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STUDENT

Notes

ACCA Paper P2
Corporate Reporting

(INTERNATIONAL AND UK STREAM)


For exams in 2012

To be used with the BPP Study Text for exams in 2012 (2011 edition)

First edition 2008


Sixth edition January 2012
ISBN 9781 4453 2501 9
(Previous edition 9781 4453 2072 4)
British Library Cataloguing-in-Publication Data
A catalogue record for this book
is available from the British Library
Published by
BPP Learning Media Ltd
BPP House, Aldine Place
London W12 8AA
www.bpp.com/learningmedia

All our rights reserved. No part of this


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BPP Learning Media Ltd


2012

ii

CONTENTS

chapter 1
FINANCIAL REPORTING FRAMEWORK
page 1
chapter 2
PROFESSIONAL AND ETHICAL DUTY OF THE
ACCOUNTANT
page 9
chapter 3
ENVIRONMENTAL AND SOCIAL REPORTING
page 21
chapter 4
NON-CURRENT ASSETS
page 31
chapter 5
EMPLOYEE BENEFITS
page 47
chapter 6
INCOME TAXES
page 59
chapter 7
FINANCIAL INSTRUMENTS
page 69
chapter 8
SHARE-BASED PAYMENT
page 83
chapter 9
PROVISIONS, CONTINGENCIES AND EARP
page 89

chapter 10
RELATED PARTIES
page 95
chapter 11
LEASES
page 99
chapter 12
REVISION OF BASIC GROUPS
page 111

chapter 13
COMPLEX GROUPS
page 131
chapter 14
CHANGES IN GROUP STRUCTURES
page 139
chapter 15
CONTINUING AND DISCONTINUED
INTERESTS
page 147
chapter 16
FOREIGN CURRENCY TRANSACTIONS
AND ENTITIES
page 155
chapter 17
GROUP STATEMENTS OF CASH FLOWS
page 169
chapter 18
PERFORMANCE REPORTING
page 177
chapter 19
CURRENT DEVELOPMENTS
page 201
chapter 20
REPORTING FOR SPECIALISED ENTITIES
page 209
chapter 21
REPORTING FOR SMALL AND MEDIUMSIZED ENTITIES
page 217
chapter 22
CHAPTER LEARNING EXAMPLES
page 221
chapter 23
ANSWERS TO CHAPTER LEARNING
EXAMPLES
page 241

Introduction

iii

iv

chapter 1

REGULATORY FRAMEWORK

CONCEPTUAL FRAMEWORK

REVENUE RECOGNITION

This chapter sets out the regulatory and conceptual


framework, discussing the advantages and
disadvantages of the IASBs Conceptual Framework for
Financial Reporting.

FINANCIAL
REPORTING
FRAMEWORK

REGULATORY FRAMEWORK
2

Regulatory
framework

Conceptual
framework

Regulatory framework
International Accounting Standards
European Union
IASC Foundation
Trustees

Listed companies have


complied with IFRS since
2005.

Stock Exchange
International
Standing
Standards
Accounting Interpretations Advisory
Standards
Committee
Council
Board
(SIC)
(SAC)
(IASB)

National Listing Rules to


be complied with by listed
companies.

Revenue
recognition

Other
National laws
 Take precedence over
IASs/IFRSs
OECD
 Undertakes its own research
into accounting standards, via
ad hoc working groups,
issuing guidelines for
members

Context
The regulatory framework consists of the different entities responsible for standard setting that
report to the IASC Foundation. Additionally, other regulatory bodies include stock exchanges and
the European Union.

1: Financial reporting framework

CONCEPTUAL FRAMEWORK

Regulatory
framework

Conceptual
framework

Conceptual framework a statement of generally accepted theoretical principles which form the
frame of reference for financial reporting.
Advantages
 Avoids patchwork or firefighting approach
 Less open to criticism of political/external
pressure
 Some standards may concentrate on the
income statement, others on the SOFP

Disadvantages
 Financial statements are intended for a variety
of users single framework may not suit all
 May need different standards for different
purposes
 Preparing and implementing standards is still
difficult with a framework

IASB Conceptual Framework


The IASB Framework for the Preparation and Presentation of Financial Statements was produced in 1989 and
is gradually being replaced by the new Conceptual Framework for Financial Reporting.
It is a joint IASB/FASB project and is being produced in phases.
Phase 1: Chapters 1 and 3, published in September 2010
Chapter 1: The objective of general purpose financial reporting
Chapter 3: Qualitative characteristics of useful financial information
Chapter 2 The Reporting Entity has not yet been published and is still an ED
Chapter 4 includes the remaining chapters of the 1989 Framework:
Underlying assumption
The elements of financial statements
Recognition of the elements of financial statements
Measurement of the elements of financial statements
Concepts of capital and capital maintenance

Revenue
recognition

Context
The conceptual framework is an essential part of effective financial reporting. It provides the
framework from which accounting standards can be developed and provides a basis for dealing with
transactions that are not covered by an accounting standard.

Learning example 1.1


Discuss why a principles based approach to accounting is preferable to a rules based approach.

Solution 1.1

1: Financial reporting framework

REVENUE RECOGNITION

Regulatory
framework

Conceptual
framework

Revenue
recognition

IAS 18
Revenue is that which arises in the course of ordinary activities such as that from sales, services provided,
interest, royalties and dividends.

Measurement
Includes only those amounts receivable by the entity on its
own account. Not sales, goods and sales tax collected by
agent to be passed to the principal.

Fair value of consideration


received/receivable. Deferred amounts
discounted
In a sale financed by the seller, any
difference between the fair value of the
item and the nominal sales value should
be accounted for as interest revenue

Recent Developments
IAS 18 was amended to give guidance on whether an entity
acts as principal or agent. In addition, an ED issued in June
2010 proposes changes to the accounting for revenue
recognition in contracts with customers.

Recognition
Goods

Services

When the following are met:

 Conditions 3 to 5 as for goods

Transfer of significant risks and rewards of


ownership (usually legal title)

No more control over goods sold

 The stage of completion of the transaction at


the year end can be measured reliably and a
proportion applied to the revenue

Amount of revenue can be reliably measured

Probable that debt will be repaid

Transaction costs can be reliably measured

 Interest time proportion basis (effective yield)


 Royalties accruals basis
 Dividends when the right to the dividend is
established

Disclosure
Accounting policy for each recognition; the amount of each significant category of revenue; amount of revenue
from exchange of goods or services.

Context
IAS 18 is a comprehensive accounting standard dealing with the recognition of revenue in specific
transactions.

1: Financial reporting framework

Reinforcement
Study Text Chapter 1

Expand notes on the conceptual framework discussion paper (para 4.7) as this
is a key current issue and revenue recognition (section 5.2)

Attempt Quick Quiz

chapter 2

ETHICAL THEORIES

INDIVIDUAL INFLUENCES

ETHICS IN ORGANISATIONS

PROFESSIONAL ETHICS

ETHICS IN THE EXAM

Ethics are an important aspect of practising as an


accountant. If financial statements are deliberately
misleading this may amount to unethical behaviour.
Professional institutions often have ethical guidelines
that members should abide by in order to maintain
professional integrity.

PROFESSIONAL
AND ETHICAL
DUTY OF THE
ACCOUNTANT
9

ETHICAL THEORIES

Ethical theories

Individual
influences

Professional
ethics

Ethics in
the exam

Lack of objective standards

Objective standards

Non-cognitivism no possibility of acquiring objective


knowledge of moral principles.
Moral relativism right and wrong are culturally
determined.

Cognitivism objective, universal principles exist and


can be known, ethics can be regarded as absolute.

Deontological ethics

Teleological Consequentalist ethics

Kant stated that acts can be judged in advance by


moral criteria:

Moral judgements based on outcomes or


consequences. Utilitarianism means acting for the
greatest good to the greatest number.

 Do what others should be doing


 Treat people as autonomous beings and not as
means to an end
 Act as if acting in accordance with universal laws

Egoism
Act is ethically justified if decision-makers pursue
short-term desires or long-term interests (justification
for free market).

10

Ethics in
organisations

Pluralism
Different views may exist but it should be possible to
reach a consensus; morality is a social phenomenon.

Context
This section goes beyond the ethics of professions like accountancy to consider what makes a good
decision good. The practical value of this discussion to the Professional Accountant is:

A very important control is being able to trust staff to act ethically but do they understand
the same thing by ethical as management does?

What is regarded as ethical business around the world may vary and getting it wrong could
lose business or cause offence, even imprisonment.

Learning example 2.1


WWW is a global construction company that is seeking to win contracts to build roads and bridges
in a foreign country. The Sales Director has reported that a government minister in the country has
told him that WWW will get the contract providing an amount equivalent to 10% of the contract
value is paid into his private bank account.
Identify the ethical position belonging to each of the following directors.
(a)

We should agree to the payment because at least we will build the roads and bridges
properly which is more than can be said for the other bidders and they would certainly pay
the bribe.

(b)

We should not pay the money. Its a bribe and it means that our company would be helping
the minister abuse his position as an elected officer of the people.

(c)

We should not pay the money, despite it being a very good contract, because it breaks our
rules on not paying inducements that on the whole avoid our sales team from getting
involved in offering bribes all over the place.

(d)

We should agree to the payment because the winning of the contract will improve our share
price and our share options fall due soon.

(e)

We should not pay the money because we wouldnt like it if our government ministers took
bribes and left us paying too much for roads and bridges.

(f)

We should pay the money because in that part of the world it's how business is done and
everyone knows it. Not paying would look like an insult to the minister and his country.

Solution 2.1

2: Professional and ethical duty of the accountant

11

INDIVIDUAL INFLUENCES

Ethical theories

Individual
influences

Professional
ethics

Ethics in
the exam

National and cultural beliefs

Psychological factors

Differences lie in four main areas.


 Role of individual v collective good
 Acceptance of power distribution
 Desire to avoid uncertainty
 Masculinity v femininity (money/possessions v
people/relationships)

Focus is on how people think and how they decide


what is morally right and wrong.

Education and employment

Locus of control
Influence individuals believe they have over their own
lives.
 Internal individuals have significant influence
 External lives shaped by luck/ circumstances

Peoples education/work background seems to be more


significant with globalisation.

Moral development

Morality

Kohlbergs three levels ethics determined by:


1 Rewards/punishments (Pre-conventional)

Actions are influenced not only by peoples own


integrity but also how much awareness they have of
their actions moral consequences.

12

Ethics in
organisations

Others expectations/law (Conventional)

Individuals own decisions (Post-conventional)

Context
These are the sources of moral beliefs and how we account for the different moral behaviour of
others.

Learning example 2.2


GGG is a public practice which has just completed the audit of a major client. Unfortunately the
audit team reports that it found it impossible to get clear and satisfactory answers from
management on a technical issue which could potentially materially affect the final accounts if it
was adverse.
Three partners of GGG are discussing the question of whether to qualify the audit report. Place each
on Kohlbergs three levels.
Partner A

This is a very good company and a good client. There is very little chance of anyone
losing any money or us getting criticised if we go ahead and sign.

Partner B

I agree with Partner A but for a different reason. If we qualify the report it will cause
the clients share price to fall and they will start to lose investors and clients. We will
damage a good business and cause people to lose their jobs for the sake of a small
accounting technicality that really doesnt matter.

Partner C

I agree with you both but I cant go along with the idea of signing. The whole reason
investors accept accounts is because firms like GGG have independently audited them.
If we simply turn a blind eye to this and bend the rules we undermine the whole basis
of our profession and betray public confidence.

Solution 2.2

2: Professional and ethical duty of the accountant

13

ETHICS IN ORGANISATIONS
14

Ethical theories

Individual
influences

Ethics in
organisations

Professional
ethics

Ethics in
the exam

Ethics
A code of moral principles that people follow with respect to what is right or wrong

Ethical systems
 Personal ethics eg deriving from upbringing
or political or religious beliefs
 Professional ethics eg medical ethics
 Organisation culture
 Organisation systems may be in a formal
code reinforced by the overall statement of
values

Not necessarily
enforced by law

Two approaches
 Compliance based ensures that the company
acts within the letter of the law. Violations are
prevented, detected and punished.
 Integrity based combines a concern for the law
with an emphasis on managerial responsibility
for ethical behaviours. Strives to define
companies guiding values, aspirations and
pattern of thought and conduct.

Context
Ethics in organisations is of utmost importance, relating to social responsibility and business
practice.

2: Professional and ethical duty of the accountant

15

PROFESSIONAL ETHICS

Ethical theories

Code of ethics and conduct

Individual
influences

Ethics in
organisations

Professional
ethics

Ethics in
the exam

This lays out ACCAs rules stating the ethics and behaviour required by all
members and students of the ACCA. Guidance is in the form of fundamental
principles (see below), specific guidance statements and explanatory notes.

Integrity

Members should be straightforward and honest in all business and professional relationships.

Objectivity

Members should not allow bias, conflicts of interest or undue influence of others to override
professional or business judgements.

Professional
competence
and due care

Members have a continuing duty to maintain professional knowledge and skill at a level required to
ensure that a client or employer receives competent professional service based on current
developments in practice, legislation and techniques. Members should act diligently and in accordance
with applicable technical and professional standards when providing professional services.

Confidentiality Members should respect the confidentiality of information acquired as a result of professional and
business relationships and should not disclose any such information to third parties without proper or
specific authority or unless there is a legal or professional right or duty to disclose. Confidential
information acquired as a result of professional and business relationships should not be used for the
personal advantage of members or third parties.
Professional
behaviour

16

Members should comply with relevant laws and regulations and should avoid any action that
discredits the profession.

Context
The key reason that accountants need to have an ethical code is that people rely on them and their
expertise.

2: Professional and ethical duty of the accountant

17

ETHICS IN THE EXAM

Ethical theories

Individual
influences

Ethics in
organisations

Professional
ethics

Ethics in
the exam

Ethics are most likely to be considered in the context of the accountants role as adviser to the directors.

A question on the Pilot Paper asked you to explain why a deliberate misrepresentation in the
financial statements was unethical.

18

Context
Ethical issues are most likely to be examined in Question 1 of the exam paper, the 50 mark case
study question.

2: Professional and ethical duty of the accountant

19

Reinforcement
Study Text Chapter 2

20

Attempt Q2 in Exam Question bank

Attempt Quick Quiz

chapter 3

ENVIRONMENTAL REPORTING

SUSTAINABILITY

SOCIAL RESPONSIBILITY

HUMAN RESOURCE ACCOUNTING

Environmental issues have become very topical over


the last few years and businesses and individuals
become more aware of their impact on the
environment.
Environmental reporting has evolved into sustainability
reporting looking at the effect of the business on
society at large.

ENVIRONMENTAL
AND SOCIAL
REPORTING

21

ENVIRONMENTAL REPORTING

Environmental
reporting

Sustainability

Social
responsibility

Environmental accounting
Environmental issues are likely to have a growing impact on business in the future due to forthcoming
legislation, consumer pressure and so on.

What is environmental accounting?




Recognising and seeking to mitigate the negative environmental effects of conventional accounting practice

Separately identifying environmentally related costs and revenues within the conventional accounting
systems

Taking active steps to set up initiatives in order to ameliorate existing environmental effects of conventional
accounting practice
Devising new forms of financial and non-financial accounting systems, information systems and control
systems to encourage more environmentally benign management decisions

What is environmental reporting?

Impact on financial statements

 Developing new forms of performance


measurement, reporting and appraisal for both
internal and external purposes

No disclosure requirements relating to environmental


issues at present. Some companies adopt voluntary
disclosures (descriptive and unquantified) in the
following areas.
 Contingent liabilities
 Exceptional charges
 Management commentary
 Profit and capital expenditure forecasts

 Identifying, examining and seeking to rectify areas


on which conventional (financial criteria) and
environmental criteria are in conflict
 Experimenting with ways in which sustainability
may be assessed and incorporated into
organisational orthodoxy

IAS 37 Provisions, contingent liabilities and contingent


assets (see Chapter 9) addresses environmental
liabilities (including site restoration costs).

Questions on environmental accounting are a good bet you can always write something!

22

Human resource
accounting

Context
Environmental reports are not compulsory, but many companies publish them as they wish to set
out their policies regarding the environment to their stakeholders.

Learning example 3.1


Jelly Bean Co operates in the mining industry and has a subsidiary which operates in a country
without any legal requirement to clean up environmental damage. Jelly Bean Co are involved in
open cast mining and in five years time when the mine is depleted can legally leave it in its current
condition.
Jelly Bean Co have long had a published environmental policy of cleaning up sites after they have
finished with them. In the past this policy has applied to operations in countries where there are no
legal responsibilities to clean up as well as those where there is a legal requirement. The subsidiary
estimates that the costs of clearing up the above site will be $11m which is payable in 5 years time.
Discuss whether Jelly Bean Co have a liability to clean up the damage to the environment, and if so,
how this should be accounted for in the financial statements.

Solution 3.1

3: Environmental and social reporting

23

SUSTAINABILITY

Environmental
reporting

Sustainability

Social
responsibility

Human resource
accounting

Pressure is mounting for companies to become more publicly accountable.


Long-term
Multi-stakeholder
International

Global Reporting Initiative

GRI guidelines
1

Vision and strategy

Profile

Governance structure and


management systems

GRI content index

Performance indicators
Economic

An increasing number
of companies follow
GRI guidelines
eg Shell, BA

24

Environmental
Social

Context
Sustainability reporting is wider in scope than environmental reporting as it focuses on
environmental and social measures.

3: Environmental and social reporting

25

SOCIAL RESPONSIBILITY

Sustainability

Environmental
reporting

Social
responsibility

Human resource
accounting

Few organisations would admit to being irresponsible. However, social responsibility as practised by business is
controversial. A socially responsible business engages in activities and incurs costs not very relevant to its
business mission but which benefit society or groups within it.

Examples
 Charitable donations
 Secondment of staff to voluntary organisations
 Imposing stricter pollution limits than required
by law
 Refusing to deal with suppliers who employ
child labour

The stakeholder view of company objectives is that many groups of people have an interest in what the company
does. Management must balance the profit objective with the pressures from the non-shareholder groups.

Should social responsibility come at the expense of profit?


Against
 Its shareholders money

 Property rights are not the only rights

 The business of business is making money; its


for governments to impose the law; raise taxes

 Businesses get government support

 Society, not business, is the best judge of moral


priorities and social welfare
 Its patronising to a workforce, whose lives might
become controlled by the company

There are no right or wrong answers to this


kind of question, but you must support your
views with reasons.

26

For

 Externalities - businesses often don't pay the


costs they impose on others
 Businesses are not just economic machines but
social institutions
 Shareholders rarely exercise power
 Society is not just a market place
 Social responsibility is good PR
 Social responsibility pre-empts legislation

Context
There is an argument that businesses have a responsibility beyond that of reporting to
shareholders, in that they have a social responsibility towards their environment.

3: Environmental and social reporting

27

HUMAN RESOURCE ACCOUNTING


28

Environmental
reporting

Basic principle

Sustainability

Social
responsibility

Human resource
accounting

Implications

 Employees are assets

 People are a resource

 Competitive advantage is gained by


effective use of people

 Organisation must protect its investment


 Deterioration in attitudes is a cost to the
company

Human asset accounting was developed, later broadened into intellectual assets.

Context
Human resource accounting is an approach which regards people as assets. An entity can gain a
competitive advantage by the effective use of the people within the organisation.

3: Environmental and social reporting

29

Reinforcement
Study Text Chapter 3

30

Read through the examples of environmental reports and case studies within
this chapter

Attempt Quick Quiz

chapter 4

DEFINITION OF AN ASSET

IASs 16, 20 AND 23

IMPAIRMENT

INVESTMENT PROPERTY

IAS 38

GOODWILL

This chapter covers the accounting standards on noncurrent assets property, plant and equipment,
government grants, investment property, borrowing
costs, impairment and intangible assets and goodwill.

NON-CURRENT
ASSETS

31

DEFINITION OF AN ASSET

Definition of
an asset

IASs 16,
20 and 23

Impairment

IASB Framework: an asset is a resource controlled


by an entity as a result of past events and from
which future economic benefits are expected to flow
to the entity

ASB (UK): assets are rights or other access to


future economic benefits controlled by an entity as
a result of past transactions or events

32

Investment
property

IAS 38

Goodwill

FASB (USA): assets are probable future economic


benefits obtained or controlled by a particular entity
as a result of past transactions or events

Key points
 Future economic benefit
 Control
 Transaction to acquire control has taken place

Context
The Framework defines the elements of financial statements which are of key importance.

4: Non-current assets

33

IASs16, 20 AND 23

Definition of
an asset

IASs 16,
20 and 23

Impairment

Investment
property

IAS 38

Goodwill

IAS 16 Property, plant and equipment


Initial measurement
On initial recognition, property, plant and equipment
(PPE) is measured at its cost.
Directly attributable
costs are included, eg
acquisition, site
preparation, installation,
delivery and professional
fees.

Costs of dismantling and


removing the asset and
restoring the site are
included to the extent that
they are recognised as a
provision under IAS 37.

 Finance costs must be capitalised if they are


directly attributable to the acquisition,
construction or production of a qualifying asset
as part of its cost
 All other borrowing costs must be expensed

PPE must be written down where necessary to its recoverable amount following IAS 36.
Subsequent expenditure (repairs and maintenance) must be recognised in profit or loss as it is incurred,
unless:
 It enhances the economic benefits
 A component of an asset that is treated separately for depreciation purposes has been restored or replaced
 It relates to a major inspection/ overhaul restoring economic benefits consumed and reflected in depreciation

Depreciation
Main points

Other points

 Depreciable amount (cost residual value) of PPE


should be allocated on a systematic basis over
useful life

 Useful life and depreciation method should be


reviewed period at least annually and adjusted
for current and future periods where necessary

 Depreciation should be recognised as an


expense unless included in carrying value of
another asset (eg capitalising depreciation on
assets used for development)

 Investment properties are still exempt from


depreciation

Subsequent measurement

Cost model: is cost less accumulated depreciation and impairment losses. Revaluation model: carry at a
revalued amount less subsequent accumulated depreciation/impairment losses.

34

Context
IAS 16 is a key accounting standard dealing with the basics of recognising and measuring noncurrent assets.

Learning example 4.1


See Chapter 22 for learning example.

Solution 4.1

4: Non-current assets

35

IASs16, 20 AND 23

Revaluation
There was a problem in the past with cherry picking
for revaluation. Also, valuations became out of date.
Under the allowed alternative of IAS 16, revaluing
assets is still optional, but:

The valuations must be kept up to date: annually for


significant movements/volatile items, 3-5 years for
other items.

Revaluations gains are credited to a revaluation surplus except to the extent that they reverse revaluation
decreases of the same assets in which case P/L for the year
Revaluation decreases are charged
 First against any revaluation surplus relating to the same asset
 Thereafter in profit or loss

IAS 20 Government grants


Problems: Conflict of accruals vs prudence.
Matching is difficult.
Accounting treatment
Matched in P/L with related costs on a
systematic basis
Grants not recognised until reasonably certain
conditions of receipt complied with
Capital grants are presented either as deferred
income or by deducting grant in arriving at
carrying value of asset
Revenue grants are shown as other income or
deducted from the related expense
If repayable, accounted for as a change in
accounting estimate (IAS 8), ie in current period

36

Where a policy of revaluation is adopted, it must be


applied to a whole class of assets.

Accounting entries
Revenue grants
Debit
Cash
Credit
P/L
In expenditure period

Capital grants
Debit Cash
Credit Deferred income
Or Asset account
Release to P/L over
expected useful life

IAS 23 Borrowing costs


Must be capitalised if they are directly attributable
Other borrowing costs must be expensed

Context
Revaluation of non-current assets is an important area of accounting for non-current assets.
Government grants are funds provided to an entity for a specific purpose.
Borrowing costs are finance costs that are capitalised into the cost of a non-current asset.

Learning examples 4.2, 4.3 and 4.4


See Chapter 22 for learning examples.

Solutions 4.2, 4.3 and 4.4

4: Non-current assets

37

IMPAIRMENT

Definition of
an asset

IASs 16,
20 and 23

IAS 36
Only review assets for impairment
if there are indicators of it, eg:
 Decline in market value
 Adverse change in market,
technology, economics or law
 Increased interest rates
 Fall in value below carrying
value
 Obsolescence or physical
damage
 Change in use
 Poor performance
If possible test individual assets,
otherwise cash generating unit
(CGU)

Impairment

Investment
property

Compare carrying value with recoverable amount


 An impairment loss for a CGU should be
allocated
First to any goodwill of the CGU
Then to other assets on a pro-rata basis,
but not below recoverable amount
 Under IAS 36, impairment losses are now
recognised for intangible assets with an
indefinite useful life and goodwill acquired in a
business combination
 Allocation of loss with unallocated corporate
assets or goodwill
Where not all assets or goodwill have been
allocated to an individual CGU then different
levels of impairment tests are performed to
ensure the unallocated assets are tested.

Test of individual CGUs


Then test the individual CGUs (including
allocated goodwill and any portion of the
carrying amount of corporate assets that
can be allocated on a reasonable and
consistent basis) basis.

Goodwill

IAS 38

Impairment losses are


recognised:
 For non-revalued
assets are
recognised in the
P/L


For revalued assets


according to the
relevant IFRS

May be reversed if
events causing it
reverse

An impairment loss
recognised for
goodwill is not
reversed.

Test of group of CGUs


Test the smallest group of CGUs that
includes the CGU under review and to
which the goodwill can be allocated/a
portion of the carrying amount of corporate
assets can be allocated on a reasonable
and consistent basis.

Questions are likely to involve both calculation and discussion. Impairment


has come up nearly every sitting of the current syllabus.

38

Context
IAS 36 aims to ensure that an asset is not carried in the statement of financial position at more
than its recoverable amount.

Learning examples 4.5, 4.6 and 4.7


See Chapter 22 for learning examples.

Solutions 4.5, 4.6 and 4.7

4: Non-current assets

39

INVESTMENT PROPERTY

Definition of
an asset

IASs 16,
20 and 23

IAS 38

Goodwill

IAS 40
An investment property is property (land or building) held to earn rentals or for capital appreciation or both, rather
than for:
 Use in the production or supply of goods or services or for administrative purposes
 Sale in the ordinary course of business

Accounting treatment

Exceptions

Choice of fair value model or cost model

Fair value model


Revalue to fair value at each accounting date
Do not depreciate
Gain or loss to P/L
Cost model
Follow cost model of IAS 16

Owner-occupied property or property held for sale to or


being constructed for third parties are not investment
property (IAS 16, IAS 2, IAS 11 respectively)

Note. Leasehold investment properties are accounted


for as finance leases

40

Investment
property

Impairment

Disclosures






Criteria for classification


Assumptions in determining fair value
Use of independent professional valuer
Rental income and expenses
Any restrictions or obligations

Context
IAS 40 Investment properties provides guidance on dealing with assets held for investment rather
than for use in the business.

4: Non-current assets

41

IAS 38

Definition of
an asset

IASs 16,
20 and 23

Investment
property

Impairment

IAS 38

Goodwill

IAS 38
Intangible assets deals with research and development costs, as well as intangible assets.

Intangible asset: an identifiable non-monetary asset


without physical substance held for use in the
production or supply of goods or services, for rental
or others, or for administrative purposes.

Development: the application of research findings or


other knowledge to a plan or design for the
production of new/substantially improved materials,
devices, products, processes, etc.

Research: original or planned investigation


undertaken with the prospect of obtaining new
scientific or technical knowledge and understanding.

Internally generated brands, mastheads,


publishing titles, customer lists and similar items
should not be recognised as intangible assets.
Internally generated goodwill should not be
recognised as an asset.

For R & D, the problem is one of matching concept vs prudence concept.

Research: original and planned investigation undertaken


with the prospect of gaining new scientific or technical
knowledge and understanding

Development: use of scientific/technical knowledge in order to produce new/substantially


improved materials devices, processes etc

Write off as incurred

Write off in year of expenditure except in


certain circumstances when it can be
capitalised and amortised

Measurement
Initial measurement
 R&D, as above
 Purchased intangible
assets capitalised at
cost

Subsequent measurement
 Cost model: cost less
accumulated depreciation and
impairment losses
 Revaluation model: revaluation

Amortisation
 Systematic over useful life
 At least annual review of UL and amortisation period
 Intangibles with indefinite useful life are not amortised but
reviewed at least annually for impairment

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Circumstances
 Probable future economic benefits
 Intention to complete and use/sell
 Resources adequate to complete and
use/sell
 Ability to use/sell
 Technical feasibility
 Expenditure can be reliably measured

Context
IAS 38 defines intangible assets as non-monetary assets without physical substance.

Learning example 4.8


See Chapter 22 for learning example.

Solution 4.8

4: Non-current assets

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GOODWILL

Definition of
an asset

IASs 16,
20 and 23

Impairment

Investment
property

IAS 38

Goodwill

Goodwill can be purchased or be acquired as part of a business combination. In either case, the treatment is
capitalisation at cost or fair value under IFRS 3.
Bargain purchase
A bargain purchase arises when the fair value of the
acquisition-date identifiable net assets acquired exceeds the
consideration transferred.
 Before recognising a gain on bargain purchase, the
acquirer must reassess whether it has correctly identified
all the assets acquired and liabilities assumed.
 Then the acquirer must review the procedures used to
measure the amounts recognised for:
- Identifiable net assets
- Non-controlling interest (if any)
- Interest previously held (if any)
- Consideration transferred

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Definition
Future economic benefits arising from assets
that are not capable of being individually
identified and separately recognised
 Recognise as an asset and measure at
cost/excess of purchase cost over
acquired interest
 Do not amortise
 Test at least annually for impairment
(IAS 36)
You may be asked for a complicated
calculation of goodwill as part of a group
accounts question.

Context
Purchased goodwill is recognised on the statement of financial position as an intangible asset.

4: Non-current assets

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Reinforcement
Study Text Chapter 4

46

Revise basic standards on non-current assets

Attempt Q4, Q5 and Q6 from Exam Question Bank

Attempt Quick Quiz