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Summary ICAEW Corporate Reporting 2024 - CR Open Book Notes 2024 (Achieved 78%) - ACA Advanced Level

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ICAEW Corporate Reporting 2024 - CR Open Book Notes 2024 (Achieved 78%) - ACA Advanced Level This document is a set of exam ready notes to be taken into the Corporate Reporting (CR) ICAEW ACA Advanced Level Exam. Got 78% in CR using these notes. They provide answers to all scenarios that ...

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1. Revenue ................................................................................................................................................................... 6
Customer Reward Scheme..................................................................................................................................................................... 6
Revenue 5 step process example .......................................................................................................................................................... 7
Indicators that control has been transferred ....................................................................................................................................8
Satisfied over time ................................................................................................................................................................................. 8
Bill and Hold Sales .................................................................................................................................................................................. 8
Bill and Hold - Audit Risks .................................................................................................................................................................8
Revenue – Service Contract. ..................................................................................................................................................................9
High risk of material misstatement examples of Revenue – Road builder example .............................................................................. 9
Revenue – goods delivered by ship but held at port until outstanding amount paid. Delivered after YE. .......................................... 10
Audit Risks....................................................................................................................................................................................... 10
Audit Procedures of Revenue for dispute with large customer ........................................................................................................... 10
Audit Procedures- Revenue ................................................................................................................................................................. 10
Accrued Revenue – Audit Procedures ................................................................................................................................................. 11
Key additional analytical procedures - Revenue ..................................................................................................................................11
Sale of the Quarry treated as Deferred Income................................................................................................................................... 12
Revenue: New inventive scheme for 6 months – 3 before YE, 3 after YE. Annual membership fee upfront, Discount on bookings for
a year – 50% deposit ............................................................................................................................................................................ 12
Specific audit risks – Revenue inventive scheme ............................................................................................................................13
2. Assets..................................................................................................................................................................... 14
Measurement of cost ..........................................................................................................................................................................14
AFHS – Audit Risks and Procedures ..................................................................................................................................................... 14
Reval of building - Audit procedures: .............................................................................................................................................. 15
Purchase of asset ................................................................................................................................................................................. 15
Website development costs ................................................................................................................................................................ 16
Audit procedures for research and development costs.......................................................................................................................16
Intangible assets recognition ............................................................................................................................................................... 17
Implications for the consolidation schedule ...................................................................................................................................17
Intangibles Policy Note Guidance ........................................................................................................................................................ 18
Impairment of a CGU ........................................................................................................................................................................... 19
Indicators of impairment ................................................................................................................................................................ 19
Calculation of the impairment loss ................................................................................................................................................. 19
Calculation of value in use ...................................................................................................................................................................19
Impairment calculation from start of asset life ................................................................................................................................... 20
Loss from discontinued operations .....................................................................................................................................................20
Revaluation of PPE – changing from Cost to Revaluation Model for consolidation ............................................................................ 20
Investment Property Treatment - Foreign ...........................................................................................................................................21
Investment Property – Change in Use from PPE to IP. Offices occupied, vacated and leased to third party. FV stated, but similar
properties in area valued differently. .................................................................................................................................................. 22
Recognition ..................................................................................................................................................................................... 22
Deferred Tax on IP .......................................................................................................................................................................... 22

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Investment Property to PPE – Was recognised as IP, but not IP..........................................................................................................23
Hierarchy of inputs .............................................................................................................................................................................. 25
3. Provisions, Contingent Liabilities & Contingent Assets ......................................................................................... 26
Contingent Liabilities – Legal Case losing is possible but not probable. .............................................................................................. 26
Impacts on group accounts if disclosure note made for provisions ................................................................................................ 26
Risks and Procedures ...................................................................................................................................................................... 26
Contingent Asset..................................................................................................................................................................................27
Audit Procedures: Insurance claim for contingent asset ................................................................................................................ 27
Provision for onerous contract ............................................................................................................................................................ 27
4. Financial Instruments ............................................................................................................................................ 28
Financial liability FVPL – Selling bonds in market, FV decreased & part of it relates to creditworthiness........................................... 28
Formulas .............................................................................................................................................................................................. 28
Financial Assets FVPL- bought shares in X for trading, Investment company (X) acquired by another company (Y). Offering shares &
cash in 1 year. Shares increase in value at YE. ..................................................................................................................................... 29
Financial Asset – ECL when investment made in loan stock, measured at A/C ................................................................................... 29
Financial Asset - Interest Free Loan between P & S ............................................................................................................................. 30
Audit Procedures ............................................................................................................................................................................30
Refinancing Arrangement .................................................................................................................................................................... 31
Convertible Bond Instrument .............................................................................................................................................................. 32
Zero Coupon bond ............................................................................................................................................................................... 32
Equity Investment ................................................................................................................................................................................ 33
Risks and Procedures of Foreign Equity Investment ....................................................................................................................... 33
Repurchase its own shares, then issue out again ................................................................................................................................ 34
EPS ....................................................................................................................................................................................................... 34
DEPS ..................................................................................................................................................................................................... 34
Financial Asset – Foreign Loan. Interest free to supplier. .................................................................................................................... 35
Risks and Procedures of Interest free foreign loan ......................................................................................................................... 35
5. Pensions ................................................................................................................................................................ 36
Defined Benefit plan ............................................................................................................................................................................36
DB Plan - Impact on FS ......................................................................................................................................................................... 36
Deferred tax on DB Plan ...................................................................................................................................................................... 36
Key Audit risks ..................................................................................................................................................................................... 37
Defined contribution plan.................................................................................................................................................................... 37
6. Changes in FX (Trade Receivables) ........................................................................................................................ 37
7. Changes in FX (Trade Payables- Purchase of asset) ............................................................................................... 37
8. Share Based Payments .......................................................................................................................................... 38
Equity-based ........................................................................................................................................................................................ 38
Cash-based ..........................................................................................................................................................................................38
Share Appreciation Rights ............................................................................................................................................................... 38
Issued share options to a supplier rather than cash ............................................................................................................................ 39
Specific audit risks ............................................................................................................................................................................... 39
Employee has choice between shares/cash ........................................................................................................................................ 39

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Disclosure of SBP ................................................................................................................................................................................. 40
9. Deferred Tax .......................................................................................................................................................... 41
PPE revaluation .................................................................................................................................................................................... 41
Pension Liability ................................................................................................................................................................................... 41
SBP .......................................................................................................................................................................................................41
Tax - Audit procedures......................................................................................................................................................................... 42
10. IFRS 16 Leases........................................................................................................................................................ 43
Lease Recognition ................................................................................................................................................................................ 43
ROU Asset & Lease Liability Recognition ............................................................................................................................................. 43
Sale and leaseback ...............................................................................................................................................................................44
Sale and Leaseback (Proceeds > FV) ....................................................................................................................................................45
Sale Proceeds> FV Example ................................................................................................................................................................. 45
Audit Objectives and Procedures of sale & leaseback ......................................................................................................................... 45
Lessor accounting – X is leasing out asset to Y .................................................................................................................................... 46
11. Hedging ................................................................................................................................................................. 47
Cash flow hedge – Highly probable forecast sale ................................................................................................................................ 47
Fair Value Hedge – Unrecognised firm commitment...........................................................................................................................47
Hedge in foreign currency – FV or Cash Flow Hedge picked. ............................................................................................................... 48
Debentures and swap .......................................................................................................................................................................... 49
Interest rate cap – 3 year variable interest loan with bank. Can purchase option for interest rate cap. ............................................ 49
Only net gain of Forward recognised ................................................................................................................................................... 50
Audit Procedures - Hedging ............................................................................................................................................................ 50
12. Groups ................................................................................................................................................................... 51
Goodwill calculation ............................................................................................................................................................................ 51
Fair value adjustments ....................................................................................................................................................................51
Inventory PURP adjustment – on consolidation .................................................................................................................................. 52
Inventory PURP adjustment – for associate. Mark up 20%, Goods supplied of 145m. Inv included £35m amd TP 38m .................... 52
Revenue - P will sell £27m of goods to S ......................................................................................................................................... 52
Inventory PURP (Gross Margin 33.33%).......................................................................................................................................... 52
Loan ................................................................................................................................................................................................ 53
JV Investment – however investment treated as a loan to company, not investment .......................................................................54
Joint Venture created .......................................................................................................................................................................... 54
JV - Audit procedures ...................................................................................................................................................................... 54
Financial Asset (FVOCI) to Subsidiary investment [X buys more shares of Y] ...................................................................................... 55
Step-Acquisition: Financial Asset (FVOCI) to Associate/Subsidiary investment [X buys more shares of Y]. Call option. ..................... 55
Step-Acquisition: Financial Asset (FVOCI) to Associate [X buys more shares of Y]. ............................................................................. 57
Step-Acquisition: Subsidiary to Subsidiary [X owns 80% but buys more shares of Y].......................................................................... 57
Audit Procedures: ........................................................................................................................................................................... 57
Foreign company acquisition: consolidation ....................................................................................................................................... 57
Disposal - Subsidiary 100% disposal [X sells shares of Y] ..................................................................................................................... 58
Individual FS ......................................................................................................................................................................................... 58
Group FS .............................................................................................................................................................................................. 58

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Step Disposal - Subsidiary disposal to Sub (>50%) [X sells shares of Y] ............................................................................................... 59
Risks and Procedures ...................................................................................................................................................................... 59
Step Disposal - Subsidiary disposal to Associate (20%-50%) [X sells shares of Y] ................................................................................ 60
Risks and Procedures ...................................................................................................................................................................... 60
Step Disposal - Subsidiary disposal to IFRS 9 Investment (<20%) [X sells shares of Y]......................................................................... 61
Group Consolidation mistakes ............................................................................................................................................................. 62
Group audit opinion ............................................................................................................................................................................ 63
13. Weakness in audit procedures .............................................................................................................................. 63
Investment properties ......................................................................................................................................................................... 63
Land and buildings ............................................................................................................................................................................... 63
Materiality ........................................................................................................................................................................................... 63
Goods received Note- Control Weakness identified ............................................................................................................................63
Trade payables ..................................................................................................................................................................................... 64
General – FX, Hedging, Legal, Debit Balances ...................................................................................................................................... 64
14. Reviewing the work of a junior.............................................................................................................................. 65
Common review points........................................................................................................................................................................ 65
Good work paper should have: ............................................................................................................................................................ 66
15. Audit Planning – Audit Risks .................................................................................................................................. 67
Analytical procedures - Journals .......................................................................................................................................................... 70
16. FS Analysis Performance & Position ...................................................................................................................... 71
Liquidity .......................................................................................................................................................................................... 71
Performance ................................................................................................................................................................................... 72
FS analysis (Analytical Procedures) to explain audit risks .................................................................................................................... 72
17. Ethics ..................................................................................................................................................................... 74
Scenario: Former employee tells news that X is manipulating of FS to claim tax refunds. Long standing customer called to party
accused of Bribery. .............................................................................................................................................................................. 74
Scenario: Former partner who left 1 year ago (partner 3 yrs ago) considering applying as NED at current client. ............................ 74
Scenario: We (manager) are auditing X. Junior audits Y which took loan from X. X creates heart monitors to identify heart disease –
could damage long term health. Medicine for it gives Y revenue. ...................................................................................................... 75
Scenario: Director tells us Director 2’s wife supplying packaging through company X, not disclosed. ...............................................76
Scenario: FD asks audit firm for help to prepare assurance report on sustainability disclosures .......................................................77
Scenario: Overhear convo between colleagues that FD overpaid for shares because wife is director of other company ..................78
Scenario: Ex-auditor has fee dispute with client, refused access to old working papers. ................................................................... 78
Scenario: Assistant of FD, important to report high profit and maximise price for selling shares. Prioritise over complying with IFRS
standards. Offers to make successor. .................................................................................................................................................. 79
Scenario: Group audit partner expects certain sign off and certain materiality. Says done audit procedures and don’t need to
perform separate ones. Board doesn’t want single company audit. ................................................................................................... 80
18. Sustainability ......................................................................................................................................................... 81
Climate-related risks and opportunities under IFRS S2 Climate-related Disclosures ........................................................................... 81
External Auditor responsibilities for social & environmental info published in the FS ........................................................................ 81
External Auditor proposal for social & environmental info published in the FS .................................................................................. 82
Important for sustainability disclosures ..............................................................................................................................................82
Implications of sustainability disclosures for audit of FS ..................................................................................................................... 82

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Revenue
Customer Reward Scheme
 The relevant accounting standard is IFRS 15 which requires a five-step process to identify the relevant contract and
performance obligations.
 The points provide a material right to customers that they would not receive without entering a contract. The
reward programme creates a performance obligation because it provides a material right to the customer.
Consequently, the scheme to provide points to the customer is a performance obligation company must allocate a
portion of the transaction price to the loyalty programme.
 Revenue will be recognised when the performance obligation is satisfied (e.g., when the loyalty points are
redeemed or expire). The standalone selling price of one point is £0.95 per point making a total of £1.425 million
based on the estimated likelihood of redemption.
 Journal: DEBIT Revenue & CREDIT Liabilities

 As with the customer loyalty scheme, IFRS 15 requires application of a five-step process.
 Step 1 - Identify the contract with the customer – customers are required to sign the contract
 Step 2 - Identify the separate performance obligations
 Step 3 - Determine the transaction price
 Step 4 - Allocate the transaction price to the separate performance obligations in the contract – this is
calculated by reference to the standalone price for the produce and the service.
 Step 5 - Recognise revenue when the performance obligation is satisfied.

Example – Q60

10 Sales 15000 91%
Points Expected to be
1 redeemed 1425
16425

DR Cash 15000
CR Revenue 13699
CR Contract Liab 1301
 Under IFRS15 - Revenue recognised when performance obligation is satisfied, and control of goods passed to
customer.
 As X has not delivered all goods to customer as future purchases not made yet, then part of revenue is
deferred (contract liability)
 As date of sale (July) only 91% of PO satisfied so only 13699 of revenue can be recognised

 The deferred element can only be recognised when points are Redeemed 300
used/expired. Total points 1425
 As 300k of points are redeemed, then this portion of contract liability 21%
is now recognised.
CR Revenue 274
Total Revenue to
DR Contract Liab 274
be recognised 13699
274
13973

Remaining
Contract Liability 1301
-274
1027
DR Rev 1027
CR Contract Liab 1027

 Therefore, incorrect to recognise full £15m as revenue.

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Revenue 5 step process example
Revenue = gross inflow of economic benefit arising during the ordinary activities of a business which results in an
increase in equity. Revenue is income arising the course of an entity’s ordinary activities. Measure at FV of the
consideration received. Discount to PV if received in the future.

Sale of goods Rendering of services Other
Recognise revenue when: Recognise revenue when: Interest: time apportioned using the
 Risks and rewards transfer  Stage of completion can be effective interest method
 Seller no longer has managerial measured reliably (at reporting
control date) Royalties: on an accruals basis in
 Revenue and costs can be  Revenue and costs can be accordance with the contract.
measured reliably measured reliably
 It is probable the goods will be  It is probable the services will be Dividends: when entity has right to
paid for paid for (economic benefit will receive (i.e. when paid, NOT when
 Costs associate with the sale can flow to the entity) declared)
be measured reliably.  Costs associated with the sale
can be measured reliably.
Revenue can’t be measured reliably = Recognise only to the extent that costs are recoverable from the customer

 Revenue should be recognised to depict the transfer of goods or services to a customer in an amount that
reflects the consideration to which the entity expects to be entitled. Generally, revenue is recognised when the
entity has transferred to the buyer control of the asset.
 The transfer of goods and services is evidenced by the transfer of control. IFRS15 sets out a five-stage
process for this.
 Step 1: Identify contract (written, verbal or implied) with customer
 The parties have approved the contract and are committed to carrying it out.
 Each party's rights regarding goods and services to be transferred can be identified.
 Payment terms can be identified.
 Contract has commercial substance.
 Probable that the entity will collect the consideration.
 Step 2: Identify separate performance obligations
 Each separate performance obligation (supply of goods or services) should be accounted for separately if it
could be sold separately – if it is distinct. A performance obligation is a promise to transfer distinct
goods/services to a customer.
 Entity = principal if it controls goods/services before transferred to buyer i.e. is providing the good/service
 Entity = agent if it arranges for goods/services to be provided i.e. only commission can be recognised
 Step 3: Determine the transaction price
 Amount of consideration expected in exchange for goods or services.
 Includes variable amounts (discounts, refunds, concessions, incentives) based on its expected value (sum
of probability weighted amounts, appropriate if there are lots of contracts with similar characteristics) or
the single most likely outcome (only appropriate if a contract has only two possible outcomes). Variable
consideration is only included to the extent that it is highly probably a significant amount will not be
reversed when uncertainty is resolved.
 Financing: The time value of money and credit risk of customers would also be reflected.
 Noncash: measured at FV.
 Step 4: Allocate the transaction price to the performance obligations
 Allocate in proportion to the stand-alone selling price of the goods or services underlying each
performance obligation. If not sold separately, company should estimate the stand-alone price.
 Step 5: Recognise revenue when a performance obligation is satisfied
 Revenue recognised when customer obtains control of the promised goods or services. This can occur at a
point in time or over time.

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Indicators that control has been transferred:

 Entity has a present right to payment
 Customer has legal title to the asset
 Entity has transferred physical possession of the asset
 Significant risks and rewards of ownership have been transferred
 Customer has accepted the asset

Point in time

 Customer obtains control of asset i.e. any of the indicators pointed out above.

Satisfied over time
 Where performance obligations are satisfied over time, progress can be measured using output methods
(measuring the value to the customer of goods or services transferred to date) or input methods
(measuring the cost to the entity of goods or services transferred to date).
 IFRS 15 states that an entity only satisfies a performance obligation over time if one of the following
criteria is met:
• Customer simultaneously receives and consumes the benefits from the entity’s performance
• Entity is creating or enhancing an asset controlled by the customer
• Entity cannot use the asset ‘for alternative use’ and the entity can demand payment for its
performance to date
 An entity must be able to reasonably measure the outcome of a performance obligation before the related
revenue can be recognised. If the outcome cannot be reliably measured revenue is recognised only to the
extent of costs incurred.

Bill and Hold Sales
 When buyer requests that delivery of goods purchased does not take place immediately even though the buyer
takes legal title of the goods and pays for them such arrangements. The entity must determine the point in
time at which it has satisfied its performance obligation by transferring control of the product to the customer.
 Control may pass at the point of delivery or when the product is shipped or at an earlier date. All the following
IFRS15 criteria must have been met in order for control to be said to have passed:
1. There must be a substantive reason for the bill and hold, e.g. that the customer has requested it.
2. The product must be identified as belonging to the customer.
3. The product must be ready for physical transfer to the customer.
4. The seller must not be able to use the product or transfer it to another customer.
 If these criteria are met, enabling revenue to be recognised, the seller should consider whether to allocate a
proportion of the transaction price to the provision of a storage service.
 Should recognise revenue and remove from inventory. Decrease Inv: DR Closing Inv COS, CR Closing Inv SOFP

Bill and Hold - Audit Risks
 A key audit risk here is that the arrangement may not meet the criteria for revenue recognition and therefore
revenue is overstated.
 Control risk – there is lack of oversight and inexperienced personnel are dealing with complex transactions.
 Cut off particularly if transactions are entered into around the YE – there may be other such transactions where
'double-counting' has occurred and inventory belonging to customers has been recognised as inventory
resulting in a risk of over or understating inventory.

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