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26 icc introduces new international commercial terms

online Relevant to ACCA Qualification changes to the Paper F4 (GlO) cat and knowledge module exams studying paper p2 (uk)? with the launch An analysis of the UK paper of accas diploma in accounting and business
www2.accaglobal. com/students/ student_accountant/ archive/2011/120/ 3449163

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24 August 2011 ReLevAnt to ACCA And FoundAtions in ACCountAnCy students
iCC introduCes new international CommerCial terms studying the uK stream of paper p2
ReLevAnt to ACCA quALiFiCAtion pApeR p2 And peRFoRmAnCe objeCtives 10 And 11 This article, which Paper P2 (UK) candidates should be read in conjunction with ACCAs official guidance, focuses on the papers UK stream, which is based on the international syllabus but includes extra detail relevant to a UK practising auditor. ReLevAnt to pApeR F4 David Kelly, examiner for Paper F4, discusses International Commercial Terms or Incoterms which are often found in international trade contracts and provide a common set of rules that aim to avoid confusion over their interpretation. Updates to Incoterms, announced by the International Chamber of Commerce in September 2010, came into effect in January 2011. ACCess ResouRCes ReLevAnt to ACCA quALiFiCAtion pApeR F4 www2.accaglobal.com/students/acca/ exams/f4/

Changes to the Cat and Knowledge module exams with the launCh of aCCas diploma in aCCounting and Business

ACCess ResouRCes ReLevAnt to ACCA quALiFiCAtion pApeR p2 www2.accaglobal.com/students/acca/ exams/p2/

Read more at www2. accaglobal.com/students/ student_accountant/ archive/2011/120/3449163

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Examiner reports, examiner interviews and a wide variety of technical articles are available on the ACCA website at www.accaglobal.com/ students/. Access the Student Accountant technical article archive at www2.accaglobal. com/students/student_ accountant/archive/

foundations in aCCountanCy
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Future issues of Student Accountant will feature articles on the Finance Act 2011 relevant to Papers F6 (UK), P6 (UK) and FTX (UK), and using spreadsheets relevant to Paper MA2.

Coming up in future issues of student aCCountant

RELEVANT TO ACCA QUALIFICATION PAPER P2

Studying the UK stream of Paper P2

ACCA has various streams available for students studying Paper P2, Corporate Reporting. The international stream is the dominant one, and is based on International Financial Reporting Standards (IFRS). The examiner writes this exam first and then tweaks the international exam to create the others. The UK stream is now also based on IFRS. So, usually the examiner will make a few adjustments to the international exam before rebranding the exam as the UK streamed one. In the recent examiner conference in February 2011, Graham Holt, the Paper P2 examiner, explained that up to 20 marks might be different in the Paper P2 (UK) compared to the Paper P2 (INT). He also explained that the marks could be spread right across the paper with some UK marks in the compulsory case study question. The UK syllabus is based on the international syllabus but includes extra details currently deemed of use to UK candidates. This means that the UK syllabus is bigger than the international syllabus. The difference is not huge, but it is certainly not easy either. The following article is designed to give you a feel for what you are getting into should you decide that the Paper P2 (UK) is for you. Please note that the article represents my interpretation of the Paper P2 (UK) syllabus and should not be taken as an official guide to Paper P2 (UK). The official guide to Paper P2 (UK) is the study guide freely available on the ACCA website and this article should be read in conjunction with it. Furthermore, an article has been written by ACCA in conjunction with Graham Holt (the Paper P2 examiner) and Steve Scott (the Paper F7 examiner) that outlines the differences between the International and UK streams. It is scheduled for publication shortly. However, I am hopeful that the following will give you a good grounding from which you can expand your studies. REASONS FOR TAKING THE UK STREAM Unless you have a very good reason for taking the UK stream, my advice would be to take the international stream. Soon there will be one form of accounting worldwide, based on IFRS, and any learning of local standards will quickly become redundant. However, ACCA advises that if you wish to be a signatory audit partner in an ACCA practice, you must have studied Paper P2 (UK). The following are extracts from the ACCA website in April 2011:

2011 ACCA

STUDYING THE UK STREAM OF PAPER P2 AUGUST 2011

Should you wish to practise as a registered auditor within the UK (obtain the audit qualification/audit practising certificate), you must attempt the Paper P2 (UK) and Paper P7 (UK) papers from June 2011 onwards. This is not a retrospective ruling, so any International papers you have already passed will be unaffected by this ruling. All UK professional accountancy bodies are governed by the requirements of the Statutory Audit Directive (SAD). In order to comply with the requirements of SAD and to practise as an auditor certain elements of UK legislation and regulation should be examined. The revised Papers P2 (UK) and P7 (UK) fully meet regulatory and business environment requirements for those wishing to obtain the UK audit qualification and, hence, practise as a registered auditor in the UK. Of course, you should also bear in mind that even if you do wish to become an audit partner and sign audit reports, by the time you actually get there it is possible there will be no UK financial reporting standards and the criteria for a registered auditor may have changed. If you feel Paper P2 may be useful to you, then make sure you carefully read the ACCA website for advice on this area, as it is possible that changes may be made regarding the applicability or content of Paper P2 (UK). STREAM DIFFERENCES As discussed above, both the international stream and the UK stream are based on IFRS. The UK syllabus simply adds extra requirements on to the international syllabus. So the UK syllabus is the international syllabus with extras bolted on. The extras comprise essentially of two forms: UK legislation for financial reporting UK financial reporting divergence. The ACCA Paper P2 Study Guide gives detailed advice on the syllabus. All the extras are clearly labelled and fairly obvious within the Paper P2 Study Guide and the examinable documents. All of this is available online on the ACCA website. But I hope to be able to give you a feel for the differences. So the extras are also covered here in summary. UK legislation for financial reporting This is reference B3a in the Paper P2 (UK) Study Guide. Entity financial statements All UK companies must produce financial statements. The most significant element of the legislation on financial reporting in the UK applies to small companies. Small companies are defined by size criteria that are highly unlikely to be examined but, for completeness, an extract of the UK Companies House website is given below.
2011 ACCA

STUDYING THE UK STREAM OF PAPER P2 AUGUST 2011

A small company must meet at least two of the following conditions: annual turnover must be not more than 6.5m the balance sheet total must be not more than 3.26m the average number of employees must be not more than 50. The main advantage of qualifying as small company in the UK is that they are exempt from filing a cash flow statement. Group financial statements A small group is exempt from producing group financial statements altogether. Of course, the individual entities must produce entity financial statements, but consolidation is not required by law. Again, it is highly unlikely that the small group criteria would be examined the following is another extract from the UK Companies House website: To qualify as small, a group of companies must meet at least two of the following conditions: aggregate turnover must be not more than 6.5m net (or 7.8m gross) the aggregate balance sheet total must be not more than 3.26m net (or 3.9m gross), and the aggregate average number of employees must be not more than 50. Also, sub-parents are not required to produce group financial statements; only ultimate parents are required to do so. So, for one group, only one group financial statement is required. UK financial reporting divergence The UK started the process of convergence with IFRS in 1990. In the period 1997 2003, the process became the primary aim of the UK Accounting Standards Board (UK ASB). During that period it was assumed that IFRS would be applicable to all companies by 2005. So, in order to make the crossover as painless as possible, the UK ASB put in all its efforts to making the UK system as close as possible to the IFRS system. Then, in 2005, listed companies adopted IFRS and nothing of any significance has happened in UK financial reporting since. The UK standards, which in 2005 were right up to date, simply froze at that time. With each year, the IFRS have developed, improved and altered while the UK standards have remained frozen. As the UK standards get older, they become less aligned with IFRS. This is the process of UK divergence. Also, the adoption of IFRS for all companies in the UK never happened. Of course, the quoted companies all adopted IFRS because they had to. The forward thinking unquoted companies adopted IFRS as well. But many UK
2011 ACCA

STUDYING THE UK STREAM OF PAPER P2 AUGUST 2011

small and medium companies are stuck in the time-warped setting of UK Financial Reporting Standards (UK FRS). It is the differences between UK FRS and IFRS that forms the bulk of the extras in the Paper P2 (UK) syllabus. It is this UK divergence that is most likely to feature in a Paper P2 (UK) exam as a variation from the otherwise identical international exam. NCA DIVERGENCE The accounting for noncurrent assets in the UK FRS and the IFRS is essentially the same. The only substantial difference of note relates to investment properties. Investment properties Under IFRS, the gain on an investment property goes to the income statement. Under UK FRS, the gain goes to the UK Other Comprehensive Income (OCI), which itself is relabelled the Statement of Total Recognised Gains and Losses (STRGL). Also, as a minor point, the value to which you revalue an investment property under IFRS is of course the fair value. This simply means the market value. Under UK FRS, the value to which you revalue is the Existing Use Value. This means the UK value could be lower if the asset is land and is being used inefficiently as a farm or a football pitch, for example. This is reference C2f in the Paper P2 (UK) Study Guide. LEASES DIVERGENCE The accounting for leases under UK FRS and IFRS is almost identical. But there are two tiny differences. The primary test for a finance lease in the UK FRS is risks and rewards, as it is in the IFRS. However, in the UK FRS there is a secondary test that is not in the IFRS. This secondary test is mathematical and states that a lease is likely to be a finance lease if the present value of minimum lease payments exceeds 90% of the fair value of the asset. The other difference is a little superficial its more cultural interpretation than substance. But the IFRS on leases requires that property leases are split into land and buildings components, whereas the UK FRS implies that property leases are just leases for property, and so no split is required. This is reference C4c in the Paper P2 (UK) Study Guide.

2011 ACCA

STUDYING THE UK STREAM OF PAPER P2 AUGUST 2011

SEGMENT DIVERGENCE Segment reporting in the UK is essentially the same whether using IFRS or UK FRS. But there is a difference in philosophy in that the IFRS uses the managerial philosophy. This argues that segmental divisions should be based on management analysis of conglomerates. The UK FRS is, of course, has existed longer and so uses the older risks and rewards philosophy. This means segmental divisions must be based on underlying differences in the businesses. In practice this makes absolutely no difference, as obviously management is going to focus on underlying differences in businesses. This is reference C5c in the Paper P2 (UK) Study Guide. EMPLOYEE BENEFIT DIVERGENCE The accounting for pensions under both streams is identical. The exception relates to the corridor. Of course, the corridor will soon be removed from IFRS. UK FRS never had a corridor. This is reference C6e in the Paper P2 (UK) Study Guide. DEFERRED TAX DIVERGENCE Both the IFRS and the UK FRS suffer from the same lack of underlying logic. Both contradict the Framework for Financial Reporting. Both are essentially number crunching exercises and applying either will give the same answer in almost all circumstances. However, there is a difference in language. The IFRS on deferred tax refers to temporary differences. This idea, as you might remember, refers to the difference in carrying values carried by the financial accountant and the tax accountant. The UK FRS refers to timing differences. This idea refers to the difference between accumulated costs recognised by the financial accountant and the tax accountant. Both as you see look at the differences that arise because financial accountants use accounting standards and tax accountants use tax legislation. This is reference C7e in the Paper P2 (UK) Study Guide. RELATED PARTY DIVERGENCE The UK ASB and the IASB developed their related party reporting standards together. So its hardly surprisingly there are almost no differences between the standards. Both are extremely detailed standards with reams of content. It is
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STUDYING THE UK STREAM OF PAPER P2 AUGUST 2011

in the detail where tiny differences may be found. However, there are no differences in the principles, and it is these principles that have been the subject of examination since the standards were issued. This is reference C9c in the Paper P2 (UK) Study Guide. SME DIVERGENCE As you know, the relatively new IFRS for SMEs allows unquoted companies to produce financial statements using the less bulky version as opposed to the more detailed full IFRS. The UK has had an equivalent standard for a number of years. It is called the Financial Reporting Standard for Small Entities (FRSSE). The FRSSE is based on the same economic idea as the IFRS for SMEs. This is the idea that reduced financial reporting for SMEs is good for the economy as a whole as it encourages entrepreneurs. The two standards are similar, but it is probably fair to say the UK FRSSE is even less burdensome than the IFRS for SMEs. One notable difference is that the FRSSE does not require a cash flow statement. The FRSSE is available for small companies as defined earlier in the article. This is reference C11f in the Paper P2 (UK) Study Guide. GOODWILL DIVERGENCE As discussed above, UK financial reporting is stuck in a time warp. So the calculation of goodwill is on the partial basis only. Furthermore, under the UK FRS, the partial goodwill is depreciated. This is reference D1j in the Paper P2 (UK) Study Guide. Martin Jones is a lecturer at the London School of Business and Finance

2011 ACCA

RELEVANT TO ACCA QUALIFICATION PAPER F4 (GLO)

ICC introduces new International Commercial Terms

Incoterms is an abbreviation of International Commercial Terms. These terms have been published by the International Chamber of Commerce (ICC) since 1936 and have been subject to review and updating since that date. The most recent updates were announced in Paris by the ICC on 16 September 2010. Although earlier versions of Incoterms may still be incorporated into future contracts if the parties agree, it is likely that most contracts made now will refer to this latest edition of Incoterms. In order to avoid the possibility of confusion, contracts should refer specifically to the Incoterms 2010 rather than just Incoterms, if the parties wish the new terms to apply. This will avoid any subsequent dispute as to which set of rules apply. The assumption is that the new version of the ICC terms will apply to Paper F4 (GLO). The Incoterms are often to be found in international contracts, and they seek to provide a common set of rules for the most frequently used international terms of trade with the aim of removing confusion over their interpretation. For example, the terms set out exactly who is under the obligation to take control of and/or insure goods at a particular point in the shipping process. The terms also deal with the obligation for the clearance of the goods for export or import, and requirements on the packing of items. Classes of terms Among the changes made in the 2010 rules is the reduction in the overall number from 13 to 11. This is the result of the removal of four previous terms and the inclusion of two new ones. In effect, this is a replacement of four previous rules, DAF, DES, DEQ and DDU, by two new rules that may be used irrespective of the agreed mode of transport. These new rules are DAT (Delivered at Terminal), and DAP (Delivered at Place) (see below for more details). Changes have also been made to better deal with cargo security and insurance, and the language has been changed to reflect the modern usage in international trade. The new rules have been separated into two classes rather than the previous four categories. The current two classes of terms are: (i) rules for use in relation to any mode or modes of transport These can be used in cases where either maritime transport is not involved in the carriage of the goods, or where maritime transport is used for only part of the carriage. This first class includes the following seven Incoterms that can be used irrespective of the mode of transport selected and irrespective of whether one or more than one mode of transport is employed:
2011 ACCA

INCOTERMS AUGUST 2011

EXW FCA CPT CIP DAT DAP DDP

Ex Words Free Carrier Carriage Paid To Carriage and Insurance Paid To Delivered at Terminal Delivered at Place Delivered Duty Paid

Most of the terms retain their former meanings, so no further explanation will be provided. However, as DAT and DAP are new and replace previous delivery terms, they need some, if brief, explanation. DAT replaces the more specific DEQ (Delivered ex Quay). It requires the seller to pay for carriage to the terminal, except for costs related to import clearance, and to assume all risks up to the point that the goods are unloaded at the terminal. The seller delivers when the goods, having been unloaded from the arriving means of transport, are placed at the buyer's disposal at a named terminal at the named port or place of destination. As indicated, DAT requires the seller to clear the goods for export where applicable but the seller has no obligation to clear the goods for import, pay any import duty or carry out any import customs formalities. DAP (Delivered at Place) replaces DAF (Delivered at Frontier), DES (Delivered ex Ship) and DDU (Delivered Duty Unpaid). Under DAP, a seller bears all the costs, other than import clearance costs and risks involved in bringing the goods to the named destination. Consequently, the seller assumes all risks and costs prior to the point that the goods are ready for unloading by the buyer at the agreed destination. It should be emphasised that although all the terms listed apply when there is no maritime transport, they can be used in cases where a ship is used for part only of the carriage. (ii) rules for sea and inland waterway transport These rules apply where the point of delivery and the place to which the goods are carried to the buyer are both ports. There are four substantives rules: FAS Free Alongside Ship FOB Free on Board CFR Cost and Freight CIF Cost Insurance and Freight

2011 ACCA

INCOTERMS AUGUST 2011

None of these rules has been changed in practice, although in relation to the last three FOB, CFR and CIF reference to the ship's rail as the point of delivery has now been deleted and this has been replaced with the goods being delivered when they are on board the vessel. This is clearly done in the pursuit of updating language and as the ICCs own introduction to the new rules states: This more closely reflects modern commercial reality and avoids the rather dated image of the risk swinging to and fro across an imaginary perpendicular line. Sphere of application A further change and recognition of existing practice is that the new rules apply to domestic as well as international trade, whereas previous Incoterms applied to international sale contracts. As a result, the new rules state that the obligation to comply with export/import formalities exists only where applicable. This alteration is in recognition of the fact that some trade blocs, such as the European Union, have minimised if not removed the significance of border formalities. It is also expected that this particular alteration should lead to greater use of the Incoterm rules within the US. Sale of goods in transit Reflecting the fact that commodities may be sold several times over during transit, through a string of sale contracts, the new rules have been amended to indicate that in reality a purchaser/seller in the middle of the string of contracts does not actually ship the commodities, as they are already on board when they acquire title over them. Consequently, under the new the rules, only the first seller will be responsible for shipping the goods and subsequent sellers will be under the obligation to procure goods shipped. This is not a major change but it does tidy up the rules. Security Given the context of uncertainty regarding potential terrorism and the need for heightened security, many countries have introduced security checks in relation to goods crossing their boundaries. The new Incoterm rules now require both sellers and buyers to provide sufficient information to one another so that export/import clearance can be obtained. Terminal handling charges The new rules look to clarify responsibility for costs arising at the end of the journey. Under the old Incoterms rules CPT, CIP, CFR, CIF, DAT, DAP, and DDP, the seller was required to make arrangements for the carriage of the goods to the agreed destination but it was actually the buyer who actually paid the costs, as these were included in the total selling price. This gave rise to problems where the carrier or terminal operator charged further handling costs to the buyer/receiver of the goods. The new Incoterms rules seek to avoid this eventuality by clearly allocating such costs between the parties.
2011 ACCA

INCOTERMS AUGUST 2011

Electronic documentation The previous rules provided for the use of electronic data interchange, where the parties had agreed its use. The new rules provide for the use of paper communications or equivalent electronic record or procedure where agreed or customary, with customary indicating recognition of current practice in this regard. Conclusion Incoterms are a core constituent of international contracts and have frequently formed the basis for questions in the Paper F4 Global exam. Although in the manner of an updating exercise, the new Incoterms 2010 do introduce significant new rules for students of the Paper F4 Global syllabus to take into consideration in their preparation for future exams. David Kelly is examiner for Paper F4

2011 ACCA