ACCA 2018 - Suport de Curs

ACCA
F7 FINANCIAL
REPORTING
ACCA – F7 FINANCIAL REPORTING
AGENDA
1. INTRODUCTION TO F7 – FINANCIAL REPORTING

2. IAS / IFRS
3. FINAL EVALUATION
Stage 1 – F3 Stage 2 – F7 Stage 3 – P2
Explain economics Explain economics and Reinforce
and relate to relate to information understanding and
information needs of needs of primary users. develop competence
primary users. Develop understanding in making the estimates
Teach mechanics of of estimates and other and other judgements
accounting and judgements involved in that are necessary to
create awareness of applying IFRSs. comply with IFRSs.
estimates and other Reinforce teaching with Some ideas:
judgements. class discussion + - cross-cutting issues
tutorials exploring class discussions
Reinforce with class
judgements. - advanced tutorials
discussion + tutorials.
- integrated case
studies
- GAAP comparisons
Stage 1 – F3 Stage 2 – F7 Stage 3 – P2
Assess knowledge Assess understanding of the Assess competence in
and basic estimates and other making the estimates and
understanding of: judgements in applying IFRS other judgements that are
i. the main concepts using fact patterns including necessary to apply IFRSs
ii. selected main unfamiliar items integrated using integrated case
principles
iii. awareness of basic
with a number of IFRS topics studies about unfamiliar
estimates and judgements and some accounting related items. Is integrated with
disciplines (eg finance) accounting related
disciplines (eg finance)
AGENDA
 CONCEPTUAL FRAMEWORK
 IAS / IFRS
→ NON CURRENT ASSETS
→ CURRENT ASSETS
→ NON CURRENT LIABILITIES
→ CURRENT LIABILITIES
→ EQUITY
 GROUP FINANCIAL STATEMENTS
 INTERPRETATION OF FINANCIAL STATEMENTS
NON CURRENT ASSETS
IAS16 Property, plant and equipment

IAS40 Investment property
IAS 41 Biological assets
IAS38 Intangible assets
IAS39/ Loans receivable
IFRS9 Investment in equity instruments
CURRENT ASSETS
IAS2 & IFRS 15 Inventory

IAS 39 Trade receivables
IFRS 9 Other current assets (Financial Assets)
IAS7 Cash & cash equivalents
IFRS 5 Non-current assets held for sale
NONCURRENT LIABILITIES
IAS39/
IFRS9 Long-term borrowings
IFRS 16 Long-term portion of lease liabilities
IAS12 Deferred tax liability
IAS 37 Provisions
IAS 20 Grants
IAS32 Redeemable preference shares
IAS32 Debt portion of convertible loan
CURRENT LIABILITIES
IAS39 Trade and other payables
IFRS9 Current portion of long-term borrowings
IAS37 Provisions (current portion)
IFRS 16 Current portion of lease liabilities
IAS12 Current tax liability
EVALUATION CRITERIAS
SEMINAR = 30%
(a) Group FS (Subsidiary + Associate) case from EXAM KIT BOOK in handwriting format
(b) Analysis of Financial reports any case from EXAM KIT BOOK in handwriting format
Both will be provided in the exam day.
FINAL EXAM = 70%
(a) 15 multiple choice questions x 2 = 30p

(b) 10 multiple choice questions x 3 p = 30p
(c) 2 questions x 15 p = 30p
(d) BONUS  10p
FINAL EXAM: Date MARCH 15th (Thursday), 18:00 – 21:00, room ______
FRAMEWORK of FINANCIAL
REPORTING
The IASB Framework
The IASB Framework sets out the concepts that
underlie the preparation and presentation of FSs for
external users.
• A conceptual framework (a statement of principles)
developed in 1989.
• Forms the foundation/cornerstone of IFRSs
The purpose of the IASB Framework
A basis for dealing with any accounting issues that arise
which are not covered by a specific accounting
standard.
FRAMEWORK of FINANCIAL REPORTING
REPORTING
 Economic resources and claims
 Changes in economic resources and claims
Financial performance reflected by accrual accounting
Financial performance reflected by past cash flows
Changes in economic resources and claims not
resulting from financial performance
REPORTING
ELEMENTS OF FINANCIAL STATEMENTS
 ASSETS (RESOURCES)
 LIABILITIES (CLAIMS)
 EQUITY
 REVENUES
 EXPENSES
RECOGNITION CRITERIA
 FUTURE ECONOMIC BENEFITS
 RELIABLE EVALUATION OF COST
REPORTING
The future economic benefits embodied in an asset may flow to

the entity:
 used single or in combination with other assets in the

production of goods or services to be sold by the entity;
 exchanged for other assets;
 used to settle a liability.
REPORTING
Settlement of a present obligation - giving up resources

embodying economic benefits - may occur in a number of
ways, by:
(a) payment of cash;
(b) transfer of other assets;
(c) replacement of that obligation with another obligation; or
(d) conversion of the obligation to equity.
REPORTING
Resource Ultimate future inflows
Call option held on an
underlying asset
Pharmaceutical
research &
development that is in
progress
Lottery ticket
The asset is the resource, not the ultimate future inflow

The liability is the obligation, not the ultimate future outflow
REPORTING
REVISION OF DEFINITION – IN PROGRESS
Existing IASB definition Proposed IASB Definition
Asset An asset is a resource controlled by the An asset is a present economic resource

entity as a result of past events and from controlled by the entity as a result of past
which future economic benefits are events. An economic resource is a right
expected to flow to the entity. that has the potential to produce
economic benefits.
Liability A liability is a present obligation of the A liability is a present obligation of the
entity arising from past events, the entity to transfer an economic resource
settlement of which is expected to result as a result of past events.
in an outflow from the entity of resources
embodying economic benefits
Equity Equity is the residual interest in the No change
assets of the entity after deducting all its
liabilities.
The asset is the resource, not the ultimate future inflow
The liability is the obligation, not the ultimate future outflow
REPORTING
Measurement of the elements in the FSs
■ HISTORICAL COST
■ CURRENT COST
■ NET REALISABLE VALUE
■ PRESENT VALUE
Case study:
Company A acquires a new machine in X4 at cost 50,000, useful life 10 years.
Company B acquires an identical one year-old machine in X5 at cost 48,000 and is has an
estimated useful life of 9 years.
Consider straight-line depreciation.
Compute the carrying amount of asset, for A and B, at the end of X5.
Debate advantages / disadvantages of historical cost.
Measurement of the elements in the FSs
Sunny Co owns a machine which it was purchased 4 years ago for 100,000 USD.
The accumulated depreciation on machine to date is 40,000 USD.
The machine could be sold to another manufacturer for 50,000 USD, but there
would be dismantling costs for 5,000 USD.
To replace the machine with a new one would cost 110,000 USD.
The cash inflows from existing machine are estimated to be 25,000 USD for next 2
years followed by 20,000 USD for remaining four years of machine’s life. The
relevant discount rate is 10%; discount factors are:
Year 1 --- 0.909
Year 2 --- 0.826
Year 3-6 inclusive --- 2.619 (annuity rate)
Calculate:
a. Historical cost
b. Net realizable value
c. Replacement cost (current cost)
d. Economic value (present value)
The purpose of the Conceptual Framework for
Financial Reporting is:
a. to assist the IASB in setting IFRSs?

b. to assist preparers of financial statements in
applying IFRSs?
c. to assist auditors in forming an opinion on whether
financial statements comply with IFRSs?
d. to assist users of financial statements in interpreting
IFRS financial statements?
e. all of the above?
The fundamental qualitative characteristics are:
a. comparability and relevance?

b. relevance and understandability?
c. relevance, completeness, and comparability?
d. relevance and faithful representation?
e. comparability, relevance and faithful representation?
How many measurement bases does IFRSs specify
for the measurement of assets?
a. one—historical cost
b. one—fair value
c. two—historical cost and fair value
d. many—including historical cost, fair value, value in
use, estimated selling price less costs to complete
and sell, etc
IAS 1
PRESENTATION OF
FINANCIAL STATEMENTS
IAS 1 PRESENTATION OF FINANCIAL
STATEMENTS
 A statement of financial position at the end of the
reporting period
 Either:
 a statement of comprehensive income, or

 an income statement plus a statement showing other
comprehensive income for the period
 A statement of changes in equity for the period
 A statement of cash flows for the period
 Accounting Policies and Notes
STATEMENTS
Statement of financial position
 ASSETS  RESOURCES
- LIABILITIES - CLAIMS
= OWNER’S EQUITY = EQUITY
STATEMENTS
Statement of comprehensive income
 Revenues
- Expenses
= Income
STATEMENTS
Statement of changes in equity
Share Share Revaluation Retained Total
capital premium surplus earnings equity
$ $ $ $ $
Balance at 31 December 20N0 X X X X X
IAS8 Changes in accounting policy (X) (X)
IAS8 Prior period errors (X) (X)
Restated balance X X X X X
IAS10 Dividends (X) (X)
IAS32 Issue of ordinary
share capital X X
Total comprehensive income
for the year X X X
Transfer to retained earnings (X) X .
Balance at 31 December 20N1 X X X X X

STATEMENTS
Statement of cash flows – special standard IAS 7
CASH INFLOWS
CASH OUTFLOWS
NET CASH FLOW
Quick question
Saqqara made the following rent payments during 200N:
■ lei 9,000 for the six months ended 31 March 200N+1
■ lei 10,000 for the six months ended 30 September 200N
■ lei 11,200 for the year ended 30 September 200N+1
The charge to the Statement of comprehensive income for rent for the year ended 31
December 200N was:
A lei 17,300; B lei 12,800; C lei 14,500; D lei 10,000
The Cash outflow in Statement of cash flows for rent for the year ended 31 December
200N was:
A lei 17,300; B lei 20,200; C lei 30,200; D lei 10,000
IAS 1 PRESENTATION OF
FINANCIAL STATEMENTS
■ Case study – see WORD DOC.
IAS 8
ACCOUNTING POLICIES,
CHANGES IN
ACCOUNTING ESTIMATES
AND ERRORS
IAS 8 ACCOUNTING POLICIES, CHANGES IN
ACCOUNTING ESTIMATES AND ERRORS
Accounting policies are the principles, bases, conventions, rules and

practices applied by an entity which specify how the effects of transactions
and other events are reflected in the financial statements.
Accounting policies should remain the same from period to period so as to

ensure consistency of treatment and comparability of FS over time.
An entity should change an accounting policy only if the change:
is required by a new IFRS, or
will result in a reliable and more relevant presentation of
transactions or events
Accounting policies are the principles, bases, conventions, rules and

practices applied by an entity which specify how the effects of transactions
and other events are reflected in the financial statements.
a) Recognition criteria e.g. an expense is now recognised rather than an
asset
b) Measurement basis e.g. stating assets at replacement cost rather than
historical cost
c) Method of presentation e.g. depreciation is now included in cost of
sales rather than admin expenses.
 Change from cost model to revaluation model (IAS 16, IAS 38, IAS 40)
 Change in inventory valuation. From FIFO to AVCO and vice versa
IAS 8 – ACCOUNTING POLICIES, CHANGES IN
Accounting estimates
 Many items in the FS cannot be measured with precision but
require some estimation.
 Estimates are used to implement the measurement aspects of
accounting policies.
 Estimation involves judgment based on the latest available
information.
Useful lives and residual values of non-current assets
Depreciation methods
Warranty provisions
Provisions for bad debts and inventory obsolescence
Errors are omissions from, and misstatements in, the financial
statements for one or more prior periods arising from a failure
to use information that:
■ was available when the financial statements for those
periods authorised for issue and
■ could reasonably be expected to have been taken into
account in preparing those financial statements
Mathematical mistakes
Mistakes in applying accounting policies
Oversights
Fraud
Which TWO of the following situations would NOT require a prior year adjustment per IAS
8?
A
In last year's financial statements, inventories were understated by a material amount due
to system error
B
A company has changed its allowance for irrecoverable receivables from 10% of outstandin
g debt to everything over 120 days old
C
A new accounting standard has been issued that requires a company to change its accoun
ting policy but gives no guidance on the specific application of the change itself
D A company has chosen to value inventory using FIFO rather than AVCO as in previous periods
E
A company has decided to move from charging depreciation on the straight line basis to th
e reducing balance basis
IAS 8 – ACCOUNTING POLICIES, CHANGES IN
Beta Company discovered that certain items had been included in inventory at
31 December X0 at value $2,500, but they had been sold before the year end.
The following data are given below:
X1 X0
SALES 52,100 48,300
COST OF SALES 33,500 30,200
GROSS PROFIT 18,600 18,100
TAX 4,600 4,300
NET PROFIT 14,000 13,800
The retained earnings at 1 January X0 were $11,200.

Prepare the Statement of Profit or Loss and Comparative figures for Retained
earnings for each year.
IAS 2 INVENTORIES
■ DEFINITION OF INVENTORIES
■ INITIAL MEASUREMENT
– PURCHASE COST
– CONVERSION COSTS
■ BALANCE SHEET DATE MEASUREMENT
IAS 2 INVENTORIES
Product Cost Selling price Selling expenses
A 100 120 25
B 50 60 5
C 75 85 15
Calculate the year end inventories figure for inclusion in balance sheet.
IAS 2 INVENTORIES
Posh plc has the following units in inventory at the end of 20X9.
Units Cost per unit ($)
Raw materials 5,000 25
Work in progress 2,000 30
Finished goods 1,000 35
Finished items usually sell for $50 per unit. However, water damage caused
by improper storage of inventory will mean that 300 units of finished goods
will be sold at 60% of the normal selling price less costs to sell of $5 per
item. A further $5.50 / unit is still to be incurred to finish off the items of work
in progress.
In accordance with IAS 2 Inventories, at what amount should inventories be stated in the
statement of financial position of Posh plc as at the end of 20X9?
IAS 2 INVENTORIES
Quantity Unit cost Unit selling price

January 1st Opening inventory 10 250
February 2nd Buys 10 300
March 5th Buys 12 250
April 28th Sales 18 425
June 4th Sales 8 410
July 13th Buys 22 330
August 19th Sales 15 400
Prepare extract of Financial statements showing the differences between FIFO and AVCO
method.
IAS 2 INVENTORIES
Disclosure
The financial statements shall disclose:
– Accounting policies adopted in measuring inventories
– Carrying amount in total & by category
– Inventories carried at fair value less costs to sell
– Cost of sales
– Write-down of inventories
– Reversal of any write-downs & the circumstances that led to the reversal
– Inventories pledged as security for liabilities
IFRS 5
ASSETS HELD FOR SALE
and DISCOUNTINUED
OPERATIONS
IFRS 5 ASSETS HELD FOR SALE
AND DISCOUNTINUED OPERATIONS
Conditions to be classified as held for sale:
1. Available for immediate sale

2. Sale is highly probable
IFRS 5 ASSETS HELD FOR SALE AND
DISCOUNTINUED OPERATIONS
MEASUREMENT
A non-current asset/disposal group classified as held for sale

must be measured at the LOWER of:
 its CARRYING AMOUNT and
FAIR VALUE LESS COSTS TO SELL

Please Note:
■ IAS 36 requires measurement at the LOWER of the carrying amount and the
recoverable amount. The recoverable amount is the higher of value in use and fair
value less costs to sell.
LOWER (carrying amount; recoverable value)
■ IFRS 5 requires measurement at the LOWER of the carrying amount and fair value
less costs to sell; value in use is not considered as the entity intends to sell rather
than use the asset(s)
LOWER (carrying amount; fair value less costs to sell)
On 1 January 20X1, Fresh Chicken Ltd purchased a chicken-plucking
machine for $100.000. It was expected that it would have a useful life of
eight years and a residual value of $20.000. However, during December
20X2, after only two years of use, the directors decide to sell the machine.
The company removes the machine from the farm in readiness for a quick
disposal and prepares the machine for viewing by potential purchasers.
They appoint an agent to assist with the marketing and advertising. The
agent advises that the disposal may take two to six months and that the
machine should sell for $45.000.
Required:
Calculate the value at which the machine should be stated in Fresh Chicken Ltd’s
statement of financial position at 31 December 20X2 and show relevant extracts
from the financial statements for the year ended 31 December 20X2.
Reclassification under IFRS 5 the treatment will depend on whether the asset followed
the cost model or revaluation model of IAS 16.
A.COST MODEL The asset is removed from PPE at its carrying amount and then
recorded as a NCA held for sale at the lower of the carrying value and the FV less costs to
sell. If the latter is lower, then an impairment loss arises and is shown in P&L.
B.REVALUATION MODELThe asset is revalued to its FV immediately before

reclassification and any gain or loss is treated in accordance with IAS 16.
The asset is then removed from PPE and transferred to NCA held for sale. On
reclassification the asset is recorded at the lower of its carrying amount (which is now
represented by the FV) and its FV less costs to sell and any impairment loss taken to
P&L.
A discontinued operation is a component of an entity that

either has been disposed of, or is classified as held for sale,
– represents a separate major line of business or
geographical area of operations, OR
– is part of a single co-ordinated plan to dispose of a
separate major line of business or geographical area
of operations; OR
– is a subsidiary acquired exclusively with a view to resale.
Disclosure
■ A single amount in the statement of comprehensive income comprising the total
of:
■ post-tax profit/loss of discontinued operations and
■ the post-tax gain/loss recognised on the measurement to fair value less costs
to sell or on disposal of the discontinued operation.
■ An analysis of the single amount, either in the notes or in the statement of

comprehensive income, separate from continuing operations, into:
■ revenue, expenses & pre-tax profit/loss of discontinued operations & the
related tax expense
■ the gain or loss recognised on the measurement to fair value less costs to
sell or on the disposal of the discontinued operation & the related tax
expense
St. Valentine produced cards and sold roses. However, half way through the
year ended 31 March 20X6, the rose business was closed and the assets
sold off, incurring losses on the disposal of noncurrent assets of $76,000 a
nd redundancy costs of $37,000. The directors reorganised the continuing
business at a cost of $98,000. Trading results may be summarised as
follows: Cards Roses
$000 $000
Revenue 650 320
Cost of sales 320 150
Distribution 60 90
Administration 120 110
Other trading information (to be allocated to continuing operations) is as follows:
Finance costs 17
Tax 31
Draft the statement of profit or loss for the year ended 31 March 20X6
IAS 12
TAXATION
IAS 12 TAXATION
The tax expense in the financial statements is made up
of two elements
1) Current tax – tax payable to authorities in relation to
current year activities, together with any under- or
over-provision from the previous year
2) Deferred tax – an application of the accruals concept.
Tax expense in SPL = current tax +/– movement in

deferred tax
IAS 12 TAXATION
■ Current tax
■ Deferred tax
■ PERMANENT DIFFERENCES
■ TEMPORARY DIFFERENCES
■ ACCOUNTING TREATMENT:
– INCREASE IN DEFERRED TAX:
■ Dr Income tax expense (SPL)
■ Cr Deferred tax (SPF)
– DECREASE IN DEFERRED TAX
■ Dr Deferred tax (SPF)
■ Cr Income tax expense (SPL)
IAS 12 TAXATION
■ F7 : Non current assets
Deferred tax is an application of the accruals concept. The provision for
deferred tax recognises the estimated future tax consequences of recognised
transactions and events.
Rules:
(1) Carrying amount > Tax base :
TAXABLE TEMPORARY DIFFERENCE-DEFERRED TAX LIABILITY
(2) Carrying amount < Tax base :

DEDUCTIBLE TEMPORARY DIFFERENCE -DEFERRED TAX ASSET
IAS 12 TAXATION
Profit before taxation 1,111.
Tax point of view: yearly depreciation of assets:
Y1: 240
Y2: 210
Y3: 150
Accounting point of view: cost 600, useful life 3 years, straight line
depreciation.
Income tax rate 30%
IAS 12 TAXATION
Profit before taxation 1,111.
Accounting point of view: yearly depreciation of assets:
Y1: 240
Y2: 210
Y3: 150
Taxation point of view: cost 600, useful life 3 years, straight line
depreciation.
Income tax rate 30%.
IAS 12 TAXATION
King has the following items on its trial balance at 30 September
20X9.
Dr Cr
Deferred tax 17,000

Taxation 2,200
The directors of King estimate that the provision necessary for
tax on current year profit is $26,000. (income tax expense for crt year).
The difference between the carrying amount and lower tax base
of King’s net assets is $63,000. King’s rate of income tax is 30%.
Required:
Show the impact of the above on the financial statements of King
for the year ended 30 September 20X9.
IAS 12 TAXATION – revaluation of non – current assets
On 1 January 20X8 Groning purchased a land at cost $25,000. Accounting

policies for lands is to revaluate them from 3 to 3 year at fair value. After 3
year, when took place the first revaluation, the fair value of land increased
to $29,000. Revaluation is not recognised by fiscal authorities.
Rate of income tax is 25%.
Required: Prepare extracts of the financial statements to show the effect

of the above transactions.
IAS 12 TAXATION
On 1 January 20X8 Simone Ltd decided to revalue its land for the first
time. A qualified property valuer reported that the market value of the land
on that date was $80,000. The land was originally purchased 6 years ago
for $65,000.
The required provision for income tax for the year ended 31 December 20
X8 is $19,400. The difference between the carrying amounts of the net as
sets of Simone (including the revaluation of the land in note (above) and
their (lower) tax base at 31 December 20X8 is $27,000.
The opening balance on the deferred tax account was $2,600.
Simone’s rate of income tax is 25%.
Required: Prepare extracts of the financial statements to show the effect

of the above transactions.
IAS 12 TAXATION
Under/over provisions
■ Any UNDER / OVER provision from the prior year in dealt with in the currrent year’s tax
charge.
■ This does not affect the year end tax liability, as this will already have been paid to
authorities duting the year. All we need to do is take the under or over provided part to
the statement of profit or loss.
• an underprovision increases the tax charge

• an overprovision decreases the tax charge.
IAS 12 TAXATION
Income tax
Year-end estimate X
Under/(over) provision X/(X)
Increase/(decrease) in deferred tax X/(X)
Charge to record in the statement of profit or loss X
Test your understanding: Tamsin plc’s accounting records shown the following:
Income tax payable for the year $60,000
Over provision in relation to the previous year $4,500
Opening provision for deferred tax $2,600
Closing provision for deferred tax $3,200
IFRS 15
REVENUE FROM
CONTRACT WITH
CUSTOMERS
IFRS 15 REVENUE
STEPS:
1. IDENTIFY THE CONTRACT

2. IDENTIFY THE SEPARATE PERFORMANCE OBLIGATION
WITH A CONTRACT
3. DETERMINE THE TRANZACTION PRICE
4. ALLOCATE THE TRANSACTION PRICE TO THE
PERFORMANCE OBLIGATION IS SATISFIED
5. RECOGNISE REVENUE WHEN PERFORMANCE
OBLIGATION IS SATISFIED
IFRS 15 REVENUE
Contract meets the following criteria:
- The parties to the contract have approved the contract and are
committed to perform their respective obligations
- the entity can identify each party’s rights regarding the goods
or services to be transferred
- the entity can identify the payment terms for the goods or
services to be transferred
- the contract has commercial substance, and
- it is probable that the entity will collect the consideration to
which it will be entitled in exchange for the goods or services
that will be transferred to the customer.
IFRS 15 REVENUE
On 1 December 20X1, Wade receives an order from a customer
for a computer as well as 12 months of technical support. Wade
delivers the computer (and transfers its legal title) to the
customer on the same day.
The customer paid $420 upfront.
The computer sells for $300 and the technical
support sells for $120.
Apply Five step ANALYSIS.

IFRS 15 REVENUE
Banlor enters into a contract with a customer to sell an
equipment on 31 December N1. Control of equipment
transfers to customer on that date. The price stated in
contract is $1 m and is due on 31 December N3.
Assume interest rate 10%.
How should be accounted this sale in financial

statements of Banlor?
IFRS 15 REVENUE
On 1 September 20X7 Selby sold a machine including
two year’s technical support for $396,000. It usually sells
the machine for $300,000 but does not sell technical
support for this machine as a stand-alone product. Other
support services offered by Selby earn a mark-up of
40%. It is expected that the technical support will cost
Selby $50,000 per year.
How much revenue was earned by Selby in the year to
31 December 20X7?
IFRS 15 REVENUE
TRANSFER OF CONTROL:
1. ENTITY HAS A PRESENT RIGHT TO PAYMENT OF ASSET

2. THE CUSTOMER HAS THE LEGAL TITLE TO THE ASSET
3. THE ENTITY HAS TRANSFERED PHYSICAL POSSESSION OF
ASSET
4. THE CUSTOMER HAS THE SIGNIFICANT RISKS AND REWARDS
OF OWNERSHIP OF THE ASSET
5. THE CUSTOMER HAS ACCEPTED THE ASSET
IFRS 15 REVENUE
REPURCHASE AGREEMENT
1. SALE IS BELOW FAIR VALUE

2. OPTION TO REPURCHASE IS BELOW EXPECTED FAIR
VALUE
3. ENTITY CONTINUES TO USE THE ASSET
4. ENTITY CONTINUES TO HOLD THE MAJORITY OF
RISKS AND REWARDS ASSOCIATED WITH OWNERSHIP
OF ASSET
5. SALE IS TO A BANK OR FINANCING COMPANY
IFRS 15 REVENUE
Substance over form concept
Repurchase agreement
On 1st January, Xavier sells its headoffice, which cost 10m to

Yorrick – a bank – for $10 m. Xavier has the option to
repurchase the property on 31 December, 4 years later, at $12
m. Xavier continues to use the property normal throughtout the
period, so is responsible for maintenance and insurance. The
head office was valued at transfer date at $18 m and is expected
to rise its value throughout the 4 years period.
How Xavier should record the above transaction?
IFRS 15 REVENUE
STEPS:
■ 1. Calculate the profit or loss of contract

■ 2. Determine the progress of contract (input or output
method)
■ 3. Prepare the Statement of Profit and Loss - extract
■ 4. Prepare the Statement of Financial Position -
extract
IFRS 15 REVENUE
CONSTRUCTION CONTRACT
RECOGNITION OF REVENUES:
 OUTPUT METHOD (WORK CERTIFIED AS COMPLETED)
 INPUT METHOD (COST INCCURED TO DATE AS A

PROPORTION OF TOTAL EXPECTED COSTS)
IFRS 15 REVENUE
RULES:
1. THE CONTRACT HAS A PROFIT: THE REVENUES SHOULD BE
RECOGNISED ACCORDING TO THE PROGRESS OF CONTRACT
2. THE CONTRACT HAS A LOSS: THE WHOLE LOSS IS RECOGNISED

IMMEDIATELY RECORDING A PROVISION AS AN ONEROUS
CONTRACT
3. THE OUTCOME IS UNKNOWN:

– REVENUES ARE RECOGNISED TO THE LEVEL OF EXPENSES
– CONTRACT COSTS SHOULD BE RECOGNISED AS AN
EXPENSE IN THE PERIOD IN WHICH THEY ARE INCCURED
IFRS 15 REVENUE
STEPS:
1. Calculate the profit or loss of contract

2. Determine the progress of contract (input or output
method)
3. Prepare the Statement of Profit and Loss – extract
(revenue & costs)
4. Prepare the Statement of Financial Position – extract
(receivables, WIP, payables)
IFRS 15 REVENUE
STEPS:
1. Calculate the profit or loss of contract

Contract price X
Less: Costs to date (X)
Less: Costs to complete (X)
Overall profit/loss X/(X)
IFRS 15 REVENUE
2. Determine the progress of contract (input or
output method):
Input methods – based on the inputs used.
(Costs to date / Total costs) × 100% = % complete
Output methods –
based on performance completed to date.
(Work certified / Contract price) × 100% = % complete
IFRS 15 REVENUE
3. Prepare the Statement of Profit and Loss –
extract (revenue & costs)
Revenue (Total price × progress (%))

■ less revenue recognised in previous years X
Cost of sales (Total costs × progress (%))
■ less cost of sales recognised in previous years (X)
■ Profit X
IFRS 15 REVENUE
4. Prepare the Statement of Financial Position
– extract (receivables, WIP, payables)
Costs to date
(Actual costs, not necessarily cost of sales) X
Profit/loss to date X/(X)
Less: Amount billed to date (X)
Contract asset/liability X/(X)
IFRS 15 REVENUE
On 1 January 20X4 Nim entered into a contract with a customer to construct a
specialised building for an agreed price of $30 million. At 31 December 20X4, Nim
had incurred costs of $14 million and estimated that costs to complete the contract
would amount to a further $7 million. Nim measures progress towards contract
completion using the input method, based on costs incurred. At 31 December Nim
had received $12 million from the customer.
How should the above contract be reflected in the financial statements of Nim for
the year ended 31 December 20X4?
IFRS 15 REVENUE
The following information relates to a contract for the construction of a building for
a customer. The builder has a right to regular payments as the work progresses.
Contract price 5 million

Work certified to date 2 million
Costs to date 1.8 million
Estimated costs to complete 2.2 million
What is the revenue, cost of sales and gross profit that can be recognised,
assuming that the company’s policy is to measure progress using an output
method, based on the work certified to date?
Revenue Cost of sales Gross profit
A $2 million $1.8 million $0.2 million
B $2 million $1.6 million $0.4 million
C $2 million $1.55 million $0.45 million
D $ 2.25 million $ 1.8 million $ 0.45 million
IAS 37
PROVISIONS, CONTINGENT
ASSETS AND CONTINGENT
LIABILITY
IAS 37
PROVISIONS, CONINGENT ASSETS AND
CONTINGENT LIABILITY
Definition:
A provision is a LIABILITY of uncertain timing or amount.
A liability is a present obligation of the entity arising from

past events, the settlement of which is expected to result
in an outflow from the entity of resources embodying
economic benefits.
IAS 37
PROVISIONS, CONINGENT ASSETS AND
Recognition:
A provision should be recognised when:
If any one of these conditions is not met, no provision may be recognize

1) an entity has a present obligation (legal or constructive) as a result of a
past event,
2) a reliable estimate can be made of the amount of the obligation,
3) it is probable that an outflow of resources embodying economic benefi
ts will be required to settle the obligation
IAS 37 PROVISIONS, CONINGENT ASSETS AND
The obligation needs to exist because of events which have already
occurred at the year end and give rise to a potential outflow of economicresources. This obl
igation can either be:
(1) A present obligation as a result of a past event
(a)Legal/contractual
(b)Constructive:this is where the company establish an expectation through a course
of past practice, regardless of whether there is a legal requirement to perform the
task or not.
(2) A reliable estimate can be made
Provisions should be recognised at the best estimate. If the provision relates
to one event, such as the potential liability from a court case, this should be measured
using the most likely outcome. If the provision is made up of numerous events, such as a
provision to make repairs on goods within a year of sale, then the provision should
be measured using expected values.
The best estimate of a provision will be:
 for a single obligation: the most likely amount payable
 for a large population of items: an expected value.
An entity sells goods with a warranty covering customers for the cost of
repairs of any defects that are discovered within the first two months after
purchase. Past experience suggests that:
 88% of the goods sold will have no defects,
 7% will have minor defects and
 5% will have major defect.
If minor defects were detected in all products sold, the cost of repairs
would be $24,000; if major defects were detected in all products sold,
the cost would be $200,000.
What amount of provision should be made?
An entity has to rectify a serious fault in an item of plant that it has

constructed for a customer.
The individual most likely outcome is that the repair will succeed at the first
attempt at a cost of $400,000, but there is a chance that a further attempt
will be necessary, increasing the total cost to $500,000.
What amount of provision should be recognised?
If the likelihood of the event is not probable, NO PROVISION should be

made. If there is a possible liability, then the company should record a
contingent liability instead.
A contingent liability is disclosed as a note to the accounts only, NO
ENTRIES are made into the financial statements other than this disclosure.
Environmental provisions
A provision will be made for future environmental costs if there is either a legal or
constructive obligation to carry out the work.
This will be discounted to present value at a pretax market rate.
Exemple 6 / pg 8 – word file

A contingent liability is:
possible obligation that arises from past events and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity,
OR
a present obligation that arises from past events but is NOT RECOGNISED
because:
■ it is not probable that an outflow of resources embodying economic
benefits will be required to settle the obligation, OR
■ The amount of the obligation cannot be measured with sufficient
reliability.
A CONTINGENT ASSET:
is a potential asset that arises from past events and whose existence will be
confirmed only by the occurrence or non occurrence of one or more uncertain
future events not wholly within the control of the entity.
Likelihood Liability Asset

Virtually certain (>95%) Provide Recognise
Probable (> 50%) Provide Disclose
Possible (< 50%) Disclose -
Remote (< 5%) - -
Shakespeare is involved in a number of lawsuits at its year-end of 31 March
20X9. Details of three of these cases are as follows:
I. Shakespeare is being sued by Marlowe over copyright issues.
Shakespeare has been advised that it has only 20% chance of
successfully defending the case, and that the potential payout is
$600,000.
II. Shakespeare is suing Hathaway for $200,000 for a breach of
contract and has been advised that it has 80% chance of success.
III. Shakespeare is being sued for $350,000 by Claudio for selling
short measures and has been advised that Claudio has only 40%
chance of success.
How will the above cases be reflected within the financial statements?
IFRS 16
LEASE
IFRS 16 LEASE
Definitions
A lease is a ‘contract that conveys the right to use an underlying asset for
a period of time in exchange for consideration’.
The lessor is the ‘entity that provides the right to use an underlying asset in
exchange for consideration’.
The lessee is the ‘entity that obtains the right to use an underlying asset in
exchange for consideration’.
A right-of-use asset ‘represents a lessee's right to use an underlying asset

for the lease term’.
IFRS 16 LEASE
At inception of lease recognize
Lease liability Right-of-use asset
Recognise at present value of Recognise at cost, which equals:

payments not yet made: 1. Initial value of lease liability
1) Fixed payments 2. Payments made at or before
2) Amounts expected to be paid commencement
under residual value 3. Initial direct costs
guarantees 4. Estimated costs of asset
3) Options to purchase that are removal or dismantling as per
reasonably certain to be lease conditions
exercised
4) Termination penalties if lease
term reflects expectation that
they will be incurred.
IFRS 16 LEASE
To calculate the lease liability and right-of-use asset entities must establish
the length of the lease term.
The lease term comprises:

i. Non-cancellable periods
ii. Periods covered by an option to extend the lease if reasonably certain
to be exercised
iii. Periods covered by an option to terminate the lease if reasonably
certain not to be exercised
IFRS 16 LEASE
Accounting for lease contracts
Statement of financial position
Dr Right – to – use (asset) X
Cr Lease liability X
Statement of profit or loss:

Dr Finance costs (SPL) X
Cr Lease liability X
Dr Depreciation of right – to – use (asset) X

Cr Accumulated depreciation X
Cash payments reduce the lease liability:

Dr Lease liability X
Cr Cash X
IFRS 16 LEASE
Timing of lease payments:
 In arrears – as per the lease term, the payments must be made at the
END of the period
YEAR BALANCE b/f INTEREST PAYMENT BALANCE c/f
1 X X (X) X
2 X X (X) X
 In advance – as per the lease term, the payments must be made at the
BEGINNING of the period
YEAR BALANCE b/f PAYMENT NET INTEREST BALANCE c/f
1 X (X) X X X
2 X (X) X X X
IFRS 16 LEASE
A company has 2 options: it can buy an asset for cash of
$5,710, or by of way of lease contract. The terms of the lease
contract are:
(1) 4 years from 1 January X2 with a rental of $2,000 pa
payable on 31 December each year;
(2) The interest rate is 15%.
What figures will be shown in the financial statements for

the the year ended 31 December X2 assuming the lease is
taken?
IFRS 16 LEASE
Delta entered into a 4 years lease on 1 January X3 for

a machine with a fair value of $69,738. Rentals are
$20,000 pa payabale in advance.The rate of interest
implicit in lease is 10%.
What figures will be shown in the financial

statements for the the year ended 31 December X3?
IFRS 16 LEASE
TYU
On 1 April 20X7, Sima entered into an agreement to lease
an item of equipment.
The lease required four annual payments in advance of
$215,000 each commencing on 1 April 20X7. The
equipment has a useful life of four years and will be
scrapped at the end of the lease period.
The present value of the total lease payments is $750,000
and the interest rate implicit in the lease is 10%.
How will this be reflected within the financial statements of
Sima for the year ended 31 March 20X8?
IFRS 16 LEASE
IFRS 16 LEASE
Restatement of operating lease according to IFRS 16
IFRS 16 LEASE
IFRS 16 LEASE
IFRS 16 LEASE – restatements
IAS 7
STATEMENT OF CASH
FLOWS
IAS 7 STATEMENT OF CASH FLOWS
Scope:
• why cash changed (cash-flows)
• where cash came from and where cash was spent
Purposes:
• predict future cash-flows
• evaluate management decisions
• ability to pay dividends and interest
• relationship between profit and cash-flows
SOURCES OF CASH
USES OF CASH
Definitions
a. CASH
b. CASH EQUIVALENT
c. OPERATING ACTIVITIES
d. FINANCING ACTIVITIES
e. INVESTING ACTIVITIES
f. CASH FLOW
ACTIVITIES
Operating activities:
= transactions associated with day-by-day activities
Investing activities:
= transactions involving increasings and decreasing of fixed assets
Financing activities:
= transactions involving borrowing of cash and the issuance of equity
(creditors and investors)
DIRECT METHOD
focused on flows of cash (payments and proceeds), classified
upon their nature (operating, investing and financing cash-flows).
INDIRECT METHOD:
focused on adjustments (RECONCILIATION) to the net income
before taxes, to compute the cash-flows from operating activities;
investing & financing cash-flows are similarly disclosed.
The statement of cash flows should be reviewed after preparation.
In particular, cash flows in the following areas should be reviewed:

a) cash generation from trading operations
b) dividend and interest receipts / payments
c) capital expenditure
d) financial investment
e) management of financing
f) net cash flow.
Operating Investing Financing Non cash
activities activities activities activity
Purchase of non-
current assets
Dividends
received
Interest paid
Borrowings repaid
Land revaluation
Increase in
Deferred tax
Presentation of Cash flows:
 Opening balance Cash & Cash equivalents

+ /- CASH FLOW
= Closing balance Cash & Cash equivalents
Extracts from the financial statements of Danny show the following:
20X4
Statement of profit or loss
Profit from operations 7,800
Finance costs (1,300)
Investment income 400
Profit before tax 6,900
Income tax expense (1,680)
Profit for the year 5,220
Extracts from the financial statements of Danny show the following:
Statement of financial position 20X4 20X3

Current assets
Inventory 1,200 1,150
Receivables 1,760 1,820
Current liabilities
Payables 1,380 1,200
Additional information During 20X4 depreciation of $1,100 was charged, and Danny sold
an item of plant at a profit of $600.
Calculate Danny’s cash generated from operations for 20X4 using the indirect
method.
Extracts from the statements of financial position of Harrad show the following:
Statement of financial position 20X9 20X8
Non-current assets
Property, plant and equipment 43,200 33,800
Equity
Share capital 10,500 9,000
Share premium 2,300 1,700
Revaluation surplus 1,850 500
Non-current liabilities
Lease payable 9,300 3,500
Current liabilities
Lease payable 3,500 1,100
Additional information
During 20X9 depreciation of $7,200 was charged, and Harrad sold an item of plant with a
carrying amount of $900 for a profit of $400.
Harrad acquired machinery under a lease agreement. At acquisition the present value of
the lease payments for this machinery totalled $10,000.
The increase in revaluation surplus relates to Harrad’s property which was revalued
during the year.
Ignore deferred taxation.
Calculate Harrad’s cash flows from investing and financing activities for 20X9.
Advantages of statements of cash flow
 Helps users make judgements on future cash flows
 Indicates the relationship between profit and cash generated
 Helps users check accuracy of previous assessments
 Difficult to manipulate
Limitations of statements of cash flow
 Based on historical information, so no predictive quality
 Small scope for manipulation, e.g. delay payments at year-end
 No indication of profitability, necessary for long-term survival
Interpretation of statements of cash flow
 Cash generated from operations – indicates sustainability
 Capital expenditure
 Sources of finance
 Net cash flow
IAS 33
EARNINGS PER SHARE
IAS 33 EARNINGS PER SHARE
■ calculate the earnings per share (EPS) in accordance with

relevant accounting standards, dealing with:
– full market value issues
– bonus issues
– rights issues
■ explain the relevance of the diluted earnings per share

(DEPS) and calculate the DEPS involving convertible debt
and share options (warrants)
Basic calculation of EPS
Earnings ÷ Weighted average number of shares
Earnings = profit available to ordinary shareholders

Weighted average number of shares will depend on the type of
share issue:
• Full market value issue – use weighted average table
• Bonus issue – assume bonus shares issued with original shares, so in
issue for whole of current year
• Rights issue – use weighted average table, with pre-issue shares
adjusted for bonus element using rights issue bonus fraction
Robert had 6,000 ordinary shares in issue on 1 January 20X3.
On 1 April 20X3 Robert issued 1,500 shares at full market
value. Robert’s earnings for the year to 31 December 20X3
were $1,200.
Required: Calculate Robert’s earnings per share for the year to
31 December 20X3
On 1 April 20X3 Robert issued 1,500 shares in a 1 for 4 bonus
issue. Robert’s earnings for the year to 31 December 20X3
were $1,200.
31 December 20X3.
On 1 April 20X3 Robert issued 1,500 shares in a 1 for 4 rights
issue (1 new share for 4 holding shares) at a price of $2.50
when the market price per share was $4. Robert’s earnings for
the year to 31 December 20X3 were $1,200.
31 December 20X3.
* Bonus fraction for old shares.

Diluted earnings per share (DEPS): The purpose of DEPS is to show
the potential impact on EPS of future share issues arising as a result
of instruments in issue at the year-end. Instruments to be considered are
convertible debt (loan stock, bonds etc.) and share options.
Diluting instruments:
CONVERTIBLE BONDS
 Impact on earnings – notional interest saved (post-tax)
 Impact on shares – assume maximum conversion
OPTIONS
 Impact on shares – bonus element
Robert had 6,000 ordinary shares in issue throughout the year to 31
December 20X3. At that date Robert also had in issue $5,000 convertible
loan stock with an effective rate of interest of 10%. Robert’s rate of income
tax is 30%. The loan is convertible into ordinary shares on the basis of 60
shares per $100 loan. Robert’s earnings for the year to 31 December 20X3
were $1,200.
Required: Calculate Robert’s diluted earnings per share for the year to 31
December 20X3.
INTERPRETATION OF
FINANCIAL
STATEMENTS
INTERPRETATION OF FINANCIAL
STATEMENTS
Value of ratios
vs
Limitations of ratios
STATEMENTS
■ PROFITABILITY RATIOS
■ LIQUIDITY RATIOS
■ LONG TERM STABILITY RATIOS
■ INVESTORS RATIOS
STATEMENTS
PROFITABILITY RATIOS
Gross profit margin (%) (Sales – COGS) / Revenue (or Sales) x100
Mark –up ratio (%) Revenue (or Sales) – COGS) / COGS x100
Operating profit margin (%) Operating profit / Revenue (or Sales) x100
Asset turnover Revenue (or Sales) / Capital employed

Return on capital employed Profit from operations / Capital
(ROCE) employed
STATEMENTS
LIQUIDITY RATIOS
Current ratio
current assets / current liabilities
(working capital ratio)
(Current assets - inventories) / current
Quick ratio (Acid test)
liabilities
(Current assets - inventories - receivables) / current
liabilities
Cash ratio
OR
Cash + Marketable securities / Current liabilities
STATEMENTS
WORKING CAPITAL RATIOS
Inventory turnover Cost of sales / Inventory
Inventory holding period Inventory / Cost of sales x 365
Receivables collection
Receivables / Revenue x 365
period
Payables / Credit purchases* x 365
Payables payment period * In the exam it is considered acceptable to substitute cost of sales for
credit purchases.
INTERPRETATION OF FINANCIAL STATEMENTS
Purchase inventory Pay supplier Sell inventory Customer pays
Inventory days Receivable days
Payable days
Working capital cycle
The calculation of the WORKING CAPITAL CYCLE is:

Inventory days + Receivable days – Payable days
a) Working capital cycle represents period of time for which inventory is

funded, i.e. from date of payment to supplier to date payment is
received from customer.
b) Shorter working capital cycle indicates higher level of efficiency.
c) Working capital cycle may be shortened by reducing inventory and/or
receivable days and/or increasing payable days.
STATEMENTS
Long-term financial stability
Gearing Debt / (Debt + Equity) x 100
Alternative gearing
Debt / Equity x 100
measure - debt: equity
Interest cover Profit before interest / Finance costs

STATEMENTS
Investor ratios
capital market ratio

Earnings to common The earnings per share
shareholders / average ratio is the best indicator
earnings per share
number of shares of how investors judge
outstanding their return on investment
Price per share of common
Market to book ratio stock / book value per
share
The price/earnings ratio
(P/E) is the best indicator
Price/Earnings Ratio price per share of common
of how investors judge
(P/E) shares/ EPS
the firm’s future
performance.
LET’S PREPARE FOR
THE EXAM
Analysis of past exams (Dec 2011 – present)
Topic
Group Financial Statements 16 22%
From Trial Balance to FS 11 15%
Statement of Changes in Equity 8 11%
Statement of Cash FLow 7 9%
Financial Ratios 6 8%
IASB Framework 7 9%
Accounting principles / substance over form 3 4%
IAS 16, IAS 37 6 8%
IAS 8, IAS 36 4 5%
IFRS 16, IAS 32/39/IFRS 7/IFRS 9, IAS 33 3 4%
IAS 12, IAS 20, IFRS 5 2 3%
IAS 2, IAS 10, IAS 40, IFRS 15 1 1%
Examination TICKET format
• 15 multiple choice questions x 2 = 30p

• 10 multiple choice questions x 3 p = 30p
• 2 questions x 15 p = 30p
• BONUS  10p
TIME ALLOWED = 3h
Looking forward ...
1. Challenges in preparing financial statements based on IAS/IFRS. Case of….
2. First time adoption of IAS/IFRS: advantages and disadvantages. Case of….
3. Applying IAS/IFRS by Romanian companies. Case of ….
4. Evaluation for financial reporting: between historical cost and fair value
5. Creativity in Financial Reporting
6. Cultural differences in Financial Reporting
7. Quality of financial reporting: IAS / IFRS vs Romanian Accounting Standards
8. Consolidated financial reports.
9. Assesing financial performance through financial reports and ratios
10. Risk Management in Financial Reporting
...CLOSING...
QUESTIONS
&
ANSWERS

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ACCA

1. INTRODUCTION TO F7 – FINANCIAL REPORTING

NON CURRENT ASSETS

IAS16 Property, plant and equipment

IAS2 & IFRS 15 Inventory

FINAL EXAM = 70%

(a) 15 multiple choice questions x 2 = 30p

The future economic benefits embodied in an asset may flow to

 used single or in combination with other assets in the

Settlement of a present obligation - giving up resources

The asset is the resource, not the ultimate future inflow

Asset An asset is a resource controlled by the An asset is a present economic resource

a. to assist the IASB in setting IFRSs?

a. comparability and relevance?

 a statement of comprehensive income, or

Balance at 31 December 20N1 X X X X X

Accounting policies are the principles, bases, conventions, rules and

Accounting policies should remain the same from period to period so as to

Accounting policies are the principles, bases, conventions, rules and

COST OF SALES 33,500 30,200

GROSS PROFIT 18,600 18,100

TAX 4,600 4,300

NET PROFIT 14,000 13,800

The retained earnings at 1 January X0 were $11,200.

Quantity Unit cost Unit selling price

Conditions to be classified as held for sale:

1. Available for immediate sale

A non-current asset/disposal group classified as held for sale

 its CARRYING AMOUNT and

FAIR VALUE LESS COSTS TO SELL

B.REVALUATION MODELThe asset is revalued to its FV immediately before

A discontinued operation is a component of an entity that

■ An analysis of the single amount, either in the notes or in the statement of

Tax expense in SPL = current tax +/– movement in

(2) Carrying amount < Tax base :

Deferred tax 17,000

On 1 January 20X8 Groning purchased a land at cost $25,000. Accounting

Required: Prepare extracts of the financial statements to show the effect

Required: Prepare extracts of the financial statements to show the effect

• an underprovision increases the tax charge

1. IDENTIFY THE CONTRACT

Apply Five step ANALYSIS.

How should be accounted this sale in financial

1. ENTITY HAS A PRESENT RIGHT TO PAYMENT OF ASSET

1. SALE IS BELOW FAIR VALUE

On 1st January, Xavier sells its headoffice, which cost 10m to

■ 1. Calculate the profit or loss of contract

 OUTPUT METHOD (WORK CERTIFIED AS COMPLETED)

 INPUT METHOD (COST INCCURED TO DATE AS A

2. THE CONTRACT HAS A LOSS: THE WHOLE LOSS IS RECOGNISED

3. THE OUTCOME IS UNKNOWN:

1. Calculate the profit or loss of contract

1. Calculate the profit or loss of contract

Revenue (Total price × progress (%))

Contract price 5 million

A liability is a present obligation of the entity arising from

If any one of these conditions is not met, no provision may be recognize

An entity has to rectify a serious fault in an item of plant that it has

If the likelihood of the event is not probable, NO PROVISION should be

Exemple 6 / pg 8 – word file

Likelihood Liability Asset

A right-of-use asset ‘represents a lessee's right to use an underlying asset

Recognise at present value of Recognise at cost, which equals:

The lease term comprises: