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ACCA Paper F7 – Financial reporting (International

)

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 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, 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

Chapter 2

Study Text Chapter 2

The regulatory framework

The regulatory framework
• Home study chapter
• Examined occasionally for, say, 10 marks

Slide 9

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

Statement of financial position
ASSETS Non-current assets Property, 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, 12/07, 6/08

$’000

X X X X X X X X X X X

Total assets
Slide 13

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

Statement of changes in equity
Share capital Share premium Ret’d Available- 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

Approach to questions
1. Read requirements & scan question 2. Set up proformas & page for workings 3. Read additional information & make a mark by relevant caption that is going to change

4. Transfer figures into proformas or workings
5. Work through adjustments (both sides of double entry), balance off & transfer figures

Slide 17

Lecture example
AZ Co is a quoted manufacturing company. Its finished products are stored in a nearby warehouse until ordered by customers. AZ Co has performed very well in the past, 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

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, 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

$'000 124,900
Comprehensive income

94,000 9,060 16,020 121 1,200 639 30,315 3,720 6,060 1,670 24,000 4,852 9,330 1,190 20,000 1,000 430 3,125 9,552 1,000 60 18,250 8,120 194,307

Financial position

Slide 19

194,307

Additional information provided
(i) The property, 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. Income tax for the year to 31 March 20X3 is estimated at $161,000. The closing inventories at 31 March 20X3 were $5,180,000. An inspection of finished goods found that a production machine had been set up incorrectly and that several production batches, which had cost $50,000 to manufacture, had the wrong packaging. The goods cannot be sold in this condition but could be repacked at an additional cost of $20,000. They could then be sold for $55,000. The wrongly packaged goods were included in closing inventories at their cost of $50,000.

(ii) (iii)

Slide 20

Additional information provided
(iv)
(v)

(vi)
(vii)

The preference shares will be redeemed at their par value ($1,000,000) in 20X9. Preference dividends are paid on 31 March each year. The 7% debentures are 10-year loans due for repayment by 31 March 20X7. Interest on these debentures needs to be accrued for the six months to 31 March 20X3. The restructuring costs in the trial balance represent the cost of a major restructuring of the company to improve competitiveness and future profitability. No fair value adjustments were necessary to the investment properties during the period.

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.
Slide 21

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 $'000 124,900

Slide 22

Lecture example 1 - Workings

1

Expenses Cost of sales Distribution $’000 $’000 9,060 94,000 Admin $’000 16,020 Other $’000 121

Per question

Slide 23

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

Lecture example 1 - Workings
2 Property, plant and equipment Plant & equipment $’000 30,315 (6,060) Vehicles Total

Cost Accumulated depreciation b/d NBV b/d Charge for year NBV c/d

$’000 3,720 (1,670)

$’000

Slide 25

Lecture example 1
Non-current assets Property, plant and equipment Investment properties Current assets Inventories Trade receivables Cash and cash equivalents 24,000

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 - Workings

1

Expenses Cost of sales Distribution $’000 $’000 9,060 94,000 4,852 Admin $’000 16,020 Other $’000 121

Per question Opening inventories

Slide 27

Lecture example 1
Non-current assets Property, plant and equipment Investment properties Current assets Inventories Trade receivables Cash and cash equivalents 24,000

9,330 1,190

Equity Ordinary share capital Share premium Revaluation surplus Retained earnings (9,552 – 1,000

20,000 430 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
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

Lecture example 1
Non-current assets Property, plant and equipment Investment properties Current assets Inventories Trade receivables Cash and cash equivalents 24,000

9,330 1,190

Equity Ordinary share capital Share premium Revaluation surplus Retained earnings (9,552 – 1,000

20,000 430 3,125

Non-current liabilities 7% debentures 20X7 Redeemable preference shares
Current liabilities Trade payables Income tax payable Interest payable

18,250 1,000

8,120

Slide 30

Lecture example 1 - Workings
2 Property, plant and equipment Plant & equipment $’000 30,315 (6,060) Vehicles Total

Cost Accumulated depreciation b/d NBV b/d Charge for year 30,315 x 20% 2,050 x 25% NBV c/d

$’000 3,720 (1,670)
2,050 (513) 1,537

$’000 34,035 (7,730)
26,305 (6,063) (513) 19,729

24,255 (6,063)
18,192

Slide 31

Lecture example 1
Non-current assets Property, plant and equipment (W2) Investment properties Current assets Inventories Trade receivables Cash and cash equivalents 19,729 24,000

9,330 1,190

Equity Ordinary share capital Share premium Revaluation surplus Retained earnings (9,552 – 1,000

20,000 430 3,125

Non-current liabilities 7% debentures 20X7 Redeemable preference shares
Current liabilities Trade payables Income tax payable Interest payable

18,250 1,000

8,120

Slide 32

Lecture example 1 - Workings

1

Expenses Cost of sales Distribution $’000 $’000 Per question 9,060 94,000 Opening inventories 4,852 Depreciation - P&E (W2) 6,063 - vehicles (W2) 513 Admin $’000 16,020 Other $’000 121

Slide 33

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

1,200

(161)

Slide 34

Lecture example 1
Non-current assets Property, plant and equipment (W2) Investment properties Current assets Inventories Trade receivables Cash and cash equivalents 19,729 24,000

9,330 1,190

Equity Ordinary share capital Share premium Revaluation surplus Retained earnings (9,552 – 1,000

20,000 430 3,125

Non-current liabilities 7% debentures 20X7 Redeemable preference shares
Current liabilities Trade payables Income tax payable Interest payable

18,250 1,000

8,120 161

Slide 35

Lecture example 1 - Workings
3 Inventories Defective batch Selling price Costs to complete - repackaging NRV Cost Write-off required $’000 $’000

55 (20) 35 (50) (15)

Slide 36

Lecture example 1
Non-current assets Property, plant and equipment (W2) Investment properties Current assets Inventories (5,180 – (W3) 15) Trade receivables Cash and cash equivalents 19,729 24,000

5,165 9,330 1,190

Equity Ordinary share capital Share premium Revaluation surplus Retained earnings (9,552 – 1,000

20,000 430 3,125

Non-current liabilities 7% debentures 20X7 Redeemable preference shares
Current liabilities Trade payables Income tax payable Interest payable

18,250 1,000

8,120 161

Slide 37

Lecture example 1 - Workings

1

Expenses Cost of sales Distribution $’000 $’000 Per question 9,060 94,000 Opening inventories 4,852 Depreciation - P&E (W2) 6,063 - vehicles (W2) 513 Closing inventories (5,180 – (W3) 15) (5,165) Admin $’000 16,020 Other $’000 121

Slide 38

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 + ((18,250 x 7%) – 639) Profit before tax Income tax expense Profit for the year $'000 124,900

1,200 (1,338)

(161)

Slide 39

Lecture example 1
Non-current assets Property, plant and equipment (W2) Investment properties Current assets Inventories (5,180 – (W3) 15) Trade receivables Cash and cash equivalents 19,729 24,000

5,165 9,330 1,190

Equity Ordinary share capital Share premium Revaluation surplus Retained earnings (9,552 – 1,000

20,000 430 3,125

Non-current liabilities 7% debentures 20X7 Redeemable preference shares
Current liabilities Trade payables Income tax payable Interest payable (1,278 – 639)

18,250 1,000

8,120 161 639

Slide 40

Lecture example 1 - Workings

1

Expenses Cost of sales Distribution $’000 $’000 Per question 9,060 94,000 Opening inventories 4,852 Depreciation - P&E (W2) 6,063 - vehicles (W2) 513 Closing inventories (5,180 – 15 (W3)) (5,165) 99,750 9,573 Admin $’000 16,020 Other $’000 121

16,020

121

Slide 41

Lecture example 1
AZ CO INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 20X3 $'000 124,900 Revenue (99,750) Cost of sales (W1) 25,150 Gross profit (9,573) Distribution costs (W1) (16,020) Administrative expenses (W1) (121) Other expenses 1,200 Finance income (1,338) Finance costs (639 + 60 + ((18,250 x 7%) – 639) (702) Profit before tax (161) Income tax expense (863) Profit for the year
Slide 42

Lecture example 1
Non-current assets Property, plant and equipment (W2) Investment properties Current assets Inventories (5,180 – (W3) 15) Trade receivables Cash and cash equivalents 19,729 24,000 43,729 5,165 9,330 1,190 15,685 59,414 20,000 430 3,125 7,689 31,244 18,250 1,000 19,250 8,120 161 639 8,920 59,414

Equity Ordinary share capital Share premium Revaluation surplus Retained earnings (9,552 – 1,000 – 863)

Non-current liabilities 7% debentures 20X7 Redeemable preference shares
Current liabilities Trade payables Income tax payable Interest payable (1,278 – 639)

Slide 43

Chapter 4

Study Text Chapter 4

Non-current assets

Subsequent costs
e.g. airframe, depreciate over 20 years

e.g. seating depreciate over 8 years
Slide 45

e.g. engines depreciate over 6 years

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. 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

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

Lecture example 2
(W1) Impairment loss Carrying value Recoverable amount $000 1,950 (1,500) 450

Re goodwill Re other assets pro-rata

200 250

Slide 54

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

Slide 55

Lecture example 2
(W2) Allocation of impairment loss
1,083 PPE (250 x 1,300/1,500) Dev exp (250 x 200/1,500) PPE cannot be reduced below FV - CTS of 1,120 $000 217 33 250 37 Loss allocated $000 180 70 250

Slide 56

Lecture example 2
Before impairment Goodwill (2,000 – 1,800) PPE Dev exp Net current assets $000 200 1,300 200 250 1,950 Impairment loss (W1)/(W2) $000 (200) (180) (70) (450) After impairment $000 1,120 130 250 1,500

Slide 57

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

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

S

Slide 64

Non-controlling interest - valuation
Non-controlling interest can be valued at:
(a) Share of net assets; or

(b) Fair value (per IFRS 3 revised)
Fair value can be based on MV of shares, or you may be given the FV. Valuation of the NCI will affect the goodwill calculation

Slide 65

Goodwill – NCI at fair value
Goodwill is likely to be higher when NCI is valued at FV. This excess is termed:
Goodwill attributable to the NCI. Non- 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

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

Approach to the consolidated SFP
Step 1
Step 2 Step 3 Step 4 Step 5

Examined Pilot paper, 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

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

Intragroup loans and interest
Balance sheets: Non-current assets – PPE – investment in S – 4% loan to S P $'000 6,200 1,000 400 7,600 1,350 8,950 800 6,900 7,700 200 200 1,050 8,950 S $'000 3,050 3,050 850 3,900 1,000 1,800 2,800 400 400 700 3,900 Consol $'000 9,250 9,250 2,200 11,450 800 8,700 9,500 200 200 1,750 11,450

Current assets Share capital Retained earnings Non-current liabilities – bank loan – 4% loan from P Current liabilities

Slide 71

Intragroup loans and interest
Income statements: P $'000 2,200 (1,540) 660 16 (20) 656 (196) 460 S $'000 1,100 (770) 330 (16) 314 (94) 220 Consol $'000 3,300 (2,310) 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

Chapter 11

Study Text Chapter 11

Accounting for associates

Equity method
Statement of financial position Non-current assets Investment in associate Working

Examined Pilot paper, 12/07, 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
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

$13.5m $ 3.5m $10.0m 3 years

When should profit be recognised?
Slide 78

Chapter 13

Study Text Chapter 13

Provisions, contingent liabilities and contingent assets

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

Financial assets at fair value
Illustration
An entity holds an investment in shares in another company, which cost $45,000, and are classed as an available-for-sale financial asset. At the year end their value has risen to $49,000. The following adjustment would need to be made in an accounts preparation question: DR Investment in shares ($49,000 - $44,000) CR Reserves $4,000 $4,000

If the shares were held at fair value through profit and loss the gain would be reported in profit or loss. In either case, dividends received on the share are reported as income
Slide 87

Equity instruments
Illustration
A company issues 100,000 $1 shares when the market price is $2.60 per share. Issue costs of $3,000 are incurred.

The shares are shown at their net proceeds in accordance with IAS 32 Financial Instruments: Presentation, i.e. any issue costs reduce the value recorded for the shares as follows:
DR Cash [(100,000 x $2.60) – $3,000] CR Share capital (100,000 x $1) CR Share premium [(100,000 x $1.60) – $3,000] or $257,000 $100,000 $157,000

Slide 88

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

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 20X1 $000 500 ( - ) 500

20X2 $000 500 (150) 350 20X2 $000 (150) (150)

Slide 96

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) ( - ) 350
20X1 $000 500 ( - ) (150) 350

20X2 $000 500 (150) 350
20X2 $000 (150) 150 ( 0)

Deferred tax assets
Illustration - losses
A company incurs $80,000 of tax losses in the year ended 31 December 20X1 which it can carry forward for 2 accounting periods before they expire. The company expects to make a loss in 20X2 and to return to profitability in 20X3, expecting to make a profit of £50,000 in that year. The company pays tax at 20%. A deferred tax asset is recognised in 20X1 for $50,000 x 20% = $10,000. In 20X3 the deferred tax asset is charged in profit or loss when profits are earned that the tax losses are used against.

Slide 98

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

Limitations of financial statements
A number of factors may make financial statements less reliable than they appear: • • Problems of historical cost information - especially in periods of inflation Creative accounting - often aimed at reducing gearing


The effect of related parties, in particular involving group companies
Seasonal trading - timing of year end

Asset acquisition - especially just before the year end

Slide 105

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

Slide 106

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, therefore comparison difficult

Slide 107

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

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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
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$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
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$000

Chapter 22

Study Text Chapter 22

Alternative models and practices

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. the amount at which an asset could be exchanged between knowledgeable willing parties in an arm's length transaction. the amount of the cash and cash equivalents that would have to be paid if the same or an equivalent asset was acquired currently. the amount of the cash and cash equivalents that could currently be obtained by selling the asset in an orderly disposal, net of the estimated costs of completion and the estimated costs necessary to make the sale. the present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business.

Present value of future cash flows
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Current value accounting

Current purchasing power

Adjust by general rate of inflation

Current cost accounting

Adjust for specific prices changes

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Chapter 23

Study Text Chapter 23

Specialised, not-for-profit and public sector entities

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

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Regulatory framework
Public sector
International Public Sector Accounting Standards (IPSASs), based on IFRS Private sector Regulated nationally eg by Charities Commission in UK.

Statement of Recommended Practice (SORP) 2005. Charities must use accruals basis (unless revenue below £100,000 p.a.) and apply UK standards.
In other countries, requirements will be different.
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Performance measurement
Not judged by bottom line profit but must show that they have managed their funds properly.
Performance measured in terms of achievement of stated purpose.

Possible performance measures are:
• 3’Es - Economy, Efficiency, Effectiveness • KPIs - Key Performance Indicators - specific to that organisation • VFM - Value For Money - and Best Value for outside services • Impact report - produced by some charities to show measure of achievement - what impact did they have?

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