Financial Reporting - International Accounting Standards

Syllabus review

Following a review of this syllabus CIMA is introducing some changes which will be assessed for the first time in May 2003.

Two syllabuses are available below. The first one will be examined in November 2002 and the second one will be examined for the first time in May 2003.

Financial Reporting - International Accounting Standards  - This syllabus will be examined in November 2002.

Syllabus overview

Where financial statements are required in a form suitable for publication, it is expected that the layout and presentation will follow that seen in the relevant IAS: for example IAS 1 for an income statement and a balance sheet and IAS 7 for cash-flow statements. In some cases, IASs permit two accounting treatments for like transactions and events. In this paper it is expected that answers will be produced using the benchmark treatment, and only knowledge of an alternative treatment is required. It should also be noted that certain concepts utilise terms seen in the wider accounting literature and not just those found in IASs.

This syllabus will draw upon all of the accounting standards seen in the earlier paper, Financial Accounting. However, the following standards seen in that syllabus will be particularly relevant to questions asked in this paper: IASs 1, 4, 8, 12, 16, 17, 19, 33, 35, 36 and 37. 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 undertakings, for publication in accordance with International Accounting Standards (IASs);
• 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.

Assessment

There will be a written three-hour paper. The paper will contain two sections: Section A will be compulsory for 60% of the marks, with 40 of the 60 marks 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 income statement and a consolidated balance sheet for a group of undertakings;
• 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 concept of an associate and a joint venture;
• prepare consolidated financial statements for an associate or a joint venture within the group;
• explain the pooling of interests method of consolidation;
• prepare consolidated financial statements under the pooling of interests method;
• compare and contrast pooling of interests, 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 historical rate 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 pooling of interests methods (IAS 22 + 27).
• The treatment in consolidated financial statements of minority interests, pre- and post-acquisition reserves, goodwill, fair value adjustments, 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 (IAS 28 + 31), using the equity method and proportional consolidation method.
• The accounting entries for mergers, demergers and capital reconstruction schemes.
• Foreign currency translation (IAS 21), 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 changing prices (IAS 15) and hyperinflation (IAS 29).
• The principle of substance over form (IAS 1) and its influence in dealing with transactions such as sale and repurchase agreements, debt factoring, securitised assets, loan transfers, consignment stock and public- and private-sector financial collaboration.
• The accounting treatment of goodwill, intangible and tangible assets (IAS 16 + 38).
• Impairment of non–current assets, including brands and goodwill (IAS 36).
• Capitalisation of interest (IAS 23), and discounting.
• Provisions and contingencies (IAS 37).
• Financial instruments classified as liabilities or shareholders’ funds and the allocation of finance costs over the term of the borrowing (IAS 32 + 39).
• The measurement and disclosure of financial instruments (IAS 39).

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 financial statements;
• identify those environmental issues which should be disclosed;
• explain the process of measuring, recording and disclosing the effect of exchanges between a business and society – human resource accounting;
• identify the influences on financial reporting of cultural differences across the world;
• identify major differences between IASs, UK GAAP 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, and 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 IASs, UK GAAP and US GAAP.
• Emerging issues and exposure drafts issued by the regulatory bodies.

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 published financial statements;
• explain the weaknesses of the financial report which can reduce effectiveness in communicating meaningful information to users; 
• prepare and interpret segmental analysis, inter-firm and international comparison.

• Advanced aspects of the interpretation of financial statements following analysis of published financial statements.
• The identification of information required to assess financial performance, position and adaptability, 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 comparisons (IAS 14). 

This syllabus represents an advanced study of financial accounting. It concerns the financial statements of groups of undertakings in an international context. Students elect to answer in terms of International Accounting Standards (IASs) but they should also be familiar in general terms with major differences of practice between IASs, UK Generally Accepted Accounting Practice (GAAP) and USA GAAP. A detailed knowledge of individual UK or USA Accounting Standards will not be required.

Where financial statements are required in a form suitable for publication it is expected that the layout and presentation will follow that seen in the relevant IAS, for example IAS 1 for an Income Statement and a Balance Sheet and IAS 7 for Cash Flow Statements. In some cases IASs permit two accounting treatments for like transactions and events. In this paper it is expected that answers will be produced using the benchmark treatment and only knowledge of an alternative treatment is required. It should also be noted that certain concepts utilise terms seen in the wider accounting literature and not just those found in IASs.

This syllabus will draw upon all of the accounting standards seen in the earlier paper, Financial Accounting. However, the following standards seen in that syllabus will be particularly relevant to questions asked in this paper: IASs 1, 4, 7, 8, 12, 14, 16, 17, 19, 32, 33, 35, 36, 37, 38 and 39. It should be noted that some of these standards are shown again within this syllabus where their content is relevant to group situations.

Aims

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

• prepare financial statements for groups of undertakings, for publication in accordance with International Accounting Standards (IASs);
• 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 paper of three hours. There will be three sections: section A will be compulsory as 10 multiple choice questions for 20% of the marks; section B will be a compulsory question for 30% of the marks; and section C will offer a choice of two from four questions for 50% 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 income statement and a consolidated balance sheet for a group of undertakings;
• 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 concept of an associate and a joint venture;
• prepare consolidated financial statements for an associate or a joint venture within the group;
• explain the pooling of interests method of consolidation;
• prepare consolidated financial statements under the pooling of interests method;
• compare and contrast pooling of interests, 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 historical rate method;
• explain the correct treatment for foreign loans financing foreign equity investments.

Syllabus content

• 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 pooling of interests methods, (IAS 7 +22+27).
• The treatment in consolidated financial statements of minority interests, pre- and post- acquisition reserves, goodwill, fair value adjustments, intra-group transactions and dividends, piece-meal and mid-year acquisitions, and disposals to include sub subsidiaries and mixed groups.
• The accounting treatment of joint ventures and associates (IAS 28+31) using the equity method and proportional consolidation method.
• The accounting entries for mergers, demergers and capital reconstruction schemes.
• Foreign currency translation (IAS 21) 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 and apply the principles used to determine the substance and economic reality of a range of transactions;
• explain the difference between liabilities and shareholders' funds, and allocate finance costs appropriately.
• explain the recognition and valuation issues concerned with pension schemes and the treatment of actuarial deficits and surpluses

Syllabus content

• 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 changing prices (IAS 15) and hyper inflation (IAS 29).
• The principle of substance over form (IAS 1) and its influence in dealing with transactions such as debt factoring, securitised assets, loan transfers and public and private sector financial collaboration.
• The accounting treatment of goodwill, intangible and tangible assets (IAS 16 + 38).
• Impairment of non-current assets including brands and goodwill (IAS 36).
• Capitalisation of interest (IAS 23), and discounting.
• Provisions, contingent assets and contingent liabilities (IAS 37).
• Financial instruments classified as liabilities or shareholders funds and the allocation of finance costs over the term of the borrowing (IAS 32 +39).
• The measurement and disclosure of financial instruments (IAS 39).
• Retirement benefits, including pension schemes - defined benefit schemes and defined contribution schemes, actuarial deficits and surpluses (IAS 19).

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 financial statements;
• identify those environmental issues which should be disclosed;
• explain the process of measuring, recording and disclosing the effect of exchanges between a business and society - human resource accounting;
• identify the influences on financial reporting of cultural differences across the world;
• identify major differences between IASs, UK GAAP and US GAAP;
• discuss emerging developments in financial reporting evidenced by discussion and exposure drafts issued by regulatory bodies.

Syllabus content

• Environmental and social accounting issues; differentiating between environmental measures and environmental losses, and 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 IASs, UK GAAP and US GAAP.

• Emerging issues and exposure drafts issued by the regulatory bodies.

7b(iv) The Analysis of Financial Statements - 20%

Learning Outcomes

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 published financial statements;
• explain the weaknesses of the financial report which can reduce effectiveness in communicating meaningful information to users;
• prepare and interpret segmental analysis, inter-firm and international comparison.

Syllabus content

• Advanced aspects of the interpretation of financial statements following analysis of published financial statements.
• The identification of information required to assess financial performance, position and adaptability 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.
• Segment analysis; inter-firm and international comparisons (IAS14).