ACCA P2 CLMN December 2012 exam Current issues

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

2. 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

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

4. 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

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

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

7. 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

8. 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)

9. 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

10. 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

11. 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

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

13. 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

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

15. 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

16. 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)

17. 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

18. 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

19. 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

20. 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

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

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

23. What’s new • Useful information has four enhancing characteristics • Comparability • Verifiability • Timeliness • Understandability