Financial Analysis: Paper P8 Fully Reflects the Move from National to International Financial Reporting Standards. Fortunately, the Changeover Isn't as Dramatic as It Might at First Seem
Sweetman, Tony, Financial Management (UK)
One of the key features of the new CIMA qualification is that papers P7, Financial Accounting and Tax Principles, and P8, Financial Analysis, are based exclusively on international accounting standards. Where students previously studied a national variant of the financial accounting or reporting papers under the old syllabus, they will now be required to base their preparations for the P7 and P8 exams on international financial reporting standards (IFRSs). This may seem daunting at first, but in many cases their underlying principles are similar to those on which national standards have been based. In several respects, compliance with national accounting standards will achieve compliance with IFRSs.
Students should be aware that knowledge of the syllabus for paper C2, Financial Accounting Fundamentals, is a prerequisite for papers P7 and P8. C2 does not require specific knowledge of any accounting standard and does not ask candidates to prepare accounts in a published format. This means that published accounting formats are dealt with primarily in P7.
This article is mainly concerned with some of the international accounting standards that are relevant to P8. It draws on the guidance published in the feature "Never-ending story" in the December/January 2004/05 issue of CIMA Insider.
In general, the underlying principles upon which UK financial reporting standards (FRSs) and IFRSs are based are very similar. The main issue for P8 candidates, therefore, often concerns changes in supporting references and specific points of detail. One change is in respect of terminology. For example, the profit and loss account becomes the income statement; stocks become inventories; debtors become receivables; and fixed assets become non-current assets.
A second change concerns the format of the primary accounting statements. The balance sheet typically adopts a format that identifies total assets and total equity and liabilities, rather than the "net assets" format more normally used in the UK. IFRS1 includes sample formats of the principal statements, although they are not mandatory and can be adapted.
IFRS1 covers the initial adoption of IFRSs. Technical issues and accounting treatments relevant to consolidated accounts--eg, the treatment of goodwill--may be subject to compliance with IFRSs for the first time. The analysis and interpretation of financial statements may also be informed by knowledge of the IFRSs used to prepare those statements.
IFRS2 deals with share-based payments. In principle, where an entity receives goods or services in exchange for equity instruments in itself, the increase in equity should be measured and recorded at fair value. This is done either at the date on which the goods or services are provided or, if fair value can't be reliably measured, at the date on which the entity agreed to a share-based payment (referred to as the grant date).
Example one: IFRS2
On January 1, 2002, an entity grants 200 share options to each of its 1,000 employees. Each grant is made on the basis that the employee remains with the entity until December 31, 2004. The fair value of each share option is 9 [pounds sterling].
During 2002, 40 people leave and the entity estimates that 20 per cent of its workforce will leave during the three-year period. Another 40 people leave during 2003 and the entity now estimates that 15 per cent of its employees will leave during the three-year period. A further 20 of its employees leave during 2004.
You are required to calculate the remuneration expense that will be recognised in respect of the share-based payment for the three-year period ended December 31, 2004.
The solution is as follows:
The employees' services are received during the three-year vesting period. The amount to be recognised is based on me fair value of the snare options at the grant date of January 1, 2002.The total option expected to vest year by year at the end of the three-year period is calculated in table 1, above. …