tricks & tips for p2

1. e- FABS Foundation for Accounting and Business Studies P2: Corporate Reporting Tricks and Tips Hassaan Bhagat and Yaseen Munshi

2. P2: Corporate Reporting ‘Tricks and Tips’ Hassaan Bhagat MY STORY This material is a product of e-Foundation for Accounting and Business Studies. This material cannot be reproduced without prior permission of e-Foundation for Accounting and Business Studies.

3. P2: Corporate Reporting ‘Tricks and Tips’ Hassaan Bhagat • Pre-exam do(s); • Proper planning and allocation of days • Don’t neglect areas like current affairs and 12 marks theory in the consolidation • Distribute IAS and IFRS between Short and Lengthy ones • 1 question per day of consolidation • 1 Lengthy IAS with 2 short ones • Preparing Introduction Of about half page for each IAS • Highlighting Complicated Adjustments And Their Wordings In The Practice Questions This material is a product of e-Foundation for Accounting and Business Studies. This material cannot be reproduced without prior permission of e-Foundation for Accounting and Business Studies.

4. P2: Corporate Reporting ‘Tricks and Tips’ Hassaan Bhagat • Pre-exam do(s) contd… ; • Don’t forget mixed IAS(s) • What have been examined in Dec 2010 could be examined again • Take breaks • Don’t try to learn anything new in the end This material is a product of e-Foundation for Accounting and Business Studies. This material cannot be reproduced without prior permission of e-Foundation for Accounting and Business Studies.

5. P2: Corporate Reporting ‘Tricks and Tips’ Hassaan Bhagat • During exam do(s); • Plan time in 15 mins (Consolidation 1:30 hrs, 45 mins and 45 mins) • Don’t PANIC • Leave 3 pages blank for presentation of consolidation (workings + explanation) • Notes and assumption • Leave what you don’t know • Go for adjustments even if you didn’t remember their accurate application (Use commonsense) • Don’t calculate but explain IAS first This material is a product of e-Foundation for Accounting and Business Studies. This material cannot be reproduced without prior permission of e-Foundation for Accounting and Business Studies.

6. P2: Corporate Reporting ‘Tricks and Tips’ Hassaan Bhagat • During exam do(s) contd …; • Proper presentation • Explain Your calculations • Don’t Leave a question completely • Focus On your paper rather than on others expression • Choosing the correct question for your self This material is a product of e-Foundation for Accounting and Business Studies. This material cannot be reproduced without prior permission of e-Foundation for Accounting and Business Studies.

7. P2: Corporate Reporting ‘Tricks and Tips’ Hassaan Bhagat • During exam don’t(s); • Candidates do not write in sufficient detail • Candidates should, where possible make sure that they show all workings and start each question in a new page • Give proper time to each requirement rather than focusing on just one • Time management is critical in passing the paper • Candidates face difficulty in applying standards to the scenario • Candidates have knowledge but they are unable to present it • Sometimes Key principles of standard are lost due to unnecessary detail This material is a product of e-Foundation for Accounting and Business Studies. This material cannot be reproduced without prior permission of e-Foundation for Accounting and Business Studies.

8. P2: Corporate Reporting ‘Tricks and Tips’ Yaseen Munshi Major latest updates; This material is a product of e-Foundation for Accounting and Business Studies. This material cannot be reproduced without prior permission of e-Foundation for Accounting and Business Studies.

9. P2: Corporate Reporting ‘Tricks and Tips’ Yaseen Munshi • Major latest updates (contd…); • Exposure draft on offsetting The main proposals of the ED in detail • Under the proposals, an entity would be required to offset (ie present as a single net amount in the statement of financial position) a recognised financial asset and a recognised financial liability if, and only if, it has an enforceable unconditional right of set-off and intends either to settle the asset and liability on a net basis or to realise the asset and settle the liability simultaneously (the offsetting criteria). • The proposals clarify that the offsetting criteria apply whether the right of set-off arises from a bilateral arrangement or from a multilateral arrangement (ie between three or more parties). The proposals also clarify that a right of set-off must be legally enforceable in all circumstances (including default by or bankruptcy of a counterparty) and its exercisability must not be contingent on a future event. • The proposals would require an entity to disclose information about offsetting and related arrangements (such as collateral agreements) to enable users of its financial statements to understand the effect of those arrangements on its financial position. This material is a product of e-Foundation for Accounting and Business Studies. This material cannot be reproduced without prior permission of e-Foundation for Accounting and Business Studies.

10. P2: Corporate Reporting ‘Tricks and Tips’ Yaseen Munshi • Major latest updates (contd…); • Supplement to Exposure Draft: Financial Instruments: Impairment Financial Instruments: Impairment proposes to replace the incurred loss impairment models in IAS 39 and US GAAP with an expected loss impairment model including separate approaches to recognising expected losses for performing assets in a "good book" and for troubled assets in a "bad book". Expected credit losses in the "good book" would be recognised under a time-proportional approach based on the weighted average age and expected life of the assets in the portfolio, but subject to a minimum allowance of at least those credit losses expected to occur in the foreseeable future (a period on not less than twelve months from the reporting date). When assets are transferred from the "good book" to the "bad book" the proposals would require the expected credit loss to be immediately recognised. This material is a product of e-Foundation for Accounting and Business Studies. This material cannot be reproduced without prior permission of e-Foundation for Accounting and Business Studies.

11. P2: Corporate Reporting ‘Tricks and Tips’ Yaseen Munshi • Major latest updates (contd…); • Exposure Draft: Hedge Accounting Summary of the ED proposals • A new hedge accounting model which combines a management view that aims to use information produced internally for risk management purposes and an accounting view that seeks to address risk management issue of the timing of recognition of gains and losses • Look only at whether a risk component can be identified and measured, as opposed to determining what can be hedged by type of item (financial or non-financial) • Base qualification for hedge accounting on how entities design hedges for risk management purposes and permit hedging relationships to be adjusted without necessarily stopping and potentially restarting hedge accounting • Treat the time value premium of a purchased option as a cost of hedging, which will be presented in other comprehensive income (OCI) • Extending the use of hedge accounting to net positions (to improve the link to risk management) A comprehensive set of new disclosures that focus on the risks being hedged, how those risks are being managed and the effect of hedging those risks upon the primary financial statements This material is a product of e-Foundation for Accounting and Business Studies. This material cannot be reproduced without prior permission of e-Foundation for Accounting and Business Studies.

12. P2: Corporate Reporting ‘Tricks and Tips’ Yaseen Munshi • Major latest updates (contd…); • Request for views: Effective Dates and Transition Methods IASB is seeking views on whether or how to sequence effective dates in order to reduce the burden to interested parties. In deciding how to proceed, the IASB will consider the needs of jurisdictions already using IFRSs as well as those planning to do so. Feedback from the consultation will inform the boards as they jointly develop an implementation plan for those new standards that helps stakeholders to manage both the pace and cost of change. This material is a product of e-Foundation for Accounting and Business Studies. This material cannot be reproduced without prior permission of e-Foundation for Accounting and Business Studies.

13. P2: Corporate Reporting ‘Tricks and Tips’ Yaseen Munshi • Major latest updates (contd…); • Exposure Draft: Leases The accounting under existing requirements depends on the classification of a lease. Classification as an operating lease results in the lessee not recording any assets or liabilities in the statement of financial position (balance sheet) under either International Financial Reporting Standards or US standards (generally accepted accounting principles). This results in many investors having to adjust the financial statements (using disclosures and other available information) to estimate the effects of lessees' operating leases for the purpose of investment analysis. This material is a product of e-Foundation for Accounting and Business Studies. This material cannot be reproduced without prior permission of e-Foundation for Accounting and Business Studies.

14. P2: Corporate Reporting ‘Tricks and Tips’ Yaseen Munshi • Major latest updates (contd…); • Exposure Draft: Severe Hyperinflation – Proposed amendment to IFRS 1 The amendment proposes guidance on how an entity should resume presenting financial statements in accordance with International Financial Reporting Standards (IFRSs) after a period when the entity was unable to comply with IFRSs because its functional currency was subject to severe hyperinflation. According to the proposed amendment an entity that has been subject to severe hyperinflation would be allowed to measure assets and liabilities at fair value and use that fair value as the deemed cost of those assets and liabilities in the opening IFRS statement of financial position. This material is a product of e-Foundation for Accounting and Business Studies. This material cannot be reproduced without prior permission of e-Foundation for Accounting and Business Studies.

15. P2: Corporate Reporting ‘Tricks and Tips’ Yaseen Munshi • Scope and recognition • The proposed IFRS would apply to all insurance contracts as defined. An insurance contract would be recognised at the earlier of: • - the insurer being on risk to provide coverage to the policyholder for insured events; and • the signing of the insurance contract. • An insurer would derecognise an insurance liability when it is extinguished. • Measurement • Measurement of the insurance contract is based on a 'building block approach' that portrays a current assessment of the contract, using the following: • - an unbiased, probability-weighted average (expected value) of future cash flows expected to arise as the insurer fulfils the contract; • - the effect of time value of money; and • - a margin. • The building blocks would be used to measure the combination of rights and obligations arising from an insurance contract rather than to measure the rights separately from the obligations. The combination of rights and obligations would be presented on a net basis. • Disclosure • With respect to disclosure, the ED proposes that entities should disclose qualitative and quantitative information about: • the amounts, recognised in its financial statements, arising from insurance contracts; and • the nature and extent of risks arising from insurance contracts. • Major latest updates (contd…); • Exposure Draft: Insurance Contracts This material is a product of e-Foundation for Accounting and Business Studies. This material cannot be reproduced without prior permission of e-Foundation for Accounting and Business Studies.

16. P2: Corporate Reporting ‘Tricks and Tips’ Yaseen Munshi • Major latest updates (contd…); • Exposure Draft: Deferred Tax: Recovery of Underlying Assets The proposal would amend one aspect of IAS 12 Income Taxes. Under IAS 12, the measurement of deferred tax liabilities and deferred tax assets depends on whether an entity expects to recover an asset by using the asset or by selling the asset. In some cases, it is difficult and subjective to assess whether recovery will be through use or through sale. To provide a practical approach in such cases, the proposed amendment would introduce a presumption that an asset is recovered entirely through sale unless the entity has clear evidence that recovery will occur in another manner. The presumption would apply when investment properties, property, plant and equipment or intangible assets are remeasured at fair value or revalued at fair value. This material is a product of e-Foundation for Accounting and Business Studies. This material cannot be reproduced without prior permission of e-Foundation for Accounting and Business Studies.

17. P2: Corporate Reporting ‘Tricks and Tips’ Yaseen Munshi • Major latest updates (contd…); • Exposure Draft: Removal of Fixed Dates for First-time Adopters The Basis for Conclusions states: IFRS 1 First-time Adoption of International Financial Reporting Standards requires a first-time adopter to restate past derecognition transactions that occurred after 1 January 2004. This requirement was included in IFRS 1 as a result of the revision to IAS 39 Financial Instruments: Recognition and Measurement in 2003, to place entities then adopting IFRSs for the first time in the same position as existing IFRS users at that time. As time passes, the fixed transition date of 1 January 2004 becomes more remote and increasingly less relevant to the financial reports of additional jurisdictions that will adopt IFRSs. This material is a product of e-Foundation for Accounting and Business Studies. This material cannot be reproduced without prior permission of e-Foundation for Accounting and Business Studies.

18. P2: Corporate Reporting ‘Tricks and Tips’ Yaseen Munshi • Major latest updates (contd…); • Exposure Draft: Revenue from Contracts with Customers • Identify the contract(s) with a customer. Normally each revenue transaction is a single contract, but sometimes the elements of a multiple-element contract must be accounted for separately or, less commonly, two contracts are combined. • Identify the separate performance obligations in the contract. If an entity promises to provide more than one good or service, it would account for each promised good or service as a separate performance obligation only if the good or service is distinct – that is, it is or could be sold separately. • Determine the transaction price. Transaction price is the probability-weighted amount of consideration that an entity expects to receive. This would take into account collectibility, the time value of money, the fair value of noncash consideration, and consideration payable to a customer. • Allocate the transaction price to the separate performance obligations in proportion to the standalone selling prices of the goods or services underlying each performance obligation. • Recogniserevenue when the entity satisfies each performance obligation by transferring the promised good or service to the customer. A contract for the development of an asset (for example, construction, manufacturing, and customised software) would result in continuous revenue recognition only if the customer controls the asset as it is developed. This material is a product of e-Foundation for Accounting and Business Studies. This material cannot be reproduced without prior permission of e-Foundation for Accounting and Business Studies.

19. P2: Corporate Reporting ‘Tricks and Tips’ Yaseen Munshi • Major latest updates (contd…); • Exposure Draft: Presentation of Items of Other Comprehensive Income • Exposure Draft include: • Items of OCI should be grouped on the basis of whether they will eventually be 'recycled' (reclassified) into the profit or loss section of the statement of comprehensive income. • Income tax on items presented in OCI would be allocated between items that might be subsequently 'recycled' and those that will not be 'recycled', if the items in OCI are presented before tax (which is an option). • The title of the statement of comprehensive income would be changed to 'Statement of profit or loss and other comprehensive income' when referred to in IFRSs, though entities could use another title (such as 'statement of comprehensive income'). This material is a product of e-Foundation for Accounting and Business Studies. This material cannot be reproduced without prior permission of e-Foundation for Accounting and Business Studies.

20. P2: Corporate Reporting ‘Tricks and Tips’ Yaseen Munshi • Major latest updates (contd…); • Exposure Draft: Defined Benefit Plans • Among the amendments proposed to IAS 19 are: • Immediate recognition of all estimated changes in the cost of providing defined benefits and all changes in the value of plan assets. This would eliminate the various methods currently in IAS 19, including the 'corridor' method, that allow deferral of some of those gains or losses. • A new presentation approach that would clearly distinguish between different types of gains and losses arising from defined benefit plans. Specifically, the ED proposes that the following changes in benefit costs should be presented separately: • service cost – in profit or loss : finance cost (ie, net interest on the net defined benefit liability) – as part of finance costs in profit or loss • - remeasurement– in other comprehensive income • The effect of presenting these items separately is to remove from IAS 19 the option for entities to recognise in profit or loss all changes in defined benefit obligations and in the fair value of plan assets. • Improved disclosures about matters such as: • the characteristics of the company's defined benefit plans. • the amounts recognised in the financial statements. • risks arising from defined benefit plans. • participation in multi-employer plans. This material is a product of e-Foundation for Accounting and Business Studies. This material cannot be reproduced without prior permission of e-Foundation for Accounting and Business Studies.

21. P2: Corporate Reporting ‘Tricks and Tips’ Yaseen Munshi • Major latest updates (contd…); • Exposure Draft: Fair Value Option for Financial Liabilities 'two-step approach': 1. As a first step, an entity would present the full change in fair value in profit or loss. 2. In the second step, the portion relating to changes in an entity's own credit risk would be presented as an offsetting entry in profit or loss and presented in OCI. The ED does not propose any other changes for financial liabilities. Consequently, the proposals will affect only those entities that elect to apply the fair value option to their financial liabilities. Importantly, those who prefer to bifurcate financial liabilities when relevant may continue to do so. That is consistent with the widespread view that the existing requirements for financial liabilities work well, other than the 'own credit' issue that these proposals cover. This material is a product of e-Foundation for Accounting and Business Studies. This material cannot be reproduced without prior permission of e-Foundation for Accounting and Business Studies.

22. P2: Corporate Reporting ‘Tricks and Tips’ Yaseen Munshi • Major latest updates (contd…); • Exposure Draft: Conceptual Framework - The Reporting Entity Can a portion of an entity be a reporting entity? What is a reporting entity? A reporting entity is a circumscribed area of economic activities whose financial information has the potential to be useful to existing and potential equity investors, lenders and other creditors who cannot directly obtain the information they need in making decisions about providing resources to the entity and in assessing whether the management and the governing board of that entity have made efficient and effective use of the resources provided. A portion of an entity could qualify as a reporting entity if the economic activities of that portion can be distinguished objectively from the rest of the entity and financial information about that portion of the entity has the potential to be useful in making decisions about providing resources to that portion of the entity. When does one entity control another entity (resulting in a combined reporting entity)? An entity controls another entity when it has the power to direct the activities of that other entity to generate benefits for (or limit losses to) itself. If an entity that controls one or more entities prepares financial reports, it should present consolidated financial statements. This material is a product of e-Foundation for Accounting and Business Studies. This material cannot be reproduced without prior permission of e-Foundation for Accounting and Business Studies.

23. P2: Corporate Reporting ‘Tricks and Tips’ Yaseen Munshi • Major latest updates (contd…); • Exposure Draft: Financial Instruments: Impairment IASB's proposed expected loss model The model proposed in the ED is an 'expected loss model'. Under that model, expected losses are recognised throughout the life of a loan or other financial asset measured at amortised cost, not just after a loss event has been identified. The expected loss model avoids what many see as a mismatch under the incurred loss model – front-loading of interest revenue (which includes an amount to cover the lender's expected loan loss) while the impairment loss is recognised only after a loss event occurs. Proponents of the expected loss model believe it better reflects the lending decision. Under the IASB's proposed expected loss model: • Initial measurement. An entity determines the amortised cost carrying amount of a financial asset or portfolio of financial assets at initial recognition on the basis of the present value of future expected cash flows in considering expectations about future credit losses. • Subsequent measurement. Subsequent to initial recognition the entity re-estimates the future expected cash flows and determines the present value. An impairment loss is therefore recognised only if there is an adverse change in expected cash flows, and a reversal of impairment losses is recognised if there is a favourable change in expected cash flows with any adjustment recognised in profit or loss. All measurements are made on the basis of present values, not market values. Extensive disclosure requirements would provide investors with an understanding of the loss estimates that an entity judges necessary. This material is a product of e-Foundation for Accounting and Business Studies. This material cannot be reproduced without prior permission of e-Foundation for Accounting and Business Studies.

24. P2: Corporate Reporting ‘Tricks and Tips’ Yaseen Munshi • Major latest updates (contd…); • Exposure Draft: Measurement of Liabilities in IAS 37 Main provisions of the revised liability measurement ED: • IAS 37 currently requires an entity to record an obligation as a liability only if it is probable (likelihood greater than 50%) that the obligation will result in an outflow of cash or other resources from the entity. The revised ED does not include the 'probability of outflows' criterion. Instead, an entity would account for uncertainty about the amount and timing of outflows by using a measurement that reflects their expected value, namely the probability-weighted average of the outflows for the range of possible outcomes. • Liabilities within the scope of IAS 37 would be measured at the amount that the entity would rationally pay at the measurement date to be relieved of the liability. Normally, this amount would be an estimate of the present value of the resources required to fulfil the liability, which would take into account the expected outflows of resources, the time value of money, and the risk that the actual outflows might ultimately differ from the expected outflows. • If the liability is to pay cash to a counterparty (for example to settle a legal dispute), the outflows would be the expected cash payments plus any associated costs, such as legal fees. • If the liability is to undertake a service (for example, to decommission plant) at a future date, the outflows would be the amounts that the entity estimates it would pay a contractor at the future date to undertake the service on its behalf. This material is a product of e-Foundation for Accounting and Business Studies. This material cannot be reproduced without prior permission of e-Foundation for Accounting and Business Studies.

25. P2: Corporate Reporting ‘Tricks and Tips’ Yaseen Munshi • Major latest updates (contd…); • Exposure Draft: Fair Value Measurement Overview of the Proposals in the Fair Value MeasurementED • FV definition. The IASB proposes an exit price definition of FV: "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date". • Most advantageous market. FV measurement of an asset or liability assumes sale or transfer in the most advantageous market for the asset or liability available to the entity. • Measurement assumptions. FV measurement of an asset or liability should use the assumptions that market participants would use in pricing the asset or liability. • Highest and best use of an asset. FV measurement of an asset assumes that the asset will be sold to a market participant who will use it at its highest and best use. • Assume transfer of a liability. FV measurement of a liability assumes that the liability is transferred to a market participant at the measurement date. • Day one gains/losses. In four cases identified in the ED, FV measurement at initial recognition might differ from the transaction price. An entity would recognise any resulting gain or loss unless the relevant IFRS for the asset or liability requires otherwise. • Valuation techniques. The ED proposes guidance on valuation techniques, including specific guidance on markets that are no longer active. Valuation techniques must be consistent with the 'market approach', 'income approach' or 'cost approach'. An entity would choose the valuation technique most appropriate in the circumstances and for which sufficient data are available to measure fair value. • Hierarchy of inputs to valuation. The ED proposes a fair value hierarchy that prioritises into three levels the inputs to valuation techniques used to measure fair value. • Disclosures. The ED proposes various disclosures about how assets and liabilities were measured at fair value . This material is a product of e-Foundation for Accounting and Business Studies. This material cannot be reproduced without prior permission of e-Foundation for Accounting and Business Studies.

26. P2: Corporate Reporting ‘Tricks and Tips’ Yaseen Munshi • Major latest updates (contd…); • Exposure Draft ED/2009/2: Income Tax (Proposed replacement of IAS 12) • Proposals to change IAS 12 include: • A new definition of tax basis. 'The measurement under applicable substantively enacted tax law of an asset, liability, or other item'. • New definitions. New definitions 'tax credit' and 'investment tax credit' • Determination of tax basis. Tax basis determined assuming recovery of the carrying amount of the asset by sale, rather than management expectation of sale or use. • Initial recognition exemption. On initial measurement, assets and liabilities that have tax bases different from their initial carrying amounts are disaggregated into (a) an asset or liability excluding entity-specific tax effects and (b) any entity-specific tax advantage or disadvantage. An entity would recognise and measure the former in accordance with IFRSs and recognise a deferred tax asset or liability for any resulting temporary difference between the carrying amount and the tax basis. If the consideration paid or received differs from the total recognised amounts of the acquired assets and liabilities (including deferred tax), an entity recognises the difference as an allowance against, or premium on, the deferred tax asset or liability. Deferred tax is not recognised on initial recognition of an asset or liability whose recovery or settlement will have no effect on taxable profit. • Exceptions for investments in subsidiaries and related entities. The exception from recognising a deferred tax asset or liability arising from investments in subsidiaries, branches, associates and joint ventures will be restricted to investments in foreign subsidiaries, joint ventures or branches (no exception for associates). • Deferred tax asset recognition. Deferred tax assets would be recognised in full, with a valuation allowance to reduce the carrying amount to the highest amount that is more likely than not to be realisable. This is the FASB SFAS 109 approach. Under IAS 12 currently these are netted. This material is a product of e-Foundation for Accounting and Business Studies. This material cannot be reproduced without prior permission of e-Foundation for Accounting and Business Studies.

27. P2: Corporate Reporting ‘Tricks and Tips’ Yaseen Munshi • Major latest updates (contd…); • Exposure Draft ED/2009/2: Income Tax (Proposed replacement of IAS 12) • Proposals to change IAS 12 include: • Uncertain tax positions. Uncertainty would be reflected by measuring current and deferred tax assets and liabilities using the probability-weighted average amounts of possible outcomes assuming that the tax authorities will examine the amounts reported to them by the entity and have full knowledge of all relevant information. • Tax rate – effect of distributions. Where different tax rates apply to distributed and undistributed profits, current and deferred tax assets and liabilities would reflect the entity's expectations of future distributions. • Classification of deferred taxes. Deferred tax assets and liabilities would be classified as either current or non-current based on how the related non-tax asset or liability is classified. This would amend IAS 1, which currently treats all deferred tax to be classified as non-current. • Intraperiod allocation of taxes. Income tax expense would be allocated to the components of comprehensive income and equity using a SFAS 109 approach. • Recording subsequent changes in deferred taxes. Change in the allocation guidance to replace 'backwards tracing' with an approach similar to that required by FASB Statement 109. This material is a product of e-Foundation for Accounting and Business Studies. This material cannot be reproduced without prior permission of e-Foundation for Accounting and Business Studies.