Paper P2 June 2013 Commentary

Question 1 – a consolidated statement of financial position for 35 marks. It was a “D” shaped group including, as usual, a fair value adjustment to the assets of the sub-subsidiary. The timing of the acquisitions was important – the parent, Trailer, and the subsidiary, Park, both acquired their holdings in the sub-subsidiary, Caller, BEFORE Park became a subsidiary of Trailer so, on Trailer’s acquisition of Caller, Caller was not even an associate.  It was simply an investment with no apparent significant influence.
Ncis were measured throughout at their proportional fair value so no goodwill was attributable to the ncis
Goodwill was impaired in the subsidiary, but not in the sub-subsidiary
A loan was made by Trailer at a subsidised rate of 3% where a realistic market rate would have been 6%
An investment by Trailer in office accommodation had previously been impaired subsequent to acquisition and now needed to be unimpaired with a consequent depreciation adjustment.
Provision for closure costs involved in restructuring was needed (the plan had been announced and redundancy notices issued). $4 million costs involved in this plan relate to retraining costs and should therefore not be provided for.
A second plan involving future costs does not, from the question, appear to have been announced and is not to be commenced for another two years so no provision is required – it’s not announced, so the board could subsequently change their collective minds.
As is often the case at this level, there is a pension fund adjustment needed – the only entries so far effected are to record the cash elements of contributions paid.
The well-prepared student should have been able to collect a fair proportion of these 35 marks!

Part b) of the question (9 marks) asked for an explanation for the directors of the effect on the financial statements that would result were the ncis to be measured on a full fair value basis rather than on a proportionate basis. This really should be within the reach of P2 students because this apparent anomaly should have been covered at F7 level.  Certainly, on my courses, we cover this aspect of nci valuations!

Part c) as is becoming usual asked for a discussion (6 marks) about an extremely contentious matter of ethics! “There is no point in an accountant studying ethics and there is no ethical issue in the false declaration of accounting profits”  WELL! I leave that with no further comment necessary

Question 2 and question 3 were both typical P2 questions involving giving advice to directors about appropriate accounting treatment of various matters covered by IAS / IFRS
Question 2 involved IFRS 8 Operating Segments (5 marks), IAS 18 Revenue (6 marks), IAS 37 Provisions and Contingent Assets and Liabilities (6 marks) and finally for 6 marks IAS 1, IAS 16 and IAS 20 (Presentation of Financial Statements, Property Plant and Equipment and Government Grants) There should have been sufficient knowledge to be able to score adequately in this question!
Question 3 part a) covered IAS 17 Leases for 12 marks and could have brought in IAS 40 Investment Properties.  Do not be overwhelmed by the length of the suggested solution – even the best prepared student would have had difficulty simply copying the printed solution with the allocated time of 21.6 minutes even without having to read, think and plan!
Part b) for 5 marks brought in Investment Properties (IAS 40) and Fair Value Measurements (IFRS 13). Knowledge of the three-level hierarchy would certainly have helped and scored marks
Part c) for 6 marks involved a knowledge of IFRS 5 Non-current Assets held for Sale and Discontinued Operations and really should not have given any major difficulties to find 6 relevant, markable points.
As ever, time pressure would be a major problem, but the well-self-disciplined student should have been able to score a pass in both questions 2 and 3.

Question 4 – the current issues question – asked for a discussion (9 marks) about the recurrent argument concerning the “optimal level of disclosure in annual reports”  Basically, can you have too much or is excessive disclosure counter-productive?.  In addition, for a further 6 marks, a discussion about the barriers which may exist against reducing the extent of disclosure.  The fact that this question is broken down into 2 separate sections should have made it rather more approachable than were it simply to be “Here’s a problem – discuss for 25 marks”
Part b) of the question was a mini-scenario where the directors felt that any further disclosure would be excessive and therefore unnecessary. Knowledge of IFRS 7 Financial Instruments, Disclosures should have been brought into an answer as also should IAS 10 Events After the Recording Period.
But even without a thorough knowledge of these, the application of common sense would have scored some marks
From a personal perspective, I would be inclined to avoid the current issues question and trust that my knowledge of IAS / IFRS would be sufficient to score enough in questions 2 and 3 but, just in case I were to be left cold with either 2 or 3, I would try to ensure that I were up-to-date with “what’s happening out there” as I walked into the exam room.
Questions 2, 3 and 4 all carried the additional 2 professional marks
All in all, a fair exam which would allow the well-prepared student to gather sufficient marks to score a pass.  Remember, although you may be aiming for 100%, no one has ever, ever, EVER achieved it and 50% is enough to get you over this P2 hurdle