring-fenced portion of another entitys assets and liabilities.

IFRS 11 Joint arrangements Not in F7 Financial Reporting syllabus Definition two or more parties having joint control which requires unanimous consent Joint venture where parties have joint control and have rights to net assets of a separate entity formed for the joint venture use equity accounting per IAS 28. Joint operation parties have joint control and have rights to the assets and obligations for the liabilities of the joint operation normally will not be a separate entity and parties agree rights and responsibilities or particular activities within the joint operation. Each joint operation party accounts for their own transactions and has amounts due to and from other joint operation partners.

IFRS 12 Disclosure of interests in other entities Not in F7 Financial Reporting syllabus Single source of disclosure requirements in FS applicable to interests in subsidiaries, associates and joint arrangements Disclose assumptions and judgements made in determining status of investment(s) Disclose restrictions on ability to exercise control or influence

IFRS 13 Fair value measurement Does not apply to transactions covered by IAS 17 and IFRS 2 Provides single and standardised definition and source of guidance for fair value measurements. Definition the amount received to sell an asset or transfer a liability in an orderly (i.e. not distress) transaction between willing parties in an arms length transaction at the measurement date. Presumed to take place in an active market principal or most advantageous market Excludes transactions costs they are not a feature of the asset or liability to be valued
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Introduces 3-tier hierarchy of inputs used for valuation: o Level 1 identical assets or liabilities traded in an active market observable o Level 2 similar assets or liabilities traded in an active market observable o Level 3 other data used to determine fair value unobservable

IFRS for SME Published July 2009 and normally requires approval within a country to be effective. SME defined as unlisted entity and each county able to add additional or excluding criteria such as banking financial services activities, charities, size criteria etc. One focus point for framework and accounting treatment and disclosures for SME. Expected to be updated approximately every three years. Some topics excluded completely from IFRS for SME: o Earnings per share o Interim financial statements o Segmental reporting o Assets held for sale Some topics simplified for IFRS for SME: o Research and development always expensed o Goodwill amortised over ten years o No revaluation of PPE o Finance costs never capitalised

Tony Sweetman Kaplan Publishing & Kaplan Financial December 2012