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Accounting standard question

cornflowercornflower Well-KnownRegistered Posts: 129
Hi everyone,

My friend is doing a college assignment and she has asked me about how irfs 3 has changed an how the effect of this has on a business.

My books on DFs dont have this in it does anyone know about it? Steve?



  • peugeotpeugeot Experienced Mentor Registered Posts: 624

    IFRS 3 tends not to be examined in depth at DFS and I don't think the AAT have incorporated the changes to IFRS 3 into their syllabus at DFS level. It was a hot topic for the ACCA guys in December however.

    I don't want to bore you with details but tell your friend there has been lots of articles written on IFRS 3 changes (some by myself) but as an overview IFRS 3 is concerned with business combinations i.e. when parent acquires a new subsidiary. The changes place greater emphasis on control - the major change was in goodwill recognition but there were some others.

    Previously IFRS 3 required goodwill only be recognised to the extent of the parent's interest. This is still allowed under the revised IFRS 3 and simply means that there is no recognition of goodwill in minority interests (renamed 'non-controlling interests' in the revised IFRS 3).

    Under revised IFRS 3 you can however recognise goodwill at 100% (instead of simply the parent's share e.g. 80%) and the balance going to non controlling interests in the equity section of the statement of financial position (balance sheet). As an example:

    H acquires 80% of S for $100 net assets in S = $50. Goodwill is $100 less group share of assets (80% x $50) = $60. Non controlling interests share of goodwill is 20% x $50 = $10. This is the 'traditional' method. Under the revised method:

    Goodwill is still $60 as calculated above but under revised IFRS 3 the NCI is measured at fair value to include their share of the goodwill (which we don't recognise under the 'old' method but can in the 'new') so if we assume the value placed at acq of the goodwill attributable to the NCI is $10 then:

    Goodwill = $60 + $10 = $70
    NCI is still $10 but plus the other $10 to recognise the 'fair value'. You record the NCI share of goodwill as DR goodwill CR NCI bottom half of bal sheet. This is referred to as recognising goodwill under the 'full' method.

    That was the main affect on businesses reporting under the new IFRS 3. As I say there are lots of articles out there one of which I wrote which is here and gives a general overview of the main changes such as acquisition costs, contingent consideration, step acquisition etc.

    Your mate might also want to link these changes to IFRS 3's companion standard IAS 27 (Consolidated and Separate Financial statements).

    Best wishes
  • cornflowercornflower Well-Known Registered Posts: 129
    Thanks for this Steve. Could you just tell me what you mean about step acquisitions as not sure we understand it:001_unsure:

    Also if I pass DfS this time I am going to be doing ACCA. I am not good at remembering the accounting standards or what they mean . Are we expected to know them like we are in DFS?

    Thanks for all help.

  • peugeotpeugeot Experienced Mentor Registered Posts: 624
    A step acquisition is where a company acquires another company in stages. Where this happens you calculate goodwill on the day control is obtained after fair valuing any prior investments. Prior to the revision the acquirer would measure goodwill separately for each investment.

    You will need to learn accounting standards at ACCA for F7 and P2 papers as well as for the audit papers. The levels of difficulty do crank up from DFS as you will deal with more complex accounting standards such as IAS 39 (Financial Instruments), IFRS 2 (Share based payments) and also deal with foreign issues such as parent acquiring a foreign subsidiary whose reporting currency is its own so you will have issues such as translations to deal with.

    I always say it's more important to know how to apply each accounting standard to a given scenario than it is to rote learn and try to regurgitate the contents of the accounting standards book. You cannot be examined on every single standard in an exam but most standards interact with one another e.g. IAS 16 (Property plant and equipment) has relations with IAS 36 (Impairment).

  • BluewednesdayBluewednesday Font Of All Knowledge Registered Posts: 1,624

    I hate to tell you this but you will be expected to know many more accounting standards in much greater detail. However you will find it not such a chore as you do so much practice involving standards and you begin to see more of why they are there in the first place!

    To jump in and give Steve a rest, step aquisitions are when you buy a company bit by bit to build up your shareholding.

    Good luck
  • BluewednesdayBluewednesday Font Of All Knowledge Registered Posts: 1,624
    Sorry I think Steve and I posted at the same time!
  • cornflowercornflower Well-Known Registered Posts: 129
    Thanks both of you. Looks like ACCA is going to be an uphill struggle for me then!

    Can you do UK accounting standards or is it all international like DFS? I prefer UK so is there much difference between the two. Sorry for all the questions but it has got me thinking.

  • peugeotpeugeot Experienced Mentor Registered Posts: 624
    The ACCA do have 2 streams -UK and Int.

    There are not a huge amount of differences between UK standards and International because the whole of the UK will soon be required to report under IFRS (a standard for the SME sector in the UK is due out anytime now from the IASB). As a result of the switchover, the UK has always kept FRS/SSAP and task force abstracts in line with IFRS.

    There are some differences which I covered in a recent article which should help you.

    Kind regards
  • cornflowercornflower Well-Known Registered Posts: 129
    Thanks for this. just 1 last question:001_wub: If you are expected to know all about the accountancy standards at ACCA how are you supposed to learn them all? I thought DFS was bad enough but sounds like ACCA is even harder.
  • peugeotpeugeot Experienced Mentor Registered Posts: 624
    The thing with accounting standards is they are vast, they are complex and there is a huge amount to them. For example financial instruments are that huge there are 3 standards devoted to them FRS 25/IAS 32, FRS 26/IAS 39 and FRS 29/IFRS 7.

    Students go into financial reporting studies thinking they are expected to know every examinable accounting standard inside out. The accounting standards book is about 3,500 pages long - how can any examiner in the world expect a student to know that inside out??!!

    At AAT and ACCA level you are expected to know the basics of how they work because the standards are a fundamental aspect of the profession as a whole but you are not expected to be a 'guru'. At DFS level how many accounting standards are you examined on in their entirety? Not many but you are applying them in the exam e.g. by consolidating a parent/subs financial statements you are applying the principles laid down in IAS 27. By preparing a cash flow statement you are applying the principles in IAS 7 - exactly the same sort of approach is used by ACCA in their exams.

    It's not a case of rote learning the textbook/accounting standards book - it is more about getting a broad knowledge of the standards and then applying this knowledge to case studies and scenarios.

    Kind regards
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