Financial Reporting (FR) : Revision Notes

ACCA
Applied Skills
Financial
Reporting (FR)
Revision Notes
For exams in September

2021, December 2021, March
2022 and June 2022
TT2021
BPP Tutor Toolkit copy

Second edition 2021
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TT2021

Contents
Introduction
Essential skills areas to be successful in Financial Reporting (FR) iv
Chapter 1: The Conceptual Framework 1

Chapter 2: The regulatory framework 4
Chapter 3: Tangible non-current assets 6
Chapter 4: Intangible assets 8
Chapter 5: Impairment of assets 10
Chapter 6: Revenue and government grants 11
Chapter 7: Introduction to groups 13
Chapter 8: The consolidated statement of financial position 15
Chapter 9: The consolidated statement of profit or loss and other comprehensive
income 17
Chapter 10: Accounting for associates 19
Chapter 11: Financial instruments 20
Chapter 12: Leases 22
Chapter 13: Provisions and events after the reporting period 24
Chapter 14: Inventories and biological assets 26
Chapter 15: Taxation 27
Chapter 16: Presentation of published financial statements 28
Chapter 17: Reporting financial performance 29
Chapter 18: Earnings per share 31
Chapter 19: Interpretation of financial statements 33
Chapter 20: Limitations of financial statements and interpretation techniques 35
Chapter 21: Statement of cash flows 36
Chapter 22: Specialised, not-for-profit and public sector entities 37
TT2021

Essential skills areas to be successful in Financial
Reporting (FR)
We think there are three areas you should develop in order to achieve exam success in Financial
Reporting (FR):
(a) Knowledge application
You will gain technical knowledge as you work through the chapters of the FR workbook. You will
learn to demonstrate that knowledge in the exam using the following skills shown in the diagram
below:
(b) Specific FR skills
(c) Exam success skills
cess skills
Exam suc
r planning
Answe
c FR skills C
n Specifi o
tio
rr req
a
ec ui
of
m
t i rem
or
nt
inf
erp ents
ng
Approach to Application
reta
agi
objective test of accounting

(OT) questions standards
Man
tion l y si s
Spreadsheet Interpretation
Go od
skills skills
ana
ti m
c al
Approach
em
to Case
e ri
OTQs
an
um
ag
tn
em
en
en
t ci
Effi
Effe cti
ve writing
a nd p r
esentation
Specific FR skills
These are the skills specific to FR that we think you need to develop in order to pass the exam.
In the FR BPP Workbook, there are five Skills Checkpoints which define each skill and show how it
is applied in answering a question. A brief summary of each skill is given below.
TT2021 iv Financial Reporting (FR)

Skill 1: Approach to OTQs
As 60% of your marks will be gained by correctly answering objective test questions (‘OTQ’), you
need to ensure that you are familiar with the different types of OTQs and the best approach to
tackling them in the exam.
A step-by-step technique for ensuring that you approach the OTQs in the most efficient and
effective way is outlined below:
STEP 1: Answer the questions you know first.

If you’re having difficulty answering a question, move on and come back to tackle it
once you’ve answered all the questions you know.
It is often quicker to answer discursive style OT questions first, leaving more time
for calculations.
STEP 2: Answer all questions.

There is no penalty for an incorrect answer in ACCA exams; there is nothing to be
gained by leaving an OT question unanswered. If you are stuck on a question, as a
last resort, it is worth selecting the option you consider most likely to be correct
and moving on. Flag the question, so if you have time after you have answered the
rest of the questions, you can revisit it.
STEP 3: Read the requirement first!

The requirement will be stated in bold text in the exam. Identify what you are
being asked to do, any technical knowledge required and what type of OT
question you are dealing with. Look for key words in the requirement such as
"Which TWO of the following," or "Which of the following is NOT".
STEP 4: Apply your technical knowledge to the data presented in the question.
Work through calculations taking your time and read through each answer option
with care. OT questions are designed so that each answer option is plausible. Work
through each response option and eliminate those you know are incorrect
Skills Checkpoint 1 in the FR BPP Workbook covers this technique in detail through application to a
series of exam-standard question.
Skill 2: Approach to Case OTOs

In the exam, you will have three OT Case style questions, each worth 10 marks each. They are
OTQ style questions, however, they will be linked along a common theme, such as recognising
revenue (including government grants) or accounting for non-current asset acquisitions and
resulting deferred tax adjustments. This allows the Examining Team to ask questions on specific
areas in greater detail than just one OTQ will permit.
Therefore, it is imperative that you are familiar with the OTQ style of question and recognise the
style of a case question.
TT2021
Introduction v

A case question will be scenario based, so there will be a short description together with some
financial information, and five questions will be asked about the information. There will be a
combination of narrative and numerical questions.
Key steps in developing and applying this skill are outlined below:
STEP 1: Read the scenario carefully

Read the introduction to the question carefully, ensuring you understand what the
questions are asking you to do. Skimming the questions requirement will help you
to identify whether the questions are narrative or numerical in style.
STEP 2: Start with narrative questions

Attempt the narrative questions first as this will allow you to use any remaining
time to focus on the numerical and calculation questions. The case is usually split
into three narrative questions with two further, calculation based questions.
STEP 3: Work through numerical questions methodically

Apply your technical knowledge to the data presented in the question.
Work through calculations taking your time and read through each answer option
with care. OT questions are designed so that each answer option is plausible. Work
through each response option and eliminate those you know are incorrect.
STEP 4: Be aware of time

Stick to your time carefully, as each question is worth two marks, so spending more
than the allocated time of 18 minutes on each case question is an inefficient use of
your time, as you will need to move onto the Section C questions. If you are
running out of time, or you cannot answer any of the questions, guess the answer
from the options provided. You do not lose marks for incorrect answers.
Skills Checkpoint 2 in the FR BPP Workbook covers this technique in detail through application.
Skill 3: Using spreadsheets effectively

Section C will require the use of the spreadsheet functionality in the exam, so you need to be
familiar with the software and what the FR examining team is expecting to see in terms of
presentation.
TT2021 vi Financial Reporting (FR)

The Section C question which requires you to prepare extracts from the financial statements (this
may be for a single entity or for a group, and it may be any of the primary financial statements)
will require you to use the spreadsheet software.
A step-by-step technique for using spreadsheets in the exam is outlined below:
STEP 1: Understanding the data in the question

Where a question includes a significant amount of data, read the requirements
carefully to make sure that you understand clearly what the question is asking
you to do. You can use the highlighting function to pull out important data from
the question. Use the data provided to think about what formula you will need to
use. For example, if the company calculates the allowance for receivables as a
percentage of the balance, use the percentage function.
STEP 2: Use a standard proforma working.

You will be asked to prepare an extract or a set of financial statements. Set out
your statement of profit or loss or the statement of financial position before you
start to work through the question. This will give you the basic structure from
where you can enter the data in the question.
Format your cells to ensure the workings look consistent, for example, using the
comma function to mark the thousands in numerical answers.
STEP 3: Use spreadsheet formulae to perform basic calculations.

Ensure you are showing your workings by using the spreadsheet formula for simple
calculations, for example, the cost of sale figure will be made up of different
balances, so add them together using the formula. Cross refer any more detailed
workings, and link workings into your main answer.
Step 4: Include the results of workings in the proforma

You must ensure that you include your workings form in the proforma and
complete your final answer. Remember to show how you have included your
workings by cross referencing to the relevant working and by using the formula
within the cell to add/subtract the balance.
Skills Checkpoint 3 in the FR BPP Workbook covers this technique in detail through application to
an exam-standard question.
Skill 4: Application of accounting standards

Knowledge of the IFRS standards will be required in all sections of the FR exam. You may be asked
to identify the key requirements of an IFRS Standard in a knowledge based narrative question and
are likely to be asked questions about the application or impact of IFRS Standards in an OTQ.
Knowledge of the requirements of IFRS Standards is essential when preparing financial statements
and may be relevant in the interpretation of an entity’s performance and position in Section C.
TT2021
Introduction vii

A step-by-step technique for applying your knowledge of accounting standards is outlined below:
STEP 1: Overview of key standards

Ensure you have a high-level overview of the key standards covered in the FR
exam. Use the summary diagrams at the end of the chapters in the Workbook to
act as your summaries. These are a useful way of remembering the key points.
STEP 2: Numerical question practice

Practice the numerical questions in the Workbook and in the Practice & Revision
Kit. These will test your knowledge of the mechanics of the accounting standards.
Often there can be a difference between understanding what the standard does
and how it applies to a specific scenario. Practice OTQs as well as longer, Section C
questions to consolidate your knowledge.
STEP 3: Narrative question practice

Practice the narrative questions which test your understanding of how the standard
can affect the financial statements. This will help you to revise your understanding
of why the accounting standard is important in a scenario. For example, what are
the key tests for impairment of assets and why would this be important for the
financial statements?
Skill 5: Interpretation skills

Section C of the Financial Reporting (FR) exam will contain two questions. One of these will require
you to interpret a set of financial statements of a single entity or group or extracts from a set of
financial statements. The interpretation is likely to contain computational elements in the form of
ratios, but your focus should be on the interpretation of those ratios to explain the performance
and position of the single entity or group you are presented with.
Given that the interpretation of financial statements will feature in Section C of every exam, it is
essential that you master the appropriate technique for analysing and interpreting information
and drawing relevant conclusions in order to maximise your chance of passing the FR exam.
TT2021 viii Financial Reporting (FR)

STEP 1: Read and analyse the requirement.
Read the requirement carefully to see what calculations are required and how many
marks are set for the calculation and how many for the commentary.
Work out how many minutes you have to answer each sub-requirement.
STEP 2: Read and analyse the scenario.

Identify the type of company you are dealing with and how the financial topics in
the requirement relate to that type of company. As you go through the scenario,
you should be highlighting key information which you think will play a key role in
answering the specific requirements.
STEP 3: Plan your answer.

You will have calculated the ratios and understand the performance and position of
the company. You must now plan the points you will make in interpreting the ratios.
Read through the information in the scenario and identify the points that help you
to explain the movement in ratios. Using each ratio as a heading, create a bullet
point list of the relevant points.
STEP 4: Type your answer.

You should now take the bullet point list created at the planning stage and expand
the points, remembering to use information given in the scenario and to avoid
generic explanations.
As you write your answer, explain what you mean – in one (or two) sentence(s) –
and then explain why this matters in the given scenario. This should result in a
series of short paragraphs that address the specific context of the scenario.
Exam success skills

Passing the FR exam requires more than applying syllabus knowledge and demonstrating the
specific FR skills. It also requires the development of excellent exam technique through question
practice.
We consider the following six skills to be vital for exam success. The skills checkpoints show how
each of these skills can be applied in the exam.
Exam success skill 1

Managing information
Questions in the exam will present you with a lot of information. The skill is how you handle this
information to make the best use of your time. The key is determining how you will approach the
exam and then actively reading the questions.
Advice on developing Managing information
Approach
The exam is three hours long. There is no designated ‘reading’ time at the start of the exam.
Once you feel familiar with the exam paper consider the order in which you will attempt the
questions; always attempt them in your order of preference. For example, you may want to leave
to last the question you consider to be the most difficult.
If you do take this approach, remember to adjust the time available for each question
appropriately – see Exam success skill 6: Good time management.
TT2021
Introduction ix

If you find that this approach doesn’t work for you, don’t worry – you can develop your own
technique.
Active reading
You must take an active approach to reading each question. Focus on the requirement first,
underlining key verbs such as ‘evaluate’, ‘analyse’, ‘explain’, ‘discuss’, to ensure you answer the
question properly. Then read the rest of the question, underlining and annotating important and
relevant information, and making notes of any relevant technical information you think you will
need.

Correct interpretation of the requirements
The active verb used often dictates the approach that written answers should take (eg ‘explain’,
‘discuss’, ‘evaluate’). It is important you identify and use the verb to define your approach. The
correct interpretation of the requirements skill means correctly producing only what is being
asked for by a requirement. Anything not required will not earn marks.
Advice on developing the Correct interpretation of the requirements
This skill can be developed by analysing question requirements and applying this process:
Step 1 Read the requirement

Firstly, read the requirement a couple of times slowly and carefully and
highlight the active verbs. Use the active verbs to define what you plan to do.
Make sure you identify any sub-requirements.
Step 2 Read the rest of the question

By reading the requirement first, you will have an idea of what you are looking
out for as you read through the case overview and exhibits. This is a great time
saver and means you don’t end up having to read the whole question in full
twice. You should do this in an active way – see Exam success skill 1: Managing
Information.
Step 3 Read the requirement again

Read the requirement again to remind yourself of the exact wording before
starting your written answer. This will capture any misinterpretation of the
requirements or any missed requirements entirely. This should become a habit
in your approach and, with repeated practice, you will find the focus, relevance
and depth of your answer plan will improve.

Answer planning: Priorities, structure and logic
This skill requires the planning of the key aspects of an answer which accurately and completely
responds to the requirement.
Advice on developing Answer planning: Priorities, structure and logic
Everyone will have a preferred style for an answer plan. For example, it may be a mind map,
bullet-pointed lists or simply annotating the question paper. Choose the approach that you feel
most comfortable with, or, if you are not sure, try out different approaches for different questions
until you have found your preferred style.
For a discussion question, it would be better to draw up a separate answer plan in the form of a
bullet pointed list. You would then expand the bullet points when typing up your final answer.

Efficient numerical analysis
This skill aims to maximise the marks awarded by making clear to the marker the process of
arriving at your answer in Section C questions. This is achieved by laying out an answer such
that, even if you make a few errors, you can still score subsequent marks for follow-on
TT2021 x Financial Reporting (FR)

calculations. It is vital that you do not lose marks purely because the marker cannot follow what
you have done.
Advice on developing efficient numerical analysis
This skill can be developed by applying the following process:
Step 1 Use a standard proforma working where relevant

If answers can be laid out in a standard proforma then always plan to do so.
This will help the marker to understand your working and allocate the marks
easily. It will also help you to work through the figures in a methodical and
time-efficient way.
Some interpretations questions have a preformatted response area which
requires you to show your calculations and final answer for each of the
required ratios. If the exam includes a pre-formatted response area, you must
complete it as indicated.
Step 2 Show your workings

Keep your workings as clear and simple as possible and ensure they are cross-
referenced to the main part of your answer. Where it helps, provide brief
narrative explanations to help the marker understand the steps in the
calculation. This means that if a mistake is made you do not lose any
subsequent marks for follow-on calculations.
Step 3 Keep moving!

It is important to remember that, in an exam situation, it can sometimes be
difficult to get every number 100% correct. The key is therefore ensuring you do
not spend too long on any single calculation. If you are struggling with a
solution then make a sensible assumption, state it and move on.

Effective writing and presentation
Written answers should be presented so that the marker can clearly see the points you are
making, presented in the format specified in the question. The skill is to provide efficient written
answers with sufficient breadth of points that answer the question, in the right depth, in the time
available.
Advice on developing Effective writing and presentation
Step 1 Use headings

Using the headings and sub-headings from your answer plan will give your
answer structure, order and logic. This will ensure your answer links back to the
requirement and is clearly signposted, making it easier for the marker to
understand the different points you are making. Underlining your headings will
also help the marker.
Step 2 Write your answer in short, but full, sentences

Use short, punchy sentences with the aim that every sentence should say
something different and generate marks. Write in full sentences, ensuring your
style is professional.
Step 3 Do your calculations first and explanation, second

Interpretation questions will require you to calculate ratios then provide
explanation as to the differences/trends that the ratios show. You must perform
the calculations first then use the information in the question to form your
explanations.
TT2021
Introduction xi

Good time management
This skill means planning your time across all the requirements so that all tasks have been
attempted at the end of the three hours available and actively checking on time during your
exam. This is so that you can flex your approach and prioritise requirements which, in your
judgement, will generate the maximum marks in the available time remaining.
Advice on developing Good time management
The exam is 3 hours long, which translates to 1.8 minutes per mark. Therefore a 10-mark
requirement should be allocated a maximum of 18 minutes to complete your answer before you
move on to the next task. At the beginning of a question, work out the amount of time you should
be spending on each requirement and write the finishing time next to each requirement on your
exam paper.
Keep an eye on the clock
Aim to attempt all requirements, but be ruthless and move on if your answer is not going as
planned. The challenge for many is sticking to planned timings. Be aware this is difficult to
achieve in the early stages of your studies and be ready to let this skill develop over time.
If you find yourself running short on time and know that a full answer is not possible in the time
you have, consider recreating your plan in overview form and then add key terms and details as
time allows. Remember, some marks may be available, for example, simply stating a conclusion
which you don’t have time to justify in full.
Question practice
Question practice is a core part of learning new topic areas. When you practice questions, you
should focus on improving the Exam success skills – personal to your needs – by obtaining
feedback or through a process of self-assessment.
Sitting this exam as a computer-based exam and practicing as many exam-style questions as
possible in the ACCA CBE practice platform will be the key to passing this exam. You should
attempt questions under timed conditions and ensure you produce full answers to the discussion
parts as well as doing the calculations. Also ensure that you attempt all mock exams under exam
conditions.
ACCA have launched a free on-demand resource designed to mirror the live exam experience
helping you to become more familiar with the exam format. You can access the platform via the
Study Support Resources section of the ACCA website navigating to the CBE question practice
section and logging in with your my ACCA credentials. Question practice is a core part of learning
new topic areas. When you practice questions, you should focus on improving the Exam success
skills – personal to your needs – by obtaining feedback or through a process of self-assessment.
TT2021 xii Financial Reporting (FR)

Chapter 1: The Conceptual Framework
The Conceptual Framework
What is a The IASB’s The objective of

conceptual Conceptual general purpose
framework? Framework financial reporting
A statement of generally Purpose To provide financial information

accepted theoretical principles, • To help develop IFRSs which about the reporting entity that is
which form the frame of are based on consistent useful to existing and potential
reference for financial reporting concepts investors, lenders and other
• To assist preparers where no creditors in making decisions
IFRS applies about providing resources to the
Advantages entity
• Accounting standards
developed on same principles, Status
using a consistent approach Accrual accounting
• Not an IFRS
• Development of accounting • Compliance required by IAS 1 The effects of transactions and
standards less subject to other events are recognised
political pressure when they occur, even if the
• Avoids need for large volume of Contents resultant cash receipts/payments
rules occur in a different period
• The objective of general
purpose financial reporting
• The qualitative characteristics
Disadvantages Going concern
of useful financial information
• Not clear that single • Financial statements and the The financial statements are
conceptual framework will suit reporting entity normally prepared on the
all users • The elements of financial assumption that the entity is a
• May be a need for a variety of statements going concern and will continue
accounting standards, each • Recognition and derecognition in operation for the foreseeable
produced for a different • Measurement future
purpose (and with different • Presentation and disclosure
concepts as a basis) • The concepts of capital and
• Not clear that a conceptual capital maintenance
framework makes the task of
preparing and then
implementing standards any
easier than without a
framework
TT2021
1
Qualitative The elements Recognition
characteristics of useful of financial and
financial information statements derecognition
Fundamental qualitative Asset Recognition criteria

characteristics Present economic resource • Meets the definition of an
• Relevance: controlled by the entity as a element
– Capable of making a result of past events • Provides information that is
difference in the decisions relevant and a faithful
made by users representation
– Predictive and/or Liability • At a cost that does not
confirmatory value A present obligation of an entity outweigh the benefit
– Materiality to transfer an economic resource
• Faithful representation: as a result of past events
– Represents economic Derecognition
phenomena in words and • When control of all/part of an
numbers Equity asset is lost
– Reflects substance The residual interest in the assets • When there is no longer a
– Complete of an entity after deducting all present obligation in respect of
– Neutral its liabilities all/part of a liability
– Free from error
Income and expenses

Enhancing qualitative
• Income: Increases in assets or
characteristics
decreases in liabilities that
• Comparability: About other result in increases in equity,
entities and other periods other than those relating to
• Verifiability: Information must contributions from holders of
be capable of being verified equity claims
• Timeliness: Information must • Expenses: Decreases in assets
be available in time to or increases in liabilities that
influence decision making result in decreases in equity,
• Understandability: Information other than those relating to
must be classified and distributions to holders of
presented in a clear and equity claims
concise manner
The cost constraint

The benefits of reporting
financial information must justify
the costs incurred to provide and
use it
TT2021
2 Financial Reporting (FR)

Measurement Concepts of capital and
capital maintenance
Historical cost
• Most common Capital
• Measured at the transaction • Financial concept of capital =
date and not subsequently net assets/equity
updated • Physical concept of capital =
• Asset: Cost of acquisition/ productive capacity
creation of asset plus
transaction costs
• Liability: Value to incur/take on Capital maintenance
the liability less transaction
• A 'profit' is made where
costs
'capital' has increased over the
period (excluding transactions
with holders of equity claims)
Current value
• Financial capital
• Information is updated to maintenance – profit is made if
reflect changes in value at the net assets/equity increase
measurement date • Physical capital maintenance –
• Fair value: Price that would be profit is made if the physical
received to sell an asset/paid productive capacity/operating
to transfer a liability in an capacity increases
orderly transaction between
market participants at the
measurement date
• Value in use (assets)/fulfilment
value (liabilities)
– Value in use – present value
of the cash flows expected to
be derived from the asset
– Fulfilment value – present
value of the cash flows
expected to be obliged to
transfer to fulfil the liability
• Current cost: Cost of an
equivalent asset/consideration
that would be received for an
equivalent liability at the
measurement date
TT2021
3
Chapter 2: The regulatory framework
The Regulatory Framework
Need for regulatory framework Principles vs Rules
• To act as a central source of reference • Principles = guidance

• Designate a system of enforcement to • Rules = specific
ensure consistency
Advantages
• Single framework ensuring consistency
across standards
• Principles avoid requirement of excessive detail
in standards
• Rules can be broken and loopholes found
Disadvantages
• Practices may change leading to outdated principles
• Principles may be overly flexible
IASB IASB and national standard setters
Definition • Working to harmonise accounting standards across

'Independent standard setter made up of the global economies
representatives from differing global economies' • Use of Discussion Papers and Exposure Drafts
• Annual IASB Conference to encourage debate and
discussion on key issues
Advantages • IASB works with both national standard setters
• Greater international consistency of financial and other global bodies, such as World Bank
statements • USA – FASB, some convergence and projects
• Reduced costs of running an international, (Norwalk, IFRS 15 and IFRS 16), however, no
centralised reporting framework than a national current plans
reporting framework
• Europe – EU Commission aiming to build fully
• Greater control over and understanding of foreign
integrated market, including recent harmonisation
operations, including their consolidation, as using
of company law (including non-EU entities)
one international recognised set of standards
• UK – FRS 100-105 based on IFRS. Company law
updates in 2017
Disadvantages
• Japan – increased convergence, with further local
• IFRS may not meet local needs adoption of IFRS Standards
• Loss of control at national level in respect of • China – national standards increasingly converged,
accounting standards but no plans to fully adopt IFRS Standards
• Language, translation and interpretation issues
• Africa – significant adoption of IFRS Standards
• May conflict with national law
across African continent
• South America – required across majority of the
Objectives of IFRS Standards continent
• To develop, in the public interest, a single set of high
quality, understandable and enforceable global
accounting standards
• To promote the use and rigorous application of those
standards
• To bring about convergence of national accounting
standards and IFRS
TT2021

Due process of IASB Criticisms of the IASB
Standard setting Accounting standards and choice

• Issues paper and consultation with IFRS Advisory Too much choice and variation in interpretation?
Council
• Discussion Paper
• Exposure Draft Advantages
• IFRS Standard • Reduce variations in accounting methods
• Focal point for debate and discussion on
accounting matters
Coordination with national standard setters • Companies must disclose their accounting policies
• Coordination of work plans • Increased conformity
• Power to local standard setters regarding issuance • Increased information available to the users of the
of Exposure Drafts financial statements
• National standard setters set the process regarding
integration and due process
Disadvantages
• 'One-size fits all' not always appropriate, especially
Interpretation of accounting standards across different industries and territories
• IFRS Interpretations Committee • May be subject to influence and pressure by
– Question resulting in discussion and consideration larger economies
by the Committee • Trend towards rigidity
• Resulting in either • Not all national standards have a conceptual
– Additional illustrative material added to existing framework of accounting
standard; or
– Amendment to the Standard (narrow scope
standard setting)
TT2021
5
Chapter 3: Tangible non-current assets
Tangible non-current assets
Property, plant and Investment property (IAS 40)

equipment (IAS 16)
Accounting for PPE Definitions Subsequent measurement

Assumed knowledge – • Investment property – is • Cost model (IAS 16)
recognition, measurement, property held to earn rentals • Fair value model
depreciation, disposals, or for capital appreciation – Measure fair value at end of
disclosure • Owner-occupied – property each reporting period
held by the owner for use in – Gain or loss to p/l
the production or supply of – No depreciation
Accounting for revaluations goods or services or for
• Revaluation surpluses in OCI administrative purposes
and revaluation surplus (SFP) • Fair value – price that would Transfers
– Unless reverses previous be received to sell an asset in • Investment property to
decrease in which case P/L an orderly transaction at the PPE/Inventory
to cancel previous loss then measurement date – Per IAS 40 to the date of
OCI • Cost – cash or cash transfer, fair value becomes
equivalents paid or the fair cost of PPE/inventory
• Revaluation decreases to P/L
value of other consideration
– Unless reverses previous • PPE to Investment property
given to acquire an asset
surplus in which case loss to – Per IAS 16 to date of transfer,
• Carrying amount – amount at
OCI then P/L then IAS 40
which an asset is recognised
in the statement of financial
Revaluation of depreciated position. Disposals
assets Gain or loss recognised in p/l
• All assets depreciated for year Recognition
– If revaluation at the start of
• Probably economic benefits Disclosure
the year, revalue then
will flow to the entity
depreciate • Choice of fair value model or
• Cost can be reliably measured
– If revaluation at the end of cost model
the year, depreciate on • Criteria for classification as
b/fwd cost/valuation to find investment property
Initial measurement
CA then revalue • Assumptions in determining
– If revaluation mid-year, Cost per IAS 16
fair value
pro-rate calculations • Use of independent
• Revalution surplus may be professional valuer
released to retained earnings (encouraged but not required)
• Rental income and expenses
• Any restrictions or obligations
Complex assets
• Components of complex assets
depreciated separately
• Cost of replacement parts/
overhauls capitalised if
recognition criteria satisfied
TT2021

Borrowing costs (IAS 23)
Accounting treatment
• Borrowing costs relating to a qualifying
asset must be capitalised as part of the
cost of that asset
– A qualifying asset is one that
necessarily takes a long period of
time to be ready for its intended use
or sale
Borrowing costs eligible for

capitalisation
• Funds specifically borrowed – at actual
borrowing rate less any income
• General funds – weighted average of
borrowing costs in period
– Amount capitalised should not
exceed actual cost
Commencement, suspension and

cessation
• Commence capitalisation when:
– Expenditure incurred
– Borrowing costs incurred
– Activities to get the asset ready for
use/sale are in progress
• Suspend capitalisation when
development is interrupted
• Cease capitalisation when activities to
get the asset ready for use/sale are
complete
TT2021
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Chapter 4: Intangible assets
Intangible assets
Definitions Recognition and categories of intangible asset
Intangible assets Recognition criteria

• Identifiable Recognise intangible asset if it meets:
• Non-monetary asset • Definition of an intangible asset
• Without physical substance • Recognition criteria
– Probable future economic benefits
– Cost can be measured reliably
Identifiable
• Separable:
– Capable of being separated/divided from entity
and sold/transferred/licensed/exchanged; or
• Arises from contractual or other legal rights
Monetary assets
• Money held
• Assets to be received in fixed/determinable
amounts of money
Acquired intangible assets Internally generated intangible assets
Recognition criteria Definitions

• Assumed to be satisfied • Research – original and planned investigation to
• Separately acquired recognised at purchase gain new knowledge/understanding
• Acquired as part of a business combination • Development – application of research to
– Recognise separately from goodwill develop/enhance products
Goodwill Recognition criteria

• Internally generated – do not recognise • Research expenditure
• As a result of a business combination – recognise – Recognise as an expense in P/L
positive goodwill as an intangible asset in the • Development expenditure:
group accounts – Capitalise as an intangible asset if all of the
following are met:
◦ Probable future economic benefits
◦ Intention to complete and use/sell
◦ Resources available to complete asset
◦ Ability to use/sell asset
◦ Technical feasibility of completing asset
◦ Expenditure can be measured reliably
• Recognition as an intangible asset
prohibited for:
– Brands
– Mastheads
– Publishing titles
– Customer lists
TT2021

Initial measurement Subsequent measurement
• Acquired separately: Measure at cost Cost model or revaluation model

– Purchase price (include import duties and • Cost model:
non-refundable purchase taxes; deduct trade
Cost X
discounts and rebates)
Accumulated amortisation (X)
– Directly attributable costs
Accumulated impairment (X)
• Acquired as part of a business combination:
Measure at fair value Carrying amount X
• Internally generated: Measure at cost • Revaluation model:
– Sum of expenditure incurred from date Fair value (at revaluation date) X
intangible asset first meets recognition criteria Subsequent accumulated amortisation (X)
– Directly attributable costs
Subsequent accumulated impairment (X)
Carrying amount X
Revaluation model
• Revalue to fair value by reference to an
active market
• Revalue all assets of that class unless no
active market
• Revalue sufficiently often that carrying amount
does not differ materially from fair value
• Increase in value: to OCI (unless reverses
previous revaluation loss in P/L)
• Decrease in value: (1) to OCI (2) to P/L
Amortisation/Impairment Derecognition
• Finite useful life Point of derecognition

– Amortise on systematic basis over useful life Derecognise an intangible asset:
– Usually recognise in P/L • On disposal; or
– Residual value normally zero • When no future economic benefits are expected
– Begins when asset is available for use from its use or disposal
– Review useful life and amortisation method at
least every year end
• Indefinite useful life: Gain or loss on derecognition
– Do not amortise asset
Net disposal proceeds X
– Conduct impairment reviews:
Less: Carrying amount (X)
◦ Annually; and
◦ Where indication of possible impairment Gain/(loss) on derecognition X
• Review useful life at least annually • Recognise gain/loss in P/L
• Accounting entry:
DEBIT Cash (if any)
CREDIT Intangible asset
CREDIT/DEBIT Profit or loss (balancing figure)
Revaluation model
Balance on revaluation surplus transferred to
retained earnings
TT2021
9
Chapter 5: Impairment of assets
Impairment of assets
Principle of impairment Impairment

indicators
Basic principle Recoverable amount Examples of impairment indicators

Assets should not be carried at Higher of: • External
more than their value to an entity • Fair value less costs of disposal – Asset's value declined more
• Value in use than expected due to the
Definitions passage of time or normal use
– Adverse changes in
• Impairment loss – amount by Impairment loss
technological, market,
which carrying amount exceeds • If carrying amount exceeds economic or legal environment
recoverable amount recoverable amount, impairment – Increased market interest rates
• Carrying amount – amount at loss arises – Carrying amount of net assets
which asset is presented in • If carrying amount is less than exceeds market capitalisation
financial statements recoverable amount, no
• Recoverable amount – higher of • Internal
impairment loss – Obsolescence or physical
fair value less costs of disposal
and value in use damage
• Cash generating unit – smallest – Significant changes with an
identifiable group of assets that adverse effect on the entity
generates cash flows – Evidence available that asset
• Fair value less costs of disposal performance will be worse
– price received to sell an asset than expected
less incremental costs to dispose
of the asset
• Value in use – present value of
the net future cash flows
Cash generating Recognition of After the

units impairment losses impairment review
Assets within CGU Recognition of impairment losses Depreciation and amortisation

• Smallest group of assets that in the financial statements Based on revised carrying amount
generates cash flows Losses for individual assets: over estimated remaining useful life
• Net of associated liabilities • If at historic cost – in profit/loss
• Goodwill and corporate assets • If revalued assets – rules per Reversal of impairment loss
should be allocated relevant IFRS Standard • Only if change in circumstances
• Asset at historic cost –
Allocation of impairment losses for immediately in profit/loss
CGU • Revalued asset – as a
Allocate first to goodwill, then to revaluation surplus
other assets pro-rata • Impairment of goodwill cannot
be reversed
Minimum value
Maximum value
No asset below:
• Its fair value less costs of Asset not above carrying amount
disposal had no impairment occurred
• Its value in use (if determinable)
• Zero
TT2021

Chapter 6: Revenue and government grants
Revenue and government grants
Revenue IFRS 15 Revenue from

recognition Contracts with Customers
Revenue is income arising in the course of an entity’s Revenue is recognised when there is transfer of
ordinary activities (IFRS 15: Appendix A) control to the customer from the entity supplying the
goods or services
IFRS 15 five steps to recognition of revenue Common types of transaction
1. Identify contract Principal versus agent

• Contract: An agreement between two or more Indicators that an entity controls the goods or
parties that creates enforceable rights and services before transfer and therefore is a principal
obligations. include:
• Contract costs are the incremental costs of (a) The entity is primarily responsible for fulfilling the
obtaining a contract (such as sale commission) are promise to provide the specified good or service;
recognised as an asset if the entity expects to (b) The entity has inventory risk; and
recover those costs (c) The entity has discretion in establishing the price
for the specified good or service.
2. Identify performance obligations
• Performance obligations should be accounted for Sales with a right of return
separately provided the good or service is distinct. • Goods not expected to be returned
• Where a promised good or service is not distinct, it is – Recognise revenue and cost of sales as normal
combined with others until a distinct bundle of • Goods expected to be returned
goods or services is identified – Do not recognise revenue or cost of sales on goods
expected to be returned
3. Determine transaction price – Recognise a refund liability and an asset for the
right to recover goods
The amount to which the entity expects to be 'entitled'
Consignment arrangements
4. Allocate transaction price to performance
obligations • The customer does not obtain control of the product
at the delivery date
Based on standalone selling prices ↓
• The inventory remains in the books of the entity and
5. Recognise revenue when (or as) performance revenue is not recognised until control passes
obligation is satisfied
When entity transfers control of a promised good or Bill and hold arrangements
service to a customer An entity will need to determine at what point the
customer obtains control of the product
Warranties
• IFRS 15: If separate performance obligation
• IAS 37: If legal and constructive obligation
TT2021
11
Performance IAS 20 Accounting for
obligations Government Grants and Disclosure
of Government Assistance
• A contract includes a promise to transfer Grants are not recognised until there is
goods or services to a customer reasonable assurance that the conditions will
• This is the performance obligation within the be complied with and the grants will be received
contract
• An entity must be able to reasonably measure
the outcome of a performance obligation Grants relating to income
before the revenue can be recognised Grants relating to income are shown in profit or
loss either separately or as part of 'other
income' or alternatively deducted from the
Performance obligations satisfied over time related expense
• An entity may transfer a good or service over
time with the revenue being recognised over
time Grants relating to assets
• A performance obligation is satisfied when Government grants relating to assets are
the entity transfers a promised good or presented in the statement of financial position
service (ie an asset) to a customer either:
↓ • As deferred income; or
• An asset is considered transferred when (or • By deducting the grant in calculating the
as) the customer obtains control of that asset carrying amount of the asset
↓ • Any deferred credit is amortised to profit or
• Control of an asset refers to the ability to loss over the asset's useful life
direct the use of, and obtain substantially all
of the remaining benefits from, the asset
Repayment of grants
• A government grant that becomes repayable
Methods of measuring performance is accounted for as a change in accounting
• Output methods estimate in accordance with IAS 8 Accounting
– Units produced Policies, Changes in Accounting Estimates
– Survey of completion to date and Errors
• Input methods • Repayment of grants relating to income are
– Resources consumed applied first against any unamortised
– Costs incurred deferred credit and then in profit or loss
• A contract asset is recognised when revenue • Repayments of grants relating to assets are
has been earned but not yet invoiced (revenue recorded by increasing the carrying amount
that has been invoiced is a receivable) of the asset or reducing the deferred income
• A contract liability is recognised when a balance
customer has paid prior to the entity • Any resultant cumulative extra depreciation is
transferring control of the good or service to recognised in profit or loss immediately
the customer
TT2021

Chapter 7: Introduction to groups
Introduction to groups
Introduction and definitions Control
Types of investment Criteria for control

• Subsidiary – control – full consolidation • Power to direct relevant activities
• Associate – significant influence – equity accounting • Exposure or rights to variable returns
• Investment – acretion of wealth – financial • Ability to use power to affect returns
instrument • Examples of power:
– Voting rights
– Rights to appoint/remove management
Definitions – Right to appoint/remove entity directing relevant
• Control – investor is exposed, or has rights, to activities
variable returns and has the ability to affect those – Decision-making rights in a management contract
returns • Examples of relevant activities:
• Power – right to direct activities – Selling and purchasing goods/services
• Subsidiary – entity that is controlled by another – Selecting/acquiring/disposing of assets
entity – Research and development
• Parent – entity that controls one or more other – Determining funding decisions
entities • Examples of variable returns:
• Group – parent and all its subsidiaries – Dividends
• Associate – an entity over which an investor has – Interest
significant influence – Changes in value of investment
• Significant influence – power to participate in the • Ability to use power to affect returns:
policy decisions of an investee – Current ability even if entity does not use the
ability
Parent's separate financial statements Group financial statements
Parent's statement of financial position Requirement to prepare group financial statements

Investment held at: cost, fair value, equity method Required to prepare group financial statements which
show substance of relationship
Important features
• Investment remains at cost, unchanged over time Features of the consolidated statement of financial
• Assets and liabilities are those of parent only position
• Present results as single economic entity
• No investment in subsidiary
• Subsidiary assets and liabilities included
• Share capital that of parent only
• Show the assets and liabilities controlled by
the group
• Shows the equity of the owners of the net assets
TT2021
13
Goodwill Non-controlling interest (NCI)
Recognition and initial measurement What is the NCI?

Value of the business exceeds the fair value of its net Shares in a subsidiary not owned by the parent
assets
Points to note
Calculation of goodwill • Don't need to own 100% of S to control it
$ $ • NCI in equity section to reflect ownership
Consideration transferred X
Non-controlling interests X
Less fair value of net assets at acquisition:
Share capital X
Share premium X
Retained earnings X
Revaluation surplus X
(X)
X
Subsequent measurement
Test annually for impairment
Impairment of positive goodwill

For a wholly-owned subsidiary:
DEBIT Expenses (and reduce retained earnings)
CREDIT Goodwill
Mid-year acquisitions
Net assets of subsidiary

• No SOFP at acquisition date
• Need to estimate net assets (= equity)
Pre- and post-acquisition reserves

• Pre-acquisition profits included in reserves (net
assets) at acquisition
• Post-acquisition profits included in group accounts
Rules for mid-year acquisition

Assume profits accrue evenly
TT2021

Chapter 8: The consolidated statement of financial position
The consolidated statement of financial position
Approach to the Goodwill

consolidated statement
of financial position
Basic procedure Calculation of goodwill Impairment of positive goodwill

• Combined on line by line basis $ For a wholly-owned subsidiary:
• Present as if group is single Consideration transferred X DEBIT Expenses (and reduce
entity Non-controlling interests X retained earnings)
Less fair value of net assets CREDIT Goodwill
at acquisition (X)
Standard approach
Goodwill X
• Establish group structure Fair value of consideration
• Enter proforma transferred
• Transfer figures from question • Measure at fair value:
to proforma – Assets transferred by
• Complete workings for • Positive purchased goodwill:
the parent
standard adjustments for – Intangible non-current asset
– Liabilities incurred by
– Goodwill – Test annually for impairment
the parent
– Non-controlling interests • Negative purchased goodwill: – Equity instruments issued
– Retained earnings and other – Reassess by the parent
reserves – Credit to profit or loss
• Deferred consideration:
– Other transactions per – Gain from a bargain
– Discount to present value
question purchase
• Contingent consideration:
• Transfer workings to proforma • Internally generated goodwill:
– Measure at fair value at
and complete – Do not recognise
acquisition
– Adjust goodwill if additional
info re facts at acquisition
date
– Any other change, do not
adjust equity and take
changes in liability to P/L
Fair values
Definition of fair value Fair value of subsidiary’s net assets at acquisition

Market-based measure (IFRS 13) • Identifiable
– Separable; or
– Arise from contractual or other legal rights
Measuring NCI at acquisition • Meet the Conceptual Framework's definitions of assets and liabilities
• At proportionate share of net • Detailed rules:
assets; or • Recognise identifiable net assets even if not in subsidiary's accounts eg
• At fair value – Intangible assets
– Contingent liabilities
TT2021
15
Pre- and post-acquisition Dividends paid
profits and other reserves by subsidiary
Pre- and post-acquisition profits • Dividends paid to NCI not

• Pre-acquisition reserves cancelled as not generated under parent's presented in consolidated
control statement of financial position
• Include group share of subsidiary's post-acquisition reserves • Dividends paid to parent
cancelled on consolidation
Other reserves
• Include in goodwill working
• Include parent + group share of subsidiary post-acquisition
Intragroup Unrealised profit on Transfer of

balances transfer of inventory non-current assets
IFRS 10 requirement Cost v NRV Carrying amount and

• Single entity concept • One group company sells depreciation
• Eliminate intragroup balances goods to another • If sale at a profit, profit is
• If goods still in inventory at the unrealised
year end: • Depreciation will be based on
Intragroup payables and – Internal profit: must be transfer value
receivables eliminated
• Arise from credit transactions – Inventory overstated: state at
between group companies lower of cost and NRV to the Method
• Eliminate them on group • Adjust profit in the selling
consolidation company
• Adjust depreciation in the
Method for eliminating receiving company
Reconciliation of intragroup unrealised profit • NCI takes share of any
balances • In the consolidated retained adjustment that impacts profit
• If balances do not agree, earnings working:
adjust for in transit items – Deduct the unrealised profit
• Push them forward to their from the sellers column
ultimate destination • When adding across inventory
of parent and subsidiary:
– Deduct the unrealised profit
Method • If the subsidiary is the seller,
(1) Account for items in transit adjustment is required in NCI
• Cash: DEBIT working
CREDIT
• Goods: DEBIT
CREDIT
(2) Eliminate intragroup payable
and receivable
DEBIT Intragroup payable
CREDIT Intragroup receivable
TT2021

Chapter 9: The consolidated statement of profit or loss and other
comprehensive income
The consolidated statement of profit or loss and other comprehensive income (SPLOCI)
Approach to the consolidated statement of profit or loss Intragroup

and other comprehensive income (SPLOCI) trading
Aim of the consolidated SPLOCI Issue

Show group as a single entity • Treat group as if it were a
single entity
• Eliminate intragroup trading
Allocation of profit and other comprehensive income and unrealised profit
Non-controlling interests (NCI)
Working:
Method
PFY TCI
$ $ • Eliminate intragroup revenue
Per question X X and cost of sales
DEBIT (↓) Group revenue
CREDIT (↓) Group cost for
profit:
sales
Impairment loss on goodwill for year (if NCI at fair
for all intragroup trading in
value at acq’n) (X) (X)
the year
Provision for unrealised profit (if sub is the seller) (X) (X)
• Eliminate unrealised profit on
Interest on intra group loans (X)/X (X)/X
goods still in inventory at the
Fair value adjustments – movement in the year (X)/X (X)/X year end
A B DEBIT (↑) Cost of sales
NCI share NCI % A NCI % B CREDIT (↓) Inventories
Basic procedure
• Draw up group structure, % ownership, date of acquisition
• Create proforma
• Transfer parent and 100% sub to proform (pro-rate mid year)
• Adjust for intragroup trading, loans, fair value adjustments
• Complete NCI calculations
Mid year acquisitions

Include results from date of acquisition
Impairment
Only current year impairment losses included
Dividends paid to subsidiary

• Dividends paid to the parent are eliminated on consolidation
• Remove dividend income and reinstate subsidiary retained earnings
TT2021
17
Intragroup loans Disposal of
and interest subsidiary
Issue Control boundary

• Intragroup borrowings do not Full disposal of subsidiary means parent no longer has control or
represent: significant influence
– Amounts owed/owing
– Additional finance
income/expense Approach to full disposal
– From a group perspective • SPLOCI – include results up to disposal and profit/loss on disposal
• SFP – no consolidation as no subsidiary at year end
Method
• Cancel the loan Calculation of profit or loss on disposal (in consolidated accounts)
DEBIT (↓) Loan payable Fair value of consideration received X
CREDIT (↓) Loan receivable Less share of consolidated carrying amount at date
• Eliminate the interest control lost:
DEBIT (↓) Finance income Net assets X
CREDIT (↓) Finance expense Goodwill X
Less NCI (X)
(X)
Group profit/(loss) X/(X)
Calculation of profit or loss on disposal in parent's separate financial

statements
Fair value of consideration received X
Less carrying amount of investment disposed of (X)
Profit/(loss) X/(X)
TT2021

Chapter 10: Accounting for associates
Associates and joint arrangements
Associates – Associates – parent's Associates – consolidated

definitions separate financial statements financial statements
Associate Carry investment: Equity method

An entity over which the investor • At cost; or • Consolidated statement of
has significant influence • At fair value (financial financial position
instrument under IFRS 9); or – Investment in associate:
• Using equity method $
Significant influence Cost of associate X
• Usually 20% - 50% of voting Share of post-acquisition
power reserves X
• Other indicators: Impairment (X)
– Representation on board of Group share of
directors unrealised profit (X)
– Participation in
X
policy-making process
– Material transactions • Impairment of investment in
between entity and investee associate
– Interchange of management – Deduct from investment in
personnel associate
– Provision of essential • Consolidated statement of
technical information profit or loss and other
comprehensive income
– Group share of associate's
profit for the year
– Group share of associate's
other comprehensive income
for the year
• Unrealised profit
– Cancel group share:
DEBIT Share of profit of
associate
CREDIT Investment in
associate
TT2021
19
Chapter 11: Financial instruments
Financial instruments
The need for Classification

a standard
• Increase in number and variety Categories Liabilities v equity

of financial instruments • Financial asset: • Substance over form important
• Standard setters did not keep – Cash • Liabilities contain a
pace – Equity instrument of another contractual obligation
• Inconsistencies in recognition entity
and measurement – Contractual right to:
• Criticism about recognition ◦ Receive cash (or another Compound financial instruments
and disclosure financial asset) • Split into financial liability and
• Lack of understanding from ◦ Exchange financial equity components
users instruments under • Financial liability:
favourable conditions Present value of principal X
• Financial liability: Present value of interest X
– Contractual obligation to X
◦ Deliver cash (or another • Equity:
financial asset) – Proceeds – financial liability
◦ Exchange financial
instruments under
unfavourable conditions Interest, dividends, gains and
• Equity: losses
– Evidences a residual interest • Presented in p/l if associated
in the assets after deducting with liabilities
all of its liabilities • Presented in equity if
associated with equity
Recognition Derecognition Factoring of trade receivables
• When entity becomes party to • Financial assets – rights to • In substance a genuine sale
contractual provisions of the cashflows expire or – Derecognise trade receivable
instrument • Substantially all risks and • In substance a secured loan
• Usually: rewards transferred – Continue to recognise a
– Trade receivable/payable • Financial liabilities – trade receivable and
◦ On transfer of promised discharged, cancelled, expires recognise a financial liability
goods/services
– Loans
◦ On issue
– Shares
◦ On issue
TT2021

Measurement
Measurement of financial assets Measurement of financial liabilities

Business model test Two categories
Initial and subsequent measurement Initial and subsequent measurement

• Investments in debt instruments held to collect • Most financial liabilities:
contractual cash flows (solely principal and – Initial: Fair value - transaction costs
interest) – Subsequent: Amortised cost
– Initial: FV + transaction costs • Financial liabilities at fair value through P/L
– Subsequent: Amortised cost ('held for trading' and derivative liabilities)
• Investments in debt instruments held to collect – Initial: Fair value
contractual cash flows (solely principal and – Subsequent: Fair value through P/L
interest) and to sell
– Initial: FV + transaction costs
– Subsequent: FV through OCI Fair value
• Investments in equity instruments not 'held for Price to sell an asset or transfer a liability in
trading' (optional irrevocable election on orderly transaction between market
initial recognition) participants at the measurement date
– Initial: FV + transaction costs
– Subsequent: FV through OCI
• All other financial assets Amortised cost
– Initial: FV + transaction costs • Amount at which item was initially recorded
– Subsequent: FV through OCI less any principal repayments, plus the
cumulative amortisation of the difference
between the initial and maturity values
Fair value • Calculation:
Price to sell an asset or transfer a liability in Balance b/d X
orderly transaction between market X
participants at the measurement date Interest received (coupon × par value) (X)
Balance c/d X
Amortised cost
• Amount at which item was initially recorded
less any principal repayments, plus the
cumulative amortisation of the difference
between the initial and maturity values
• Calculation:
Balance b/d X
X
Interest received (coupon × par value) (X)
Balance c/d X
TT2021
21
Chapter 12: Leases
Leases (IFRS 16)
Issue Identifying a lease Lease liability
To prevent off-balance Definitions PVFLP (not paid at

sheet financing • A contract, or part of a contract, that conveys the commence. date) X
right to use an asset (the underlying asset) for a Interest at implicit % X
period of time in exchange for consideration Payment in arrears (X)
• Contract contains a lease if the contract conveys Liability c/d
the right to control an asset for a period of time for (split NCL & CL) X
consideration, where, throughout the period of use,
the customer has:
(a) Right to obtain
substantially all of the economic benefits from
use, and
(b) Right to direct use of identified asset
Right-of-use asset Presentation Recognition exemptions
Right-of-use asset • Right-of-use assets disclosed • Optional exemptions (expense

PVFLP X separately from other assets, in P/L):
Payments on/before EITHER as a separate line on – Short-term leases (lease term
comm. date X the face of the SOFP or as a < 12 months)
Initial direct costs X separate category within the – Underlying asset is low value
Notes. (eg tablet PCs, small office
Dismantling/restoration costs X
• Right-of-use investment assets furniture, telephones)
X to be presented within
investment property
• Lease liabilities should be split
Depreciate to earlier of end of between current and
useful life (UL) and lease term non-current (IAS 1)
(UL if ownership expected to • Interest expense presented in
transfer) finance costs
TT2021

Sale and leaseback transactions
Transfer is in substance a sale

• Seller/lessee:
– Derecognises asset transferred
– Recognises a right-of-use asset at proportion of
previous CA for right of use retained
– Recognises gain/loss in relation to rights
transferred
• Buyer-lessor accounts for:
– The purchase as normal purchase
– The lease per IFRS 16
Transfer is NOT in substance a sale

• Seller-lessee:
– Continues to recognise transferred asset
– Recognises financial liability equal to transfer
proceeds (and accounts for it per IFRS 9)
TT2021
23
Chapter 13: Provisions and events after the reporting period
Provisions and events after the reporting period
Provisions Types of provision

(IAS 37)
Definition Warranties Future operating losses

Liability of uncertain timing or • Legal obligation or a Do not recognise provisions for
amount constructive obligation future operating losses
• Provision required under IAS 37
• Separate contract for
Recognition performance (such as Onerous contracts
Recognise provision if meet all extended warranty) requires • Definition: Unavoidable costs
three of: treatment under IFRS 15 exceed benefits
• Present obligation as result of • Provide for the least net cost of
past event exiting the contract ie lower of:
• Probable outflow Decommissioning costs – Net cost of fulfilling the
• Reliable estimate • Provision for contract
dismantling/removal of plant – Compensation or penalties
and restoring construction arising from failure to fulfil
Measurement damage: contract
• Best estimate – Recognise at time of
• Discount if time value of money construction and include as
is material part of asset cost Restructuring
• Expected values if large DEBIT Property, plant & • Constructive obligation exists if
population of items equipment entity has:
• Most likely outcome for single CREDIT Provision – A detailed formal plan
obligation • Provision for restoring damage – Raised a valid expectation in
– To create/increase a from plant's operation eg those affected
provision: extraction: • Provision should only include
DEBIT Expense/PPE – Recognise over the period of direct expenditure:
CREDIT Provision operation – Necessarily entailed by the
– To decrease a provision: DEBIT Expense restructuring
DEBIT Provision CREDIT Provision – Not associated with the
CREDIT Expense/PPE entity's ongoing activities
– To use a provision:
DEBIT Provision
CREDIT Cash
TT2021

Contingent Contingent Events after the
liabilities assets reporting period (IAS 10)
Definition Definition Definition

• Possible obligation • Possible asset from past events Events which occur between
• Present obligation: outflow not • Existence will be confirmed by the end of the reporting period
probable/ cannot measure future uncertain event(s) and the date when the
reliably financial statements are
authorised for issue
Accounting treatment Inflow:
Disclose in note to the financial • Virtually certain – recognise Accounting treatment
statements unless possibility of asset • Conditions which existed at
outflow is remote • Probable – disclose end of reporting period –
• Possible – do nothing adjusting
• Remote – do nothing • Conditions which arose after
Nature of disclosure the end of the reporting
• Nature of contingent liability period – non-adjusting
• Estimate of financial effect Nature of disclosure
• Uncertainties relating to • Brief description
amount or timing • Estimate of financial effect Nature of disclosure
• Possibility of reimbursement Material events to disclose the
nature and estimate of the
Need for disclosure financial impact (or why it
Need for disclosure Make users aware of potential cannot be reliably estimated)
Make users aware of potential positive impact on cash
adverse impact on cash flows/profit
flows/profit Need for disclosure
Users can understand the
reason behind unusual
movements or provisions in the
financial statements, and their
financial impact
TT2021
25
Chapter 14: Inventories and biological assets
Inventories and biological assets
IAS 2 Inventories IAS 41 Agriculture
IAS 2 definition IAS 41 definition

Assets that are: • Biological assets – living animals or plants
• Held for sale in the ordinary course of • Biological transformation – processes that
business cause qualitative and quantitative changes in
• In the process of production for sale a biological asset
• In the form of materials/supplies to be • Agricultural produce – the harvested product
consumed in the production process/ of an entity's biological assets
rendering of services
Recognition
Measurement • Entity controls the asset as a result of past
• At the lower of cost and net realisable value events
• Cost: • Probable that future economic benefits will
– Costs of purchase flow to the entity
– Costs of conversion • Fair value or cost of the asset can be
– Other costs measured reliably
• Estimation techniques to determine cost:
– Standard cost
– Retail method Measurement
– FIFO • Biological assets
– Weighted average – Initial measurement at fair value less costs
• NRV: to sell
– Estimated selling price less estimated costs – Subsequent measurement also at fair value
of completion and estimated costs less costs to sell
necessary to make the sale (marketing, • Agricultural produce
selling, distribution) – Initial measurement (at harvest) at fair value
less costs to sell
– Subsequent measurement per IAS 2
Disclosure
• Accounting policies including cost formula
• Total carrying amount of inventories Presentation
(RM, WIP, FG) Biological assets are non-current assets
TT2021

Chapter 15: Taxation
Taxation
IAS 12 Income Taxes Current tax
IAS 12 covers current and deferred tax • Tax actually payable to the tax authorities
• Tax charged by tax authority
• Unpaid tax due is recognised as a liability
• Excess tax paid over what is due is recognised as
an asset
• Having calculated the tax due:
– DEBIT Tax charge (SOPL)
– CREDIT Tax liability (SOFP)
What is deferred tax?
• Deferred tax is an accounting measure only Temporary differences continued

• Deferred tax is recognised for all temporary • Provisions and allowances for ECL (doubtful debts)
differences except – Provisions and allowances recognised for
– Tax arising on business combination accounting purposes per IAS 37/IFRS 9
(incl in goodwill) – Tax treatment allows tax relief when expense
– Taxes on adjustments which go to equity incurred
(IAS 8 accounting policy change) • Revaluation of non-current assets
– As the gain on the revaluation is charged to
Temporary differences SPLOCI (other comprehensive income), so the
• Property, plant & machinery deferred tax is also only recognised in the SPLOCI
– Temporary differences arises due to different • Tax base: tax rules set out by each jurisdiction
rates of depreciation between the accounting
and the tax rates Measurement
• Accrued income/accrued expense • Tax rates used that have been enacted by end of
– Accounting uses accruals principle to recognise the reporting period
income and expense • Changes in tax rates after the year end are
– Tax treatment takes the date of payment non-adjusting events after the reporting period
or receipt
Calculating deferred tax Other aspects of deferred tax
Deferred tax is calculated as follows: Losses can be carried forward to reduce the future
$ tax liability – future tax saving – deferred tax asset
Carrying amount of asset/(liability) [in recognised
accounting statement of financial position] X/(X)
Less tax base [value for tax purposes] (X)/X Presentation
X/(X) • Deferred tax assets/liabilities should be shown
Deferred tax (liability)/asset [always opposite separately from other assets/liabilities.
• Current tax – can be offset ONLY WHEN
(X)/X – Legally enforceable right to do so
– Amounts will be settled on a net basis, or the
asset and liability settled at the same time
TT2021
27
Chapter 16: Presentation of published financial statements
Presentation of published financial statements
IFRS Statement of Statement of profit

Financial financial or loss and other
statements position comprehensive income
IAS 1 Presentation of Financial Key sections of the statement of Key sections of the statement of
Statements applies to the financial position profit or loss
preparation and presentation of • Non-current assets • Revenue
general purpose financial • Current assets • Cost of sales
statements in accordance with • Equity • Gross profit
IFRS • Non-current liabilities • Other income
• Current liabilities • Distribution costs
• Administrative expenses
• Other expenses
• Finance costs
• Income tax expense
Key section of the statement of

other comprehensive income
Gains/(losses) on property
revaluation
Revision of basic Statement of Financial statement

accounts preparation changes in equity preparation questions
Recap Key sections of the statement of A methodical approach is

• An asset is a resource control changes in equity important in the exam
by the business • Equity section of the SOFP
• An asset is expected to be of • Shows movement arising from:
future benefit – Dividends
• A liability is an amount owed – Share issues
by the business – Profit or loss
• Share capital is a permanent – Revaluation gains or losses
investment in the business by
its owners
• Retained earnings are
accumulated profits (less
losses)
TT2021

Chapter 17: Reporting financial performance
Reporting financial performance
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
Accounting policies Accounting estimates Prior period errors

• Accounting policies are the • Changes in accounting • Prior period errors are
specific principles, bases, estimates result from new omissions from, and
conventions, rules and information or new misstatements in, the entity's
practices applied by an entity developments and, financial statements for one or
in preparing and presenting accordingly, are not correction more prior periods arising from
the financial statements of errors a failure to use reliable
• Area of judgment • Examples: information that:
• Information relevant and – Allowances for doubtful (a) Was available when the
reliable debts financial statements for
– Inventory provisions those periods were
– Useful lives of non-current authorised for issue; and
Changes in accounting policies assets (b) Could reasonably be
• A change in accounting policy expected to have been
is made only if: obtained and taken into
(a) It is required by an IFRS; or Changes in accounting account in the preparation
(b) It results in the financial estimates and presentation of those
statements providing • Changes in SOFP (assets, financial statements
reliable and more relevant liabilities, equity) – adjust in • Examples
information the period of the change – Arithmetical errors
• Change applied • Changes in SOPL (income, – Mistakes in applying
retrospectively expense) – adjust in current accounting policies
– Restate comparatives (as if and future period if the change – Deliberate errors
new policy had always affects both
applied)
– Adjust opening balance for Correction of the error
each component of equity Disclosure • An entity corrects material
for the earlier period • Nature of the change prior period errors
presented; and • Quantify the change retrospectively in the first set of
– Show adjustment in SOCIE financial statements
as separate (second) line authorised for issue after their
discovery
– Restate comparative
Disclosure amounts for each prior
• Nature of the change period in which the error
• Reason for the change occurred
• Quantify the effect of the – Show adjustment in SOCIE
change as separate (second) line
Disclosure
• Nature of the change
• Quantify the effect of the
change
TT2021
29
IFRS 5 Non-current Assets Held for Sale IAS 21 The Effects of
and Discontinued Operations Changes in Foreign
Exchange Rates
Aids the users of the statements Discontinued operations • Functional currency: currency
to under the future of the • A major line of of the primary economic
company's operations business/geographical region environment in which the entity
of business; or operates
• Part of a single co-ordinated • Translated at spot rate at date
Non-current assets held for sale plan to dispose of a major of transaction.
To be classified as 'held for sale': line/geographical region of • Restatement at year end
business; or (closing rate) if: Monetary
(a) The asset must be available
• Subsidiary acquired for resale assets and liabilities
for immediate sale in its
• Exchange differences
present condition, subject
recognised in SOPL
only to usual and customary
Disclosure • Differences arising on items in
sales terms; and
OCI are also charged to OCI
(b) The sale must be highly • On the face of the SOPL: single
(eg revaluations)
probable amount of post-tax profit or
loss of discontinued operations
and post-tax gain/loss on any
Accounting treatment FV adjustments
• Write down NCA to FV less • On the face of the statement of
costs to sell (if less than CA) profit or loss and other
• Impairment loss charged to comprehensive income or in
SOPL the notes:
• NCA classified as 'Held for sale' – Revenue
and not depreciated/amortised – Expenses
– Profit before tax
– Income tax expense
Disclosure – Post-tax gain or loss on
• As a single amount separately disposal of assets or on
from other assets remeasurement to fair value
• On the face of the SOFP less costs to sell
• Normally as current assets
TT2021

Chapter 18: Earnings per share
Earnings per share
Basic eps
Objective Calculation
• Improve comparison between entities and over Earnings
• Basic EPS =
periods Weighted average no. of equity shares
• Applies to listed companies only outstanding during the period
• Earnings is profit attributable to ordinary
shareholders of the parent ie consolidated profit
Definitions after:
• Ordinary shares – equity instrument subordinate to – Income taxes
all other classes of equity instruments – Non-controlling interests
• Potential ordinary shares – financial instrument – Preference dividends on preference shares
that may entitle its holder to ordinary shares. classified as equity
• Financial instrument – contract that gives a
financial asset of one entity and a financial liability
or equity instrument of another entity. Weighted average number of shares outstanding
• Equity instrument – any contract that evidences a • Full market price:
residual interest in the assets of an entity after – Time apportion share issues in the year
deducting all of its liabilities. • Bonus issue:
• Dilution – A reduction in earnings per share or an Number of shares after bonus issue
increase in loss per share – Bonus fraction =
Number of shares before bonus issue
– Use bonus fraction retrospectively in current year
– Fraction = no shares after/no shares before
Presentation
– Use reciprocal to restate comparative
Basic and diluted EPS shown on face of SPLOCI with
• Rights issue:
equal prominence Fair value per share immediately
– Bonus fraction = before exercise of rights
for rights issue Theoretical ex-rights price (TERP)
– Use bonus fraction retrospectively in current year
– Fraction = FV before rights/TERP
– Use reciprocal to restate comparative
TT2021
31
Diluted eps Eps as a performance measure
Issue Importance of the eps measure

A 'warning' measure of what may happen in the • May be a better indication than profit as it
future if potential ordinary shares are converted considers changes in capital
to shares • Considered a key stock market indicator and is
quoted in the financial press
• It has a role in the price/earnings (P/E) ratio
Calculation of diluted eps
Assume that all of the pos are converted into ordinary
shares at the beginning of the period and at the most Limitations of eps
advantageous rate • Based on historical data and so is an indication of
past performance
• Diluted EPS figure is theoretical
Convertible debt • Includes one-off income/expense which distorts the
Earnings EPS figure
Basic earnings X
Add back: interest net of tax (or preference
dividend) X
Diluted earnings X
No. of shares
Basic weighted average number of shares X
Add additional (max) shares on conversion X
Diluted number of shares X
Share options and warrants

No. of shares
Basic weighted average number of shares X
Add shares deemed issued for nil consideration (W1) X
Diluted number of shares X
Working 1
No. shares under option X
Less no. that would have been issued at average
market price X
No. of shares deemed issued for nil consideration X
TT2021

Chapter 19: Interpretation of financial statements
Interpretation of financial statements
Analysis and Financial ratios

interpretation
Ratio analysis vs Categories Short term liquidity and efficiency

interpretation • Profitability • Current ratio =
• Ratio analysis starting • Short-term liquidity and efficiency Current assets
point to understanding • Long-term liquidity/gearing Current liabilities
changes in entity or • Investors' ratios
between entities Measures a company's ability to pay
• Interpretation involves its current liabilities out of its current
using ratios and Profitability ratios assets
information about • Return on capital employed = • Quick ratio (or acid test) =
entity to explain Current assets − Inventories
Profit before interest and taxation
changes/differences × 100% Current liabilities
Capital employed
Measure of how efficiently a Removes inventory (the least liquid
company uses capital to generate asset) from current assets
profits • Inventory holding period (or
• Net (operating) profit margin = inventory days) =
Inventories
Profit before interest and taxation × 365 days
× 100% Cost of sales
Revenue
Measure of how an entity converts The average number of days
revenue to profit inventories are held by a company
before being sold to customers
• Asset turnover =
• Receivables collection period (or
Revenue
receivables days) =
Capital employed
Trade receivables
Measure of how efficiently the × 365 days
Revenue
company is using its capital to
generate revenue The average number of days it takes
to receive payment from credit
• Return on equity =
customers
Profit after tax and preference dividends
Ordinary share capital + reserves
× 100% • Payables payment period (or
payables days) =
Return for ordinary shareholders
Trade payables
• Gross profit margin = × 365 days
Cost of sales
Gross profit
× 100% The average number of days it takes
Revenue
the company to pay its suppliers for
goods purchased on credit
TT2021
33
Financial ratios continued Interpretation
Long-term liquidity/gearing Approach to analysing financial statements

• Gearing
1. Identify the user
Long-term debt
Debt/(Debt + Equity) = × 100% 2. Read question and analyse data
Long-term debt + Equity
3. Calculate key ratios
Measure of the long-term financial stability of 4. Write up your answer, discussing performance
the company and position
• Interest cover = 5. Consider the limitations of analysis and identify
any areas where further information is needed
Profit before interest and tax
6. Reach a conclusion
Interest expense
The number of times a company could pay its
interest out of its profit from operations Interpretation questions in the exam
• Comparison of a single entity over time
• Comparison of two entities in the same period
Investors' ratios • Comparison of the entity with the sector
• Dividend yield = • Analysis of groups – acquisition of subsidiary
Dividend per share • Analysis of groups – disposal of subsidiary
% • Interpretation of the statement of cash flows
Share price
A measure of the return an investor expects on a
company's shares Stakeholder perspectives
• Dividend cover = Assessment of stakeholder's needs is necessary when
Profit for the year tackling an interpretation question
Dividends
How easily a company can afford to pay its
dividend out of its current profit
• Price/earnings (P/E) ratio =
Share price
EPS
Indicates shareholder confidence in the company
and its future
TT2021

Chapter 20: Limitations of financial statements and interpretation
techniques
Limitations of financial statements and interpretation techniques
Limitations of IAS 24 Related Limitations of

financial statements Party Disclosures interpretation techniques
Problems with historical Definitions Limitations of ratio analysis

information Related party is a person or Consider the impact of:
• Reflects performance and entity that is related to the entity • Inflation
position in the past by being • Different accounting policies
– Not necessarily predictive of (a) A person or a close member • Lack of detailed information
future performance of that person's family • Year end figures not being
– No guarantee that trends (b) An entity that is related to representation of balances
continue another entity throughout the year
– Entities may change strategy • Related party transactions
• Historical cost accounting • The impact of different risk
widely used Disclosure requirements profiles
– Can be misleading when (a) The name of its parent and • Manipulation of financial
trying to predict future the ultimate controlling party statements
irrespective of whether there
have been any transactions
Creative accounting (b) Total key management Other factors
• Options in accounting policies, personnel compensation Factors other than the financial
judgements and estimates (c) If the entity has had related statements may be relevant:
allows flexibility party transactions: • How technologically advanced
• Entities under pressure from (i) Nature of the related is the company?
investors to report certain party relationship • What are its environmental
results (ii) Information about the policies?
– Profit smooth over time transactions and • What is the reputation of
– Sales/profit growth as outstanding balances management and as an
expected employer?
– No large changes in ratios • What is its mission statement?
Possible effect of related party
transactions on financial
statements
• Higher or lower revenue and
profit due to artificial prices
• Costs or savings due to
different terms and conditions
• Revenue that would not occur
without the influence of the
related party
• Loans to or from related
parties at preferential interest
rates
TT2021
35
Chapter 21: Statement of cash flows
Statement of cash flows
IAS 7 Formats Interpretation of Cash flow

Statement statement of ratio
of Cash Flows cash flows
Key terms • Indirect method Analysis points Provides a useful

• Cash (examinable) • Overall increase/ indicator of a company's
• Cash equivalents • Direct method decrease in cash cash position
• Operating activities (awareness only – not • What are the Calculated as:
• Investing activities examinable in FR) significant Net operating
• Financing activities components in the cash inflow
× 100
cash flows? Total debt
Key sections of the • Cash flows from
statement of cash flows operating activities
• Cash flows from • Cash flows from
operating activities investing activities
• Cash flows from • Cash flows from
investing activities financing activities
• Cash flows from
financing activities
TT2021

Chapter 22: Specialised, not-for-profit and public sector entities
Specialised, not-for-profit and public sector entities
Primary aims of Regulatory Performance

not-for profit and framework measurement
public sector entities
Non-profit focused IFRS Standards form the basis Three Es: Economy, efficiency,
• Government departments for accounting standards effectiveness
• Local councils • IPSAS 42 standards in issue • KPIs will be dependent on the
• Public funded bodies • SORP in the UK (non type of entity and the sector in
• Educational institutions compulsory) which they operate
• Charities • Problems with reporting can be
• Sporting bodies caused by:
– Multiple objectives
– Difficult of non-financial
indicators
– Comparison may be difficult
– Financial constraints
– Social, political and legal
barriers
TT2021
37

Financial Reporting (FR) : Revision Notes

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ACCA

For exams in September

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Chapter 1: The Conceptual Framework 1

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objective test of accounting

TT2021 iv Financial Reporting (FR)

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STEP 1: Answer the questions you know first.

STEP 2: Answer all questions.

STEP 3: Read the requirement first!

Skill 2: Approach to Case OTOs

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STEP 1: Read the scenario carefully

STEP 2: Start with narrative questions

STEP 3: Work through numerical questions methodically

STEP 4: Be aware of time

Skill 3: Using spreadsheets effectively

TT2021 vi Financial Reporting (FR)

BPP Tutor Toolkit copy

STEP 1: Understanding the data in the question

STEP 2: Use a standard proforma working.

STEP 3: Use spreadsheet formulae to perform basic calculations.

Step 4: Include the results of workings in the proforma

Skill 4: Application of accounting standards

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STEP 1: Overview of key standards

STEP 2: Numerical question practice

STEP 3: Narrative question practice

Skill 5: Interpretation skills

TT2021 viii Financial Reporting (FR)

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STEP 2: Read and analyse the scenario.

STEP 3: Plan your answer.

STEP 4: Type your answer.

Exam success skills

Exam success skill 1

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Exam success skill 2

Step 1 Read the requirement

Step 2 Read the rest of the question

Step 3 Read the requirement again

Exam success skill 3

Exam success skill 4

TT2021 x Financial Reporting (FR)

BPP Tutor Toolkit copy

Step 1 Use a standard proforma working where relevant

Step 2 Show your workings

Step 3 Keep moving!

Exam success skill 5

Step 1 Use headings

Step 2 Write your answer in short, but full, sentences

Step 3 Do your calculations ﬁrst and explanation, second

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TT2021 xii Financial Reporting (FR)

BPP Tutor Toolkit copy

The Conceptual Framework

What is a The IASB’s The objective of

A statement of generally Purpose To provide financial information

Fundamental qualitative Asset Recognition criteria

Income and expenses

The cost constraint