P2 terms and techniques

238 Pages·2017·2.84 MB·English

ACCA P2 terms & techniques

The ideas, principles and techniques of Corporate Reporting explained with illustrations from real
exams, IFRS, IFRICs, EDs and DPs. This guide helps you learn in-depth, integrate insights and think
critically about the key issues in corporate reporting and how they are assessed in professional
examinations. On this foundation you can build coherent and complete answers to discursive and
computational questions.

December 19, 2015
Authored by: Abibu Dumbuya
Corporate Reporting ACCA paper P2 Terms & Techniques

INTRODUCTION
Why terms and techniques for Corporate reporting?
Of course there are many accounting dictionaries available online - so why this book, and a possible online version of it? This book is focused on the specific
exam meaning and requirements of the toolkit (terms and techniques) identified – the issues that the examiner requires students to think about and the
terms in which questions are framed. As such the book is unique, relevant and necessary. Bringing together all the elements of the toolkit saves time and
gives students confidence that they have access to, and can potentially master the entire toolkit of corporate reporting. This can only help to reduce learner
anxiety while promoting proficiency in the use of the toolkit.

Connected thinking and integrated learning
The main aim of the book is to help students learn corporate reporting concepts, principles and techniques in depth, and to be able to apply them with confidence and
judgement in the exams and at work. A key benefit of the book is the way it facilitates connected thinking. Students tend to learn and maintain what they learn
episodically, which is one of the reasons they struggle to deal with case study questions that require them to consider many sides to a problem and apply integrated
knowledge and understanding. This book aims to overcome that limitation in students' learning by linking concepts based on how they are similar or different in
meaning and application to particular business contexts and situations. A good example of this can be seen in the discussion of the meaning of the Business model.
This approach reflects the examiner's approach explained on page 7 of the syllabus.

Context-centred learning
The author believes that the meaning of a term is found in the context to which it applies. Hence a key feature of the book is its context focus. For example, in
explaining the meaning of Carrying value various contexts are cited to illustrate the different meanings and measurements of carrying value, making it clear that it is
the context that determines the financial reporting practice and related requirements.

Reasoning and problem solving
Another key feature of the dictionary is fostering the development of abstract reasoning and problem solving skills. Hence accounting, ethical and corporate reporting
tasks are set within the formal structures of logic as explained under Accounting Arguments & The Accounting question. For example, deciding whether or not
to recognise a transaction as finance or operating lease can be expressed as a syllogism - the simplest form of deductive reasoning. The author believes that
this practice will improve reasoning skills which is essential for analysing and solving accounting and related issues.

Wide reading
The book encourages wide reading, critical evaluation and synthesis. This is in line with the intellectual levels explained in the syllabus at page 1.Thus key
websites are included with explanations of what they provide and how their contents benefit students' learning, versatility and application. In addition, comprehension
techniques and requirements are discussed throughout including at Word, Writing, Wide & Deep discussion.

Overall impact on professional competence
It is expected that the book will be a significant addition to the repertoire of the student and practising accountant.

Related products
The author believes that accounting is a language with its own grammar, vocabulary and techniques that must be applied judiciously with commercial insights. The
effective accountant is the one that has this insight and knows how to use it to pass the exams and advance his career. Many students and practising accountants are
handicapped for the lack of this insight. The author believes that the suit of products being developed will contribute significantly towards their repertoire. Thus related
products are being developed including:

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Corporate Reporting ACCA paper P2 Terms & Techniques

How to read corporate reporting texts
How to write corporate reporting notes & exams

Alternative arrangement
The current alphabetical arrangement has its merits. An alternative arrangement is to organise the terms and techniques according to syllabus learning outcomes with
a general section for commonly applicable terms and techniques. The choice is hard to make because it is difficult to know which of these formats would be more
appealing to students.

Another major issue is making the book accessible to students taking the exams of other accountancy bodies e.g. ICAEW. As can be seen this book is rooted
in ACCA, but its focus and scope are wide. As there is considerable overlap between the corporate reporting/financial reporting exams access to the book is available
to non ACCA students. The question is how can the book be arranged to allow fuller access to other students so as to optimise market potential? Is a book for each
body the way to go?

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Please send your comments and suggestions to: [email protected] or go to the contact page and fill out the form at www.sekoyen.com
ABSTRACT
To consider apart, from application to or association with a particular instance

Abstraction is integral to application of IFRS principles to unfamiliar situations. How business issues become financial reporting issues: abstract business
issues and apply financial reporting principles in a dynamic way involving exploring with various assumptions about variables to determine outcomes such as
fair values (IFRS13 Level 3)

The kind of learning that facilitates abstraction can be obtained by applying the convergence principle. Case study is a suitable medium for this.

Avoid learning things the wrong way e.g. do not rely on recall when deduction is required.

Abstract nouns express key concepts in accounting. Examples: conceptual framework, materiality, convention, relevance, understandability,
verifiability, timeliness and faithful representation.

ACCESSORY
- Present in a small amount; not essential feature e.g. call-waiting is an example of an accessory service provided by phone suppliers. This concept would
be relevant in determining performance obligations for the purpose of allocating revenue in accordance with IFRS 15.
- Aiding or contributing in a secondary way (subordinate/supplementary) to the overall effectiveness, impact or problem.
- When making judgement about accounting details it is essential to be able to distinguish between accessory and principal details in the narrative to be able
to determine the applicable.

ACCOUNTING CONTEXT & SITUATION

Accounting Contexts Context can refer to internal factors and circumstances and the way that the business adapts to external
In accounting context is used as frame of reference (background, influences and threats. Examples:
relation, connection, circumstances e.g. changes taking place, Business start-up (measurement of shares under IFRS rules)
problems, opportunities and threats). Restructure (recognition and measurement of restructuring provisions under IAS 37)
Turnaround (Reversal of impairment of assets through profit or loss under IAS 36; revenue sources increase
This gives meaning to accounting data. For example, revenue is calling for diverse application rules of IFRS 15)
recognised when sufficient performance is achieved by the Group re-structure (Disposal groups NCA held for sale IFRS 5; change in investment status and measurement
seller (or producer of goods and services). There are various rules: IAS 28 to IFRS 10; Business combination IFRS 3)
commercial circumstances that govern how this principle is Financial difficulties: cash flow, loss-making, insolvency (IFRS 5 assets held for sale; IAS 36 impairment of
applied to recognise revenue. assets).
Financial position (the view presented by the financial statements in which relations are depicted e.g. asset
structure the relationship between current and fixed assets; liquidity position, solvency position, profitability,
etc.)
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For example, in dairy production revenue is recognised when
production is completed and the customer takes delivery in Context can also mean Industry type e.g.
accordance with a contract specification (IFRS 15). Local authorities
Housing association
However, where there is no contract the end of production does Commercial Property management
not mark the point at which revenue is recognised. Instead, Financial services
revenue is recognised when a sale actually takes place. In the Charity
meantime the goods are held as stock in accordance with IAS 2. Grocery retailing
Construction of building and other assets
Technology

Context can also relate to the external environment
Recession (affects impairment of debtors)
Competition
Environmental pressures and effects on Corporate Social Responsibility

Context can also relate to type of transaction
Lease transactions can provide the context for asset recognition
Construction contracts can provide the context for income and asset recognition

Context can also relate to the business model (the way resources are used to deliver value to the customer and
at the same time create value for the organisation)
Property used as a hotel cannot qualify as investment property – it must be accounted for under IAS 16 ( at cost
under the cost model or at fair value under the revaluation model)
Property used for rent and capital appreciation must be accounted for as investment property under IAS 40
(cost model or fair value model).

An accounting situation is a specific commercial circumstance Single item or group of items
(that takes place in a context) which requires the application of Accounting for a transaction in various situations
accounting policies for its resolution. These policies are based on Recording a sale
IFRS principles and Framework guidance. (Financial situation Measurement of the sale for monthly management reporting
calls for the application of financial strategies for its resolution Measurement of the sale for annual statutory reporting
e.g. cash flow deficit or profitability deficit).
Business level transactions
SUBJECT MATTER + TOOL KIT = RESOLUTION Accounting for business combinations (IFRS 3 Business Combinations)
(Transactions/Conditions/ IFRS rules/ Identification (matching) Disposal groups (IFRS 5 NCA HfS & Discontinued operations)
Other events) Techniques/ Recognition (debit/credit)
Measurement (determine
Transactions straddling two or more financial reporting periods
values)
Presentation (SOCI/SOFP) Measurement of revenue in the context of shared ownership
Disclosure (users) Measurement of revenue in the context of long term contracts IAS 11
The financial accounting process equation. Leases (operating and finance) IAS 17

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ACCOUNTING INNOVATION
Accounting innovation is a product of a philosophy of continuous improvement whereby accountants stay on top of their game by finding solutions to new
problems and new ways of solving existing problems. It entails adopting new technologies and practices to improve accounting efficiency and business
integration, integrity and compliance of records, and the reports that are drawn from them to demonstrate stewardship of resources and financial position. It
also entails productivity (process innovation) and addresses ethical and environmental concerns. Accounting innovation requires strategic thinking to ask what
needs improving over a period of time. It entails transposing new research into accounting practice e.g. blending theory with practice. It involves continuous
strategic learning by the accountant to anticipate, evaluate and adapt available resources for maximum effect. That is why the P2 syllabus is assessed at level 3
– synthesis and evaluation with the aim: “To apply knowledge, skills and exercise professional judgement in the application and evaluation of financial
reporting principles and practices in a range of business contexts and situations.”

Examples of accounting innovation include computerised ledger processing, payment, purchasing, reporting, budgeting and green initiatives to reduce paper
and printing materials consumed in production.

Examples of financial reporting: integrated reporting.
Other sources:
Quality in the accounting function
Innovation advisory systems
Innovation networks

ACCOUNTING MODEL
A model is a simple description or construction that represents the functioning of the whole – it shows how the whole thing works. Thus an accounting model
shows how the accounting system as a whole works – its essential elements and how they work together to achieve the objectives of accounting. As
accounting is about representing the effects of business activity in accounting terms the model of accounting must contain elements that address the critical
stages of business activity using suitable techniques (know-how, skill), tools (equipment) measurement concepts (based on measurement concepts such as fair
value, historic cost, current cost, etc.) and assumptions about capital maintenance (nominal or money, financial, physical).

Business Accounting Technique Tools Measurement concepts Capital maintenance
activity/condition process concepts
Sale of goods Recognition Double entry bookkeeping: Chart of accounts Historical cost: Initial capital (nominal capital
based on the Ledgers Applicable to period maintenance)
accrual concept Recognise cost of sale expense (debit) Journals transactions
De-recognise stocks (credit) Day books

Recognise cash/account receivable (debit)
Recognise income (credit)

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Property plant and Capitalisation Double entry bookkeeping: Chart of accounts Historical cost or Initial capital (nominal capital
equipment (PPE) to segregate from Ledgers Revaluation maintenance)
acquired revenue so that Recognise capital value (debit) Journals
profits can be Recognise an obligation/or Day books
measured derecognise cash (credit)
accurately
PPE used Depreciation Double entry bookkeeping: Chart of accounts Historical cost: if an asset is Initial capital (nominal capital
based on the Ledgers subsequently revalued and a maintenance)
accrual concept Recognise an expense for the expired cost Journals surplus is recognised the
(debit) additional deprecation
Recognise a provision for the allocated cost charged in the profit or loss is
netting off the recognised cost to give the offset by a transfer from the
carrying value (credit) revaluation surplus to the
retained earnings account.
PPE impaired Write-down Double entry bookkeeping: Chart of accounts Historical cost or Initial capital (nominal capital
The asset must not Ledgers Revaluation maintenance)
be overstated – Recognise an expense for wasted asset Journals
hence the write (debit)
down to its De-recognise cost of asset portion wasted
recoverable (credit)
amount.
PPE disposal De-recognition Double entry bookkeeping: Chart of accounts Historical cost or Initial capital (nominal capital
The asset ceases to Ledgers Revaluation maintenance)
provide economic Recognise the proceeds (debit) Journals
benefits hence it is Derecognise the accumulated depreciation
no longer an asset. (debit)
Therefore it must Recognise loss on disposal (debit)
be eliminated from Derecognise the remaining cost (credit)
the accounting Recognise gain on disposal (credit)
records.

The above illustrates why the introduction to the conceptual framework states that financial statements are most commonly prepared in accordance with an
accounting model based on recoverable historical cost and the nominal financial maintenance concept.

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ACCOUNTING SCENARIOS

The elements of an accounting scenario
Factors Context Issue Resolution
A fact, condition, event or other Context (in the context of exchanging A problem that has to be resolved or a Explain, using analysis and reasoning how the
circumstance that influences, conditions, goods for a consideration measured in the subject that has to be considered in problem (issue) is resolved within the framework
constrains, modifies or determines the buyer’s equity instruments) determines relation to the outcome that is sought. In of IFRS, conceptual framework, ethics and CSR.
outcome of transactions, conditions, or the extent to which the factor (e.g. the the context of accounting the issue
other events with (controllable) or without terms of settlement in a share-based relates to the factor that most crucially This entails matching the transaction criteria to
(uncontrollable) the intervention of payment transaction: whether the supplier meets the accounting objective. the financial reporting standard (IFRS) criteria.
management and the governing board. has the right to choose settlement options) Where there is an exact match the issue is
becomes an issue to be resolved. resolved (convergent thinking). At times there
Factors, such as exchange rates, are isn’t an exact match because the issue e.g.
neutral – they are only activated and There may be more than one factor. In control (of a subsidiary) or significant influence
given specific meaning by a context such which case the most relevant factor must (over an associate) is not straightforward. See
as consolidating a foreign subsidiary. be identified and applied to the particular ACCA December 2013 q3c & answer for an
Therefore, the relevance of a factor is accounting objective e.g. determine the illustration of divergent thinking about
contingent on the situation. nature of the rights and obligations relevant factors in an attempt to determine
arising in a share-based payment whether control exists over a subsidiary.
transaction.
Also refer to Professional judgement.
Consider how the factors interact given
certain terms and conditions. For
example, in a share- based payment
transaction the fair value of the equity
instruments may not be the same as the
amount required to settle the obligation
because the supplier may request
payment in cash, resulting in the
recognition of a hybrid equity and
liability components.
Refer to Examiner’s report, q4a December 2014
Entity A leased block of flats under a Accounting for the block of flats is a How the block of flats would be Cite the rule that proves the conclusion. E.g.
finance lease – an event (awaiting a context because it creates a whole used becomes an issue that if block of flats is used to
context to make it an accounting new perspective on the event – which determines how the acquisition is i) rent as investment (then it is an
issue). Other events include: disposal now raises an issue. So we say: in the accounted for. The key issue: is the investment property to be accounted
and valuation. context of accounting for the leasing a social housing service or a for under IAS 40)
transaction … we need to consider the commercial operation resulting in ii) rent as social service (then it is plant
issue of … or the key issue is … commercial rent? and should be accounted for under
PPE IAS 16)

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ACCOUNTING ARGUMENTS
The accounting question
The greatest challenge to any thinker is stating the problem in a way that will allow a solution. Bertrand Russell
Critical analysis p3: we can learn a lot from others about how to develop critical thinking and evaluation by examining
“…analysing how they select, combine and order reasons to construct a line of reasoning;”
“…evaluate whether their reasons are well-founded, based on good (reliable) evidence or logic”
“…identifying flaws in their reasoning”
The nature of an accounting argumentation
- Begins with a premise: the IFRS recognition criteria see ACCA P2 December 2011 q3c
- Analyses commercial transaction details and surrounding circumstances to determine the criteria by which the transaction can be identified
- Compares the recognition details with IFRS criteria
Recognition
- Concludes: there is a match
i) transaction identified e.g. financial asset
ii) Transaction classified: consider business model e.g. amortised cost

- Concludes: there is no match
If …then … comment.
If …then…otherwise

If… then… however,
- Concludes there is a conditional match: exercise professional judgement in identifying the substance of the transaction. Then i) identify and ii) classify

Linear arguments
Convergent support
Argument analysis
ACCOUNTS RECEIVABLE
If the receipt of accounts receivable is delayed by more than twelve months the outstanding balance should be discounted at the market rate to reflect the time
value of money and the risks associated with an equivalent financial instrument. The basis of measurement is the “income approach” under IFRS 13 Fair
value measurement. Thus, if instead of receiving cash, accounts receivable is in the form of another financial instrument with interest rates do not reflect
market rates, the cash flows would be discounted at rates of interest for that level of risk.

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ACCOUNTING ELEMENTS AND COMPOUNDS

Unit of account (the atoms and molecules – reactants, catalysts and products)
Hybrid or compound instruments (inert molecules)
How elements can be combined e.g. within sub-groups of the IAS 1 formats; how the elements of one group relate to the elements of another group e.g. how
inventory (current assets) relate to trade payables (current liabilities)
Modes of communicating meaning

ACCOUNTING ESTIMATES, MEASUREMENTS & VALUATIONS
Similarities and differences

Measurement basis Estimation basis Valuation basis
Driver Determined by the accounting policy Determine the amounts based on the policy e.g. Determine amounts based on measurement
e.g. depreciate an asset, recognise calculate the depreciation in accordance with the concepts e.g. fair value, current value (exit
goodwill on the basis of acquisition approved policy based on the relevant value or replacement costs), value in use,
accounting, recognise intangible assets parameters of cost, useful economic life and historical cost of the asset.
with indefinite lives, capitalise residual value if any.
development expenditure.
Perspective Internal - management Internal – management; can have an external Market participants
focus for verifiability as in estimating the fair
value of a financial liability held as a financial
asset by another party.
Type of values Entry and exit values Entry values (e.g. depreciation, stock valuation, Exit values
etc. based on acquisition costs) and

Exit values (e.g. stock valuation base on NRV)
Judgement required Judgement is focused on evaluating the Requires judgement about key variables that Requires judgement about key variables that
business model requirements for determine the amount to be recognised. determine the value of the asset or liability.
reflecting the economic substance of the
transaction over the useful economic life The value of the asset depends on being able
of its benefits and obligations. to exercise future rights over the present
resource.
For example, how is the asset used in
the business and what is the expected The value of the liability depends on the
pattern of consumption of its benefits? future obligations to transfer economic
Judgement about risks affecting benefits to settle the obligation.
measurement of values (e.g. risk of
default or counterparty credit risk,
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