2 Worked Examples

Chartered Accountants Program
Financial Accounting & Reporting
WE
Worked example 2.1

Preparing a statement of cash flows using the
reconstruction method
Introduction
The statement of cash flows provides important information to readers about an entity’s sources
and use of cash during a given period. Preparing the statement of cash flows is often a more
complicated exercise than preparing other statements because the cash flows presented must
be derived from the accrual-based accounting records. It also requires an understanding of the
nature of the accounts in the accounting records and the entity’s non-cash activities.
This worked example links to learning outcome:
•• Advise on the requirement for financial statements.
At the end of this worked example you will be able to prepare a statement of cash flows in
accordance with IAS 7 Statement of Cash Flows (IAS 7), using the reconstruction method and your
understanding of the operations of an entity.
It will take you approximately 45 minutes to complete.
Scenario
Louise is a financial accountant at Giles & More, assisting Jump To It Limited (JTI) with the
preparation of their financial statements. She is working with the finance team to finalise the
financial statements for the year ending 30 June 20X2.
Louise has prepared the statement of financial position and statement of profit or loss and
other comprehensive income for JTI for the year ended 30 June 20X2. She has also obtained the
statement of financial position as at 30 June 20X1. These statements are reproduced below:
Jump To It Limited
Statement of profit and loss and other comprehensive income for the year ended 30 June 20X2
Notes 20X2
$’000
Sales revenue 1 8,500
Cost of sales (5,440)
Gross profit 3,060
Advertising (303)
Impairment loss – trade receivables (40)
Bad debts (140)
Depreciation – equipment (100)
Depreciation – motor vehicles (65)
Employee benefits (1,237)
Insurance (29)
Interest expense – debentures (135)

fin21402_we_pdf01_01
Unit 2 – Worked examples Page 2-1

Financial Accounting & Reporting Chartered Accountants Program
WE
Jump To It Limited
Statement of profit and loss and other comprehensive income for the year ended 30 June 20X2
Notes 20X2
$’000
Interest expense – overdraft (15)
Loss on disposal of motor vehicle 2 (15)
Rental expense (500)
(2,579)
Profit before tax 481
Income tax expense (190)
Underprovision for income tax expense (8)
(198)
Net profit for the year 283
Total comprehensive income for the year 283
Jump To It Limited
Statement of financial position as at 30 June 20X2
Notes 20X2 20X1

$’000 $’000
Current assets
Cash at bank – 210
Trade receivables 2,990 2,470
Allowance for impairment loss – trade receivables (125) (85)
Prepayments 23 29
Inventory 2,109 1,810
Total current assets 4,997 4,434
Non-current assets
Equipment – cost 1,000 1,000
Equipment – accumulated depreciation and impairment (700) (600)
Motor vehicles – cost 600 450
Motor vehicles – accumulated depreciation and impairment (97) (84)
Total non-current assets 803 766
Total assets 5,800 5,200
Current liabilities
Bank overdraft 180 –
Trade payables 1,920 1,720
Provision for employee entitlements 197 125
Income tax payable 190 150
Page 2-2 Worked examples – Unit 2

Chartered Accountants Program Financial Accounting & Reporting
WE
Jump To It Limited
Statement of financial position as at 30 June 20X2
Notes 20X2 20X1

$’000 $’000
Dividend payable 3 140 105
Debentures 400 –
Total current liabilities 3,027 2,100
Non-current liabilities
Debentures 4 600 1,000
Total liabilities 3,627 3,100
Net assets 2,173 2,100
Shareholders’ equity
Share capital 1,500 1,500
General reserve 300 100
Retained earnings 5 373 500
Total shareholders’ equity 2,173 2,100
Notes
1. All sales were on credit.
2. The proceeds from the sale of the motor vehicle were $33,000. Its carrying value at the time of sale was $48,000.
3. Debentures with a face value of $400,000 will be repaid on 31 December 20X2.
4. The remaining debentures ($600,000) mature on 31 December 20Y3.
5. An interim dividend of $70,000 was paid on 1 December 20X1. A final dividend of $140,000 was declared
on 2 June 20X2. $200,000 of retained earnings was transferred to the general reserve on 1 June 20X2.
Note: Ignore GST.
Task
Alison Giles, a partner of Giles & More, has asked Louise to prepare the statement of cash flows
for the year ended 30 June 20X2 using the direct method explained in IAS 7 paras 18–19.
Alison reminds Louise that JTI’s accounting policy is to include bank overdrafts in cash and
cash equivalents for the purposes of the statement of cash flows.
Solution
Louise worked through the following steps to complete the task.
Step 1 – Review the Standard

Louise reviewed the relevant sections of IAS 7 before starting to prepare the cash flow
statement, including the following relevant paragraphs:
•• IAS 7 para. 6: Definitions of operating, investing and financing activities.
•• IAS 7 para. 10: Presentation of a statement of cash flows.

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•• IAS 7 paras 14, 16 and 17: Examples of cash flows within each activity.
•• IAS 7 para. 19: Guidance on the direct method.
•• IAS 7 para. 31: Interest and dividends.
•• IAS 7 para. 35: Taxes on income.
Step 2 – Classify the items in the financial statements

Louise referred to the statement of financial position and the statement of profit or loss and
other comprehensive income that she prepared earlier, as well as the statement of financial
position as at 30 June 20X1. She reviewed each line item and classifies them according to one of
the following categories:
•• Cash.
•• Operating activity.
•• Investing activity.
•• Financing activity.
•• Non-cash item.
Louise then determined which line item in the statement of cash flows each item impacts.
She knew that these amounts are not the actual cash flows, but that they will be used to
calculate the cash flows.
Louise documented her classification of each financial statement line item (or component of a
line item) in a table, with explanations as necessary; first the statement of financial position and
then the statement of profit or loss and other comprehensive income.
Classification of statement of financial position items
Line item 20X2 20X1 Classification Specific cash flow

$’000 $’000
Assets
Current assets
Cash and cash – 210 Cash and cash Is included in the movement in the cash
equivalents equivalents and cash equivalents for the year
Trade and other 2,990 2,470 Operating Receipts from customers

receivables activity
Allowance for (125) (85) Operating Receipts from customers

impairment loss – activity
trade receivables
Prepayments 23 29 Operating Payments to suppliers, employees and

activity others
Inventory 2,109 1,810 Operating Payments to suppliers, employees and

activity others

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Classification of statement of financial position items
Line item 20X2 20X1 Classification Specific cash flow

$’000 $’000
Non-current assets
Plant and 1,600 1,450 Investing Payments for acquisition of plant and
equipment activity equipment/proceeds from sale of plant
and equipment
Accumulated (797) (684) Investing Payments for acquisition of plant and

depreciation and activity equipment/proceeds from sale of plant
impairment – plant and equipment
and equipment
Liabilities
Current liabilities
Trade and other (1,920) (1,720) Operating Payments to suppliers, employees and
payables activity others
Borrowings – bank (180) – Cash and cash Is included in the movement in the cash
overdraft equivalents and cash equivalents for the year
Borrowings – (400) – Financing N/A – reclassification from non-current

current portion of activity
debentures
Provisions (197) (125) Operating Payments to suppliers, employees and

– employee activity others
entitlements
Dividend payable (140) (105) Financing Dividends paid

activity
Non-current liabilities
Borrowings – non- (600) (1,000) Financing N/A – reclassification to current

current portion of activity
debentures
Equity
Share capital (1,500) (1,500) Financing N/A – no movement

activity
Reserves (300) (100) Non-cash item N/A – non-cash item
Retained earnings (373)1 (500) Financing Dividends paid

activity
Note: $373,000 = $500,000 (opening retained earnings + $283,000 (net profit) – $200,000 (transfer to general reserve) –
$210,000 (dividends paid and declared).
With the reconstruction method, if a statement of financial position item such as share capital
does not change from the previous year there is no impact on the calculation of the cash flows.
The current portion of the debentures is $400,000 at the 20X2 year end. During the 20X2 year
there was a reclassification between current and non-current but there was no cash flow.
Similarly, there was no cash flow when $200,000 was transferred from retained earnings to the
general reserve.

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Classification of statement of profit or loss items
Line item 20X2 Classification Specific cash flow

$’000
Revenue 8,500 Operating activity Receipts from customers
Inventory and materials (5,440) Operating activity Payments to suppliers, employees and others
used – cost of sales
Rental expense (500) Operating activity Payments to suppliers, employees and others
Employee benefits (1,237) Operating activity Payments to suppliers, employees and others
expense
Depreciation on plant (165) Investing activity N/A – used in reconstruction to calculate

and equipment payments for acquisition of plant and
equipment
Impairment loss expense (40) Operating activity N/A – used in reconstruction to calculate
receipts from customers
Bad debts expense (140) Operating activity N/A – used in reconstruction to calculate
receipts from customers
Other expenses (332) Operating activity Payments to suppliers, employees and others
Loss on motor vehicle (15) Investing activity N/A – used in reconstruction to calculate
proceeds from the sale of plant and equipment
Interest expense (150) Operating activity Interest paid
Income tax expense (190) Operating activity Income tax paid
Underprovision for (8) Operating activity Income tax paid

income tax expense
Note: While an expense such as depreciation is non-cash in nature, it will need to be included in the calculation when
using the reconstruction method to account for the movement in the related contra-asset accounts.
Step 3 – Prepare a template for the statement of cash flows

Using the different types of cash flows that she identified, Louise prepared a pro forma for the
statement of cash flows for the year ended 30 June 20X2.
Jump To It Limited
Statement of cash flows for the year ended 30 June 20X2
Notes 20X2
$’000
Cash flows from operating activities
Receipts from customers
Payments to suppliers, employees and others
Finance costs paid
Income tax paid
Net cash flows from operating activities
Cash flows from investing activities
Payments for plant and equipment
Proceeds from sale of plant and equipment

WE
Jump To It Limited
Notes 20X2
$’000
Net cash flows from investing activities
Cash flows from financing activities
Dividends paid
Net cash flows from financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the financial year
Cash and cash equivalents at the end of the financial year
Step 4 – Create and reconstruct relevant T-accounts for each cash flow line item
As the major step in the reconstruction method, Louise created and reconstructed a T-account
for each cash flow line item she identified in Step 3 and documented this for Alison’s review.
Where the cash flow is only impacted by a single item from the statement of financial position
and statement of profit or loss and other comprehensive income, Louise simply documented the
amount of the cash flow without going through the T-account process.
T-account to calculate cash receipts from customers

The first T-account Louise created was to calculate cash receipts from customers:
Trade receivables
Dr Cr
$’000 $’000
Opening trade receivables 2,470 Closing trade receivables 2,990
Closing allowance for impairment loss 125 Opening allowance for impairment loss 85
Impairment loss expense 40
Sales revenue 8,500 Bad debts expense 140
Receipts from customers 7,840
11,095 11,095
T-account to calculate payments to suppliers, employees and others

Using the same process, Louise created a T-account to calculate payments to suppliers,
employees and others. Although Louise realised this can be performed in a variety of ways,
she did so by reconstructing accounts payable, in which she also included the other asset and
liability balances identified in Step 2 pertaining to payments to suppliers, employees and others,
along with related expenses:

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Trade payables
Dr Cr
$’000 $’000
Closing trade payables 1,920 Opening trade payables 1,720
Opening inventory 1,810 Closing inventory 2,109
Opening prepayments 29 Closing prepayments 23
Closing provisions – employee 197 Opening provisions – employee 125

entitlements entitlements
Payments to suppliers, employees 7,530 Employee benefits expense 1,237

and others
Rental expenses 500
Other expenses 332
Cost of sales 5,440
11,486 11,486
T-account to calculate income tax paid

Louise moved on to calculate the cash outflow for income tax paid. She calculated the tax paid
of $158,000 by adding together the opening current tax liability, the underprovision of tax
and the instalments paid in the year from the trial balance ($150,000 + $8,000 + $190,000). She
confirmed this figure by re-creating the current tax payable T-account.
Current tax payable
Dr Cr
$’000 $’000
Closing current tax liability 190 Opening current tax liability 150
Income tax paid 158 Underprovision for income tax expense 8
Income tax expense 190
348 348
T-account to calculate net carrying amount of plant and equipment sold

Louise now moved on to the cash flows for property, plant and equipment. She recalled that
there was one disposal of a motor vehicle during the year, with sale proceeds of $33,000.
Since this amount is known, a T-account to calculate the cash flows from the sale of plant and
equipment is not required. However, she quickly prepared one to determine the net carrying
amount of the motor vehicle sold, which was required to complete the plant and equipment
T-account.
Disposal of plant and equipment
Dr Cr
$’000 $’000
Net carrying amount of plant and 48 Proceeds from sale of plant and 33
equipment sold equipment
Loss on sale of plant and equipment 15
48 48

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T-account for plant and equipment

Louise created the T-account for plant and equipment (combining the equipment and motor
vehicles accounts). In addition to the accounts impacting this cash flow identified in Step 2,
Louise needed to include the net carrying amount of plant and equipment sold during the year
to calculate the cash flow.
Plant and equipment
Dr Cr
$’000 $’000
Opening plant and equipment 1,450 Closing plant and equipment 1,600
Closing accumulated 797 Opening accumulated depreciation 684

depreciation and impairment and impairment
Payments for plant and 250 Depreciation expense 165

equipment
Net carrying amount of plant and 48

equipment sold
2,497 2,497
T-account for dividends paid

Louise created the T-account for dividend payable to calculate the dividends paid in the year.
Dividend payable
Dr Cr
$’000 $’000
Closing dividend payable 140 Opening dividend payable 105
Dividends paid 175 Dividends declared 210
315 315
Step 5 – Calculate remaining items for the statement of cash flows

Louise noted that for some items in the statement of profit or loss and other comprehensive
income there was no related account in the statement of financial position. The cash flow
amount could simply be taken from the statement of profit or loss and other comprehensive
income.
The relevant item is noted in the table below:
Directly calculated cash flows
Cash flow $’000
Interest paid (150)
Finally, Louise calculated the opening and closing cash and cash equivalent balances:
Cash and cash equivalents per statement of cash flows
Account 20X2 20X1

$’000 $’000
Cash and cash equivalents – 210
Bank overdraft (180) –
Total (180) 210

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Step 6 – Prepare the statement of cash flows

Louise now prepared the statement of cash flows by entering the cash flows she calculated into
the template she created earlier.
Jump To It Limited
Notes 20X2
$’000
Cash flows from operating activities
Receipts from customers 7,840
Payments to suppliers, employees and others (7,530)
Interest paid (150)
Income tax paid (158)
Net cash flows from operating activities 2
Cash flows from investing activities
Payments for plant and equipment (250)
Proceeds from sale of plant and equipment 33
Net cash flows used in investing activities (217)
Cash flows from financing activities
Dividends paid (175)
Net cash flows used in financing activities (175)
Net increase/(decrease) in cash and cash equivalents (390)
Cash and cash equivalents at the beginning of the financial year 210
Cash and cash equivalents at the end of the financial year (180)

WE
Worked example 2.2

Calculating cash flows using the spreadsheet
method
Introduction
The statement of cash flows provides important information to readers about an entity’s sources
and use of cash during a given period. Preparing the statement of cash flows is often a more
complicated exercise than preparing other statements because the cash flows presented must
be derived from the accrual-based accounting records. It also requires an understanding of the
nature of the accounts in the accounting records and the entity’s non-cash activities.
•• Advise on the requirements for financial statements.
It follows on from Worked example 2.1. It is recommended that you attempt Worked
example 2.1 first.
At the end of this worked example you will be able to prepare a statement of cash flows, in
accordance with IAS 7 Statement of Cash Flows (IAS 7), using the spreadsheet method and your
understanding of the operations of an entity.
Scenario
Louise is a financial accountant at Giles & More, assisting Jump To It Limited (JTI) with the
preparation of its financial statements. She is working with the finance team to finalise the
financial statements for the year ended 30 June 20X2, and has just finished preparing the
statement of cash flows using the reconstruction method.
JTI has requested that Giles & More provide it with an IT-based approach that it will be able
to use in future periods to calculate cash flows, thus minimising the work required each year.
Alison Giles, a partner of Giles & More, knows that the ability to roll over a spreadsheet is a key
benefit of using the spreadsheet method.
Preparing the spreadsheet for the current year will demonstrate that it produces the same cash
flows as those calculated earlier using the reconstruction method.
Task
Alison asks Louise to complete the cash flow spreadsheet for the year ended 30 June 20X2 using
the Giles & More template that calculates the cash flows of JTI based on the current and prior
year trial balances, and to use formulas to adjust for non-cash items.

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Solution
Louise worked through the following steps to complete the task.
Step 1 – Create or obtain a workings template

Louise created a blank Giles & More cash flow workings template and worked through the
remaining steps to complete the task.
The cash flow spreadsheet (Worked example 2.2 cash flow statement.xlsx) is available online.
Access myLearning to download a copy of the file.
The Step 1 tab of the cash flow spreadsheet shows how the template looks at the completion
of this step.
Step 2 – Populate the trial balance accounts and balances

Working from the blank cash flow workings template, Louise first entered all the trial balance
accounts into Column A of the workings and used links to populate the balance of each account
at 30 June 20X2 and 30 June 20X1 into Columns B and D. She entered debit balances as positive
figures and credit balances as negative figures.
Last year’s closing retained earnings have been inserted into the 20X1 column in cell D25.
The workings contain a balance check in cells B42 and D42 to ensure that all accounts in the trial
balance are included.
The balance check at cell F62 contains a figure indicating there is a balancing problem; however,
this will return to $0 once the remaining steps have been performed. Similarly, the balance
check at cell S42 contains a figure indicating there is a balancing problem; however, again, this
will return to $0 once Step 3 has been performed.
The Step 2 tab of the cash flow spreadsheet shows how the workings look at the completion
of this step, with the results highlighted in yellow.
Step 3 – Complete the movements column

Louise then used column F to calculate the movements in the asset, liability and equity accounts
between 20X2 and 20X1. Only statement of financial position accounts can have year-on‑year
movements, as income and expense accounts do not have opening and closing balances.
Columns D and F have therefore been greyed out for these accounts.
The balance check at cell S42 is now $0, indicating that all movements are accounted for in the
cash flow spreadsheet.
of this step, with the results of the step highlighted in yellow.
Step 4 – Label the columns for the different cash flows applicable to JTI
Cash flows from interest paid must be disclosed separately, but can be classified as operating,
investing or financing activities, in accordance with IAS 7. JTI has chosen to classify interest
paid as an operating activity. Louise knows that when classifying cash flows it is important
to be consistent from year to year.
Using her understanding of JTI, Louise inserted the headings for the cash flows relevant to JTI
under the appropriate columns in the workings.

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The workings template already has formulas set up to total each column and transfer each
to the particular cash flow statement line item, and also to transfer the headings entered for the
cash flows to the line items in the statement of cash flows.
Step 5 – Allocate the movements or profit or loss balances

Louise now allocated each movement calculated in Step 3 to one of the columns in the
workings, based on the appropriate type of cash flow and the sub-categories within each.
Rather than entering the value of the account movement, income, expense or dividend, she used
formulas to specify which cell she is allocating to a cash flow column, so that should any further
changes to the trial balance be made (e.g. if a late adjustment needs to be made to the financial
statements), they will flow through the cash flow spreadsheet.
Louise checked that the balance check in the final column is now $nil for all accounts.
This ensures that all accounts have been fully allocated; however, it does not ensure that they
have been allocated under the appropriate cash flow column.
Step 6 – Adjust allocated amounts as necessary

The allocation Louise completed in Step 5 is just a starting point. Louise knews that she needed
to make adjustments to some of these allocated amounts to account for certain transactions
or non-cash activities that may not flow through automatically. This is why the balance check
at the end of the statement of cash flows in cell F60 did not balance in Step 5.
Adjustment
Louise maked an adjustment for the motor vehicle sold during the year. She determined that the
vehicle sold had a net carrying value of $48,000, an original cost of $100,000 and accumulated
depreciation of $52,000. She adjusted the allocation in the workings for these amounts, and
also the figure in the payments for plant and equipment column. This is because the movement
in the cost of motor vehicles account is due to both a sale and purchases during the year.
(That is, if the overall movement in the cost of motor vehicles account is $150,000 after factoring
in the $100,000 cost of the asset sold during the year, then the actual amount paid to purchase
motor vehicles during the year must have been $250,000.)
The balance check at the end of the statement of cash flows in cell F60 is now $0.
Louise could have completed Steps 5 and 6 at the same time, using her understanding of each
cash flow when allocating the accounts, but she prefers to do them in sequence.
Step 7 – Review the statement of cash flows

Louise reviewed the workings and the resulting statement of cash flows. She ensures that the
balance checks are nil. She also reviewed the calculated cash flows in the statement of cash
flows to ensure that they are reasonable in the context of her understanding of the entity (and in
this case, match the cash flows calculated earlier using the reconstruction method).
The Step 7 tab of the cash flow spreadsheet shows the finalised statement of cash flows.
In future reporting periods, since the allocation of the trial balance accounts should be
consistent from period to period, JTI will be able to use the spreadsheet created to calculate its
cash flows, after making necessary adjustments each year for particular transactions.

WE
Worked example 2.3

Preparing operating segment disclosures
Introduction
It is important for users of financial statements to be able to assess the risks and returns of
the entity’s operations. Different business activities will face different risks and returns and,
therefore, financial information relating to these activities should be disclosed.
•• Explain and account for an entity’s operating segments.
At the end of this worked example you will be able to identify an entity’s reportable segments
and apply the requirements for operating segment accounting policies, including the allocation
of assets, liabilities, revenues and expenses, by preparing specific disclosure information in
accordance with IFRS 8 Operating Segments (IFRS 8).
Scenario
This worked example is based on Tsara.
The CFO of Tsara PLC has requested that Tsara A provide the information to enable it to
prepare its IFRS 8 disclosures. Michelle Lam is a financial accountant working at Tsara A.
Operating divisions
Tsara A comprises the following divisions:
A. Fashion Australia: a manufacturer and retailer of men’s and women’s fashion clothing in
Australia.
B. Accessories Australia: a manufacturer and retailer of men’s and women’s fashion
accessories in Australia.
C. Fashion and Accessories New Zealand: a manufacturer and retailer of men’s and women’s
fashion clothing and accessories in New Zealand.
Each division operates independently of the others, with the exception of Accessories Australia
which sells the equivalent of 10% of its external sales to Fashion Australia.
Internal reporting
Peter Cartus, CFO of Tsara A, receives financial information on a monthly basis.
The financial information is prepared using the same principles as those for external reporting
purposes (except for those relating to long service leave).

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The report for the year ended 30 June 20X3, which highlights key information, is provided
below:
Tsara A financial information for the year ended 30 June 20X3
Fashion Accessories Fashion and Accessories Tsara A

Australia Australia New Zealand* (Total**)
$ $ $ $
External revenues 20,223,350 8,667,150 1,000,000 29,890,500
Interest expense 215,000 20,000 – 235,000
Depreciation expense 281,250 63,750 30,000 375,000
Income tax expense 69,632 56,038 9,426 135,096
Profit after tax 198,723 159,777 27,113 385,613
Assets 12,035,672 2,092,011 1,488,900 16,624,988
Liabilities 2,148,587 529,044 712,927 4,799,967
* Reported in A$.
** The total column includes unallocated amounts, thus the total of the three divisions does not necessarily equal the
amount in the total column.
Further information relating to the year ended 30 June 20X3

The Australian divisions account for $28,890,500 of Tsara A’s revenue and $9,000,000 of its
$11,904,850 non-current assets. There are no unallocated non-current assets.
As at 30 June 20X3, Fashion Australia had sold all products acquired from Accessories Australia.
During the year, Accessories Australia suffered a fire at one of its vacant warehouses resulting
in an asset impairment loss of $210,000, which is reflected in the above table.
If Tsara A had applied IAS 19 Employee Benefits for internal reporting information provided
to the CFO, profit after tax would have decreased by $100,000. Correspondingly, a long service
leave liability of $142,857 would be recognised, along with a $42,857 deferred tax asset.
Task
Michelle has been asked by Peter Cartus to prepare the operating segment disclosures in
accordance with IFRS 8 paras 23, 28 and 33 for Tsara A for the year ended 30 June 20X3.
The tax rate of Tsara A is 30%.
Solution
Michelle worked through the following steps to complete the task.
Step 1 – Determine whether segment reporting is required

Michelle first reviewed IFRS 8 to assess whether Tsara A is required to report locally
on operating segments under the Standard.
She determined that IFRS 8 applies to for-profit entities whose debt or equity instruments
are traded in a public market, or that are in the process of filing accounts with a regulator
or securities commission for the purpose of issuing a class of instruments in a public market
(IFRS 8 para. 2).

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Ordinarily, Tsara A would not be required to apply IFRS 8; however, it has been requested by
Tsara PLC, the parent company, that Tsara A prepare certain disclosures required by IFRS 8.
Step 2 – Identify operating segments

Michelle reviewed IFRS 8 para. 5 to establish whether the three operating divisions are
operating segments under IFRS 8.
She noted that all three divisions engage in business activities from which they earn revenues
and incur expenses. Michelle also observed that the chief operating decision maker (CODM)
reviews the results, and that there is discrete financial information recorded for all three
divisions.
Fashion Australia, Accessories Australia and Fashion and Accessories New Zealand are therefore
all operating segments.
Step 3 – Identify reportable segments

Michelle then reviewed the 30 June 20X3 end of year report to establish whether the segments
are reportable by applying the quantitative thresholds in IFRS 8 para. 13.
She noted that the quantitative threshold for revenue is based on both sales to external
customers and inter-segment sales; therefore, she must take into account the sales from
Accessories Australia to Fashion Australia when considering this threshold.
She created the following table to help her identify whether the divisions are reportable
segments:
Quantitative thresholds
Tsara A’s operating Reportable segment Reason

segment (Yes/No)
Fashion Australia Yes It is a reportable segment as reported revenue (external

and internal) is at least 10% of total revenue (external and
internal) for all segments ($20,233,350 ÷ $30,757,2151 =
65.8%), which meets the quantitative threshold criteria
detailed in IFRS 8 para. 13(a)
Accessories Australia Yes It is a reportable segment as reported revenue (external

and internal) is at least 10% of total revenue (external and
internal) for all segments ($9,533,8652 ÷ $30,757,215 =
31.0%), which meets the quantitative threshold criteria
detailed in IFRS 8 para. 13(a)
Fashion and No It is not a reportable segment because it does not meet any
Accessories New of the quantitative threshold criteria in IFRS 8 para. 13
Zealand
•• Reported revenue (external and internal) is less than
10% of total revenue (external and internal) for all
segments ($1,000,000 ÷ $30,757,215 = 3.3%)
•• Reported profit is less than 10% of total profit for all
segments ($27,113 ÷ $385,613 = 7.0%)
•• Segment assets are less than 10% of total segment
assets ($1,488,900 ÷ $15,616,583 = 9.5%)
Notes
1. $29,890,500 (external revenue) + $866,715 (internal revenue) = $30,757,215.
2. $8,667,150 + $866,715 (internal revenue) = $9,533,865.

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Michelle checked that at least 75% of external revenue is reported by operating segments in line
with IFRS 8 para.15. Fashion Australia and Accessories Australia account for 96.7% ($28,890,500
÷ $29,890,500) of total external revenue and so additional segments do not need to be identified
as reportable.
Step 4 – Identify the disclosure requirements

Michelle reviewed IFRS 8 paras 23, 28 and 33 to identify the disclosure requirements specified
by Tsara PLC for the operating segments, and noted that the following disclosures are required:
•• Information about profit or loss, assets and liabilities.
•• Reconciliations between segment disclosures and the entity balances.
•• Information about geographical areas.
Step 5 – Prepare the disclosures

Michelle prepared the operating segment disclosures for Tsara A. She made reference to the
requirements in the Standard, using the internal reporting information for the year ended
30 June 20X3, combined with the further information relating to the year ended 30 June 20X3
as outlined in the scenario.
Profit or loss, assets and liabilities

In accordance with IFRS 8 para. 23, Michelle prepared the following operating segment
disclosures for Tsara A at 30 June 20X3.
Profit or loss, assets and liabilities
Fashion Accessories All other Tsara A

Australia Australia segments total
$’000 $’000 $’000 $’000
External revenues 20,223 8,667 1,000 29,890
Inter-segment revenue – 867 1

– 867
Interest expense 215 20 – 235
Depreciation 281 64 30 375
Impairment of assets – 210 2 – 210
Income tax expense 70 56 9 135
Segment profit after tax 199 160 27 386
Segment assets3 12,036 2,092 2,497 16,625
Segment liabilities4 2,149 529 2,122 4,800
Notes
1. Inter-segment revenue is 10% of external sales of Accessories Australia to Fashion Australia (10% × $8,667,150).
2. The cost associated with the fire damage at the Accessories Australia division is reported as ‘impairment of assets’ and
is material.
3. Includes $1,489,000 of Fashion and Accessories New Zealand’s assets and $1,008,000 of unallocated assets.
4. Includes $713,000 of Fashion and Accessories New Zealand’s liabilities and $1,409,000 of unallocated liabilities.

WE
Reconciliations
Michelle noted that under IFRS 8 para. 28, the following reconciliations are required:
•• A reconciliation of total reportable segments’ revenues to the entity’s revenue; the
reconciling item being inter-segment revenue between Accessories Australia and Fashion
Australia.
•• A reconciliation of total reportable segments’ profit to the entity’s profit.
•• A reconciliation of total reportable segments’ assets to the entity’s assets.
•• A reconciliation of total reportable segments’ liabilities to the entity’s liabilities.
•• A reconciliation of total reportable segments’ other material items to the entity’s other
material items.
The reconciliation of total reportable segments’ profit to the entity’s profit would normally be
based on profit before tax; however, where tax expense/income has been allocated to reportable
segments, the entity may reconcile profit after tax.
Michelle noted that the profit for Tsara A is reported internally by operating segment after tax;
therefore, she uses these figures.
She also noted that the reconciling item is the adjustment for long service leave not accounted
for in accordance with IAS 19 Employee Benefits (IAS 19) for internal reporting purposes.
This adjustment reduces profit and increases liabilities, and therefore appearing as a reconciling
item in three parts of the reconciliation disclosures.
Reconciliations
$’000
Revenues
Total revenue for reportable segments1 29,757
Other revenue 1,000
Less: Elimination of inter-segment revenue (867)
Entity’s revenue 29,890
Profit/(loss) after income tax
Total profit for reportable segments 359
Other profit/(loss) 27
Adjustment for long service leave2 (100)
Entity’s profit after income tax 286
Assets
Total assets for reportable segments 14,128
Other assets3 1,489
Other unallocated amounts4 1,051
Entity’s assets 16,668
Liabilities
Total liabilities for reportable segments 2,678
Other liabilities 713
Other unallocated amounts5 1,552
Entity’s liabilities 4,943
Other material items
Total other material items for reportable segments – impairment loss 210
Entity’s other material items 210

WE
Notes
1. $20,223,000 Fashion Australia external revenue + $8,667,000 Accessories Australia external revenue + $867,000
Accessories Australia inter-segment revenue.
2. This is an after-tax adjustment as it was stated in the scenario that the net profit would have decreased by $100,000 if
IAS 19 was applied.
3. Assets of Fashion and Accessories New Zealand.
4. $1,008,405 unallocated assets + $42,857 deferred tax asset. As a long service leave liability has been recorded as an
adjustment, a corresponding temporary difference is recognised for the related tax effect ($142,857 × 30%) and has
been included within other unallocated amounts.
5. $1,409,409 unallocated liabilities + $142,857. As the $100,000 adjustment for long service leave was after tax, the
liability adjustment is $142,857 ($100,000 ÷ (1 – 30%)).
Geographical information
Michelle reviewed the geographical disclosure requirements in IFRS 8 and noted that para. 33
requires disclosure of revenue and non-current assets.
She created the following table that shows the geographical disclosure information.
Geographical information
Revenues from Non-current assets

external customers
$’000 $’000
Australia 28,890 9,000
New Zealand 1,000 2,905
Total 29,890 11,905
Michelle sent the operating segment disclosures to Peter Cartus as he requested.

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Chartered Accountants Program

Financial Accounting & Reporting

Worked example 2.1

Sales revenue 1 8,500

Cost of sales (5,440)

Gross profit 3,060

Impairment loss – trade receivables (40)

Bad debts (140)

Depreciation – equipment (100)

Depreciation – motor vehicles (65)

Employee benefits (1,237)

Interest expense – debentures (135)

Unit 2 – Worked examples Page 2-1

Interest expense – overdraft (15)

Loss on disposal of motor vehicle 2 (15)

Rental expense (500)

Profit before tax 481

Income tax expense (190)

Underprovision for income tax expense (8)

Net profit for the year 283

Total comprehensive income for the year 283

Statement of financial position as at 30 June 20X2

Notes 20X2 20X1

Cash at bank – 210

Trade receivables 2,990 2,470

Allowance for impairment loss – trade receivables (125) (85)

Inventory 2,109 1,810

Total current assets 4,997 4,434

Equipment – cost 1,000 1,000

Equipment – accumulated depreciation and impairment (700) (600)

Motor vehicles – cost 600 450

Motor vehicles – accumulated depreciation and impairment (97) (84)

Total non-current assets 803 766

Total assets 5,800 5,200

Bank overdraft 180 –

Trade payables 1,920 1,720

Provision for employee entitlements 197 125

Income tax payable 190 150

Page 2-2 Worked examples – Unit 2

Statement of financial position as at 30 June 20X2

Notes 20X2 20X1

Dividend payable 3 140 105

Debentures 400 –

Total current liabilities 3,027 2,100

Debentures 4 600 1,000

Total liabilities 3,627 3,100

Net assets 2,173 2,100

Share capital 1,500 1,500

General reserve 300 100

Retained earnings 5 373 500

Total shareholders’ equity 2,173 2,100

Step 1 – Review the Standard

Unit 2 – Worked examples Page 2-3

Step 2 – Classify the items in the financial statements

Classification of statement of financial position items

Line item 20X2 20X1 Classification Specific cash flow

Trade and other 2,990 2,470 Operating Receipts from customers

Allowance for (125) (85) Operating Receipts from customers

Prepayments 23 29 Operating Payments to suppliers, employees and

Inventory 2,109 1,810 Operating Payments to suppliers, employees and

Page 2-4 Worked examples – Unit 2

Classification of statement of financial position items

Line item 20X2 20X1 Classification Specific cash flow