ACCA Paper F7 – Financial reporting (International

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Course slides

Syllabus
A B C D E
Slide 2

A conceptual framework for financial reporting A regulatory framework for financial reporting Financial statements Business combinations Analysing and interpreting financial statements

Format of the Exam

Format of the Exam Question 1 Question 2 Question 3 Preparation of group FS Preparation/restatement of non group FS Appraisal of performance and may include statements of cash flow

Marks 25 25 25

Question 4
Question 5 Total
Slide 3

Will test the remainder of the syllabus
Will test the remainder of the syllabus

15
10 100

The BPP Learning Media classroom slides
What do these slides cover?
– A selection of key areas of the syllabus

Using the slides
– Use the slides as a point of reference – Add detail by talking around the slides (eg using material from the corresponding Study Text chapter) – Consider adding slides yourself to suit your course – Recommend students attempt appropriate questions from the Practice & Revision Kit

Slide 4

Chapter 1

Study Text Chapter 1

The conceptual framework

The elements of financial statements

Examined Pilot paper, 6/08

ASSETS

LIABILITIES

EQUITY

Financial position

INCOME

EXPENSES

Financial performance

Slide 6

the settlement of which is expected to result in an outflow of resources embodying economic benefits EQUITY INCOME The residual interest in the assets of an entity after deducting its liabilities Increases in economic benefits during the period other than contributions from equity participants EXPENSE Decreases in economic benefits during the period other than distributions to equity participants Slide 7 .The elements ASSET A resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity LIABILITY A present obligation of the entity arising from past events.

Chapter 2 Study Text Chapter 2 The regulatory framework .

10 marks Slide 9 .The regulatory framework • Home study chapter • Examined occasionally for. say.

Chapter 3 Study Text Chapter 3 Presentations of published financial statements .

Proforma FS – Statement of comprehensive income Revenue Cost of sales Gross profit Other income Distribution costs Administrative expenses Other expenses Finance costs Profit before tax Income tax expense Profit for the year Slide 11 $’000 X (X) X X (X) (X) (X) (X) X (X) X Disclose nature & amount of material items .

Statement of comprehensive income – continued Other comprehensive income: Available-for-sale financial assets Gains on property revaluation Income tax relating to components of other comprehensive income for the year Other comprehensive income for the year net of tax Total comprehensive income for the year $’000 X X (X) X X Slide 12 .

6/08 $’000 X X X X X X X X X X X Total assets Slide 13 . plant and equipment Goodwill Other intangible assets Available-for-sale investments Current assets Inventories Trade receivables Other current assets Cash and cash equivalents Examined Pilot paper.Statement of financial position ASSETS Non-current assets Property. 12/07.

Proforma FS – Statement of financial position $’000 EQUITY AND LIABILITIES Equity Share capital Other reserves Retained earnings Total equity Non-current liabilities Long-term borrowings Deferred tax Long-term provisions Total non-current liabilities X X X X X X X X Slide 14 .

Proforma FS – Statement of financial position $’000 Current liabilities Trade and other payables Short-term borrowings Current portions of long-term borrowings Current tax payable Short-term provisions Total current liabilities Total liabilities Total equity and liabilities X X X X X X X X Slide 15 .

Rev’n earnings for-sale surplus financial assets X X X (X) X (X) X X X _ X _ X X X (X) _ X _ X X X X X X X Total Balance at 1 January 20X6 Changes in accounting policy Restated balance Changes in equity for 20X6 Dividends Total comprehensive income for the year Balance at 31 December 20X6 Changes in equity for 20X7 Issue of share capital Dividends Total comprehensive income Balance at December 20X7 X X X (X) X (X) X X X (X) X X X X X X Slide 16 .Statement of changes in equity Share capital Share premium Ret’d Available.

Work through adjustments (both sides of double entry). Read requirements & scan question 2. Transfer figures into proformas or workings 5. balance off & transfer figures Slide 17 . Set up proformas & page for workings 3.Approach to questions 1. Read additional information & make a mark by relevant caption that is going to change 4.

Lecture example AZ Co is a quoted manufacturing company. AZ Co has performed very well in the past. Its finished products are stored in a nearby warehouse until ordered by customers. but has been in financial difficulties in recent months and has been reorganising the business to improve performance. The trial balance for AZ Co at 31 March 20X3 was as follows: Slide 18 .

125 9.120 194.000 4.190 20.000 9.552 1.TRIAL BALANCE AT 31 MARCH 20X3 Sales Cost of goods manufactured in the year to 31 March 20X3 (excluding depreciation) Distribution costs Administrative expenses Restructuring costs Interest received Debenture interest paid Plant and equipment (20% straight line) Vehicles (25% reducing balance) Accumulated depreciation at 31 March 20X2: Plant and equipment Vehicles Investment properties (at market value) Inventories at 31 March 20X2 Trade receivables Bank and cash Ordinary shares of $1 each.720 6.060 16. fully paid 6% redeemable preference shares of $1 each Share premium Revaluation surplus Retained earnings at 31 March 20X2 Ordinary dividends paid Preference dividends paid 7% debentures 20X7 Trade payables $'000 $'000 124.060 1.900 Comprehensive income 94.330 1.307 .852 9.000 430 3.250 8.200 639 30.020 121 1.670 24.000 60 18.000 1.315 3.307 Financial position Slide 19 194.

180. An inspection of finished goods found that a production machine had been set up incorrectly and that several production batches. They could then be sold for $55. Income tax for the year to 31 March 20X3 is estimated at $161.000.000. plant and equipment are being depreciated as follows: Plant and equipment 20% per annum straight line Vehicles 25% per annum reducing balance Depreciation of plant and equipment is considered to be part of cost of sales while vehicle depreciation should be included under distribution costs. (ii) (iii) Slide 20 .Additional information provided (i) The property. The closing inventories at 31 March 20X3 were $5. had the wrong packaging. which had cost $50.000.000. The wrongly packaged goods were included in closing inventories at their cost of $50. The goods cannot be sold in this condition but could be repacked at an additional cost of $20.000 to manufacture.000.

Slide 21 . No fair value adjustments were necessary to the investment properties during the period.000) in 20X9. The 7% debentures are 10-year loans due for repayment by 31 March 20X7. Preference dividends are paid on 31 March each year.000. Interest on these debentures needs to be accrued for the six months to 31 March 20X3.Additional information provided (iv) (v) (vi) (vii) The preference shares will be redeemed at their par value ($1. Required: Prepare the income statement section of the statement of comprehensive income for AZ Co for the year to 31 March 20X3 and a statement of financial position at that date. The restructuring costs in the trial balance represent the cost of a major restructuring of the company to improve competitiveness and future profitability.

900 Slide 22 .Lecture example AZ CO INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 20X3 Revenue Cost of sales Gross profit Distribution costs Administrative expenses Other expenses Finance income Finance costs Profit before tax Income tax expense Profit for the year $'000 124.

060 94.Lecture example 1 .020 Other $’000 121 Per question Slide 23 .Workings 1 Expenses Cost of sales Distribution $’000 $’000 9.000 Admin $’000 16.

Lecture example 1 AZ CO INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 20X3 Revenue Cost of sales Gross profit Distribution costs Administrative expenses Other expenses Finance income Finance costs (639 Profit before tax Income tax expense Profit for the year $'000 124.900 1.200 Slide 24 .

060) Vehicles Total Cost Accumulated depreciation b/d NBV b/d Charge for year NBV c/d $’000 3.670) $’000 Slide 25 .720 (1.Lecture example 1 .Workings 2 Property.315 (6. plant and equipment Plant & equipment $’000 30.

000 Equity Ordinary share capital Share premium Revaluation surplus Retained earnings Non-current liabilities 7% debentures 20X7 Redeemable preference shares Current liabilities Trade payables Income tax payable Interest payable Slide 26 .Lecture example 1 Non-current assets Property. plant and equipment Investment properties Current assets Inventories Trade receivables Cash and cash equivalents 24.

Lecture example 1 .852 Admin $’000 16.000 4.060 94.Workings 1 Expenses Cost of sales Distribution $’000 $’000 9.020 Other $’000 121 Per question Opening inventories Slide 27 .

000 20.552 – 1.330 1.000 430 3.125 Non-current liabilities 7% debentures 20X7 Redeemable preference shares Current liabilities Trade payables Income tax payable Interest payable 1.000 Slide 28 .Lecture example 1 Non-current assets Property. plant and equipment Investment properties Current assets Inventories Trade receivables Cash and cash equivalents 24.190 Equity Ordinary share capital Share premium Revaluation surplus Retained earnings (9.000 9.

Lecture example 1 AZ CO INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 20X3 Revenue Cost of sales Gross profit Distribution costs Administrative expenses Other expenses Finance income Finance costs (639 + 60 Profit before tax Income tax expense Profit for the year $'000 124.900 1.200 Slide 29 .

250 1.330 1.552 – 1.000 20.000 9.120 Slide 30 .000 8.Lecture example 1 Non-current assets Property.125 Non-current liabilities 7% debentures 20X7 Redeemable preference shares Current liabilities Trade payables Income tax payable Interest payable 18.190 Equity Ordinary share capital Share premium Revaluation surplus Retained earnings (9. plant and equipment Investment properties Current assets Inventories Trade receivables Cash and cash equivalents 24.000 430 3.

192 Slide 31 .060) Vehicles Total Cost Accumulated depreciation b/d NBV b/d Charge for year 30. plant and equipment Plant & equipment $’000 30.050 x 25% NBV c/d $’000 3.035 (7.720 (1.315 (6.050 (513) 1.670) 2.315 x 20% 2.063) (513) 19.Lecture example 1 .305 (6.537 $’000 34.255 (6.063) 18.730) 26.729 24.Workings 2 Property.

330 1.729 24.Lecture example 1 Non-current assets Property.125 Non-current liabilities 7% debentures 20X7 Redeemable preference shares Current liabilities Trade payables Income tax payable Interest payable 18. plant and equipment (W2) Investment properties Current assets Inventories Trade receivables Cash and cash equivalents 19.120 Slide 32 .000 20.552 – 1.000 9.190 Equity Ordinary share capital Share premium Revaluation surplus Retained earnings (9.000 430 3.000 8.250 1.

060 94.000 Opening inventories 4.852 Depreciation .P&E (W2) 6.020 Other $’000 121 Slide 33 .Workings 1 Expenses Cost of sales Distribution $’000 $’000 Per question 9.Lecture example 1 .063 .vehicles (W2) 513 Admin $’000 16.

200 (161) Slide 34 .Lecture example 1 AZ CO INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 20X3 Revenue Cost of sales Gross profit Distribution costs Administrative expenses Other expenses Finance income Finance costs (639 + 60 Profit before tax Income tax expense Profit for the period $'000 124.900 1.

000 9.000 8.000 430 3.120 161 Slide 35 .729 24.330 1.552 – 1.000 20.Lecture example 1 Non-current assets Property. plant and equipment (W2) Investment properties Current assets Inventories Trade receivables Cash and cash equivalents 19.250 1.125 Non-current liabilities 7% debentures 20X7 Redeemable preference shares Current liabilities Trade payables Income tax payable Interest payable 18.190 Equity Ordinary share capital Share premium Revaluation surplus Retained earnings (9.

Lecture example 1 .repackaging NRV Cost Write-off required $’000 $’000 55 (20) 35 (50) (15) Slide 36 .Workings 3 Inventories Defective batch Selling price Costs to complete .

000 20.120 161 Slide 37 .250 1.125 Non-current liabilities 7% debentures 20X7 Redeemable preference shares Current liabilities Trade payables Income tax payable Interest payable 18.552 – 1. plant and equipment (W2) Investment properties Current assets Inventories (5.000 8.000 430 3.Lecture example 1 Non-current assets Property.165 9.330 1.729 24.000 5.180 – (W3) 15) Trade receivables Cash and cash equivalents 19.190 Equity Ordinary share capital Share premium Revaluation surplus Retained earnings (9.

Workings 1 Expenses Cost of sales Distribution $’000 $’000 Per question 9.Lecture example 1 .000 Opening inventories 4.060 94.852 Depreciation .P&E (W2) 6.020 Other $’000 121 Slide 38 .063 .180 – (W3) 15) (5.165) Admin $’000 16.vehicles (W2) 513 Closing inventories (5.

Lecture example 1 AZ CO INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 20X3 Revenue Cost of sales Gross profit Distribution costs Administrative expenses Other expenses Finance income Finance costs (639 + 60 + ((18.900 1.200 (1.338) (161) Slide 39 .250 x 7%) – 639) Profit before tax Income tax expense Profit for the year $'000 124.

120 161 639 Slide 40 .000 430 3.330 1.000 5.729 24.165 9.250 1.000 8.125 Non-current liabilities 7% debentures 20X7 Redeemable preference shares Current liabilities Trade payables Income tax payable Interest payable (1.552 – 1.278 – 639) 18.190 Equity Ordinary share capital Share premium Revaluation surplus Retained earnings (9.180 – (W3) 15) Trade receivables Cash and cash equivalents 19.000 20.Lecture example 1 Non-current assets Property. plant and equipment (W2) Investment properties Current assets Inventories (5.

P&E (W2) 6.060 94.Lecture example 1 .vehicles (W2) 513 Closing inventories (5.Workings 1 Expenses Cost of sales Distribution $’000 $’000 Per question 9.750 9.165) 99.063 .000 Opening inventories 4.180 – 15 (W3)) (5.020 121 Slide 41 .020 Other $’000 121 16.852 Depreciation .573 Admin $’000 16.

750) Cost of sales (W1) 25.200 Finance income (1.Lecture example 1 AZ CO INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 20X3 $'000 124.020) Administrative expenses (W1) (121) Other expenses 1.250 x 7%) – 639) (702) Profit before tax (161) Income tax expense (863) Profit for the year Slide 42 .900 Revenue (99.338) Finance costs (639 + 60 + ((18.150 Gross profit (9.573) Distribution costs (W1) (16.

000 19.250 8.250 1.685 59.120 161 639 8.125 7.330 1.165 9.920 59.729 5.414 20.Lecture example 1 Non-current assets Property.552 – 1.414 Equity Ordinary share capital Share premium Revaluation surplus Retained earnings (9.000 – 863) Non-current liabilities 7% debentures 20X7 Redeemable preference shares Current liabilities Trade payables Income tax payable Interest payable (1.180 – (W3) 15) Trade receivables Cash and cash equivalents 19.244 18.000 430 3.190 15.689 31.000 43.729 24.278 – 639) Slide 43 . plant and equipment (W2) Investment properties Current assets Inventories (5.

Chapter 4 Study Text Chapter 4 Non-current assets .

g.Subsequent costs e. seating depreciate over 8 years Slide 45 e. depreciate over 20 years e.g. engines depreciate over 6 years .g. airframe.

Depreciation • Cost/Rev’n – Revised value over useful life (UL) • Components depreciated separately • Review UL/RV/dep’n method at each y/e Slide 46 .IAS 16 Fair value • Land and buildings • Plant and equipment • Specialised market value (prof valuers) market value (appraisal) income/ depreciated replacement cost Scope • All assets of same class Frequency • So that no material diff to fair value at end of reporting period.

Chapter 5 Study Text Chapter 5 Intangible assets .

Measurement at recognition Examined 12/07 Separate acquisition Acquired as part of business combination Internally generated goodwill Internally generated intangible assets Acquired by government grant Cost Fair value (IFRS 3) NOT recognised Only recognised if PIRATE criteria met Slide 48 .

Internally generated intangible assets Probable future economic benefits Intention to complete and use/sell asset Resources adequate and available to complete Ability to use/sell asset Technical feasibility Expenditure can be reliably measured PIRATE Slide 49 .

Measurement at recognition Separate acquisition Acquired as part of business combination Internally generated goodwill Internally generated intangible assets Acquired by government grant Cost Fair value (IFRS 3) NOT recognised Asset/grant @ FV Only or recognised if PIRATE Nominal amount + criteria met direct expenditure Slide 50 .

Chapter 6

Study Text Chapter 6

Impairment of assets

Recoverable amount

What is recoverable amount? Higher of

FV – costs to sell

Value in Use

Slide 52

Lecture example
Before impairment $000 Goodwill (2,000 – 1,800) 200 PPE 1,300 Dev exp 200 Net current assets 250 1,950 Impairment loss (W1)/(W2) $000 After impairment $000

Slide 53

950 (1.500) 450 Re goodwill Re other assets pro-rata 200 250 Slide 54 .Lecture example 2 (W1) Impairment loss Carrying value Recoverable amount $000 1.

300 200 250 1.800) PPE Dev exp Net current assets $000 200 1.Lecture example 2 – Solution (cont’d) Before impairment Goodwill (2.000 – 1.950 Impairment loss (W1)/(W2) $000 (200) After impairment $000 - Slide 55 .

CTS of 1.Lecture example 2 (W2) Allocation of impairment loss 1.083 PPE (250 x 1.300/1.120 $000 217 33 250 37 Loss allocated $000 180 70 250 Slide 56 .500) PPE cannot be reduced below FV .500) Dev exp (250 x 200/1.

950 Impairment loss (W1)/(W2) $000 (200) (180) (70) (450) After impairment $000 1.500 Slide 57 .120 130 250 1.000 – 1.Lecture example 2 Before impairment Goodwill (2.800) PPE Dev exp Net current assets $000 200 1.300 200 250 1.

Chapter 7 Study Text Chapter 7 Reporting financial performance .

IFRS 5: Approach First measure in accordance with applicable IFRS Classify as held for sale. at lower of: • Carrying amount. and • Fair value less costs to sell (FV – CTS) Subsequent changes in FV – CTS: • Further impairment loss/ loss reversal Not depreciated Separately disclosed on face of B/S Slide 59 .

Chapter 8 Study Text Chapter 8 Introduction to groups .

Illustration Shareholders BPP Holdings plc the ‘BPP Group’ BPP Professional Education Ltd BPP International Ltd BPP Offshore Group Ltd Slide 61 .

Chapter 9 Study Text Chapter 9 The consolidated statement of financial position .

Goodwill Goodwill Consideration transferred Non-controlling interest Less: Net fair value of identifiable assets. liabilities and contingent liabilities X X (X) X Slide 63 .

g.the non-controlling shareholders receive $20 S Slide 64 . S pays a $100 dividend: .Non-controlling interest P P controls S because it has > 50% of voting power P does not own 80% all of S e.P receives $80 .

or you may be given the FV. Valuation of the NCI will affect the goodwill calculation Slide 65 .Non-controlling interest . or (b) Fair value (per IFRS 3 revised) Fair value can be based on MV of shares.valuation Non-controlling interest can be valued at: (a) Share of net assets.

This excess is termed: Goodwill attributable to the NCI.controlling interest at year end then becomes: NCI% of S net assets X PURP (if applicable) Goodwill attributable to NCI (X) X X Slide 66 .Goodwill – NCI at fair value Goodwill is likely to be higher when NCI is valued at FV. Non.

Inventories sold at a profit within group Inventories should be valued at the lower of cost and NRV to the group Inventories transferred at a profit within group Sold to a third party Remain in inventories Profit realised Slide 67 Profit unrealised .

12/07 Group structure Proforma Assets & liabilities Adjustments Goodwill Step 6 Step 7 Step 8 Slide 68 Investment in associate Non-controlling interest Retained earnings .Approach to the consolidated SFP Step 1 Step 2 Step 3 Step 4 Step 5 Examined Pilot paper.

.Chapter 10 Study Text Chapter 10 Consolidated income statement (income statement section of statement of comprehensive income).

Consolidated income statement Revenue Examined 6/08 Add 100% P + 100% S as represents what is controlled Profit for period (PFP) Attributable to: Owners of P NCI β S’s PFP x NCI% NB: Exclude dividend income from S Slide 70 .

800 400 400 700 3.050 850 3.000 400 7.200 11.900 7.700 200 200 1.250 9.950 800 6.600 1.500 200 200 1.950 S $'000 3.900 1.000 1.750 11.700 9.800 2.900 Consol $'000 9.Intragroup loans and interest Balance sheets: Non-current assets – PPE – investment in S – 4% loan to S P $'000 6.050 3.450 800 8.200 1.250 2.050 8.350 8.450 Current assets Share capital Retained earnings Non-current liabilities – bank loan – 4% loan from P Current liabilities Slide 71 .

310) 990 (20) 970 (290) 680 Revenue Cost of sales and expenses Profit before interest and tax Finance income (from S) Finance costs Profit before tax Income tax expense Profit for the year Slide 72 .540) 660 16 (20) 656 (196) 460 S $'000 1.300 (2.Intragroup loans and interest Income statements: P $'000 2.100 (770) 330 (16) 314 (94) 220 Consol $'000 3.200 (1.

Chapter 11 Study Text Chapter 11 Accounting for associates .

6/08 X X X/(X) X/(X) (X) (X) X Initial cost Add/less: post acquisition share of profits/losses Add/less: post acquisition share of gains/losses not in I/S Less: post-acquisition dividends received Less: impairment losses on associate to date Slide 74 .Equity method Statement of financial position Non-current assets Investment in associate Working Examined Pilot paper. 12/07.

Equity method Income statement A’s Profit for the period x Group % X Shown before group profit before tax Slide 75 .

Chapter 12 Study Text Chapter 12 Inventories and construction contracts .

Lower of cost and NRV – item by item Inventory item 1 2 3 4 Cost $ 27 14 43 29 113 NRV $ 32 8 55 40 135 Lower $ 27 8 43 29 107 The inventories figure is $107 not $113 Slide 77 .

Issue Examined Pilot paper • Contract price • Total costs • Overall profit • Contract term $13.0m 3 years When should profit be recognised? Slide 78 .5m $ 3.5m $10.

contingent liabilities and contingent assets .Chapter 13 Study Text Chapter 13 Provisions.

Provisions: obligations Legal Constructive Slide 80 .

Contingent liabilities For a provision we needed: (a) Present obligation (b) Probable outflow (c) Reliable estimate possible ? contingent liability Slide 81 .

Contingent liabilities For a provision we needed: (a) Present obligation possible (b) Probable outflow contingent liability (c) Reliable estimate Slide 82 .

Contingent liabilities For a provision we needed: (a) Present obligation (b) Probable outflow (c) Reliable estimate contingent liability Slide 83 .

Contingent assets Inflow Virtually certain Probable Possible Treatment • Recognise • Disclose • Do nothing Slide 84 .

Chapter 14 Study Text Chapter 14 Financial assets and liabilities .

Types of financial asset Type (a) Loans and receivables (b) Held-to-maturity investments (c) Financial assets at fair value through profit or loss (held for ‘trading’ and derivatives) (d) Available-for-sale financial asset (any other financial asset) Held at Examined 6/08 Amortised cost Fair value (profit/loss) Fair value (changes in reserves until disposal) Slide 86 .

which cost $45. In either case. dividends received on the share are reported as income Slide 87 . and are classed as an available-for-sale financial asset.$44.Financial assets at fair value Illustration An entity holds an investment in shares in another company.000.000 $4. At the year end their value has risen to $49.000 .000) CR Reserves $4. The following adjustment would need to be made in an accounts preparation question: DR Investment in shares ($49.000.000 If the shares were held at fair value through profit and loss the gain would be reported in profit or loss.

Equity instruments Illustration A company issues 100.000 x $1. any issue costs reduce the value recorded for the shares as follows: DR Cash [(100.000 $100. Issue costs of $3.000 are incurred. i.60 per share.000 x $1) CR Share premium [(100.e. The shares are shown at their net proceeds in accordance with IAS 32 Financial Instruments: Presentation.000] or $257.000 Slide 88 .000] CR Share capital (100.000 x $2.000 $1 shares when the market price is $2.60) – $3.000 $157.60) – $3.

Chapter 15 Study Text Chapter 15 The legal versus the commercial view of accounting .

Asset and liability definitions Asset A resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity Liability A present obligation of the entity arising from past events. the settlement of which is expected to result in an outflow of resources embodying economic benefits Slide 90 .

Revenue recognition: sale of goods (a) (b) (c) (d) (e) transferred the significant risks/rewards of ownership no continuing managerial involvement revenue can be measured reliably probable that economic benefits will flow to the entity costs incurred can be measured reliably Slide 91 .

Revenue recognition: rendering of services (a) (b) (c) (d) (e) transferred the significant risks/rewards of ownership no continuing managerial involvement revenue can be measured reliably probable that economic benefits will flow to the entity costs incurred can be measured reliably + stage of completion can be measured reliably Slide 92 .

Chapter 16 Study Text Chapter 16 Leasing .

Sale & leaseback transactions If leaseback is operating lease SP = FV Rec. any profit or loss immediately SP < FV SP > FV Excess over FV Rec. any profit/ loss defer & amortise immediately unless loss compensated by over period expected to be used future rentals defer & amortise Slide 94 .

Chapter 17 Study Text Chapter 17 Accounting for taxation .

) 500 20X1 $000 500 ( .Scenario 1 – Tax accounted for as becomes due Extracts from statement of financial position Cash Royalty receivable Current tax payable Does not apply accruals concept Not true and fair! Extracts from income statement Royalty income receivable Current tax Profit for the period 20X1 $000 500 ( .) 500 20X2 $000 500 (150) 350 20X2 $000 (150) (150) Slide 96 .

) 350 20X1 $000 500 ( .Scenario 2 – Tax accounted for on accruals basis Extracts from statement of financial position Cash Royalty receivable Deferred tax liability Current tax payable Extracts from statement of comprehensive income Royalty income receivable Current tax Deferred tax Profit for the year Slide 97 20X1 $000 500 (150) ( .) (150) 350 20X2 $000 500 (150) 350 20X2 $000 (150) 150 ( 0) .

losses A company incurs $80.000. The company expects to make a loss in 20X2 and to return to profitability in 20X3.Deferred tax assets Illustration . A deferred tax asset is recognised in 20X1 for $50.000 x 20% = $10. expecting to make a profit of £50.000 of tax losses in the year ended 31 December 20X1 which it can carry forward for 2 accounting periods before they expire.000 in that year. Slide 98 . The company pays tax at 20%. In 20X3 the deferred tax asset is charged in profit or loss when profits are earned that the tax losses are used against.

Chapter 18 Study Text Chapter 18 Earnings per share .

Changes in equity share capital SHARE ISSUES Market price Bonus issue Rights issue Use weighted average Apply retrospectively (use bonus fraction) FMP followed by bonus issue Slide 100 .

Chapter 19 Study Text Chapter 19 Analysing and interpreting financial statements .

Working capital cycle Inventory days Buy inventories Receivables days Receive cash from Sell receivables inventories Payables days Pay payables Working capital cycle Slide 102 .

Approach to the Interpretation questions Examined pilot paper. 12/07 Step 1 Read requirements Step 2 Step 3 Step 4 Step 5 Step 6 Read question and analyse data Calculate key ratios Group analysis into categories Write up your answer summarising performance Consider limitations (if relevant) Slide 103 .

Chapter 20 Study Text Chapter 20 Limitations of financial statements and interpretation techniques .

in particular involving group companies Seasonal trading .Limitations of financial statements A number of factors may make financial statements less reliable than they appear: • • Problems of historical cost information .timing of year end • Asset acquisition .especially just before the year end Slide 105 .especially in periods of inflation Creative accounting .often aimed at reducing gearing • • The effect of related parties.

Slide 106 . Change of accounting policy can only be justified on grounds of fairer presentation.such as whether to revalue assets or capitalise interest costs.Accounting policies Choice of accounting policy can affect the financial statements .

therefore comparison difficult Slide 107 .Limitations of ratio analysis • • • In first year of trading no comparative figures Comparison against industry averages may not be very revealing If based on historical cost. undervalued assets may distort ROCE and gearing • • • Ratios influenced by choice of accounting policy May be distorted by creative accounting measures Results may be distorted by inflation • No two companies have the same risk profile.

Chapter 21 Study Text Chapter 21 Statements of cash flows .

Approach to cash flow questions Step 1 Step 2 Read question & set up proforma Examined 6/08 Transfer figures from statement of financial position to face or working Step 3 Step 4 Step 5 Step 6 Step 7 Transfer figures from statement of comprehensive income (income statement) to face or working Deal with additional information Finish workings Do additional workings for direct method (if required) Finish statement of cash flows Slide 109 .

Statement of cash flows – example pro-forma $000 Cash flows from operating activities Profit before taxation Adjustments for: Depreciation Amortisation Interest expense Profit on disposal of equipment Increase in trade receivables Increase in inventories Decrease in trade payables Increase in provisions Cash generated from operations Interest paid Income taxes paid Net cash from operating activities Slide 110 $000 .

Statement of cash flows – example pro-forma $000 Cash flows from investing activities Development expenditure Purchase of property. plant and equipment Proceeds from sale of equipment Net cash used in investing activities Cash flows from financing activities Proceeds from issue of share capital Proceeds from issue of debentures Dividends paid Net cash from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Slide 111 $000 .

Chapter 22 Study Text Chapter 22 Alternative models and practices .

the amount at which an asset could be exchanged between knowledgeable willing parties in an arm's length transaction. the present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business.Asset valuation methods Assets carried at Historical cost Fair value Current cost Net realisable value the amount of the cash and cash equivalents paid or fair value of the consideration given. Present value of future cash flows Slide 113 . net of the estimated costs of completion and the estimated costs necessary to make the sale. the amount of the cash and cash equivalents that could currently be obtained by selling the asset in an orderly disposal. the amount of the cash and cash equivalents that would have to be paid if the same or an equivalent asset was acquired currently.

Current value accounting Current purchasing power Adjust by general rate of inflation Current cost accounting Adjust for specific prices changes Slide 114 .

not-for-profit and public sector entities .Chapter 23 Study Text Chapter 23 Specialised.

Primary aims Public sector entities Examples: • Government departments • Health services (if government funded) • Education services (publicly funded) Aims • To provide service to the public • To make good use of taxpayers’ funds Private sector entities Example: • Charities Aims • To provide service to beneficiaries • To raise funds for this purpose Slide 116 .

000 p. Charities must use accruals basis (unless revenue below £100.) and apply UK standards.a. Statement of Recommended Practice (SORP) 2005. Slide 117 .Regulatory framework Public sector International Public Sector Accounting Standards (IPSASs). based on IFRS Private sector Regulated nationally eg by Charities Commission in UK. In other countries. requirements will be different.

Key Performance Indicators .what impact did they have? Slide 118 . Efficiency.Performance measurement Not judged by bottom line profit but must show that they have managed their funds properly.Economy.Value For Money . Effectiveness • KPIs . Performance measured in terms of achievement of stated purpose.specific to that organisation • VFM .produced by some charities to show measure of achievement . Possible performance measures are: • 3’Es .and Best Value for outside services • Impact report .

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