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current
Question 4, that really delves into the political and intellectual debate that
permeate the entire syllabus. But it is the last question in the exam paper,

RELEVANT TO acca qualification paper P2

Current issues are at the heart of Paper P2, Corporate Reporting, and

This article first looks at some of the hot topics in Business combinations
financial reporting. Then, by using an illustrative Tangled up in the process of convergence is the
question, it shows you how to use this information project to make sense of group accounting. The
to formulate an answer to a current issues IASB has long accepted that the US slant on
question. groups was better suited to the entity concept
and the reality of acquisitions. So the IASB issued
The Framework and reissued IFRS 3, Business Combinations, in
The examiner’s advice is that if you are not sure order to reflect this. But perhaps the rarity of
where to start your answer to a current issues non-controlling interest (NCI) in the US has led to
question, then begin with the Framework. The the IASB creating unnecessary complications as
Framework for Financial Reporting sets out the regards the NCI goodwill.
conceptual basis for the development of standards,
represents current issues in financial reporting.

and is itself based on the elements of assets and Management commentary

liabilities. To paraphrase the Framework, ‘an asset/ The spiralling complexity of financial reporting
liability is a right/obligation to a future economic has led to most companies translating their
outflow/inflow’. This focus on financial position has financial statements into a more digestible report,
permeated all the standards issued in recent years, tagged on to the financial statements in the
and continues to dominate current issues. annual report. This ‘management commentary’
But the Framework also refers to other concepts, is largely unregulated at the moment, but the
such as relevance, reliability and entity. Which IASB has a standard under development that,
brings us to fair value. once issued, will produce some conformity in
management commentaries.
Fair value
This is the hot topic in financial reporting. In order ILLUSTRATIVE QUESTION
to make the position statement a genuine statement The following is an illustrative current issues
of financial position, rather than simply a balance question. It is partly based on past examples of
sheet, the International Accounting Standards Question 4, but it also looks forward to current
Board (IASB) has been pushing financial reporting issues that are topical now and which will remain so
towards fair value. Fair value accounting attempts for the next few sittings. So the question, therefore,
to present all assets and liabilities at market value takes its lead from the examiner, Graham Holt, and
and, as such, is highly subjective. But the IASB is his comments (made at the February 2009 ACCA
prepared to accept reduced reliability in favour of teachers’ conference) that lecturers should try
increased relevance. to write questions of the future, especially in the
context of current issues. As you look through the
Convergence question, you will note the use of numbers, rarely
Also red hot is the subject of convergence, which seen in previous Question 4 examples. This also
the IASB interprets essentially as the convergence takes its lead from the examiner’s comments at
of IFRS with US accounting. This process has the conference, when he warned that future current
received a major boost in recent months, with the issues questions might use numbers to draw out
US Securities and Exchange Commission (SEC) conceptual issues.
coming out in favour of fair value and the IASB.
 student accountant 05/2009
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Studying Paper P2?
Performance Objectives 10 and 11 are linked

issues

examiner’s comments that group accounting under IFRS 3 (Revised)

Question 4: Fudge because the focus is primarily on the accounting.

the first thing to advise in the context of a question like this is:
Fudge is a medium-sized industrial group that is Negotiations with Sugar shareholders continue,
listed on a major world stock exchange. It has finally and Fudge hopes to purchase a further 10%

‘do not become obsessed by the numbers’. It is clear from the

succeeded in acquiring a controlling interest in its (10,000 shares) early next year. It is expected
principle supplier, Sugar. This acquisition is seen by that the consideration will be $1m, and that the
the board as a great achievement, since in the past, identifiable net assets of Sugar will be $6m at this

will be an important topic for examination in the future.

concerns over supply have frustrated the Board and anticipated third point of purchase. The CFO would
worried the shareholders. like to understand how this third purchase will be
You are advising the chief finance officer (CFO) reported, should it go ahead. Goodwill remains
regarding the issues raised by the acquisition. unimpaired throughout. The group has the policy of
She has various concerns, most of which relate recognising full goodwill.
to the financial reporting of the acquisition
and the conceptual reasons underlying the Required
financial reporting. The acquisition of Sugar was Write a report for the CFO that addresses the
achieved in stages. Sugar is a traditional raw following requirements:
materials supplier and had, until recently, been
under family ownership and control. Fudge has, for (a) Calculate the goodwill attributable to Sugar at
a number of years, been in negotiations with the the current year end. Explain the conceptual
family to purchase shares, but only last year, for the basis for the calculation of goodwill.
first time, was Fudge offered shares in Sugar. Fudge (13 marks)
purchased 25% (25,000 shares) at the end of last (b) Explain how the important strategic reasons
year for $2m, and obtained a seat on the main for the acquisition could be communicated to
Board. The fair value of the identifiable net assets Fudge shareholders.
of Sugar at that time was $4m. (5 marks)
Last week, Fudge acquired a further 35% (35,000 (c) Calculate the transfer in equity and the
shares) for $3.5m and obtained control. The fair reduction to equity that is attributable to the
value of the identifiable net assets of Sugar at this parent shareholders that would result from
second point of purchase was $5m. The fair value the third purchase, assuming it occurs as
of the previous ownership of 25% was measured predicted. Explain the conceptual basis for
at $2.25m, and the fair value of the NCI was this transfer.
measured at $3.2m. These latter two fair values (7 marks)
have been measured using appropriate models. (Total 25 marks)
It is approaching the year end, and the CFO
wants to understand how the above purchase Comments on the question
will be reported, both in the financial statements Perhaps the first thing to advise in the context
and elsewhere. She understands that there are of a question like this is: ‘do not become
new rules regulating group accounting, and that obsessed by the numbers’. It is clear from the
these have been motivated partly by the need for examiner’s comments that group accounting
global accounting convergence. She is particularly under IFRS 3 (Revised) will be an important topic
keen to understand the underlying principles for examination in the future. It is also clear
behind the accounting and also the application of that the examiner’s articles in the February and
fair value to the process of measuring goodwill. April 2009 issues of student accountant will be
However, she is also concerned that the acquisition, important. But it is also clear from the question
which is a major strategic success, might not be above that discussion of the issues is at least as
communicated to shareholders appropriately, important as the numbers.
58 technical

The examiner regularly complains of answers that are technically wonderful,

So do not attempt to dazzle markers with excessive detail; instead, use your
understanding of the key issues to simply and clearly answer the question.
but which do not answer the question and therefore achieve few marks.
I would also advise students not to try to be too Parent viewpoint
clever. The examiner regularly complains of answers From the point of view of the parent as a single
that are technically wonderful, but which do not entity, the parent simply acquires first 25,000
answer the question and therefore achieve few marks. shares, then another 35,000 shares. So the parent
So do not attempt to dazzle markers with excessive sees two purchases.
detail; instead, use your understanding of the key
issues to simply and clearly answer the question. Group viewpoint
But the group perspective is quite different. The
MODEL ANSWER group acquires the sub when it obtains control, and
clearly that happens when the second purchase of
Report 35,000 shares occurs. That is the point at which the
sub enters the group.
To: Chief Finance Officer
From: Me Effect
Date: Today The effect of this is that we must recognise only one
Subject: Acquisition issues point of acquisition of the sub. In order to achieve
this, we deem the group to have sold its associate
Introduction and acquired a sub at the point the group obtains
control. So the first 25,000 shares are deemed to
The following report discusses the issues raised by have been sold and then immediately bought back
the acquisition of Sugar. at fair value at acquisition.

(a) The financial reporting of the acquisition Fair value

This leads to one of the more unusual features of
Goodwill IFRS 3 (Revised). The fair value of the shares deemed
The goodwill in Sugar at the point of obtaining sold and bought back need not be in line with that of
control at the coming year end will be calculated those actually acquired (or even those retained) by
as follows: the NCI. A simple calculation can show this:
$’000
Fair value of consideration 35% 3,500 Share volume Fair value given Fair value per
Fair value of previous ownership 25% 2,250 share
Fair value of NCI 40% 3,200 35,000 $3.5m $100
Fair value of the business 100% 8,950 25,000 $2.25m $90
Fair value of net assets (5,000) 40,000 $3.2m $80
Goodwill at acquisition 3,950
(Calculation worth 5 marks) Fair value elsewhere
The above divergent fair value is most odd, given
Conceptual basis that in other situations, for example, the fair
The above calculation is based on the entity concept valuation of financial assets at fair value with gains
within the Framework for Financial Reporting. This and losses to the profit and loss, the transaction
concept notes that the group is one entity under the price on one share gives the fair value of all the
control of the parent shareholders. This key concept others at this point. This divergence of fair value
notes that the parent has control over the parent results in goodwill attributable to the NCI far below
assets and liabilities, as well as the assets and that of the goodwill attributable to the controlling
liabilities of the sub. interest. This makes part (c) below much harder.
 student accountant 05/2009
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Question 4, summed up by the examiner as ‘Subjective: 1 mark per point’. See how
Note the style of the answer. The language is simple and the ideas are clear.
But notice also how the answer has been tuned to the marking guide for

my answer uses one heading for each point to aid the marking process.
Goodwill split Sugar acquisition
Goodwill is split between the controlling and the The Sugar acquisition is exactly the kind of issue
NCI as follows: that management commentary is designed to
$’000 accommodate. The numbers, as presented in the
Goodwill (controlling interest) (3,500 + financial statements, do not give the reader a
2,250 - (60%)(5,000)) 2,750 flavour of the purpose behind the purchase.
Goodwill (NCI) (3,200 - (40%)(5,000)) 1,200
Goodwill at acquisition (see above) 3,950 Presentation
The Fudge group should use the management
Notice that the NCI is 40%, but that they own less commentary to explain the importance of the Sugar
than one third of the goodwill. acquisition in terms of supply stability, and should
also explain the extended negotiations that resulted
Convergence in the step acquisition.
It is true that the revision of IFRS 3 was motivated
by the desire to improve financial reporting in the Regulation
context of the entity concept. However, it is also true The IASB has published a discussion document on
that the project has been dominated by the desire management commentaries, and the group should
to converge IFRS with US accounting standards. read this before publishing. The group should also
(1 mark per point to give 9 marks for discussion, look at other management commentaries and at
therefore one extra point) how others have dealt with acquisitions.

(b) The communication with shareholders Website

The group should also consider using its website
Management commentary to communicate the acquisition, maybe even
Management commentary is the generic name for considering a press conference.
the unaudited operating and financial review that (1 mark per point to give 6 marks for discussion)
accompanies most financial statements in the
annual report presented to shareholders. (c) The financial reporting of the transfer

The idea Transfer

The idea of this report is to translate the The following will transfer out of NCI:
performance and position of the group from $’000
the hard numbers, as presented in the financial Net assets attributable to NCI at transfer
statements, into softer words and pictures for (40%)($6m) 2,400
easier understanding. Goodwill attributable to NCI at transfer
(unchanged from (a)) 1,200
NCI before transfer of 10% ownership 3,600
Transfer to controlling equity (10%/40%) (900)
NCI remaining 2,700
(Calculation worth 3 marks)
60 technical

their delivery of clear answers, and draw from the broad range of issues
I recommend that students review and work through past current issues
questions to improve their knowledge of current issues, to improve
Reduction in the equity attributable to the COMMENTS ON THE ANSWER
parent shareholders Note the style of the answer. The language is
The above transfer into controlling equity will simple and the ideas are clear. But notice also how
meet the cost of the consideration to create the the answer has been tuned to the marking guide
following reduction: for Question 4, summed up by the examiner as
$’000 ‘Subjective: 1 mark per point’. See how my answer
Transfer to controlling equity (above) 900 uses one heading for each point to aid the marking
Consideration cost recognised directly process. Also notice that when I am aiming for five

discussed above to demonstrate their understanding.

in equity (1,000) marks, I give six points.
Reduction to equity that is attributable Next, note that the answer draws widely from
to the parent shareholders (100) across current issues. Of course, the answer is
(Calculation worth 1 mark) founded on the new IFRS on business combinations,
but look how I bring in the conceptual framework,
Conceptual basis fair value, convergence, management commentary,
The above financial reporting is again based on and other issues.
the entity concept and the related concept of Finally, note that ‘subjective’ implies that there
control. Once the group has absolute control of are other issues that could alternatively have
the sub at acquisition, then the group has control. been discussed, and the following would all have
This occurred last week when the 35,000 shares been acceptable:
were purchased. ¤ Accounting for the entity, Sugar, over the year in
the statement of comprehensive income, would
Control have been as an associate up to acquisition and
Control is an absolute: either you have it or you do as a sub thereafter.
not. The group cannot get more control by buying ¤ The deemed disposal of the associate at
more shares later. acquisition would generate a profit on disposal.
¤ The models used for share valuation are highly
Ownership subjective and open to manipulation.
Ownership is quite different. Clearly, if the group ¤ The family company was privately owned and that
does increase its ownership to 70%, then the NCI is why there is no market price before or after
will decrease to 30%. This results in the transfer the acquisition.
between the equity owners, from non-controlling
to controlling. The examiner has, on numerous occasions, made
it clear that alternative answers that consider
Goodwill alternative issues are welcomed by markers.
If Fudge successfully purchases the further
10,000 shares, this will not be a sub acquisition. CONCLUSION
Therefore, if there is no acquisition, there is no new I recommend that students review and work
goodwill calculation. through past current issues questions to improve
(1 mark per point to give 4 marks for discussion) their knowledge of current issues, improve their
delivery of clear answers, and draw from the broad
range of issues discussed above to demonstrate
their understanding.

Martin Jones is a lecturer at the London School of

Business and Finance