For Examinations to June 2015

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Revision Essentials

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ACCA
Paper F7 | FINANCIAL REPORTING

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ACCA

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PAPER F7
FINANCIAL REPORTING
(INTERNATIONAL)

M REVISION ESSENTIALS
For Examinations to June 2015
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®
No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this
publication can be accepted by the author, editor or publisher.

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These are condensed notes focusing on key issues for those of you who lead busy, mobile
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Be Warned: These notes only offer guidance on key issues. On their own they are not enough to pass the examination.
 CONTENTS

CONTENTS

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Syllabus (ii)
Approach to examining (iii)
Core topics 0101
Framework 0201

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Assets 0301
Liabilities 0401
Income and expenses 0501
Financial instruments 0601
Business combinations 0701
Presentation of financial statements 0801
Disclosure standards

Additional reading
Articles
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Interpretation of Financial Statement
0901
1001
1101
1201
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Analysis of specimen paper 1301
Exam technique 1401

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 SYLLABUS

Syllabus Aim

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CR (P2) BA (P3) To develop knowledge and skills in understanding and
applying accounting standards and the theoretical framework
in the preparation of financial statements of entities,
including groups and how to analyse and interpret those
financial statements.

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CL (F4) FR (F7) AA (F8)
Main capabilities
On successful completion of this paper, candidates should be
able to:
FA (F3) A Discuss and apply a conceptual and regulatory
frameworks for financial reporting
B Account for transactions in accordance with
International accounting standards

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D
Analyse and interpret financial statements.
Prepare and present financial statements for single
entities and business combinations in accordance with
International accounting standards.
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Relational diagram of main capabilities
The conceptual and regulatory
framework for financial reporting
(A)
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Accounting for transactions in financial statements (B)
Preparation of financial statements (D)
APPROACH TO EXAMINING THE SYLLABUS
Exam format




3 hour paper-based examination. M
Additional 15 minutes reading and planning time.
All questions are compulsory.
Both computational and discursive elements. Some
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questions will adopt a scenario/case study approach.
 Section A comprises 20 multiple choice questions of 20
marks each.
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SYLLABUS
 Section B comprises two 15 mark questions and one 30
mark question.
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 The 30 mark question will examine the preparation of
financial statements for either a single entity or a group.
 Section A and the other two questions in section B can
cover any area of the syllabus.
Analysis and  A question may often involve elements that relate to
interpreting different subject areas of the syllabus. The financial
financial
statements statement question could include matters relating to
(C) several standards, such as IAS 16 and IAS 18.
 An understanding of accounting principles and concepts
and how these are applied to practical examples will be
tested.


Questions on topic areas that are also included in Paper
F3 will be examined at an appropriately greater depth in
F7.
Candidates will be expected to have an appreciation of
the need for specified standards and why they have
been issued. For detailed or complex standards,
candidates need to be aware of their principles and key
elements.
(iii)
 SYLLABUS

Examinable documents

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For 2014 exams the cut-off date is 31 August 2013.

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 CORE TOPICS

CORE TOPICS Tick when completed

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Group accounts
 Consolidated statement of financial position 
 Consolidated statement of comprehensive income


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 Theoretical aspects of group accounting 
IASB documentation
 Account preparation 
 IASs/IFRSs 
Analysis


Statement of cash flows
Interpretation
M 

SA
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 FRAMEWORK

CONCEPTUAL FRAMEWORK FOR FINANCIAL  Objective of FS

REPORTING

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 To report on the
 Purpose
 Financial performance
 To help users/auditors/preparers of FS understand
 Financial position and
the basis of preparation
 Changes in financial position

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 To help countries in developing their own national
standards  Underlying assumption
 To assist the IASB in developing consistent  Going concern
standards
 Assumes that the entity will continue in
 Status operation for the foreseeable future
 Not an IAS  Neither intention nor need to liquidate in the
 Scope foreseeable future.




Objectives of FS
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Qualitative characteristics
Definitions, recognition and measurement of
elements
SA
 Concepts of capital and capital maintenance

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 FRAMEWORK

 Fundamental qualitative characteristics  Liability

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 Relevance – making a difference to user, gives  Present obligation
predictive and confirmatory values
 Past event
 Faithful representation – financial statements  Outflow of future economic benefits
represent economic phenomena in words and

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numbers. True and fair view  Equity
 Enhancing qualitative characteristics  Assets less liabilities
 Comparability – Over time and between
companies  Income
 Verifiability – different parties could reach same  Increases in economic benefits
consensus  Due to increase in assets/decrease in liabilities
 Timeliness – having information in time to assist  Resulting in increase in equity


and concisely.
Elements
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in decision making process by users
Understandability – presenting information clearly


 Other than contribution by equity
shareholders

Expense

 Decreases in economic benefits

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 Asset
 Due to decrease in assets/increase in liabilities
 Control  Resulting in decrease in equity
 Past event  Other than distribution to equity shareholders
 Inflow of future economic benefits

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 FRAMEWORK

 Recognition IFRS 13 FAIR VALUE MEASUREMENT

 Meaning – incorporating in FS an item which
meets the definition and the criteria
 Criteria
 Probable that future economic benefits
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 Fair value is price that would be received to sell an
asset or paid to transfer a liability in an orderly
transaction between market participants at
measurement date.

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will flow AND  Value reflects characteristics of asset/liability if market
 Item has cost/value that can be participants would take those characteristics into
measured reliably. account when valuing item.
 Measurement assumes that asset/liability is exchanged
 Measurement in orderly transaction with market participants at
measurement date and under current market conditions.
 Historical cost
 Current cost  Assume transaction occurs in principal market place, or
in absence of principal market, then most advantageous



 Present value

Capital and maintenance

 Capital = equity
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Realisable value


market.
Hierarchy

 Level 1 input – quoted (unadjusted ) prices in

active market for identical item that entity can
access at measurement date
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 Two concepts
 Level 2 input – inputs other that quoted prices
 Financial capital maintenance within Level 1 that are observable for the item,
 Physical capital maintenance either directly or indirectly
 Level 3 input – unobservable inputs for the item.

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 ASSETS

IAS 2 INVENTORIES  This may include assets that had no direct purchase
price, such as newly born livestock

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 Value at lower of cost and net realisable value (NRV)
 Any gains/losses on initial measurement are recognised
 Cost includes purchase price + costs of conversion
in profit or loss
+ other costs incurred in bringing inventories to
their place and condition  It is presumed that fair value can be measured reliably,

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 NRV is estimated selling price less estimated costs
of completion and estimated costs to sell
 Cost formulas
 Specific identification of costs for items not
ordinarily interchangeable/specific projects
 Otherwise FIFO or weighted average
 Recognise cost of inventories as an expense in the
unless:
 A quoted market price is not available; and
 Alternative estimates are clearly unreliable.
IAS 16 PROPERTY, PLANT AND EQUIPMENT
 Definition
 Residual value – Estimated amount that would
currently be obtained (after deducting disposal



period they are sold.
IAS 41 BIOLOGICAL ASSETS M
Biological asset is a living animal or plant
Agricultural produce is the product harvested from a

costs) if the asset were of age and condition
expected at the end of its useful life
Recognition –framework recognition criteria apply
SA
biological asset
 Biological assets are measured at fair value less costs to
sell on initial recognition and at the end of each
reporting period

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 ASSETS

 Measurement  Revaluation model

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 At recognition – at cost  Entire class
 All costs of getting asset to place and  Any surplus is taken directly to equity ,
condition of use through other comprehensive income,(may
be transferred to retained earnings through
 May include borrowing costs (IAS 23)

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consumption of asset)
 May include PV of decommissioning costs
(IAS 37) IAS 20 ACCOUNTING FOR GOVERNMENT GRANTS
AND DISCLOSURE OF GOVERNMENT ASSISTANCE
 Subsequent costs
 Recognition
 Recognise day-to-day costs in profit or loss
 Only when there is reasonable assurance that the
as incurred
entity will comply with the relevant conditions
 Capitalise replacement parts if criteria met and that the grant will be received

 After recognition


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(derecognise parts replaced) – similarly
major inspection/overhaul costs

Cost model – cost less accumulated

depreciation and any accumulated

 Grants must be taken to profit or loss in the same
periods as the costs that they compensate
Presentation
 Capital grants – either credited against the
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carrying amount of the asset or present as deferred
impairment losses income
 Revaluation model – revalued amount (i.e.  Other grants – present as deferred income
fair value at date of revaluation) less
subsequent depreciation/impairment losses.
 Depreciate over useful life

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 ASSETS

IAS 23 BORROWING COSTS  Treatments

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 Borrowing costs  All borrowing costs that relate to a qualifying
asset must be capitalised.
 Interest and other costs incurred by an entity in
connection with the borrowing of funds  All other borrowing costs will be expensed when
incurred.
 Includes

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 Interest expense calculated using the
effective interest method as described in IAS
39
 Finance costs in respect of finance leases
 FX differences on FX borrowings to the
extent that they are an adjustment to
borrowing costs
 Capitalise to the extent they relate to qualifying
assets
 Specific borrowing – no problem
 General borrowing – apply capitalisation rate
to expenditures incurred
 Start – when borrowing costs incurred, costs
incurred on asset and active development

 Qualifying asset



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An asset that necessarily takes a substantial period
of time to get ready for its intended use
May include



Suspend – if no active development – unless
necessary for asset to get ready for use/sale
Cease – when asset is substantially ready for
use/sale
SA
 Assets under construction
 Inventories that take time to mature (whisky)

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 ASSETS

IAS 36 IMPAIRMENT OF ASSETS  Accounting for an impairment loss

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 Definitions  If CV > RA then impairment has occurred
 Impairment loss – Amount by which the carrying  Dr P or L (or revaluation surplus if there
value (CV) exceeds recoverable amount (RA) exists a surplus in respect of the impaired
asset)
 Recoverable amount – Higher of FV less costs of  Cr asset

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disposal and value in use With amount of impairment loss
 Fair value less costs of disposal – Amount  Accounting for impairment loss within CGU
obtainable from disposal of an asset in an arm’s
length transaction less the costs of disposal  If CV > RA of CGU then impairment has occurred
 Value in use – PV of estimated future cash flows  Order of impairment
expected to arise from continuing use and from
(1) Reduce the value of any specific asset within
disposal at the end of the asset’s useful life
the CGU that has become impaired


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Cash generating unit (CGU) – Smallest
identifiable group of assets generating cash flows
from continuing use that are largely independent
of cash flows from other assets or group of assets
(2) Reduce any goodwill
(3) Pro-rate remaining impairment loss amongst
remaining assets of the CGU
In (3) no asset should be reduced below the higher
of
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 FV less cost of disposal
 Value in use
 Zero.

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 ASSETS

 Reversals of impairment  Internally generated intangibles – only capitalise if

following demonstrated

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 Only reverse if original factors of impairment have
been reversed  Technical feasibility
 Never reverse impairment of goodwill  Intention to use/sell
 Cannot reverse to the extent that the asset would  Ability to use/sell

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be valued at an amount above its depreciated  Probable future economic benefits – how
historic cost if impairment had not occurred. generated (e.g. existence of market)
IAS 38 INTANGIBLE ASSET  Adequate resources available to complete
 Reliable measurement of expenditure
 Definitions
Research phase costs always expensed
 An intangible asset is an identifiable non-
monetary asset with no physical substance  Subsequent expenditure on acquired in-process
R&D – as for internally generated intangibles
 Recognition



M
Separate acquisition – not normally a problem as
there is a transaction verifying the cost
Business combinations – include all identifiable
intangibles of subsidiary even though subsidiary



Measurement after recognition
 Same as property, plant and equipment but must
be an active market if revaluation model used
Useful life
SA
may not have recognised in own statement of  Finite – cannot exceed legal rights
financial position
 Indefinite (is not infinite!)
 Internally generated goodwill – cannot be
recognised as an asset  No amortisation
 Impairment test at least annually

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 ASSETS

IAS 40 INVESTMENT PROPERTY (IP)

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 Definition
 Property (land or buildings, or part thereof) held to
earn rentals or for capital appreciation or both
 Not owner occupied property

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 Measurement at recognition
 Cost model (as IAS 16) – include transaction costs
 Measurement after recognition
 Choice between fair value and cost models
 Fair value model – value at FV end of each
reporting period with any gain/loss taken to profit


or loss
Cost model (as IAS 16)
M
SA
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 LIABILITIES

IAS 12 INCOME TAXES  Tax base = amount assigned to asset for tax
purposes

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 Covers
 Be careful – if the economic benefits will not
 Income tax be taxable the tax base = CV
 Deferred tax
 Key skills

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 Income taxes
 Income tax, for current and prior periods, to the  Calculation of year end liability
extent unpaid should be recognised as a liability
CV TB TD Liability
 If the amounts paid exceed the amounts due the @x%
excess should be recognised as an asset Asset X (X) =X X
 Any under or over provision is adjusted against Liabilities (X) X =X X
the tax expense of the following period.
 Allocation of movement in the liability
 Deferred tax



M
Why it arises – Accounting adjustment as tax in
the FS is not the same as profit in the FS (e.g.
fines, depreciation/capital allowances, interest)
Basic rules
Liability at start of year
To revaluation reserve
To P or L – balancing figure

Liability at end of year

X
X
X
____

X
SA
 Provide deferred tax on all temporary
differences
 Temporary differences = CV less tax base

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 LIABILITIES

 Exam approach  Split period payments into capital element and

interest

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 Set out assets and liabilities CVs
 Calculate interest using interest rate implicit in
 Calculate tax base of each asset/liability
lease
 Calculate temporary difference
 Apply tax rate  liability  Split liability into current and non-current

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 Account for movement in position  Operating lease
 Do not capitalise
IAS 17 LEASES  Expense periodic rentals to P or L
 Definitions Sale and leaseback
 Finance lease – A lease that transfers substantially  Sale and finance lease
all risks and rewards incident to ownership of an  Do not derecognise asset



asset

lease
Accounting by lessee
Finance lease
M
Operating lease – A lease that is not a finance





Restate asset to fair value
Defer any “profit” and amortise over lease term
Recognise liability, as per finance lease
Sale and operating lease
SA
 Capitalise asset and liability  Derecognise asset
 Depreciate asset over useful life or lease term if  Recognise revenue
shorter
 If selling price at FV recognise profit/loss
immediately

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 LIABILITIES

 If selling price > FV defer and amortise any  Constructive obligation – obligation derived from
abnormal profit over lease term an entity’s actions where responsibility is accepted

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by:
 If selling price < FV recognise profit/loss
immediately, unless loss compensated for by  A pattern of past practice
discounted future lease payments (when loss shall
 Published policies or
be deferred and amortised over lease term)


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Current statement
IAS 37 PROVISIONS, CONTINGENT LIABILITIES Raising a valid expectation that it will discharge
AND CONTINGENT ASSETS the responsibility
 Definitions
 Contingent liabilities
 Provision – a liability of uncertain timing or
amount  a present obligation arising as a result of a
past event but not recognised as an outflow
 Obligating event – event that creates a legal or of resources is not probable or cannot be
constructive obligation which gives the entity no



Contract
Legislation or
M
alternative than to settle the obligation
Legal obligation – Obligation from:

measured reliably; or
a possible obligation arising as a result of a
past event whose existence will only be
confirmed by the occurrence or non-
occurrence of an uncertain future event
SA
 Other operation of law  Contingent asset – a possible asset arising as a
result of past events whose existence will only be
confirmed by the occurrence or non-occurrence of
an uncertain future event.

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 LIABILITIES

 Recognition  Future operating losses

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 Provision  Not recognised as there is no past event – these are
not unavoidable
 A present legal or constructive obligation to
transfer economic benefits as a result of past  Onerous contracts
events  Definition – a contract in which the unavoidable

PL
 Probable outflow of resources costs of meeting the obligations exceed the
 Reliable estimate of amount economic benefits expected to be received from it
  Present obligation relating to past event
 Measurement
 Therefore recognise provision
 Best estimate of amount required to settle
obligation  Restructurings

 Taking into account  Examples



 M
risks (variability) and uncertainties (disclose)
present value

Contingent assets and liabilities







Sale or termination of line of business
Closure of business locations
Relocations
Changes in management structure
Fundamental reorganisation
SA
Do not recognise
 But maybe disclose

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 LIABILITIES

 Recognition – Only if formal detailed plan  PV of provision increases each year as it gets
identifies: closer to settlement, this “unwinding of discount”

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is charged to P or L
 Business or part affected
 Locations affected
 Location, function and number of employees

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who will be compensated for terminating
services
 Expenditures to be undertaken when the plan
is implemented
 Raised a valid expectation that it will carry
out restructuring by starting or announcing
main features of the plan.

 Decommissioning costs

 M
Common in oil and nuclear power industries.
Provide for PV of costs as soon as obligating
event has occurred, maybe on construction of the
nuclear plant.
SA
 Dr Non-current asset (nuclear plant)
 Cr Provision

 Depreciate non-current asset (including initial

provision)

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 INCOME AND EXPENSES

IAS 11 CONSTRUCTION CONTRACTS  Outcome can be estimated reliably

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 Issue  Contract revenue can be measured reliably
 Allocation standard  Probable future economic benefits
 Revenue and profit recognition  Costs to date can be identified
 Costs to complete can be measured reliably

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 Accruals – as the contract goes on
 Stage of completion can be measured
 Prudence – at the end reliably
 Definitions
 Rules
 A contract specifically negotiated for the
construction of an asset/group of assets  Outcome can be estimated reliably

 Contract revenue  Revenue – by % completion

 Costs – by % completion


M
Amount agreed in the contract
Variations in contract and incentive
payments
 To extent probable they will result in
revenue
 Can be measured reliably

 Rectification costs – when incurred

Loss making



Revenue – by % completion
Costs – to give expected loss
SA
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 INCOME AND EXPENSES

 Outcome cannot be estimated reliably IAS 18 REVENUE

 Revenue – equal to costs incurred
 Costs – actual costs incurred
 Present on statement of financial position
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 Definitions
 Revenue – gross inflow of economic benefits
during the period arising in the course of ordinary
activities resulting in increases in equity, other

PL
than increases relating to contributions from
 Actual costs incurred equity participants
 Plus profits/(losses) to date
 Fair value – the price that would be received to
 Less amounts billed sell an asset or paid to transfer a liability in an
orderly transaction between market participants at
 If positive  asset the measurement date
 If negative  liability  Recognition criteria
 Sale of goods
 Exam approach




Calculate % complete
M
Establish total expected profit each year for each
contract

Calculate P or L figures – using above rules





Significant risks and rewards transferred
No continuing management control
Revenue can be measured reliably
Probable flow of economic benefits
SA
 Calculate SOFP figures
 Related costs can be measured reliably

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 INCOME AND EXPENSES

 Provision of services

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 Use % of completion method provided
revenue and related costs can be measured
reliably
 Probable flow of economic benefits


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Stage of completion can be measured
reliably

 Interest, royalties and dividends

 Interest time apportioned

 Royalties on an accruals basis
 Dividends when shareholders right to receive
has been established


M
Illustrative appendix to standard to illustrate application
of standard
SA
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 E
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• Accounting

• International Financial Reporting

• Project Management

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Continuing Professional Education

Healthcare

For more information on how Becker Professional Education can

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support you in your career, visit www.becker.com.

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 For Examinations to June 2015

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Revision Essentials includes:

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• ACCA syllabus aim and main capabilities
• Core topics checklist
• Summary of essential facts and theory
• Further reading
• Relevant articles
• Comprehensive analysis of past examinations
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Examiners' feedback for the last exam session
Exam technique
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Revision Essentials are not quality assured by ACCA but their content is substantially derived from materials which have been quality assured by ACCA.