Financial Reporting – UK Accounting Standards (IFRP) (Pre-requisite IFNA or IFAI) -

Syllabus overview

This syllabus is an advanced study of financial accounting. It concerns the financial statements of groups of companies in an international context prepared in accordance with UK statements of Generally Accepted Accounting Practice (GAAP). Students may elect to answer in terms of Financial Reporting Standards (FRSs) and Statements of Standard Accounting Practice (SSAPs) and UK company legislation, but they should also be familiar in general terms with major differences of practice between UK GAAP, International Accounting Standards (IASs) and USA GAAP. A detailed knowledge of individual IASs or USA accounting standards will not be required. It should also be noted that certain concepts utilise terms seen in the wider accounting literature and not just those found in FRSs and SSAPs.

This syllabus will draw upon all of the accounting standards seen in the earlier paper, Financial Accounting. However, the following earlier standards seen in that syllabus will be particularly relevant to questions asked in this paper: SSAPs 2, 15, 21, 24 and 25 and FRSs 3, 12, 14 and 15. It should be noted that some of these standards are shown again within this syllabus where their content is relevant to group situations.

The syllabus aims to test the student’s ability to:

• prepare financial statements for groups of companies, for publication in accordance with UK accounting standards;
• evaluate accounting practice with particular reference to capital maintenance theory, asset valuation and disclosure, and the expression of economic substance over legal form;
• evaluate recent developments under discussion to improve the regulation of financial reporting;
• analyse and interpret financial statements in an international context.

There will be a written three-hour paper. The paper will contain two sections: Section A will be compulsory for 60% of the marks, and 40 of those 60 marks will be concerned with consolidated financial statements. Section B will offer a choice of two from four questions for 40% of the marks.

On completion of their studies students should be able to:

• explain the conditions required for an undertaking to be a subsidiary or an associate of a group;
• explain and apply the rules for the exclusion of subsidiaries from consolidation;
• prepare a consolidated profit and loss account and a consolidated balance sheet for a group of companies;
• prepare a group cash-flow statement with appropriate notes;
• explain and apply the concept of fair value at the point of acquisition;
• prepare financial statements when a subsidiary is acquired or disposed of part-way through an accounting period; to include the effective date of acquisition and dividends out of pre-acquisition profits;
• prepare consolidated financial statements where the shareholdings, or control, are acquired in stages;
• explain the concepts of an associate and a joint venture;
• prepare consolidated financial statements to include an associate or joint venture within the group;
• explain the merger method of consolidation;
• prepare consolidated financial statements under the merger method;
• compare and contrast merger, acquisition and equity methods of accounting;
• prepare accounts for a capital reconstruction scheme or a demerger;
• explain and apply foreign currency translation principles;
• explain the difference between the closing rate/net investment method and the temporal method;
• explain the correct treatment for foreign loans financing foreign equity investments.

• Relationships between investors and investees and the exclusion of subsidiaries from consolidation with reference to dominant influence, participating interest, managed on a unified basis and significant influence.
• The preparation of consolidated financial statements (to include the group cash flow statement) involving one or more subsidiaries, sub-subsidiaries and associates, under the acquisition and merger methods (FRS 1 + 2 + 6 + 10).
• The treatment in consolidated accounts of minority interests, pre- and post-acquisition reserves, goodwill, fair value adjustments (FRS 7), intra-group transactions and dividends, piecemeal and mid-year acquisitions, and disposals, to include sub-subsidiaries and mixed groups.
• The accounting treatment of joint ventures and associates (FRS 9), using the equity method and proportional consolidation method.
• The accounting entries for mergers, demergers and capital reconstruction schemes.
• Foreign currency translation (SSAP 20), to include overseas transactions and investments in overseas subsidiaries.

On completion of their studies students should be able to:

• explain the problems of profit measurement and alternative approaches to asset valuations;
• explain measures to reduce distortion in financial statements when price levels change;
• discuss the principle of substance over form to a range of transactions;
• explain the difference between liabilities and shareholders’ funds, and allocate finance costs appropriately.

• The problems of profit measurement and the effect of alternative approaches to asset valuation; current cost and current purchasing power bases and the real terms system; accounting for hyper-inflation (UITF Abstract 9).
• The principle of substance over form (FRS 5) and its application to transactions, including sale and repurchase agreements, debt factoring, securitised assets, loan transfers, consignment stock and the Private Finance Initiative (PFI).
• The accounting treatment of goodwill, intangible and tangible assets ( FRS 10 + 15).
• Impairment of fixed assets, brands and goodwill (FRS 11).
• Capitalisation of interest (FRS 15), and discounting.<
• Provisions and contingent liabilities and contingent assets (FRS 12).
• Capital instruments classified as liabilities or shareholders’ funds and the allocation of finance costs over the term of the borrowing (FRS 4).
• The measurement and disclosure of financial instruments (FRS 13).

On completion of their studies students should be able to:

• explain how financial information concerning the interaction of a business with the natural environment can be communicated in the published accounts;
• identify those environmental issues which should be disclosed;
• explain the process of measuring, recording and disclosing the effect of exchanges between a business and its sociological environment–human resource accounting;
• identify the influences on financial reporting of cultural differences across the world;
• identify major differences between UK GAAP, IASs and US GAAP;
• discuss emerging developments in financial reporting evidenced by discussion and exposure drafts issued by regulatory bodies.

• Environmental and social accounting issues; differentiating between environmental measures and environmental losses; explain the capitalisation of environmental expenditure, and the recognition of future environmental costs by means of provisions.
• Human resource accounting.
• The influence of different cultures on financial reporting.
• Major differences between UK GAAP, US GAAP and IASs.
• Emerging issues and exposure drafts issued by the regulators.

On completion of their studies students should be able to:

• evaluate financial statements and prepare a concise report on the results of the analysis;
• identify the limitations of analysis based on financial statements;
• explain the weaknesses of the financial report which reduce its effectiveness in communicating meaningful information to users;
• prepare and interpret segmental analysis, inter-firm and international comparisons.

• Advanced aspects of the interpretation of financial statements via the analysis of corporate reports.
• The identification of information required to assess financial performance and the extent to which financial statements fail to provide such information.
• Ratios in the areas of performance, profitability, financial adaptability, liquidity, activity and gearing of business.

• Segmental analysis; inter-firm and international comparison (SSAP 25).