ACCA

Paper P2 (International)
Corporate Reporting

On-line Final Mock Examination

Question Paper

Reading and planning 15 minutes

Writing 3 hours

This paper is divided into two sections

Section A This question is compulsory and MUST be attempted

Section B TWO questions ONLY to be attempted

Instructions:
Please attempt this exam under exam conditions and attach the frontsheet complete with your name and
address to your script. The completed package should be sent to BPP Marking Department.
Take a few moments to review the notes on the inside of this page titled, ‘Get into good exam habits now!’ before
attempting this exam.

DO NOT OPEN THIS PAPER UNTIL YOU ARE READY TO START UNDER
EXAMINATION CONDITIONS

ACP2FM10(J) INT Online Mock

Get into good exam habits now!
Take a moment to focus on the right approach for this exam.

Effective time management

• Watch the clock and allow 1.8 minutes per mark. Work out how long you can spend on each
question and do not exceed that time.
• Take a few moments to think what the requirements are asking for and how you are going to
answer them.

Effective planning
• This paper is in exactly the same format as the real exam. You should read through the paper and
plan the order in which you will tackle the questions. Always start with the one you feel most
confident about and take time to choose the questions you will answer in sections with choice.
• Read the requirements carefully: focus on mark allocation, question words (see below) and
potential overlap between requirements.
• Identify and make sure you pick up the easy marks available in each question.

Effective layout
• Present your numerical solutions using the standard layouts you have seen. Show and reference
your workings clearly.
• With written elements try and make a number of distinct points using headings and short
paragraphs. You should aim to make a separate point for each mark.
• Ensure that you explain the points you are making i.e. why is the point a strength, criticism or
opportunity?
• Give yourself plenty of space to add extra lines as necessary; it will also make it easier for the
examiner to mark.

Common terminology
Identify List relevant points
Discuss Explain the opposing arguments
Describe Present the characteristics of
Summarise State briefly the essential points
Recommend Present information to enable the recipient to take action
Analyse Determine and explain the constituent parts of
Explain Set out in detail the meaning of
Illustrate Use an example to explain something
Appraise/assess/
evaluate Judge the importance or value of

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1 Jarvis, Whitehill and Crow
The following draft statements of comprehensive income relate to Jarvis, Whitehill and Crow, all public
limited companies, for the year ended 31 December 2008.
Jarvis Whitehill Crow
$m $m $m
Revenue 4,500 2,800 1,800
Cost of sales (3,200) (2,000) (1,200)
Gross profit 1,300 800 600
Other income 80 20 -
Distribution costs (220) (140) (80)
Administrative expenses (180) (110) (60)
Finance costs (40) (20) (12)
Profit before tax 940 550 448
Income tax expense (280) (160) (120)
PROFIT FOR THE YEAR 660 390 328
Other comprehensive income:
Gains on revaluations of property, net of tax 140 90 80
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 800 480 408

Total comprehensive income for the year ended 600 380 260
31 December 2007
The following information is relevant to the preparation of the group financial statements:
(1) Jarvis acquired 80% of the ordinary shares of Whitehill on 1 January 2007 for $1,400 million when
the fair value of Whitehill’s net assets was $1,500 million. Whitehill acquired 60% of the ordinary
share capital of Crow on 1 April 2008 for $800 million when the fair value of Crow’s net assets
was $1,100 million.
Group policy is to measure non-controlling interests at the date of acquisition at their proportionate
share of the net fair value of the identifiable assets acquired and liabilities assumed.
(ii) Whitehill had sold $400 million of goods to Jarvis on 31 October 2008. There was no opening
inventories of intragroup goods but the closing inventories of these goods in Jarvis’s financial
statements was $100 million. The profit on these goods was 20% of selling price. The tax rate
applicable to both Jarvis and Whitehill is 30%.
(iii) Jarvis have a defined benefit pension scheme and the directors have included the following
amounts in the figure for cost of sales:
$m
Current service cost 12
Actuarial deficit on obligation 9
Interest cost 8
Actuarial gain on assets (6)
Charged to cost of sales 23
The fair value of the plan assets at 1 January 2008 was $120 million and the present value of the
defined benefit obligation was $140 million at that date. The expected average remaining service
lives of employees who were members of the scheme was 8 years.
The company's accounting policy is to recognise actuarial gains and losses in the period incurred
in other comprehensive income and interest cost as a finance cost.
(iv) During 2008 Jarvis paid a dividend of $150 million and Whitehill paid a dividend of $60 million.
Neither company paid a dividend in 2007.
(v) There had been no impairment losses recorded relating to the investments in either Whitehill or
Crow as at 1 January 2008. Whitehill and Crow are considered separate cash-generating units.

3
 The recoverable amount of Whitehill was $2,500 million as at 31 December 2008. There was no
impairment of the investment in Crow. Impairment losses are charged to cost of sales.
(vi) During 2008 Jarvis sold a financial asset which had a carrying value of $50 million at 31
December 2007 for $70 million. This asset had always been classified as available-for-sale by the
directors of Jarvis and during the period in which it was owned $10 million of valuation gains were
recognised directly in equity, and on which deferred tax was provided at 30%. The only
accounting entries to have been made for this disposal to date have been to record the proceeds
in the bank account.
(vii) The income tax charge on profit or loss has been correctly calculated for current and deferred tax
effects on profit or loss for each individual company. Ignore the deferred tax effects of the
actuarial gains and losses on the pension scheme.
Required:
(a) Prepare a consolidated statement of comprehensive income for the Jarvis group for the year
ended 31 December 2008. (30 marks)
(b) Discuss what is meant by corporate responsibility and in particular the factors which should
encourage companies to disclose social and environmental information. (15 marks)
Note: 2 marks will be awarded for the quality of discussion of the ideas and information.
(c) A recent survey has indicated that there has been a vast increase in narrative reporting by FTSE
350 companies on the subject of corporate responsibility however only a very small proportion of
companies identify corporate responsibilities as strategic issues or provide key performance
indicators in this area.
Discuss the ethical issues of narrative reporting without reference to strategy and the lack of key
performance indicators to support the narrative disclosures. (5 marks)
(Total: 50 marks)

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2 Tele2
Tele2 is a company in the telecommunications industry providing landline and mobile telephone
connections and equipment and other telecommunications services such as internet access. The
company is currently preparing its consolidated financial statements for the year ending 31 December
2008.
When Tele2 charge a connection fee to a customer together with the related equipment, the entire
connection fee is recognised at the date of connection even if the length of the customer relationship is
expected to span a number of accounting periods. (2 marks)
The purchase of licences for operations from governments are treated as intangible assets and are
capitalised at their initial cost. In cases where Tele2 is confident that the licence will be renewed (at no
additional cost) then the licence will not be amortised. (3 marks)
Tele2 has recently been suffering a shortage of cash and to help to alleviate this had sold one of their
office buildings to a third party institution on 1 January 2008 and then leased it back for a period of 15
years. The sale price of the building and its fair value are $8.5 million which is the present value of the
minimum lease payments. At the end of the agreement the building will be transferred back to Tele2 at nil
cost. At 31 December 2007 the carrying value of the building was $7 million. The rental under the lease
agreement is $0.8 million per annum payable in advance and the interest rate implicit in the lease is
5.44%. The directors of Tele2 are proposing to include the profit on disposal of $1.5 million in profit or
loss for the year and to treat the lease as an operating lease. (9 marks)
On 1 January 2008 Tele2 held a 30% holding in a communications software development company CSD,
which originally cost $24 million a number of years ago. On 31 March 2008 Tele2 sold a 15% holding in
CSD reducing its investment to a 15% holding meaning that Tele2 no longer exercises significant
influence over CSD. Before the sale of the shares the net asset value of CSD at 31 March 2008 was $100
million, rising from $70 million on the date of the original acquisition. Tele2 received $20 million for its sale
of the shares in CSD and the fair value of its remaining holding in CSD at 31 March 2008 was $17 million.
At 31 December 2008 the fair value of this holding was $19 million. (7 marks)
Tele2 has a number of properties held under finance leases which are surplus to requirements. Although
every effort has been made to sub-let these premises in the current economic climate it is recognised that
it may not be possible to do so immediately. Therefore there will be a shortfall arising from sublease
rental income being lower than the lease costs being borne by Tele2. (2 marks)
Effective communication to the directors. (2 marks)
Required:
Write a report to the directors of Tele2 explaining how each of these matters should be dealt with in the
group financial statements for the year ending 31 December 2008.
(Total: 25 marks)

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3 Scudder
Scudder, a public limited company, has entered into a number of share-based payment transactions.
Scudder has a year end of 31 December.
(i) Scudder wishes to engage the services of VS a management consultant. However Scudder is
short of cash and has agreed with VS that it will accept payment in the form of shares (nominal
value $1). The agreement begins on 1 January 2008 and is initially for a two year period. Scudder
has agreed to issue 10,000 ordinary shares every six months in exchange for 400 hours of
management consultancy services over each six month period.
The hourly rate charged by VS on 1 January is $100 per hour but this is to increase by 10% on 1
July 2008 and by a further 10% on 1 July 2009. The market value of Scudder’s shares at 1
January 2008 was $6 per share.
Required:
Explain how this transaction would be accounted for in 2008 and 2009. (4 marks)
(ii) On 1 January 2008 Scudder provided 200 of its key personnel with 100 share options. An
exercise price of $6 was set being the market price of the shares on that date. The options will
vest if the employees were still employed on 31 December 2010. On 1 January 2008, Scudder
estimated that 45 people would leave before the vesting date. This was revised following the
actual experience of leavers in 2008.
Scudder was unable to reliably estimate the fair value of the options. In such circumstances,
IFRS 2 states:
'The entity shall instead measure the equity instruments at their intrinsic value, initially at
the date the entity obtains the goods or the counterparty renders service and
subsequently at the end of each reporting period and at the date of final settlement, with
any change in intrinsic value recognised in profit or loss.'
Estimates however were made of staff retention and the number of these key personnel who
would leave during the three year period.
The actual/estimated figures for the market value of the share price and the number of the key
personnel leaving each year and expected to leave are as follows at each year end:
Market value Number of Additional number of
personnel leaving personnel expected to
in the year leave before vesting
31 December 2008 $8 12 28
31 December 2009 $10 8 20
31 December 2010 $13 20 –
Required:
Explain how this would be accounted for in each of the years from 2008 to 2010. (7 marks)
(iii) On 1 January 2007 Scudder had granted options over 5,000 shares to the sales director on the
condition that he must continue to work for Scudder for 3 years. There was a further condition that
annual sales must increase by 5 % per annum compound over the three year period. The sales
director was expected to remain employed over the vesting period, and this expectation has not
changed. The fair value of each share option at 1 January 2007 was $4.
In 2007 sales increased by 7% and it was estimated that the three year increase would be
achieved. However in 2008 there was a downturn in the market and sales only increased by 1%
and it was thought by the other directors that the three year target would not be met. However by
the end of 2009 sales had increased and the three year target had been met.
Required:
Explain how this would be accounted for in each of the years from 2007 to 2009. (5 marks)

6
(iv) On 1 January 2008 Scudder granted the managing director a right under which he could receive
on 31 December 2010 either 10,000 shares (provided that they are not sold for one year after
receipt) or cash to the value of 9,000 shares, both provided that he is still employed on that date .
The managing director has the right to choose which route to take and at 31 December 2010 he is
expected to take the shares.
The expected market price of Scudder’s shares is as follows:
Market value
$
1 January 2008 6
31 December 2008 8
31 December 2009 10
31 December 2010 13

The fair value of the shares option is estimated at $6 at 1 January 2008 (taking into account the
post-vesting disposal restrictions).
Required:
Explain how this would be accounted for in each of the years from 2008 to 2010. (6 marks)
(v) A subsidiary of Scudder is in a tax jurisdiction where a tax allowance is available for share-based
transactions, based on intrinsic value of the transaction at the year end. The subsidiary had
granted 100 share appreciation rights to each of its 400 employees on 1 January 2008. At 31
December 2008 it is felt that 75% of these awards will vest on 31 December 2010. The fair value
of each share appreciation right at 31 December 2008 is $6 and the market value of the shares
less exercise price at that date is $5. The tax rate is 30%.
Required:
Explain how the transaction should be accounted for and its deferred tax effect in the financial
statements at 31 December 2008. (3 marks)
(Total: 25 marks)

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4 International convergence
The International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB)
in the USA have recently been working on a number of joint projects including a new standard on
reporting of comprehensive income and developing further guidance on the use of fair values.
Required:
(a) Explain the concept of reporting comprehensive income. (5 marks)
(b) Discuss the advantages and disadvantages of reporting comprehensive income and explain the
issues to consider when deciding where figures should be reported under the concept of
comprehensive income.
Note: 2 marks will be awarded for the quality of the discussion of the ideas and information.
(10 marks)
(c) In November 2006 the IASB issued a discussion paper on fair value measurements.
Explain why the IASB are considering issuing further guidance on the use and measurement of
fair values.
(Marks will be awarded for illustrating your answer with examples of inconsistencies of fair value
measurement). (10 marks)
(Total: 25 marks)

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Student self-assessment
Having completed this paper take a few minutes to consider what you did well and what you found difficult. Use
this as a basis to focus your future study on effectively improving your performance.
Common problems
Timing and planning
Did you finish too early?
Did you overrun?
Did you waffle?
Layout
Was your answer difficult to follow?
Did you fail to explain each point?
Were some of your workings unclear? Y/N
Content
Did you struggle with:
Interpreting the questions?
Understanding the subject?
Remembering the notes/text?
Future emphasis if you answer Yes
Y/N Focus your planning time on generating more ideas.
Use models to help develop width to your thinking.
Y/N Focus on allocating your time better.
Practise questions under strict timed conditions.
If you get behind leave space and move on.
Y/N Focus your planning time on developing a logical structure to
your answer.
Y/N Use headings and subheadings.
Use numbering sequences when identifying points.
Leave space between each point.
Y/N Show why the point identified answers the question set.
Give yourself time and space to make the marker's job easy.
Y/N Learn the meaning of question words (inside front cover).
Learn subject jargon (study text glossary).
Read questions carefully noting all the parts.
Practise as many questions as possible.
Y/N Review your notes/text.
Work through easier examples first.
Contact a tutor for help.
Y/N Quiz yourself constantly as you study. You need to develop your
memory as well as your understanding of a subject.
9
10
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ACCA
Paper P2 (International)
Corporate Reporting

On-line Final Mock Examination

Commentary, marking scheme and

suggested solutions

ACP2FM10(J) INT Online Mock

Commentary
Tutor guidance on improving performance on the exam paper.

General
Your script is the only evidence you will provide to convince an ACCA marker that you should pass this paper
and therefore progress through your qualification. Even very talented students can fall down at this paper
because they do not consider the following points:
The first question you attempt should be the one you feel most comfortable with. Give the marker the impression
that you are comfortable with the syllabus as early as possible. Make it clear which question you are answering
too!
Make sure you answer ALL questions even if you have to guess. It is amazing how a stab in the dark can
generate the 50th mark – the one you need to pass – again it shows the marker that you can think about the
question (albeit in simple terms).

1 Jarvis, Whitehill and Crow

Part (a) is a consolidated statement of comprehensive income for a complex group with the sub-
subsidiary being acquired part way through the year. This part includes a number of adjustments
including pension costs, intra-group trading and unrealised profit, deferred tax and the sale of an
available-for-sale financial asset. A methodical step by step approach is key here. Note that question 1
often includes adjustments on pensions and financial instruments as in this case.
Part (b) requires a discussion of corporate responsibility and in particular social and environmental
reporting. Part (c) requires consideration of the ethical factors involved in companies disclosing large
amounts of narrative information in these areas but not viewing corporate responsibility as part of
corporate strategy. Both of these topics have been identified as being likely to appear on a recurring
basis in question 1 so make sure you are comfortable with answering discussion type questions.

2 Tele2
This is a specialised industry question which is based on a telecommunications company. The examiner
has mentioned that he is likely to set questions in the context of a specialised industry. No specific
knowledge of the industry is required, rather the industry is used as a vehicle to test application of
accounting standards. This question covered discussion of the accounting treatment of revenue
recognition, intangible assets, sale and leaseback, part disposal of an associate and an onerous contract.
The key to passing this type of question is to identify enough of the issues within the scenario. Clearly, a
good knowledge of accounting standards is helpful, but so is the ability to read the scenario carefully and
use basic principles.

3 Scudder
This is an entire question on various aspects and requirements of IFRS 2 Share-based Payment.
Favourite topics of the examiner in the past for single topic questions include:
• Employee benefits
• Share-based payments
• Financial instruments
• Deferred tax
so make sure you are prepared for questions on these topics.

2
4 International convergence
This is the essay question which covers the issues of fair value measurement and reporting
comprehensive income.
The examiner has said that he intends to use question 4 for discussion of current developments in
corporate reporting. What is required is some knowledge of these developments and the ability to put
together a good essay.

3
1 Jarvis, Whitehill and Crow
Marking scheme
Marks
(a) Revenue and COS adjustment – intragroup sale 1
Unrealised profit 1
Deferred tax on unrealised profit 2
COS – pension adjustment 2
Impairment loss (including goodwill and net assets of Whitehill) 6
Available-for-sale financial asset – profit/ reclassification/DT 6
Elimination of dividend 1
Finance costs – pension adjustment 1
Non-controlling interests - PFY 2
Non-controlling interests - TCI 2
Gain on property revaluation 1
Actuarial losses on defined benefit pension plan 1
Basic consolidation (J + W + 9/11 C) 4
30
(b) Explain corporate responsibility 3
Public interest 3
Shareholder value 3
Government/regulation 2
Lack of requirements 2
Quality of discussion 2
15

(c) Not part of strategy 2

Public relations 2
Possibly misleading 1
5
50

Suggested solution
(a) Jarvis Group
Consolidated statement of comprehensive income for the year ended 31 December 2008
$m
Revenue (4,500 + 2,800 + (1,800 x 9/12) – (W3) 400) 8,250
Cost of sales (3,200 + 2,000 + (1,200 x 9/12) – (W3) 400 + (W3) 20 – (W4) 11 + (W7) 40) (5,749)
Gross profit 2,501
Other income (80 + 20 + (W9) 30 – (W5) 48) 82
Distribution costs (220 + 140 + (80 x 9/12)) (420)
Administrative expenses (180 + 110 + (60 x 9/12)) (335)
Finance costs (40 + 20 + (12 x 9/12) + (W4) 8) (77)
Profit before tax 1,751
Income tax expense (280 + 160 + (120 x 9/12) – (W3) 6) (524)
PROFIT FOR THE YEAR 1,227
Other comprehensive income:
Available for sale financial assets:
Reclassification adjustments for gains included in profit or loss, net of tax (W9) (7)
Gains on property revaluation, net of tax (140 + 90 + (80 x 9/12)) 290
Actuarial losses on defined benefit pension plan ((W4) 9 – 6) (3)
Other comprehensive income for the year: 280
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 1,507

4
Profit attributable to:
Owners of the parent (1,227 – 202) 1,025
Non-controlling interests (W2) 202
1,227
Total comprehensive income attributable to:
Owners of the parent (1,507 – 251) 1,256
Non-controlling interests (W2) 251
1,507

Workings
1 Group structure

Jarvis

1.1.2007 80%

Whitehill

1.4.2008 60%

Crow

Effective interest in Crow (80% x 60%) 48%

... Non-controlling interests 52%
100%
Timeline

1.1.2008 1.4.2008 31.12.2008

SOCI
Jarvis (parent) – all year

Whitehill – owned for whole year

Crow – owned for 9/12 of year

2 Non-controlling interests
Profit for the year Total comp income
Whitehill Crow Whitehill Crow
$m $m $m $m
PFY/TCI per Q: Whitehill 390 480
Crow: (328 × 9/12)/(408 × 9/12) 246 306
Less: Unrealised profit (W3) (20) (20)
370 246 460 306
× 20% × 52% × 20% × 52%
74 128 92 159

202 251

5
3 Intragroup trading
Cancel intragroup sale/purchase:
DR Revenue $400m
CR Cost of sales $400m
Unrealised profit on intragroup sale:
Unrealised profit = $100m x 20%
= $20m
In Whitehill's (seller's) books:
DR Cost of sales $20m
CR Inventories $20m
This is profit made by Whitehill therefore will be used to adjust for the non-controlling
interests.
Deferred tax effect of unrealised profit:
Deductible temporary difference = $20m x 30%
= $6m
This is a deferred tax asset and therefore is a credit to the group income tax expense, as a
consolidation adjustment:
DR Deferred tax asset $6m
CR Income tax expense (P/L) $6m
The deferred tax does not affect the non-controlling interests, despite relating to a profit
made by the subsidiary. This is because under IAS 12 Income Taxes, the deferred tax is
deemed to be an issue related to the receiving company calculated at the receiving
company’s tax rate (as the receiving company will get a tax deduction at that rate when the
temporary difference reverses). In this case, the receiving company is the parent and so
the deferred tax does not affect the subsidiary or the non-controlling interests calculation.
4 Defined benefit pension cost
As the company's policy is to recognise all actuarial gains and losses in other
comprehensive income, the charge therefore to cost of sales should simply be the current
service cost of $12 million. The interest cost of $8 million can also be reported in cost of
sales or as a finance cost, but the company should be consistent with its past policy of
recognising the interest cost as a finance cost. This means that cost of sales requires a
reduction of $11 million ($23m - $12m).
The actuarial gains and losses for the year are reported in other comprehensive income.
Tutorial note:
The information about the fair value of plan assets and present value of pension
obligations is not relevant to the profit or loss figures as the company's policy is recognition
in other comprehensive income. If the '10% corridor approach' from IAS 19 were used
rather than the recognition method which the directors have used so far, the amount of any
unrecognised actuarial gains or losses would need to be compared with the higher of 10%
of the present value of the defined benefit obligation at 1 January 2008 and 10% of the fair
value of the plan assets at 1 January 2008, and any excess credited or charged to profit or
loss over 8 years (the average remaining service lives of employees in the plan).

5 Intragroup dividend
Jarvis has a figure for other income of $80m. This includes its share of the dividend from
Whitehill $48m ($60m x 80%) which must be removed on consolidation.

6
6 Goodwill - Whitehill
$m
Consideration transferred 1,400
Non-controlling interests (1,500 x 20%) 300
Less: Net fair value of identifiable assets and liabilities at acq'n (1,500)
200

7 Impairment loss
Whitehill
$m
Notional goodwill ((W6) 200 x 100%/80%) 250
Carrying amount of net assets (W8) 2,300
2,550

Recoverable amount 2,500

Impairment loss 50

Group share (Cost of sales) (50 x 80%) 40

8 Carrying amount of net assets of Whitehill
$m
Fair value of net assets at 1 January 2007 1,500
Total comprehensive income for year to 31 December 2007 380
Total comprehensive income for year to 31 December 2008 480
Dividend paid during 2008 (60)
2,300
Tutorial notes:
No adjustment is made to the net assets for the unrealised profit (W3). This is because
recoverable amount for the group financial statements would be based on the individual
financial statements of Whitehill (i.e. 100% of cash flows for value in use or 100% of
current fair value for the fair value less costs to sell figure). So as the recoverable amount
does not include a provision for unrealised profit (which is a consolidation adjustment), net
assets do not need to be adjusted either when doing the group impairment test. An
alternative would be to adjust both, although this would generate the same answer.
However, an adjustment would need to be made for any fair value adjustments at date of
the impairment test. This is because fair value adjustments are taken into account in the
goodwill calculation (reducing it) and therefore also need to be taken in account for the net
assets (increasing them).
9 Profit on sale of available-for-sale financial asset
$m
Proceeds 70
Carrying value at 31 December 2007 (50)
20
Gains reclassified to profit or loss from other comprehensive income 10
Gain on sale 30
This figure (gross of tax) will be included in other income. The current tax effect of the
gain is already included in the income tax expense per the question.

7
 In addition the gain reclassified to profit or loss will appear in other comprehensive income,
net of the deferred tax previously provided:
$m
DR Other comprehensive income (10 x 70%) 7
DR Deferred tax liability (10 x 30%) 3
CR Profit or loss 10 (included in the gain above).
(b) Increasingly businesses are expected to be socially responsible as well as profitable. As investors
become more aware of social and environmental issues affecting the globe then social
responsibility factors will increasingly be seen as affecting shareholder value. Strategic decisions
by businesses, especially global businesses, nearly always have wider social consequences. In
fact it could be argued that a company produces two outputs, the goods or services that it
provides and the social consequences of its activities. These latter aspects are what is meant by
corporate responsibility and two of the main areas are social reporting and environmental
reporting.
Corporate responsibility also encompasses disclosure of areas that can be monitored: such as the
level of the entity's carbon emissions or carbon ’footprint’ as it is now often called, the level of
community support, and the use of sustainable inputs, such as buying paper from suppliers that
plant new trees.
There are many factors which should encourage companies to disclose information on their levels
of corporate responsibility in terms of social and environmental reporting in their financial
statements.
Probably the most important factor however is the public interest which is increasing rapidly. It is
now widely recognised that although financial statements are primarily produced for investors
there are also many other stakeholders in a company, including employees, customers, suppliers
and the general public. All of these stakeholders are potentially interested in the way in which the
company’s business affects the community and the environment. Increasingly the end user
customer is concerned about how the product is made and concerned about the use of cheap
foreign labour. Equally the customer will be concerned about packaging and waste and the effects
of this on the environment. If a company has a good reputation for care of its employees and care
for the environment this will be an important marketing tool.
Companies now appreciate that their attitude to corporate responsibility also can have a direct
effect on shareholder value. Their social and environmental policies are an important part of their
overall performance and responsible practices in these areas and the provision of information in
the annual report on these areas will have a positive effect on shareholder value as the company
is perceived to be a good investment.
A further factor is the increasing influence of governments and professional bodies in their
encouragement of disclosure and sustainable practices. In some countries there are awards for
environmental and social reporting and the disclosures provided in the financial statements. In the
UK in late 2006 the Prince of Wales set up the Accounting for Sustainability project which is
designed to develop systems that will help both public and private sector organisations account
more accurately for the wider social and environmental costs of their activities.
There are also a variety of published guidelines and codes of practice designed to encourage the
practices of social and environmental reporting such as the Global Reporting Initiative, The
Confederation of British Industry’s guideline, Introducing Environmental Reporting and the
ACCA’s Guide to Environment and Energy Reporting.
However what is missing is any substantial amount of legislation or accounting requirements in
this area. The disclosure that is taking place is largely driven by the factors considered above but
the level and type of disclosure is then at the discretion of the company.

8
(c) The problem that has been noted with companies’ disclosures regarding corporate responsibility
is that although there is now widespread narrative disclosure in the annual report this tends not to
be backed up with quantitative disclosures in the form of key performance indicators.
One of the reasons for this is that few companies identify aspects of corporate responsibility as
strategic priorities. The ethical problem here is that the narrative reports are of extensive amounts
of information that are not necessarily being actively managed within the business giving perhaps
a false impression of the extent of corporate responsibility at board level. The reporting itself has
no clear links to the business performance and strategy and is therefore not necessarily a clear
reflection of the company’s thinking on these areas.
If social and environmental issues do not genuinely affect strategic and operational decisions such
as the types of products developed, supply chain issues, brand positioning and corporate culture
then it could be argued that these corporate responsibility disclosures are little more than a public
relations exercise which could at worst mislead stakeholders in the company.

9
2 Tele2
Marking scheme
Marks
Connection fee IAS 18 1
Defer 1

Licences Capitalisation 1
Useful life 1
Amortise 1

Sale and leaseback Substance 1

Treat as finance lease 1
Part of PPE 1
Value at $10m 1
Deferred income 1
Depreciation 1
Finance charge 1
Current liability 1
Non-current liability 1

Investment Significant influence lost 1

Remeasure remaining interest to fair value 1
Gain on sale 2
Financial asset remaining 1
IAS 39 classification 1
31 Dec change in value 1

Sub-lease Recognise onerous contract 1

Provision 1

Effective communication 2
25

Suggested solution
REPORT
To: The Directors of Tele2
From: Accountant
Date: May 2009
Subject: Preparation of financial statements for year ending 31 December 2008
Terms of reference:
This report considers the accounting treatment of a number issues and in particular:
• Revenue recognition re the connection fee
• Licences
• Sale and leaseback
• Sale of investment in CSD
• Sub-lease costs
Connection fee
The accounting policy chosen for the connection fees is concerning. The connection fee is a one-off fee
at the start of a contract with the customer and is part of the revenue to be earned from that customer for
the services provided. IAS 18 Revenue states that where services are performed over time then the

10
revenue from those services should be recognised on a straight line basis. Therefore a more appropriate
accounting policy would be to defer these connection fees and recognise them over the expected life of
the customer relationship.
Licences
In accordance with IAS 38 Intangible Assets, the licences purchased from governments should be treated
as an intangible non-current asset and capitalised at their initial cost provided that it is probable that
future economic benefits will flow to Tele2 from the licence and that the cost can be measured reliably. It
would seem that both of these conditions are met therefore capitalisation is the correct accounting
treatment.
However IAS 38 also states that such intangible assets should be amortised over their useful life unless
the useful life is indefinite, in which case annual impairment tests are required. The assessment of this
useful life should take into account many factors including technical, technological and commercial factors
as well as potential actions by competitors. As Tele2 does not amortise these licences then clearly the
directors believe that they have an indefinite useful life. It would be argued by most that this is an
unrealistic assumption even if the directors are confident of renewal and therefore the licences should be
amortised over the period to the next renewal date.
Sale and leaseback
The directors of Tele2 wish to treat the sale of the building as a sale and leaseback transaction as an
operating lease and to include the profit on disposal in profit or loss in the current year. However the
substance of the transaction is that it is a financing transaction which should not be dealt with as a sale
but treated as a lease. The fact that the present value of minimum lease payment is equal to the fair
value of the building and that it will be transferred back to Tele2 at the end of the lease term are indicators
that this is a finance rather than an operating lease. Therefore the building should remain in the
statement of financial position as part of property, plant and equipment but should now be valued at its
sales value of $8.5 million.
The profit on the sale of $1.5 million will be treated as deferred income and spread over the 15 year
period of the lease with a release to profit or loss of $100,000 per year. The property will be depreciated
over the 15 year period with a depreciation charge of $0.57m ($8.5m/15 years) each year. There will also
be a finance charge in profit or loss of $0.42 million in 2008 (($8.5m – 0.8m) x 5.44%). In the statement
of financial position the building will appear within property, plant and equipment at a carrying value of
$7.93 million ($8.5 million - $0.57m). The balance on the deferred income account will be $1.4 million
($1.5m – $0.1m)
Finally there will be liabilities in the statement of financial position for the current and non-current
elements of the financial lease payables. The lease liability will be $8.12 million ($8.5m – $0.8m + $0.42
from above). The current element of this will be $0.8 million, the next payment. The non-current element
will be $7.32 million ($8.12 – $0.8m 2009 payment).
Sale of investment in CSD
The investment in CSD will have been accounted for up to 31 March 2008 as an associate using the
equity method of accounting per IAS 28 Investments in Associates. However, once the 15% holding is
sold then Tele2 has only a 15% holding remaining which does not enable Tele2 to exercise significant
influence. Tele2's holding in CSD has crossed the boundary from being accounted for under IAS 28 to
IAS 39 Financial Instruments: Recognition and Measurement. IAS 27 Consolidated and Separate
Financial Statements requires Tele2 to remeasure its remaining shareholding to fair value and recognise
a gain on disposal of $4 million (see Appendix 1). This gain is shown in profit or loss. The remaining 15%
investment will be accounted for in accordance with IAS 39. This investment will be classified as an
available-for-sale financial asset or as a fair value through profit or loss financial asset. The subsequent
treatment of this investment will depend upon how it is classified.
If the investment is classified as at fair value through profit or loss then any changes in fair value will be
taken to profit or loss. In order to be at fair value through profit or loss it must meet strict criteria set out in
IAS 39 and it is doubtful that this investment will meet those criteria. Therefore it will be classified as

11
available-for-sale and the changes in fair value of the investment taken to other comprehensive income.
Therefore the investment will be remeasured to $19m, its fair value, and a gain of $2 million ($19m - 17m)
will be reported in other comprehensive income on 31 December 2008.
Sub-lease costs
The problem with the lease costs and the sub-letting of the buildings is an example from IAS 37
Provisions, Contingent Liabilities and Contingent Assets, of an onerous contract. The IAS states that a
provision should be made for the amounts of the shortfall in the financial statements at 31 December
2008.

Appendix 1
Gain on sale of CSD
$m $m
Fair value of consideration received 20
Fair value of interest retained 17
Less: carrying value at disposal:
cost 24
post-acquisition profits [(100 – 70) x 30%] 9
(33)
4

12
3 Scudder
Marking scheme
Marks
(i) Valuation of service 1
Correct figures 3
4
(ii) Explanation 1
2008 2
2009 2
2010 2
7
Marker note: a maximum of 2 marks only not earned where the incorrect
intrinsic value is used

(iii) Explanation 1
2007 2
2008 1
2009 1
5
(iv) Explanation 2
2008 1
2009 1
2010 1
Transfer to equity 1
6
(v) Deferred tax asset 1
Calculation 2
3
25

Suggested solution
(i) Expense in profit or loss and increase in equity
This is a share-based payment transaction with a third party where it is possible to measure
reliably the fair value of the services received. Therefore it is this fair value which is both the cost
of the services in profit or loss and the amount by which equity will increase.
No. shares Value/share
$ $
Y/e 31 December 2008 = 400 hours x $100 40,000 10,000 4.00
400 hours x $110 44,000 10,000 4.40
84,000 20,000
DR Expenses $84,000
CR Share capital $20,000
CR Share premium (bal) $64,000
No. shares Value/share
$ $
Y/e 31 December 2009 = 400 hours x $110 44,000 10,000 4.40
400 hours x $121 48,400 10,000 4.84
92,400 20,000

13
 DR Expenses $92,400
CR Share capital $20,000
CR Share premium (bal) $72,400
(ii) Scudder is unable to estimate reliably the fair value of the share options at the grant date and
therefore IFRS 2 required that the value used should be the intrinsic value. This intrinsic value
should subsequently be revised at each reporting date and all changes in intrinsic value
recognised in profit or loss. (IFRS 2 para 24(a)).
Y/e 31 December 2008
Equity c/d & charge to profit or loss:
(100 options x (200 – 12 – 28) employees x ($8 - $6) x 1/3 years $10,667
Y/e 31 December 2009
Equity b/d $10,667
∴Charge to profit or loss $32,000
Equity c/d (100 options x (200 – 12 – 8 – 20) employees x ($10 - $6) x 2/3 years $42,667
Y/e 31 December 2010
Equity b/d $42,667
∴Charge to profit or loss $69,333
Equity c/d (100 options x (200 – 12 – 8 – 20) employees x ($13 - $6) x 3/3 years $112,000
(iii) The performance conditions are not market based therefore the effect of these non-market
performance conditions is taken into account by adjusting the number of equity instruments likely
to ultimately vest.
Y/e 31 December 2007
5,000 x $4 x 1/3 $6,667 – charge to profit or loss
Y/e 31 December 2008
Performance target considered will not be met therefore $6,667 reversed as a credit to profit or
loss.
Y/e 31 December 2009
5,000x $4 $20,000 – charge to profit or loss
(iv) This is a share-based payment with a cash alternative. As the managing director can choose
whether to take the cash or the shares then the instrument has both an equity and a debt element.
The debt element, the liability to pay cash, should be remeasured annually and at the final
settlement.
At the grant date the fair value of the cash alternative is 9,000 shares @ $6 = $54,000
The fair value of the share alternative is 10,000 shares @ $6 = $60,000
Therefore the fair value of the equity component is $60,000 – $54,000 = $6,000
Each year there will be a liability element and an equity element recognised together with the
related expense:
Liability Equity Expense
$ $ $
Y/e 31 December 2008
Liability/equity c/d & profit or loss charge
(9,000 x $8 x 1/3)/($6,000 x 1/3) 24,000 2,000 26,000

Y/e 31 December 2009

Liability/equity b/d 24,000 2,000
∴Profit or loss charge 36,000 2,000 38,000
Liability/equity c/d (9,000 x $10 x 2/3)/$6,000 x 2/3 60,000 4,000

14
 Y/e 31 December 2010
Liability/equity b/d 60,000 4,000
∴Profit or loss charge 57,000 2,000 59,000
Liability/equity c/d (9,000 x $13 x 3/3)/$6,000 x 3/3 117,000 6,000

If the managing director elects to take the shares rather than the cash $117,000 will be transferred
from liabilities to equity at the end of 2010.
(v) Deferred tax asset
A liability will be shown for:
100 rights x 400 employees x 75% x $6 x 1year/3years = $60,000
DR Expenses $60,000
CR Liability $60,000
The tax saving is based on the intrinsic value (market value less exercise price), which is only $5
at the year end.
A deferred tax asset will therefore be recognised amounting to:
100 rights x 400 employees x 75% x $5 x 30% x 1year/3years = $15,000
DR Deferred tax asset $15,000
CR Deferred tax (P/L) $15,000

15
4 International convergence
Marking scheme
Marks
(a) Profit or loss items 1
Other comprehensive income 3
Reporting 1
5

(b) 1 mark per valid comment out of the following to a max 8

For:
Additional info for users 1
What is financial performance 1
Aggregation and characteristic 1
Realised/unrealised 1
Against:
Too much aggregation 1
Operating/revaluation gains 1
Where in statement 1
Recycling 1
Why in two parts 1

Effective communication 2

(c) 1 mark per valid comment out of the following to a max 10

Result of Memorandum of understanding
Aim of discussion paper
Single source of reference/codification
Not aimed at increasing use of fair values
Current inconsistency in use of fair values
Examples of inconsistencies (2 mark per explained example, max 4)
Exit vs entry values
Need for changes to other IFRSs
25

Suggested solution
(a) The meaning of total comprehensive income is the change in equity during a period resulting from
all transactions and events other than those changes which result from changes due to
transactions with owners in their capacity as owners. Therefore comprehensive income is all gains
and losses, whether they are realised or unrealised, but the concept excludes the raising of
finance from shareholders and the payments of dividends or other distributions to shareholders.
Comprehensive income comprises items that are part of profit or loss for the period and other
comprehensive income which includes revaluations of non-current assets, actuarial gains and
losses on defined benefit pension plans, gains and losses arising from the translation of the
financial statements of a foreign operation, gains and losses arising on remeasurement of
available-for-sale financial assets and the effective portion of gains and losses on hedging
instruments in a cash flow hedge.
The concept of reporting comprehensive income is that not only the profit or loss items but also
these other comprehensive income items are reported together in one statement. In the past of
course these other comprehensive income items were reported separately in equity. Normally the
method of reporting will be to include items required to be taken to profit or loss by IFRSs in the

16
 first part of the statement followed by the second part which deals with items of other
comprehensive income.
(b) There are a variety of advantages and disadvantages to reporting comprehensive income.
One major argument for the reporting of comprehensive income is that as transactions and
assets/liabilities and the accounting for them become more complex the users of financial
statements require additional information than that provided in a traditional income statement. It is
increasingly the case that traditional performance measures such as earnings per share are not
meeting users needs and the information provided in a comprehensive income statement does
provide users with the additional information that they need.
There also has to be a question about what financial performance actually is. The traditional
income statement views financial performance as the figures which appear in profit or loss
according to IFRSs. However there are arguments that financial performance is a wider concept
than this and includes management’s stewardship of non-current assets and financial assets.
Therefore elements of the financial statements such as revaluations and gains or losses on
available-for-sale investments are part of financial performance and should be reported with profit
or loss figures.
Reporting all income and expenses, also makes it difficult to hide losses, which sometimes went
to reserves in the past.
It is also argued that the purpose of a comprehensive income report is to provide better
information by aggregating items with shared characteristics, such as profit or loss items and
other comprehensive income, and separating items with different characteristics, such as
transactions with owners in their capacity as owners.
Traditionally the items of other comprehensive income are viewed as unrealised and that is part of
the reason that they are shown separately from profit or loss items. However it can be argued that
this concept of realisation is outdated and is in many countries a legal concept which affects the
payments of dividends. With the complexity of current day financial transactions and the
widespread use of financial instruments the distinction between realised and unrealised profits is
no longer a particularly useful basis of classifying elements of performance. Unrealised items
often play an important role in an entity’s overall performance and there is no real argument for
excluding them from the main statement reporting income.
However there are those that disagree with the aggregation of profit or loss items and other
comprehensive income items arguing that there is too much aggregation of information which
hinders its usefulness.
There is also an argument that there is a distinction between operating gains and revaluation
gains and that these should be kept separately. Similar to the argument about realisation it can
also be said that items such as revaluations are not as certain as operating figures and therefore
again should be reported separately from profit or loss items.
A further problem is with determining where each of the elements of gain or loss do appear in the
statement of comprehensive income. Are gains and losses part of operating profit or do they fall
within the areas of other comprehensive income? For example gains or losses on disposals of
non-current assets some argue should be shown as operating items whereas other gains or
losses could be argued to be holding gains or losses.
There is also the problem of recycling or reclassification. This is where items are reported in one
area of the financial statements in one period and then again in another area of the financial
statements in another period. An example would be gains on available-for-sale financial assets
which are initially reported in other comprehensive income as they happen but are then
transferred to profit or loss on the eventual sale of the financial asset. With the recent changes to
require the presentation of a statement of comprehensive income, it could be seen as even more
confusing than before now that all of the elements are in the same comprehensive income report
and are just being moved from one part to another, rather than recycled from equity.

17
 Finally there is one further argument about the format of the statement of comprehensive income
being dividend into two parts. It can be argued that the distinction is unnatural and conceptually
unsound.
(c) As part of the global convergence process for accounting standards the IASB and US FASB
published a Memorandum of Understanding reaffirming their commitment to the convergence of
US GAAP and IFRSs in February 2006. The aim is to develop high quality, common accounting
standards for use in the world’s capital markets. The work programme decided upon by the two
bodies included a project on measuring fair value.
At the time of publishing the Memorandum work in the US was well advanced on a new US
standard SFAS 157 Fair Value Measurement which has since been published. SFAS 157
establishes a single definition for fair value and a framework for measuring fair value. The IASB
recognises the need for guidance in this area and for increased convergence with US GAAP and
therefore decided to use this SFAS as the starting point for its own work on the subject.
The IASB makes quite clear that the aim of the Discussion Paper, and the fair value project
overall, is not to expand the use of fair value in financial reporting. Indeed the stated objective of
the work in this area is to codify, clarify and simplify existing guidance on fair values.
The IASB acknowledges that various IFRSs require some assets, liabilities and equity instruments
to be measured at fair value in some circumstances. However the actual guidance on measuring
fair value is included in a number of individual IFRSs and is not always consistent.
Financial assets such as receivables, when held for trading purposes at fair value through profit or
loss, are valued at fair value based on discounted cash flow techniques. Other items such as
employee share options under IFRS 2 Share-based Payment are measured using complex
mathematical models. This has led to criticism of the usefulness of the information and questions
over whether fair values are appropriate other than for items that can be traded immediately in an
active market.
Similarly, intangible assets can only be revalued to fair value under IAS 38 Intangible Assets
where there is an active market price, whereas IFRS 3 Business Combinations requires their fair
value in a business combination to be used, based on valuation models/ estimates where there is
no active market (in order to separate them from goodwill). Such inconsistencies, the IASB
believes, are unsatisfactory and that there should be a single source of guidance for all fair value
measurements required by IFRSs.
Another issue is how to determine fair value itself and whether to measure it as an exit ( i.e.
selling) price (as US GAAP does) or on some other basis. Current IFRSs generally define fair
value as 'the amount for which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm's length transaction', which is neither an exit nor an entry
(buying) price.
The proposed single source of reference for fair values, starting with this Discussion Paper,
should provide a concise definition of fair value combined with consistent guidance that applies to
all fair value measurements in order to communicate more clearly the objective of fair value
measurement. In order to establish this single set of guidance there will be a need for changes to
other IFRSs which will change how fair value is measured in some standards and how the
requirements are interpreted and applied.

18
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