Every FAR exam paper will comprise a requirement (typically question 2) that will request an ‘explanation of the required IFRS accounting treatment of the above issues’.
Often when students first encounter this requirement it appears 'alien’. We think that accounting is number crunching, producing financials and posting entries! Why on earth are we being asked to explain?
A very important skill for an accountant is the ability to be able to communicate accounting transactions without using accounting jargon. Yes, that means NOT using ‘debits’ and ‘credits’ (Dohh!).
It’s likely that at some point in your accounting career you will need to explain financial reporting treatment to a non-accountant, hence it’s imperative to be able to articulate what is happening to the financials without over-complicating things. This my friends, is the skill that is being tested in this question.
Personally, I loved this question as a student (does that make me sound sad?). For one, there was a clear technique that my tutor told me to adopt, it was ‘fool proof’ she said, and it worked for me. Secondly, the more questions I practiced, the more familiar I became with expressing the accounting treatment.
The ‘fool proof’ structure
As with all questions, read the requirement first. Whilst most will be a variation of the following:
‘Explain the required IFRS accounting treatment of issues (1) – (4)’
Often you may also have to provide calculations and journals (#accountantsdream).
The good news is, that in a question like this, each issue tends to be isolated. So, you can tackle each one individually.
It’s also very important to do a thorough active read of the question. Make a note of dates, the year-end, and consider the relevance of each bit of information provided.
The following 4-step structure may prove beneficial as you type out your answer on the CBE:
State the transaction in the issue and provide additional detail about why you ‘labelled’ the transaction as such.
E.g. As per IFRS 5 this is a non-current asset held for sale, because the intention is to recover economic benefits from a sale transaction rather than continuing use. The asset is available for immediate sale in its present condition, and is being actively marketed.
(Note: citing standards does not get you any extra marks. I like to do this as it provides a great intro to my answer, and I get to ‘show off’ that I really know my stuff 😊 Besides you have the contents page of the open book text (OBT) that states all the standards and this can help guide you, so it’s really not too difficult to do).
2) Initial treatment
What should be posted initially for this transaction and where? Keep your eyes peeled for information in the question about anything the business has already posted in respect of this transaction. Any errors noted should be stated in your answer and corrections proposed.
E.g. Initially, reclassify the non-current asset at the lower of the carrying value or the net realisable value, being £xxx (state the amount and any calculations in a bracketed working). The non-current asset held for sale should be a current asset in the Statement of Financial Position. It is incorrect of the business to leave it classified as non-current.
3) Subsequent treatment
What happens to the transaction after initial treatment? Look out for any omissions to the subsequent treatment in the issue and suggest corrections.
E.g. Subsequently do not depreciate the asset as it is no longer a non-current classification.
State the year end numbers that would feature in the financial statement.
E.g. The year end carrying value of the non-current asset held for sale amounts to £xxx (state your number).
My tip to you is to start viewing accounting treatment for transactions, in the form of initial and subsequent treatment.
Doing this will make it a whole heap easier when you attempt this sort of question style as part of your revision.
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