Written by a fully qualified CPA (Aust.) professional, these updated study notes represent the author's materials that were used to blast through the CPA Australia Professional Exams in one year with 4 high distinctions and 2 distinctions while working full time without any tuition support. In the...
High Distinction
CPA Financial Reporting Study Notes
(Version 16a)
Contents
Module 1 - The role and importance of financial reporting ................................................................... 4
The role and importance of financial reporting .................................................................................. 4
Purpose of financial reporting ........................................................................................................ 4
The Conceptual Framework for Financial Reporting .......................................................................... 7
The objective of general purpose financial reporting......................................................................... 9
Qualitative characteristics of useful financial information ............................................................... 10
Definition and recognition criteria of elements of financial statements.......................................... 12
Measurement of elements of financial statement ........................................................................... 14
Application of measurement principles in IFRS ................................................................................ 17
Accounting for a lease by the lessee (IAS 17) ............................................................................... 17
Employee Benefits (IAS 19) ........................................................................................................... 18
Share-based payments (IFRS 2) .................................................................................................... 19
Investment property (IAS 40)........................................................................................................ 20
Module 2 - Presentation of financial statements ................................................................................. 21
Part A: Presentation of financial statements .................................................................................... 21
Complete set of financial statements ........................................................................................... 21
Accounting policies ....................................................................................................................... 24
Events after the reporting period ................................................................................................. 27
Part B: Statement of profit or loss and other comprehensive income ............................................. 28
Part C: Statement of changes in equity ............................................................................................ 31
Part D: Statement of financial position............................................................................................. 32
Part E: IAS 7 Statement of cash flows ............................................................................................... 35
Module 3 - Revenue from contracts with customers; provisions, contingent liabilities and contingent
assets..................................................................................................................................................... 38
Part A: Revenue from contracts with customers .............................................................................. 38
Part B: Provisions .............................................................................................................................. 44
Part C: Contingent liabilities an contingent assets ........................................................................... 46
1
,Module 4 - Income taxes ...................................................................................................................... 47
Income tax......................................................................................................................................... 47
Module 5 - Financial instruments ......................................................................................................... 50
Part A: What are financial instruments?; Part F: Presentation issues .............................................. 50
Part B: Recognition and derecognition of financial assets and financial liabilities........................... 55
Part C: Classification of financial assets and financial liabilities; Part D: Measurement; Part E:
Impairment of financial assets and hedge accounting ..................................................................... 57
Reclassification.............................................................................................................................. 61
Hedging ......................................................................................................................................... 63
Part G: Disclosure issues ................................................................................................................... 66
Module 6 - Business combinations and group accounting ................................................................... 68
Part A: IFRS 3 Business Combinations............................................................................................... 68
Part B: Consolidated financial statements ........................................................................................ 71
Part C: Investments in associates ..................................................................................................... 72
Part D: Joint arrangements - overview ............................................................................................. 73
Module 7 - Impairment of assets .......................................................................................................... 74
Part A: Impairment of assets - an overview ...................................................................................... 74
Part B: Impairment of individual assets ............................................................................................ 77
Part C: Impairment of CGUs .............................................................................................................. 79
Part D: IAS 36 - disclosure ................................................................................................................. 82
About the Author
The author is an international best seller for CPA Australia study notes, helping candidates across the
world taking the CPA Australia exam achieve success.
After scoring a perfect accounting score at high school, the author studied a BCom at Melbourne
University and won a maximum of three Deans Honours List which eventuated in being bestowed
the BCom undergraduate medal, awarded to the best graduating commerce scholar over their three
years of study. The author proceeded to study a masters in the field of accounting while working full
time in the corporate world and graduated on the Melbourne Business School Deans Honours List.
Having a combination of professional experience and academic success, the author blasted through
six CPA exams in one year without the aid of any external tuition and scored high distinctions for
Ethics and Governance, Strategic Management Accounting, Financial Reporting and Advanced Audit
and Assurance and distinctions for Global Strategies and Leadership and Advanced Taxation.
Now a fully qualified CPA, the author has since updated the notes to incorporate student feedback
for further refinements.
2
,Disclaimer
The materials represent the author's study notes to achieve a High Distinction.
The materials are not, and not intended to be professional advice. These materials may not reflect
the most recent developments and judgement befalls on the reader to examine the suitability of the
materials for their own purposes, having full regard for any inaccuracies or omissions that may arise
in the materials. The author of the material expressly exclude themselves from any contractual,
tortuous or any other form of liability on whatever basis to any person, whether a participant in this
subject or not, for any loss or damage sustained or for any consequences which may be thought to
arise either directly or indirectly from reliance on statements made in these materials.
Any opinions expressed in these materials are from the point of view of a student preparing for an
examination and not necessarily those of any qualified professional, affiliated organisations or
members.
The materials are sold for the exclusive use of the purchaser and the author continues to reserve all
rights. No part may be reproduced, hired out, loaned, given out, resold, stored or transmitted in any
form or by any means without the written permission of the author.
3
,Module 1 - The role and importance of financial reporting
Module 1 - The role and importance of financial reporting
The role and importance of financial reporting
Purpose of financial reporting
What is the purpose of financial reporting [p17]
Provide useful financial information for various users to support their decision-making needs.
Provides a stewardship or accountability role by requiring managers to give an account of
how they have used (efficiently and effectively manage) the resources with which they have
been provided.
What is the difference between special purpose financial statements and general purpose financial
reporting? [p18]
Special purpose financial statements are more tailored financial statements for specific
needs or providing useful information. Eg bank extending credit.
General purpose financial reporting has a much broader focus catering for users who do not
have the authority to demand special reports: "Financial statements that are intended to
meet the needs of users who are not in a position to require an entity to prepare reports
tailored to their particular information needs."
How does IASB resolve the conflict that a range of users require different information and have
different information needs [p18]
To provide information that will meet the needs of the maximum number of primary users.
The criterion in judging whether information should be included or required in financial
statements is to see whether it is useful for a wide range of users.
Limitations of decision-usefulness objective for wide range of users [p19]
Lack of familiarity with new types of information making it difficult to assess its usefulness.
Decision-usefulness may vary among users.
Capable of multiple interpretations.
What does the Conceptual Framework and IFRS provide? [p20]
A coherent set of objectives, assumptions, principles and concepts within which judgements
are to be made.
4
,Module 1 - The role and importance of financial reporting
Who should prepare GPFS? [p21]
This is left to governments and regulatory agencies to decide and no stipulated in the
Conceptual Framework.
In Australia, reporting obligations are found in the Corporations Act 2001 (Cwlth): which sais
financial reports must comply with accounting standards and be prepared by all disclosing
entities, public companies, large proprietary companies and registered schemes.
In Australia, AASB adopts IFRS for 'reporting entities' which need to prepare GPFR [p21] :
reporting entities are entities (including economic entities) in respect of which it is
reasonable to expect the existence of users dependent on GPFR for information which will
be useful to them for making and evaluating decisions about the allocation of scarce
resources.
Not all entities are required to prepare financial reports in accordance with IFRSs [p22]
What comprises of the IFRS accounting standards? [p21]
International financial Reporting Standards (IFRS), issued by IASB
International Accounting Standards (IAS), issued by predecessors of IASB
IFRIC Interpretations, authoritative guidance provided by IFRS Interpretations Committee
and approved by IASB
SIC Interpretations, official interpretations of IASBs and issued by a predecessor committee
and approved by IASB. Interpretations have the same authority as IFRSs.
What does not comprise of the IFRS accounting standards? [p21]
IFRS Interpretations Committee Agenda Decisions: When the IFRS Interpretations
Committee decides that an issue does not require further consideration it publishes that on
the Agenda including the issue and a detailed explanation of why further action is not
required. These do not have the authority of IFRSs but may be used as guidance for
understanding issues.
What are the international initiatives to decrease complexity of financial reporting? [p22]
1. reducing differences in reporting standards between countries [p23]
Over 100 jurisdictions worldwide require the use of IFRSs for their publicly listed
companies.
2. reducing reporting requirements of specific organisations [p23]
IASB introduced IFRS for SMES which are less complex than full IFRS [p23]
AASB introduced differential reporting framework with reduced disclosure
requirements (RDR) where organisation meet the category of Tier 2. [p23]
5
, Module 1 - The role and importance of financial reporting
XRB introduced multi-tiered Accounting Standards Framework where the level of
disclosure and compliance requirement depends on the nature of organisations.
[p24]
3. catering to information needs of multiple stakeholders, how to measure 'performance' from
multiple perspectives that cannot be met simply by the reporting of financial statements (eg.
strategy and plan) [p24]
Implemented projects: IAS 7 statement of cash flow and IAS 8 accounting policies
and estimates [p24-25]
Research projects: Materiality, principles of disclosure (develop a disclosure
standard that binds together financial statements and their contents), standards
level review of disclosure(improve disclosure in respective standards) [p25]
Completed projects: Amendments to IAS1 [p25]
FRC UK, introduced Financial Reporting Lab as a forum for companies and investors
to solve contemporary reporting needs. [p26]
What are the interaction between financial reporting and the regulatory environment? [p26]
The financial reporting depends on the type of organisation and the jurisdiction in which it
operates
Financial reporting has economic consequences and this creates incentives for different
groups to influence financial reporting and the standard-setting process.
Regulatory capture is when regulated parties (prepares of financial reports) are able to exert
influence on the standard-setting body
Private interest theory is the capacity of various private interests to exert influence on
standard setters
What is the role of accounting standards? [p44]
Provide a practical mechanism for achieving the overall objective of financial reporting and
outlining how best to achieve as many qualitative characteristics as possible (eg, more
consistency and understandability)
Limits the scope for abuse and misreporting that may arise when the economic self-interest
of organisations or their managers interferes with objective reporting.
How does the AASB differ from IFRS? [p45]
IFRS is designed for profit-seeking enterprises but AASB is sector-neutral
IFRS forms the foundation for AASB but AASB adds new paragraphs (prefix Aus) relevant to
Australia such as to not-for-profit and public sectors (eg in impairment of assets)
6
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