F7FR (Int) DSGuide j09 PDF

FINANCIAL REPORTING (F7) DETALIED STUDY GUIDE
INTRODUCTION
The Exam
The exam has the following structure: All questions are compulsory.
Question Comprising % Comments

1 Consolidation. 25 Preparation of group financial
statements and may include a small
related discussion element.
2 Final accounts 25 This will be either a trial balance with
notes requiring the preparation of
statement of comprehensive income
and statement of financial position or
financial statements will be given but
will require amending.
3 Analysis 25 This will be either a cash flow or ratio
analysis, or even a mixture of the two.
4 Any area of the 15
syllabus
5 Any area of the 10
syllabus
An individual question may often
involve elements that relate to different
areas of the syllabus. For example a
question on the preparation of financial
statements for public issue could
include elements relating to several
accounting standards. In scenario
questions candidates may be expected
to comment on managements chosen
accounting treatment and determine a
more appropriate one, based on
circumstances described in the question.
100
Aims of home study

1 To consolidate subjects taught on introductory course.
2 To cover material not scheduled to be taught on course.
3 To prepare for tests.
Course coverage
The following guide covers all areas of the syllabus. Those areas covered on the course(s)
can be identified on the overview which accompanies this guide.
1
Study Topic Study Date

System Question completed
Session
1 GAAP and the IASB

This area was, surprisingly, examined as a whole 25 mark
question in the Dec2004 exam It is important to understand
how the IASB function and the role they have to play in
harmonising accounting throughout the world. It is worth
noting at this stage that all listed companies within the EU
must file their accounts using IASs from 1 January 2005 It
is very possible that the US economy may move from a US
GAAP model to IFRS in the very near future, making IFRS
the international set of standards..
After studying this you should be able to:
explain why a regulatory framework is needed;
explain why accounting standards on their own
are not a complete regulatory framework;
distinguish between a principles based and a rules
based framework and discuss whether they can be
complementary;
describe the structure and objectives of the IASC
Foundation, the IASB, the SAC and IFRIC;
describe the IASBs standard setting process
including revisions to and interpretations of
standards;
discuss the extent to which IFRSs are relevant to
specialised, not-for-profit and public sector
entities.
2

Session
2 Framework for the preparation and presentation of

financial statements
This is an important topic, both in real life and from an
examination point of view. You need to pay particular
attention to the definitions of elements given in the
framework and the recognition criteria of when these
elements should be included in the financial statements. It is
highly likely that you will need to consider these elements
somewhere within the exam, even if a question does not
directly ask for it. A 25 mark question was set in the June
2006 exam and under the new syllabus it is very likely that
a Q4 or Q5 could relate to the framework.
discuss what is meant by a conceptual framework
of accounting;
discuss whether a conceptual framework is
necessary and what an alternative system might
be;
discuss what is meant by understandability in
relation to the provision of financial information;
discuss what is meant by relevance and reliability
and describe the qualities that enhance these
characteristics;
define what is meant by recognition in financial
statements and discuss the recognition criteria;
apply the recognition criteria to:
assets and liabilities
income and expenses;
explain the following measures and compute
amounts using;
historical cost;
fair value/current cost;
net realisable value;
present value of future cash flows;
describe the advantages and disadvantages of the
use of historical cost accounting.
3

Session
3 Substance over form 13, 14

This concept is taken from the framework and is a very
important topic in its own right. You should be aware of the
differences within the financial statements of accounting for
the economic substance of a transaction rather than the legal
form (Off Balance Sheet Financing). It is very common for
this concept to be examined somewhere within the exam. It
is another topic that could be examined directly with
reference to substance vs form or indirectly with presumed
knowledge required for the better answers.
demonstrate the role of the principle of substance
over form in relation to recognising sales revenue;
explain the importance of recording the
commercial substance rather than the legal form
give examples of previous abuses in this area;
discuss how financial statements may be
manipulated to produce a desired effect (creative
accounting, window dressing);
describe the features that may indicate that the
substance of transactions differs from their legal
form;
apply the principle of substance over form to the
recognition and derecognition of assets and
liabilities;
recognise the substance of transactions in general,
and specifically account for the following types of
transactions;
goods sold on sale or return/consignment
inventory;
sale and repurchase/leaseback agreements;
factoring of receivables.
4

Session
4 IAS 1 Presentation of financial statements 1

This is an important standard. You must be able to produce
financial statements in an acceptable format.
You must know the minimum line items that must be
shown on the face of the financial statements. The examiner
may well ask you to produce a statement of comprehensive
income using either the nature of expense or function of
expense method. Do not ignore the Statement of Change in
Equity as this statement is becoming more and more
common in the examination. Note that IAS 1 mentions
statements of cash flows but the main body of guidance is
given in IAS 7. This is covered in the session 26 in Home
Study Phase 1 Be aware that IAS 1 has been revised by the
IASB, paying particular attention to the new statement of
comprehensive income. This new statement replaces the
income statement and parts of the statement of changes in
equity.
describe what is meant by financial statements
achieving a faithful representation;
discuss whether faithful representation constitutes
more than compliance with accounting standards;
indicate the circumstances and required disclosure
where a true and fair override may apply;
describe the structure (format) and content of
financial statements presented under IFRS;
prepare an entitys financial statements in
accordance with the prescribed structure and
content;
indicate the circumstances where separate
disclosure of material items of income and
expense is required;
prepare and explain the contents and purpose of
the statement of changes in equity.
5

Session
5 IAS 8 Accounting Policies, Changes in Accounting 15

Estimates and Errors
The standard focuss on accounting policies and the
treatment if a company changes its policy. Most voluntary
changes in accounting policy must now be done
retrospectively. It also identifies the treatment once errors
have been found, retrospective adjustment and the treatment
for any changes in estimate, prospective adjustment. It is
unlikely to feature as a separate question on a regular basis
but be prepared for a few marks incorporated into maybe a
final accounts question. Please learn the rules and be
prepared to apply them in the exam. This topic did feature as
an 11 mark question in the Dec 2006 exam.
distinguish between changes in accounting
policies and changes in accounting estimates and
describe how accounting standards apply the
principle of comparability where an entity
changes its accounting policies;
recognise and account for changes in accounting
policies and the correction of prior period errors.
6 IAS 18 Revenue 16
This standard considers when revenue should be recognised
in respect of the sale of goods, giving of services and interest,
royalties and dividends. It is an important standard in real
life as many of the accounting abuses that have occurred in
the past have related to revenue recognition. Be prepared to
apply the requirements of the standard to a case study style
question. This is a topic that can feature on a regular basis
in the Q2 style questions, where revenue may have been
recognised incorrectly within the question.
outline the principles of the timing of revenue
recognition
discuss and give examples of the various points in
the production and sales cycle where it may,
depending on circumstances, be appropriate to
recognise gains and losses
describe the IASBs balance sheet approach to
revenue recognition within its Framework and
compare this to the requirements of IAS 18
Revenue.
6

Session
7 IAS 16 Property, plant and equipment 9, 11

This is a major accounting standard dealing with the
tangible assets within NCA. PPE makes up a large
monetary part of a companies statement of financial position
and will therefore have a major impact on the position of an
entity. The standard covers many areas relating to PPE,
such as recognition, measurement both initial and
subsequent, depreciation, revaluation and subsequent
expenditure. It is highly likely that there will be at least part
of a question, if not a whole question, on every exam paper.
Make sure you are comfortable with dealing with the basic
problems relating to PPE, such as depreciation, revaluations
and disposals. Most Q2s will require calculation and
accounting for depreciation and possible revaluations, but
the standard could also be examined within other questions
on the exam. Be aware that revaluation gains are now
presented within other comprehensive income.
define and compute the initial measurement of a
non-current asset;
identify subsequent expenditure that may be
capitalised, distinguishing between capital and
revenue items;
discuss the requirements of relevant accounting
standards in relation to the revaluation of non-
current assets;
account for revaluation and disposal gains and
losses for non-current assets:
compute depreciation based on the cost and
revaluation models and on assets that have
two or more significant parts.
7

Session
8 IAS 23 Borrowing costs

This session covers a topic which is relatively
straightforward. It is an area that is closely linked to PPE in
respect of some borrowing costs may well be capitalised as a
direct cost of constructing a qualifying asset. If examined it
will probably feature in a general accounting question.
describe advantages and disadvantages to
expensing and capitalising interest;
calculate the amount of interest that should be
capitalised under IAS 23;
describe and identify qualifying assets as defined
in IAS 23.
9 IAS 20 Accounting for government grants & disclosure 10

of government assistance
A relatively minor standard which looks at the accounting
treatment of government grants and assistance. It has not
featured very heavily in past exams and if it does get
examined it will only be a small part of a large question with
not many marks attached to it.
apply the provisions of relevant accounting
standards in relation to accounting for
government grants.
8

Session
10 IAS 17 Leases 17 18
This is an important standard. It is a specific standard that
covers the concept of substance vs form. One of the main
reasons the standard was introduced was due to the
creativity of accountants who would not include the leased
asset and corresponding liability on the statement of
financial position. You need to know the accounting
treatments of both a finance and an operating lease paying
attention to the impact that the two accounting treatments
will have on the financial statements. Accounting for leases
features quite frequently in the examination.
explain why recording the legal form of a finance
lease can be misleading to users (referring to the
commercial substance of such leases);
describe and apply the method of determining a
lease type (i.e. an operating or finance lease);
discuss the effect on the financial statements of a
finance lease being incorrectly treated as an
operating lease;
account for assets and liabilities financed by
finance leases in the records of the lessee;
account for operating leases in the records of the
lessee.
9

Session
11 IAS 38 Intangible assets 19

This is an important standard. It sets out recognition rules
for intangibles and rules on subsequent accounting. You
must know these rules. Pay particular attention to the
criteria which allows the capitalisation of internally
generated intangibles during the development phase The
area does not feature quite as often as IAS 16 but it is still a
key area that the examiner does include on a regular basis.
The recognition of intangibles could be examined as part of
the consolidation question.
discuss the nature and possible accounting
treatments of internally generated goodwill;
distinguish between goodwill and other intangible
assets;
describe the criteria for the initial recognition and
measurement of intangible assets;
describe the subsequent accounting treatment,
including the principle of impairment tests in
relation to goodwill;
describe and apply the requirement of IAS 38 to
internally generate assets other than goodwill (e.g.
research and development).
12 IAS 40 Investment properties

This standard allows companies to value their Investment
Properties either using a fair value model or a cost model
based on the cost model of IAS 16. It is worth noting that if
a company adopts the fair value model then any change in
value of the property is taken to profit or loss rather than the
revaluation reserve. It is unlikely to feature as a whole
question but may form part of a discursive and practical
application question, especially when comparing it to the
valuation of a property under IAS 16.
discuss the way in which the treatment of
investment properties may differ from other
properties;
apply the requirements of IAS 40 to Investment
properties.
10

Session
13 IAS 36 Impairment of assets

This standard considers the impairment (fall in value) of
asset both tangible and intangible. It looks at factors that
may indicate an impairment has occurred, the calculation of
the recoverable amount of an asset to compare against an
assets carrying value and the accounting for an impairment
both in terms of the loss and any future reversal. it also
introduces the concept of a Cash Generating Unit (CGU)
which looks at a group of assets when it is not possible to
consider impairment of a single asset. Be prepared for this
standard to feature on a regular basis in the exam, it has
appeared in successive exams in the past.
define impairment losses
identify the circumstances that may indicate
impairment to assets
describe what is meant by a cash generating unit
state the basis in IAS 36 on which impairment
losses should be allocated, and allocate a given
impairment loss to the assets of a cash generating
unit.
14 IAS 2 Inventories 22
This is a basic standard which will probably not be a
question in its own right but may be worth a few marks in a
bigger question. Just be aware of the impact of using
different pricing methods and how the financial statements
can be altered by changing from one valuation to another.

describe and apply the principles of inventory
valuation;
explain the methods of valuing inventory
including FIFO and average cost;
calculate inventory and cost of sales under each
method given changes in prices;
calculate net realisable value.
11

Session
15 IAS 11 Construction contracts 24

You must be able to calculate Revenue, Costs and Profit for
all three outcomes of a construction contract, Profitable,
Loss making and Uncertainty about profit. Be aware that it
is one of the few standards that focus on the profit/loss
rather than asset/liability. Do expect this subject to feature
on a regular basis as either the Q4 or Q5.The examiner also
includes a small construction contract on a regular basis in
the Q2 style question.
define a construction contract and discuss the role
of accounting concepts in the recognition of profit;
describe the acceptable methods of determining
the stage (%) of completion of a contract;
prepare financial statement extracts for
construction contracts.
16 IAS 37 Provisions, contingent liabilities and 25, 26

contingent assets
This is a very important standard that could feature as a
discursive or a application question. You need to know the
definitions of a provision and a contingent liability and that
a provision is recognised in the financial statements whereas
a contingent liability is only disclosed. One of the reasons
for the introduction of the standard was to try and curb
some of the abuses that were occurring in the area of
provisions such as profit smoothing and profit
manipulation. It is another topic that features frequently in
the exams, either as a whole question or part of a composite
question.
12

Session
explain why an accounting standard on
provisions is necessary;
distinguish between legal and constructive
obligations;
state when provisions may and may not be made
and demonstrate how they should be accounted
for;
explain how provisions should be measured;
define contingent liabilities and assets and
describe their accounting treatment;
identify and account for;
warranties and guarantees;
onerous contracts;
environmental and similar provisions;
provisions for future repairs or refurbishments.
17 IAS 12 Income taxes 27 31

This is an important standard. You must learn its main
provisions and be able to account for taxation. You need to
learn the definitions of taxable and deductible temporary
differences and how they will lead to the calculation of
figures appearing in the statement of financial position. This
area tends not to be examined as a whole question but rather
as part of a larger question, however the examiner has
awarded 15 marks for this area in a previous exam. Learn
the rule of a financial value of an asset is greater than its
tax base will lead to a taxable temporary difference, this
should also then give you the other three relationships.
account for current tax liabilities and assets in

accordance with IAS 12;
record entries relating to income tax in the
accounting records;
explain the effect of both taxable and deductible
temporary differences on accounting and taxable
profits;
compute and record deferred tax amounts in the
financial statement.
13

Session
18 Financial instruments
This is an extremely complicated area and is not likely to be
examined in any great depth, so far it has only been tested to
the extent of 5 or 6 marks of a larger question. make yourself
aware of the definitions of both Financial Assets and
Liabilities and the four categories of Financial Assets. Be
capable of doing an amortised cost valuation for either a
Financial Asset or Liability and be able to split the value of a
compound instrument into its Equity and Liability
components.
explain the need for an accounting standard on
financial instruments;
define financial instruments in terms of financial
assets and financial liabilities;
indicate for the following categories of financial
instruments how they should be measured and
how any gains and losses from subsequent
measurement should be treated in the financial
statements;
fair value through profit and loss;
held to maturity (use of amortised cost);
available for sale;
loans and receivables;
distinguish between debt and equity capital;
describe the nature of the disclosure requirements
for financial instruments;
apply the requirements of relevant accounting
standards to the issue and finance costs of;
equity;
redeemable preference shares and debt
instruments with no conversion rights.
14

Session
19 Group accounts Regulatory framework

This area is fairly important as most consolidation questions
will have a section worth about 5 marks added on requiring
some knowledge of the area we have classed as regulatory
framework. These small parts of a question quite often get
ignored by students, maybe through lack of time but it is
normally fairly easy to achieve a pass mark as long as you
have read the main points identified in this session IFRS 3
has been revised by the IASB, one of the major changes iis
the new option to value NCI at fair value. The changes will
be covered in the following sessions. Anyone who is re-
sitting this exam must make themselves aware of the major
changes that have taken place in the revised IFRS 3..
describe the concept of a group as a single
economic unit
explain and apply the definition of subsidiary
companies within relevant accounting standards
describe why directors may not wish to
consolidate a subsidiary and the circumstances
where this is permitted
explain the need for using coterminous year ends
and uniform accounting policies when preparing
consolidated financial statements
indicate the effect that the related part relationship
between a parent and subsidiary may have on the
subsidiarys entity statements and the
consolidated financial statements
recognise how related party relationships have the
potential to mislead users.
15

Session
The next 4 sessions look at the area of groups/consolidated
accounts Question 1 will always be a question on group
accounts with most of the marks being awarded for the
preparation of either a consolidated statement of financial
position and/or a consolidated statement of comprehensive
income. Make sure you are able to apply the basics and try
to learn and understand the method that the study system
uses to calculate goodwill, non-controlling interest and
consolidated retained earnings as these calculations are
common to most exam questions. In the May 2006
newsletter the examiner has written an article on group
accounts, make sure you read it. The examiner has also
written an article in the August 2008 Student Accountant
relating to the revised IFRS 3 that was issued by the IASB
in 2008.
16

Session
20, 21, 22 Group accounts Statements of financial position 32 44

Basics
Cosmetic adjustments
Further adjustments
explain the concept of a group and the purpose of
preparing consolidated financial statement
explain the objective of consolidated financial
statements
prepare a consolidated statement of financial
position for a simple group dealing with pre and
post acquisition profits, non-controlling interests
and goodwill
explain why it is necessary to eliminate intra-
group transactions
account for the effects of intra-group trading on
the statement of financial position
report the effects of intra-group trading and other
transactions including unrealised profits and
intra-group loans
explain why it is necessary to use fair values for
the consideration for an investment in a
subsidiary together with the fair values of a
subsidiarys identifiable assets and liabilities when
preparing consolidated financial statements
describe and apply the required accounting
treatment of consolidated goodwill
account for the effects of fair value adjustments to
depreciating and non-depreciating non-
current assets
inventory
monetary liabilities
assets and liabilities not included in the
subsidiarys own statement of financial
position, including contingent liabilities
indicate why the value of purchase consideration
for an investment may be less than the value of
the acquired identifiable net assets and how the
difference should be accounted for
account for goodwill impairment
explain and account for other reserves of the
subsidiary.
17

Session
23 Group accounts Statements of comprehensive

income
account for the effects of intra-group trading;
prepare a consolidated statement of
comprehensive income for a simple group,
dealing with an acquisition in the period and non-
controlling interest;
account for the effects of intra-group trading and
other transactions including;
unrealised profits in inventory and non-
current assets;
intra-group loans and interest and other intra-
group charges; and
intra-group dividends;
prepare a consolidated statement of changes in
equity.
24 IAS 28 Investments in associates

This is an important area. Any question on group
accounting is may also feature an associate, such as the June
2002 exam You will not get a whole question on the
accounting for associates. The underlying treatment is very
similar to that of subsidiaries but the mechanics of including
the share of net assets is much easier. Work through the
chapter carefully.
define an associate and explain the principles and
reasoning for the use of equity accounting
prepare consolidated financial statements to
include a single subsidiary and an associate.
18

Session
25 Analysis and interpretation 48, 49

At F7 analysis and interpretation is an important area. You
need to have an appreciation of what the ratios are telling
you, there will be more marks available for the interpretation
of an entitys results rather than the calculation of a few
ratios. It is therefore important to look beyond the numbers
and think a little bit deeper, you will not earn marks simply
by saying profitability has gone down by 10%, you will need
to explain possible reasons for the reduction. This area could
be examined as a whole 25 mark question or the examiner
could just tag a 5 mark analysis to another question In the
June 2006 paper there was a combined cash flow and ratio
analysis question .
indicate the problems of using historic information to
predict future performance and trends;
explain why asset/liability figures may not be
representative of average values throughout the
period, due to;
seasonal trading;
major asset acquisitions near the end of the
accounting period;
define and compute relevant accounting ratios;
explain what aspects of performance specific
ratios are intended to assess;
analyse and interpret ratios to give an assessment
of a companys performance in comparison with;
an entitys previous periods financial statements;
another similar entity for the same accounting
period;
industry average ratios;
interpret an entitys financial statements to give
advice from the perspective of different
stakeholders;
discuss the limitations in the use of ratio analysis
for assessing corporate performance;
discuss the limitations in the use of ratio analysis
for assessing corporate performance;
indicate other information, including non-
financial information, that may be of relevance to
the assessment of an entitys performance;
discuss the different approaches that may be
required when assessing the performance of
specialised, not-for-profit and public sector
organisations.
19

Session
26 IAS 7 Statement of cash flows 46, 47

This is a very important standard both in terms of the exam
and real life. You must learn the format of the cash flow
statement and recognise that it is only concerned with cash
flows, look for changes to NCA and Capital that are not cash
flows. The examiner is very keen on this area and you can
expect a cash flow question once every 2 or 3 papers, both
indirect and direct methods have been examined with the
indirect format being the most common.
prepare a statement of cash flows for a single
entity in accordance with relevant accounting
standards using the direct and indirect method;
compare the usefulness of cash flow information
with that of a statement of comprehensive income;
interpret a statement of cash flows to assess the
performance and financial position of an entity.
27 IAS 33 Earnings per share 50

An important technique. It is unlikely that the examiner
will test this area in a full 25 mark question but it was
examined to the extent of 13 marks in the June 2006 exam.
The examiner has been quite concerned about the poor
answers to this type of question and it does get examined on
a regular basis. Make sure you can calculate a basic EPS
figure allowing for share issues during the year, and that
you can calculate a Diluted EPS figure taking account of at
least two forms of potential ordinary share.
calculate the EPS in accordance with relevant
accounting standards, dealing with bonus issues,
full market value issues and rights issues;
explain the relevance of the diluted EPS and
calculate the diluted EPS involving convertible
debt and share options or warrants;
explain the relevance of the diluted EPS and
calculate the diluted EPS involving convertible
debt and share options or warrants;
discuss the limitations of using EPS as a
performance measure.
20

Session
28 IFRS 5 NCA held for sale and discontinued operations

This standard requires NCA held for sale to be presented
separately in the financial statements and also links assets to
be disposed with discontinued operations. The definition of a
discontinued operation has changed under the new standard
to be more past event based rather than a future event. It is
unlikely to feature as a whole question but could be a
common 7 or 8 mark part of a question. The examiner may
require you to show the results of the discontinuing
operation as part of the statement of comprehensive income,
make sure you read the question requirements carefully.
This topic did feature as a 14 mark question in the Dec 2006
exam.
discuss the importance of identifying and
reporting the results of discontinued operations;
define and account for non-current assets held for
sale and discontinued operations.
29 IAS 10 Events after the reporting period

A short simple standard, requiring you to be aware of the
distinction between adjusting and non-adjusting events and
the impact upon the financial statements. It is unlikely that
this standard will feature as a whole question.
define an event after the reporting period;
account for and disclose events after the end of the
reporting period in accordance with IAS 10;
record the entries for dividends paid and
proposed in the financial statements.
21

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FINANCIAL REPORTING (F7) DETALIED STUDY GUIDE

Question Comprising % Comments

Aims of home study

Study Topic Study Date

1 GAAP and the IASB

Study Topic Study Date

2 Framework for the preparation and presentation of

Study Topic Study Date

3 Substance over form 13, 14

Study Topic Study Date

4 IAS 1 Presentation of financial statements 1

Study Topic Study Date

5 IAS 8 Accounting Policies, Changes in Accounting 15

Study Topic Study Date

7 IAS 16 Property, plant and equipment 9, 11

Study Topic Study Date

8 IAS 23 Borrowing costs

9 IAS 20 Accounting for government grants & disclosure 10

Study Topic Study Date

Study Topic Study Date

11 IAS 38 Intangible assets 19

12 IAS 40 Investment properties

Study Topic Study Date

13 IAS 36 Impairment of assets

After studying this you should be able to:

Study Topic Study Date

15 IAS 11 Construction contracts 24

16 IAS 37 Provisions, contingent liabilities and 25, 26

Study Topic Study Date

17 IAS 12 Income taxes 27 31

After studying this you should be able to:

account for current tax liabilities and assets in

Study Topic Study Date

Study Topic Study Date

19 Group accounts Regulatory framework

Study Topic Study Date

Study Topic Study Date

20, 21, 22 Group accounts Statements of financial position 32 44

Study Topic Study Date

23 Group accounts Statements of comprehensive

24 IAS 28 Investments in associates

Study Topic Study Date

25 Analysis and interpretation 48, 49

Study Topic Study Date

26 IAS 7 Statement of cash flows 46, 47

27 IAS 33 Earnings per share 50

Study Topic Study Date

28 IFRS 5 NCA held for sale and discontinued operations

29 IAS 10 Events after the reporting period

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