ACCA Articles

P2 Corporate Reporting (INT)

Or alternatively, how to avoid being miserable in December 2009?

An outpouring of misery?

The overwhelming feedback from students attempting this exam in June 2009 is one of misery (Although I am sure a lot of this will change to happiness when the results are received!). What, then, came up to cause such an outpouring of dismay? This is, we must remember an accounting paper, being sat by accountants.

June 2009 exam

Q1 Prepare a consolidated statement of financial position, incorporating 2 directly subsidiaries (one acquired on the step) and 1 associate. Goodwill is to be calculated using the fair value approach. 35 marks

Recalculate goodwill on the proportionate (old) basis and explain. 8 marks

Ethical discussion re related party transaction. 7 marks

Q2 Discussion on relevance of fair values. 4 marks

Advice on accounting for 4 financial instruments. 21 marks

Q3 Discussion of 5 transactions, primarily relating to revenue recognition, PPE and leases. 25 marks

Q4 Discussion of accounting for actuarial gains and losses. 11 marks

Discussion of current treatment re setting discount rates & expected returns. 8 marks

Two company schemes with no’s to illustrate comparison issues. 6 marks

Note: The first question is compulsory and then students choose 2 others.

The consolidation

It is fair to say with the income statement being unexamined, many students would have been expecting an income statement here. However whilst I can accept that the 15 minutes reading time would have involved some disappointment, I would expect that by the time the three hours began for real, you should have got over it….It is hardly unreasonable for the accounting examiner, to expect accounting students, in an accounting exam to prepare the primary accounting statement…the Consolidated Statement of Financial position!!

Any student who cannot prepare to a 50% pass mark a consolidated statement of financial position, and indeed who moans about being asked to do so, should fail this exam!!

The accounting standards

This exam covered, in the usually way a whole range of accounting standards:

• IAS 32/39 Financial instruments
• IAS 21 The effects of foreign exchange rates
• IAS 19 Employee benefits
• IAS 18 Revenue Recognition
• IAS 17 Leases
• IAS 16 PPE
• IAS 2 Inventory
• The Framework document
• IAS 24 Related Party disclosures
• IFRS 3 (revised)
• IAS 28 Investments in associates

The assumed knowledge standards

It is interesting that the question that caused most concern for students was question 3. Question 3 is covering absolutely core accounting standard knowledge, on areas such as IAS 18 and IAS 16. Some P2 students seem to be forgetting that they are being examined cumulatively. Just because you now have to learn standards like IAS 19 on employee benefits DOES NOT mean you can forget the basics such as IAS 18 Revenue Recognition. The standards that are introduced at F3 (In my book they are the ORANGE standards!) are core for any business and anyone entering for P2 must know the basics.

Define/ explain/ apply

Once you know the basics of your standards the marks come easily:

Q3 June 2009 includes this transaction:

Carpart sells vehicles on a contract for their market price (approximately $20,000 each) at a mark-up of 25% on cost. The expected life of each vehicle is five years. After four years, the car is repurchased by Carpart at 20% of its original selling price. This price is expected to be significantly less than its fair value. The car must be maintained and serviced by the customer in accordance with certain guidelines and must be in good condition if Carpart is to repurchase the vehicle.

Discuss how this transaction would be accounted for under IFRS in the financial statements of Carport

You can see I have highlighted the word ‘discuss’ in the requirement…this means you must ‘write stuff’ …not just do calculations!
I have highlighted the word sells also…sells =sales=revenue=IAS 18 Revenue.

Suggested approach to answering this question

IAS 18 – Revenue (Start by stating the regulation)
IAS 18- revenue regulates the accounting treatment for this transaction.

Revenue (Give the key definition)
Revenue is the gross inflow of economic benefits during the period arising in the course of ordinary activities of an enterprise.

Recognition rule (explain the rule)
Revenue is recognised for the sale of goods when the enterprise has transferred to the buyer the significant RISKS AND REWARDS of ownership of the goods.

Carport (Apply to scenario)
Carport is selling these vehicles under a sale and repurchase agreement. It is necessary therefore to consider whether all the SIGNIFICANT RISKS AND REWARDS as per IAS 18 have been transferred to the seller. If they have then the revenue may be recognised.

Residual risk
Carport does retain some residual risk with regards to these vehicles:
In four years time the must repurchase for 20% of the original selling price if the customer has maintained and serviced it in accordance with guidelines.

Level of risk
The repurchase price is expected to be significantly less than the cars fair value.

Insignificant risk
As the repurchase price is significantly less than fair value and then only if the purchaser has complied with the servicing/ maintenance guidelines the risk appears insignicant.

Transfer of signficant risks and rewards has taken place.
Carport should recognise revenue on the sale of these vehicles.

Lesson’s learned

Anybody who is planning to enter for P2 Corporate Reporting in December 2009, needs to be aware that when they start their studies they will have a lot of new learns…IAS 19 Employee Benefits, IAS 21 Foreign Currency etc etc…. but make sure it isn’t the assumed knowledge standards that take you out.. This summer would be a good time to start. Get out your F3 notes or your copy of ‘A student’s guide to IFRS’ and make a start on the ‘orange!’ assumed knowledge standards. Focus on:

• IAS 1
• IAS 2
• IAS 7
• IAS 10
• IAS 16
• IAS 18
• IAS 37 and
• IAS 38

If you sort these this summer, you will be on your way to success in P2 at the December 2009 sitting…smiles not moans please!

Clare Finch
Clare Finch is the author of ‘A students guide to International Financial Reporting Standards’