CIMA F1 2022 Notes

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CIMA 2022 Exams Watch free CIMA F1 lectures 1
CIMA F1
Financial Reporting
A. REGULATORY ENVIRONMENT OF FINANCIAL REPORTING 3
1. Regulatory environment 3
2. Professional Ethics 7
3. Corporate Governance 11
B. FINANCIAL STATEMENTS 13
4. IASB Conceptual Framework 13
5. IAS 1 Presentation of Financial Reporting 19
6. IAS 16 Property, Plant and Equipment 23
7. IAS 36 Impairment of Assets 29
8. IFRS 5 Non-current assets held for sale and discontinued operations 31
9. IAS 10 Events after the reporting period 35
10. IAS 2 Inventories 37
11. IFRS 16 Leases 39
12. IAS 7 Statement of Cash Flows 41
C. PRINCIPLES OF TAXATION 49
13. Taxation 49
14. Regulatory Environment and International Taxation Issues 59
D. MANAGING CASH AND WORKING CAPITAL 65
15. Cash Management 65
16. Short-term finance and cash investment 67
17. Working Capital 69
18. Working Capital Management 75
ANSWERS TO EXAMPLES 83
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A. REGULATORY ENVIRONMENT OF FINANCIAL

REPORTING
Chapter 1
REGULATORY ENVIRONMENT
1. Regulation of financial reporting information

The financial performance (profit/loss) and position (assets/liabilities) of an incorporated entity are
essential parts of a business that need to be understood by the users of the accounts, primarily the
shareholders.
Shareholders will need to ensure that the financial performance and position of the entity show
useful information. Through regulation of the accounting standards the shareholders will be
confident that the information presented to them gives the information needed.
2. Regulatory environment
The key elements of the regulatory environment are
๏ Local corporate law – Accounting regulations must follow the legal requirement of the
country where it is registered
๏ Local and international conceptual frameworks – Accounting standards are driven by
conceptual frameworks, the fundamental principles/ideas that must be followed in
developing accounting standards.
๏ Local and international financial reporting standards – Accounting standards are
developed both locally and internationally. Companies will follow either local rules or
international rules depending on the local corporate laws.
3. Regulatory bodies
The regulatory bodies ensure that both local and international frameworks and standards are
upheld to take account of the ever changing nature of corporate business.
3.1. Financial reporting standards
๏ International Financial Reporting Standards (IFRSs) – A global set of accounting standards
that are prepared on international conceptual frameworks
๏ Local Generally Accepted Accounting Principles (Local GAAP) – Accounting standards
that are prepared following local conceptual frameworks.
3.1. Principles of financial reporting standards
๏ Principles based – the preparation of the accounting standards follows the principles/idea
laid out in the conceptual framework, which results in more judgement in the preparation of
the financial statements
๏ Rules based – the preparation of the accounting standards follows rules, as there are no
fundamental principles to follow.
3.1. Role and structure of regulatory bodies
IFRSs are developed and published by the International Accounting Standards Board (IASB).
The IASB has 14 members, 12 of whom are full-time employees. Appointment of members is
primarily based on their having sufficient technical expertise to ensure the IASB has the experience
to tackle the relevant business and economic issues.
Seven of the full-time members of staff are responsible for liaising with national standard-setters in
order to promote the convergence of accounting standards.
The IASB has complete responsibility for all technical matters, including the preparation and
publication of international financial reporting standards (IFRS) and exposure drafts; withdrawal of
IFRSs and final approval of interpretations.
IFRS Foundation oversees the processes of the IASB. Its objectives are:
๏ Develop a set of high, quality, understandable, enforceable and globally accepted
international accounting standards.
๏ Promote the use and application of those standards
๏ Take account of the financial reporting needs of emerging economies and small and
medium-sized entities
๏ Bring about convergence on national accounting standards and IFRSs
IFRS Advisory Council will consult with local standard setters, academics and other interested
parties to determine their views on a range of issues.
IFRS Interpretations Committee is responsible for reviewing new financial reporting issues and
issuing guidance on the application of IFRSs.
As well as the IASB and its associated bodies, other bodies can also influence the setting of IFRSs.
International Organisation of Securities Commissions (IOSCO) – represent the worlds’ securities
markets regulators
Financial Accounting Standards Board (FASB) – US accounting standards setting body
3.1. Standard setting process for IFRS

Since 2002 both the FASB and IASB have been working closely to bring together both US GAAP and
IFRSs, in what has been known as the Convergence Project.
This has led to the development of several new/updated IFRSs, notably IFRS 9 Financial Instruments
and IFRS 13 Fair Value.
The process of developing a new accounting standard follows a four step process.
1. Advisory Committee
2. Discussion Papers
3. Exposure Draft
4. Issue new IFRS
Example 1 – Regulatory bodies

Which ONE of the following would NOT be regarded as a responsibility of the IASB?
A Responsible for all IFRS technical matters

B Publish IFRSs
C Overall supervisory body of the IFRS organisations
D Final approval of interpretations by the IFRS Interpretations
Committee
Chapter 2
PROFESSIONAL ETHICS
1. Introduction
The Code of Ethics for CGMAs (Chartered Global Management Accountants) sets out certain
fundamental principles about how its members should behave. It also recognises how its members
could be subject to certain threats which would compromise their behaviour and suggests ways in
which members can safeguard themselves against the operation of those threats.
The CGMA Code has aligned itself with the CIMA Code of Ethics and therefore upon qualification,
CIMA members will be compliant with both the CIMA code and CGMA code.
The ethical framework recognises that there are:
๏ Ethical principles to be followed.

๏ These are subject to threats
๏ Safeguards should be applied to avoid or to respond to threats by reducing them to
acceptable levels.
2. Sources of professional codes for ethics

Codes of ethics have developed in the accounting profession to ensure that their professional
reputation is upheld.
The key to a respected code of ethics is that it must evolve over time as beliefs and principles
change in society.
Sources of ethical codes are as follows:
๏ Law
๏ Religion
๏ Social attitudes
๏ Professional bodies
๏ Businesses
3. CIMA Code of Ethics for Professional Accountants

CIMA is a member of the International Federation of Accountants (IFAC), whose aim is to develop a
set of high quality principles-based ethical standards that govern ethical behaviour within the
accounting profession.
IFAC’s established an ethics committee (International Ethical Standards Board of Accountants
(IESBA), which has published the Code of Ethics for Professional Accountants.
CIMA and many other professional bodies have used the principles within this conceptual
framework to develop their own code of ethics.
The following are the fundamental principles contained in CIMA’s code of ethics:
1. Integrity
2. Objectivity
3. Professional competence and due care
4. Confidentiality
5. Professional behaviour
3.1. Integrity
A professional accountant should be straightforward and honest in all professional and business
relationships.
Integrity also implies fair dealing and truthfulness.
A professional accountant should not be associated with reports, returns, communications or other
information where they believe that the information:
๏ Contains a materially false or misleading statement;
๏ Contains statements or information furnished recklessly; or
๏ Omits or obscures information required to be included where such omission or obscurity
would be misleading.
3.1. Objectivity
A professional accountant should not allow bias, conflict of interest or undue influence of others to
override professional or business judgments.
Relationships that bias or unduly influence the professional judgment of the professional
accountant should be avoided.
3.2. Professional Competence and Due Care
A professional accountant has a continuing duty to maintain professional knowledge and skill at
the level required to ensure that a client or employer receives competent professional service
based on current developments in practice, legislation and techniques. A professional accountant
should act diligently and in accordance with applicable technical and professional standards when
providing professional services.
The principle of professional competence and due care imposes the following obligations on
professional accountants to:
๏ Maintain professional knowledge and skill at the level required to ensure that clients or
Employers receive competent professional service; and
๏ Act diligently in accordance with applicable technical and professional standards when
providing professional services.
3.3. Confidentiality
A professional accountant should respect the confidentiality of information acquired as a result of
professional and business relationships and should not disclose any such information to third
parties without proper and specific authority unless there is a legal or professional right or duty to
disclose.
A professional accountants should therefore refrain from:
๏ Disclosing outside the firm or employing organization confidential information acquired as a
result of professional and business relationships without proper and spec
๏ Using confidential information acquired as a result of professional and business relationships
to their personal advantage or the advantage of third parties.
3.4. Professional behaviour

A professional accountant should comply with relevant laws and regulations and should avoid any
action that discredits the profession.
Example 1 – Ethics
Which ONE of the following is NOT a fundamental principle identified in CIMA’s code of
ethics?
A Professional competence
B Professional behaviour
C Integrity
D Independence
4. Threats to ethical behaviour

The ethical code identifies five areas that provide a threat to the fundamental principles.
๏ Self-interest – a 'conflict of interest' which may inappropriately influence judgement
or behaviour.
๏ Self-review – When you are required to evaluate the results of a previous judgement
or service
๏ Advocacy threat – Arising if promoting a position or opinion to the point that your
subsequent objectivity is compromised.
๏ Familiarity – When you become so sympathetic to the interests of others as a result
of a close relationship that your professional judgement becomes
compromised.
๏ Intimidation – When you are deterred from acting objectively by actual or perceived
pressure or influence
5. Safeguards
The Code’s conceptual framework approach requires that when a threat to the fundamental
principles is not at an acceptable level, safeguards must be applied to eliminate or reduce the
threat to an acceptable level. The ‘test’ of what is acceptable is whether a “reasonable and well
informed party … would be likely to conclude that … compliance with the fundamental principles
is not compromised”.
Safeguards fall into two broad categories:
๏ Those created by the profession, legislation or regulation (e.g. professional standards and
membership requirements, including continuing professional development)
๏ Those in the work environment (e.g. whistle blowing).
Chapter 3
CORPORATE GOVERNANCE
Directors are acting as agents of the entity as they run the business on behalf of the shareholders.
Shareholders need to ensure that the systems and processes that are in place to control the
running of the entity are regularly monitored and controlled.
Corporate governance is the process that ensures the systems and processes are monitored and
controlled.
Corporate Governance has come to the attention of many over recent years following major
corporate scandals.
๏ Enron
๏ WorldCom
๏ Co-Operative Group
๏ Volkswagen Group
All of the above corporate scandals came about due to inappropriate corporate governance in
place.
1. Approach to Corporate Governance

Principles based
๏ Focuses on the objectives
๏ Can be applied across different legal jurisdictions
๏ Can stress areas where rules cannot easily be applied
๏ Puts the emphasis on investors making up their own minds.
Rules based
๏ Emphasises measurable achievements by companies
๏ Can easily be applied in jurisdictions where the letter of the law is stressed.
2. Corporate governance regulation in different markets

UK – voluntary code based upon principles of openness, integrity and accountability that has
developed to include some specific guidelines, whereby if there is no compliance then
explanations for non-compliance are required.
US – a rules based approach as the culture is on obeying the letter of the law and therefore the
code becomes part of legislation.
B. FINANCIAL STATEMENTS
Chapter 4
IASB CONCEPTUAL FRAMEWORK
The IASB Framework provides the underlying rules, conventions and definitions that underpin the
preparation of all financial statements prepared under International Financial Reporting Standards
(IFRS).
๏ Ensures standards developed within a conceptual framework
๏ Provide guidance on areas where no standard exists
๏ Aids process to improve existing standards
๏ Ensures financial statements contain information that is useful to users
๏ Helps prevent creative accounting
The revised IASB Conceptual Framework was issued in March 2018 and the new areas included are
as follows:
๏ Measurement basis
๏ Presentation and disclosure
๏ Derecognition
Whilst updates have been made to the following:
๏ Definitions of assets/liabilities
๏ Recognition of assets/liabilities
And clarification on:
๏ Measurement uncertainty
๏ Prudence
๏ Stewardship
๏ Substance over form
1. Objective of financial reporting

‘Provide information that is useful to existing and potential investors, lenders and other creditors in
making decisions about providing resources to the entity’
The decisions made by users will involve:
๏ Investment decisions
๏ Financing decisions
๏ Voting, or influencing management actions
The users will be assessing the management’s stewardship of the entity alongside its prospects for
the future, which will require the following information:
๏ Economic resources of the entity
๏ Claims against the entity
๏ Changes in the entity’s economic resources and claims.
๏ Efficiency and effectiveness of management
2. Qualitative characteristics – make information useful

Fundamental qualitative characteristics
๏ Relevance – information that makes a difference to decisions made by users (nature and
materiality)
๏ Faithful information – must faithfully represent the substance of what it represents, and is
therefore complete (helps understand and includes descriptions and explanations), neutral
(no bias, and therefore supported by the exercise of prudence) and free from error.
Measurement uncertainty will impact the level of faithful representation.
Enhancing qualitative characteristics
๏ Comparability – identify similarities/differences between entities and year-on-year
๏ Verifiability – assures the information represents the economic phenomena it represents
๏ Timeliness – information is less useful the longer it takes to report it
๏ Understandability – user have a reasonable knowledge of business and activities
A cost constraint applies in ensuing that the information is useful, in that the benefit of obtaining
the information should outweigh the cost of obtaining it.
3. Financial statements and the reporting entity

Reporting entity
Is the entity that is required to prepare financial statements and does not necessarily have to be a
legal entity.
Financial statements
Report the entities assets, liabilities, income and expenses for:
๏ Consolidated financial statements
๏ Un-consolidated financial statements
๏ Combined financial statements
๏ Prepared for the entity as a whole
๏ Entity is a going concern and will continue to do so
4. Elements of financial statements

๏ Assets
๏ Present economic resource
๏ Controlled
๏ Past events
๏ Liabilities
๏ Present obligation
๏ Transfer an economic resource
๏ Past event
๏ Equity
๏ Residual interest in assets less liabilities
๏ Income
๏ Increase in asset
๏ Reduction in liability
๏ Expense
๏ Reduction in asset
๏ Increase in liability
5. Recognition and derecognition

Recognition – the process of including an item in the financial statements and is appropriate if it
results in relevant and faithful representation
Derecognition – the removal of all or part of an asset (loss of control)/liability (no obligation)
6. Measurement
Historical cost Current value

Price of the transaction that gave rise to the Provides updated information to reflect
item conditions at the measurement date
๏ Fair value
๏ Value in use (assets)/Fulfilment value
(liabilities)
๏ Current cost
7. Presentation and disclosure

Statement of profit or loss is the primary source of information for a company’s performance, which
includes all income and expense. If the income and expense arises from changes in current value
then it can be recognised though other comprehensive income.
Reclassification of other comprehensive to profit or loss is allowable if it gives more relevant
information.
8. Capital maintenance
๏ Financial capital maintenance
๏ Operating (physical) capital maintenance
Example 1 – Framework (1)

The International Accounting Standards Board (IASB) Framework for the Preparation and
Presentation of Financial Statements (Framework) is the IASB’s conceptual framework.
Which one of the following does the Framework not cover?
A The format of financial statements
B The objective of financial statements
C Concepts of capital maintenance
D The elements of financial statements
Example 2 – Qualitative characteristics (1)

The IASB’s Framework identifies faithful representation as one of its fundamental qualitative
characteristics of financial information.
Which one of the following is not an element of faithful representation?
A Information should be timely
B Information should be free from material error
C Information should be free from bias
D Information must be complete
Example 3 – Qualitative characteristics (2)

The IASB’s Conceptual Framework for Financial Reporting identifies characteristics which make
financial information faithfully represent what it purports to represent.
Which of the following are examples of those characteristics?
1. Accruals
2. Completeness
3. Going concern
4. Neutrality
A (1) and (2)

B (2) and (4)
C (2) and (3)
D (1) and (4)
Example 4 - Measurement
In a country where the economy is growing and prices are subject to regular increases, which of the
following are false when using historical cost accounting compared to current value accounting?
1. Historical cost profits are understated in comparison to current value profits
2. Capital employed which is calculated using historical cost is understated compared to current
value capital employed
3. Historical cost profits are overstated in comparison to current value profits
4. Capital employed which is calculated using historical costs is overstated compared to current
value capital employed
A (1) and (2)

B (1) and (4)
C (2) and (3)
D (2) and (4)
Example 5 - Application of Framework

The following accounting standards were examined in Financial Accounting:
• IAS 2 Inventories
• IAS 16 Property, plant and equipment
Apply the principles outlined in the IASB Framework to the accounting standards above.
Chapter 5
IAS 1 PRESENTATION OF FINANCIAL
REPORTING
IAS 1 sets out overall requirements for the presentation of financial statements, guidelines for their
structure and minimum requirements for their content.
Financial statements will present to the users of accounts:
๏ Statement of financial position
๏ Statement of profit or loss and other comprehensive income
๏ Statement of changes in equity
๏ Statement of cash flows
๏ Notes to the accounts
๏ Comparatives
Financial statements should provide a fair presentation of the results, which is achieved by
compliance with IFRSs.
Statement of financial position as at [date]

$’000s $’000s
ASSETS
Non-current assets
Property, plant and equipment X
Intangibles X
Investments X
X
Current assets
Inventories X
Trade and other receivables X
Cash and cash equivalents X
X
Total assets X
EQUITY AND LIABILITIES

Equity
Equity shares ($1) X
Share premium X
Irredeemable preference share capital X
Revaluation surplus X
Retained earnings X
Total equity X
Non-current liabilities
Redeemable preference share capital X
Borrowings X
X
Current liabilities
Trade and other payables X
Dividends payable X
Overdraft X
Tax payable X
X
Total equity and liabilities X
Statement of profit and loss and other comprehensive income for the year ended [date]
$’000s
Revenue X
Cost of sales (X)
Gross profit X
Distribution expenses (X)
Administrative expenses (X)
Profit before interest and tax X
Finance costs (X)
Investment income X
Profit before tax X
Income tax expense (X)
Profit for the year X
Other comprehensive income

Gain on non-current asset revaluations X
Total comprehensive income for the period X
Statement of changes in equity for the year ended [date]
Equity Share Revaluation Retained Total

shares premium surplus earnings
$’000s $’000s $’000s $’000s $’000s
B/f X X X X X
Issue of share capital X X - - X
Dividends - - - (X) (X)
Total comprehensive income for the
- - X X X
year
Transfer to retained earnings - - (X) X -
C/f X X X X X
Chapter 6
IAS 16 PROPERTY, PLANT AND
EQUIPMENT
Property plant and equipment are tangible items that are:
๏ Held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes, and
๏ Expected to be used during more than one period.
1. Initial Recognition
The cost of an item of property, plant and equipment is made up of:
๏ Purchase price, including irrecoverable taxes and after deducting trade discounts (not cash/
settlements discounts)
๏ Costs directly attributable to bringing the asset to the location and condition necessary for it
to be capable of operating in the manner intended by management (e.g. site preparation,
delivery and handling costs, installation and assembly, testing, professional fees)
Note: Initial estimate of the costs of dismantling and removing the item and restoring
the site on which it is located where a present obligation exists are included in the
cost of the asset at present value.
The following costs are not included in the cost of an item of property, plant and equipment:
๏ Costs that are incidental to the construction (e.g. errors)
๏ Start-up costs
๏ General overhead costs
๏ Initial losses before the asset reaches its intended use
Example 1 – Initial recognition

Jones purchases a machine that had a list price of $100,000 but was offered a trade discount of
10%.
A further settlement discount of 5% is available if payment is made within 15-days.
Jones also incurred the following charges in getting the asset ready for its intended use:
$
Shipping & handling charges 3,500
Pre-production testing 12,000
Site preparation costs 17,000
General overheads 4,500
Included in the site preparation costs is $3,000 which is as a result of Jones providing incorrect
requirements for the asset.
Calculate the initial cost of the machine to be recorded in accordance with IAS 16 Property,
plant and equipment.
2. Subsequent Expenditure
Subsequent expenditure on property, plant and equipment should only be capitalised if it
improves the asset beyond its originally assessed standard of performance e.g. faster production or
higher quality output. All other subsequent expenditure should be written off.
Separate components, inspection and overhaul costs
If items of property, plant and equipment comprise separate components with different useful lives
the separate components should be capitalised as separate assets and each depreciated over their
useful lives.
Normally all inspection and overhaul costs are expensed as they are incurred. However, to the
extent that they satisfy the IAS 16 rules for separate components, such costs should be capitalised
separately as a non-current asset and depreciated over their useful lives.
3. Depreciation
๏ Straight line
๏ Reducing balance
Depreciation starts when the asset is ready for its intended use and not from when it starts to be
used.
Any change in estimate is applied prospectively by applying the new estimates to the carrying
value of the PPE at the date of change.
Example 2 – Change in useful life

Ecuador bought an item of property, plant and equipment for $25 million on 1 January 2012 and
depreciated over its useful life of 10 years.
On 31 December 2014, the assets remaining life was estimated as 5 years.
Calculate the amounts to shown in the financial statements of Ecuador for the year-ended 31
December 2015.
Example 3 – Change in method

A lorry was purchased for $80,000 on 1 January 20X4 when its useful life was estimated to be ten
years with a residual value of $10,000. The depreciation policy of 20% reducing balance was
selected.
On 1 January 20X9 the directors have now decided that to give a fair presentation a depreciation
policy of straight line over the useful economic life should be followed. There has been no change
in the estimated useful economic life of the asset as a result.
What would be the depreciation charge for the year ended 31 December 20X9?
4. Subsequent measurement
Revaluations
Cost Model Revaluation Model
Carried at cost less Carried at revalued amount

accumulated depreciation (fair value less accumulated
and impairment losses depreciation and impairment
losses)
๏ Review periodically and keep revaluations up to date

๏ Consistent policy for each class of asset (avoids cherry-picking of assets)
๏ Revalue at fair value
๏ Depreciate the revalued asset less residual value over its remaining useful life
5. Accounting for a revaluation

Dr Non-current assets cost/valuation
Dr Accumulated depreciation
Cr Other comprehensive income
The figure posted to the revaluation surplus can be calculated quickly as follows:
Note: A company has the option to make an annual reserve transfer for any excess depreciation
charged as a result of the revaluation.
Dr Revaluation surplus
Cr Retained earnings
Example 4 - Revaluation
Charlie bought a building on 1 January 20X5 for $500,000 with an estimated useful economic life of
twenty five years and no residual value. A straight line method of depreciation was adopted.
On 1 January 20X7 Charlie decided to revalue all non- current assets in line with IAS 16. The
building was revalued at $600,000. The useful economic life is unchanged.
Show how the revaluation would be accounted for in the financial statements for the year
ended 31 December 20X7.
6. Disposal of a previously revalued asset

The profit or loss on disposal is calculated as previously and any gains held in reserves are
transferred to retained earnings in the statement of changes in equity.
Dr Revaluation surplus
Cr Retained earnings
Example 5 – Disposal of revalued asset

William bought a building on 1 January 20X5 for $400,000 with an estimated useful economic life
of twenty five years and no residual value. A straight line method of depreciation was adopted.
On 1 January 20X7 William decided to revalue all non-current assets in line with IAS 16. The
building was revalued at $500,000. The useful economic life is unchanged.
On 1 January 20X9 William disposed of the oven for $550,000.
Calculate the profit or loss on disposal of the building at 1 January 20X9 and record the
journal entry for the previously held gains to be transferred within reserves.
Chapter 7
IAS 36 IMPAIRMENT OF ASSETS
1. Identify possible impairments (external vs. internal)
2. Perform impairment review (if identified possible impairments)
3. Record the impairment
1. Indicators of Impairment
External sources
๏ A significant decline in the asset’s market value more than expected by normal use or
passage of time
๏ A significant adverse change in the technological, economic or legal environment
Internal sources
๏ Obsolescence or physical damage
๏ Significant changes, in the period or expected, in the way the asset is being used e.g. asset
becoming idle, plans for early disposal or discontinuing/ restructuring the operation where
the asset is used
๏ Evidence that asset’s economic performance will be worse than expected
๏ Operating losses or net cash outflows for the asset
๏ Loss of key employee
2. Impairment review
If the carrying value of the asset is greater than its recoverable amount, it is impaired and should be
written down to its recoverable amount.
Recoverable amount - the greater of fair value less cost to sell and value in use.
Fair value less costs to sell - the amount receivable from the sale of the asset less the costs of
disposal.
Value in use - the present value of the future cash flows from the asset.
Example 1 - Impairment
A machine was acquired on 1 January 20X5 at a cost of $50,000 and has a useful economic life of
ten years.
At 31 December 20X9 an impairment review was performed. The fair value of the machine is
$26,000 and the selling costs are $2,000.
The expected future cash flows are $5,000 per annum for the next five years. The current cost of
capital is 10%. An annuity factor for this rate over this period is 3.791
Prepare extract from the financial statement for the year-ended 31 December 20X9.
3. Record the impairment

Individual asset
The reduction in carrying value is taken through profit or loss unless related to a revalued asset, in
which case it is taken to any revaluation surplus first.
Once the impairment has been accounted for the recoverable amount is then depreciated over the
remaining useful economic life.
Chapter 8
IFRS 5 NON-CURRENT ASSETS HELD
FOR SALE AND DISCONTINUED
OPERATIONS
1. Objective
๏ To require entities to disclose information about operations which have been discontinued
during the accounting period
๏ Improves the reader’s ability to interpret the results and to make meaningful projections
2. Non-current assets held for sale

๏ A non-current asset held for sale is one where the carrying amount will be recovered
principally through sale rather than through continuing use
๏ A disposal group is a group of (net) assets to be disposed of in a single sale transaction
To be classified as ‘held for sale’ it must be:

๏ Available for immediate sale in its present condition and,
๏ Its sale must be highly probable
For a sale to be highly probable

๏ Management must be committed to a plan to sell the asset
๏ An active programme to locate a buyer and complete the plan must have been started
๏ The asset must be being actively marketed at a price that is reasonable in relation to its
current fair value
๏ The sale should be expected to take place within twelve months from the date of
classification as ‘held for sale ‘
๏ It should be unlikely that significant changes to the plan will be made or that the plan will be
withdrawn
Non-current asset held for sale is valued at the lower of the carrying value and fair value less costs
to sell. Any reduction in value is recorded as an impairment through profit or loss.
IFRS 5
Cost Model Revaluation Model

Asset is revalued to fair value immediately
before classification as held for sale
๏ Once classified as a non-current asset held for sale it is no longer depreciated.

๏ The subsequent sale of the asset will give rise to a profit/loss on disposal.
Example 1 – NCA-HFS
York bought an asset at a cost of $120,000 on 1 January 20X1 and depreciated it straight line over
10 years. The asset’s residual value is nil and depreciation is charged pro-rate on a monthly basis.
On 30 November 20X4, York classified the asset as a non-current asset held for sale in accordance
with the rules of IFRS 5 Discontinued operations and non-current assets held for sale. At that date
the fair value of the asset was $70,000 and the costs to sell were $2,000.
The asset had not been sold by the 31 December 20X4 reporting date.
Prepare extracts from the financial statements for the year-ended 31 December 20X4.
Illustration – Non-current asset held for sale under the revaluation model
Chester bought an asset on the 1 January 20X1 at a cost of $500,000 and held it under the revaluation
model. Its useful life is 50 years.
The asset was classified as a non-current asset held for sale in accordance with IFRS 5 Discontinued
operations and non-current assets held for sale on 31 December 20X8, Chester’s reporting date. At that date
it was determined that its fair value was $600,000 and the costs to sell were $25,000.
At the date of being classified as a non-current asset held for sale, the asset’s carrying value is compared to
its fair value less costs to sell. As the asset is held under the revaluation model it is revalued to its fair value
of $600,000 immediately prior to its reclassification and a revaluation gain of $180,000 (W) recognised
through other comprehensive income. The $600,000 is now the asset’s carrying value. The fair value less
costs to sell is $575,000 (600,000 – 25,000), and as this is lower than the carrying value of $600,000 , becomes
the value of the non-current asset held for sale on the statement of financial position as it is the lower of the
two figures.
The reduction in value of the asset to $575,000 from $600,000 is treated as an impairment. Assuming that
there have been no previous revaluation gains, then this $25,000 impairment is recognised immediately
through profit or loss, alongside the depreciation on the asset for the year of $10,000 ($500,000 / 10 years).
Working
Cost model Revaluation Revaluation gain
$ $ $
Cost (1 Jan X1) 500,000
Acc. Dep. (80,000)
(=500,000/50 x 8 years)
Carrying value (31 Dec X8) 420,000 600,000 180,000
3. Discontinued operations
IFRS 5
Discontinued Operations
Definition When discontinued Disclosure
Definition
๏ Disposed of, or
๏ Held for sale, and:
Separate major line Single co-ordinated plan to Is a subsidiary acquired

of business or dispose of a separate line exclusively with a view
geographical area of of business/geographical to re-sale
operations area
Discontinued
Disposed of in the year Held for sale
Disclose in year of Disclose in year

disposal held for sale
Disclosure
P or L SCF SFP
PFY → face Net cash flows → face or notes Fully disposed of → none
Revenue, expenses, Not fully disposed of →

pre-tax profit, tax ‘assets held for sale’
expense → face or
notes
Example 2 – Discontinued operations

Angola’s car manufacturing operation has been making substantial losses. Following a meeting of
the board of directors, it was decided to close down the car manufacturing operation on 31 March
20X6. The company’s reporting date is 31 December and the car manufacturing operation is
treated as a separate operating segment.
Explain how the decision to close the car manufacturing operation should be treated in
Angola’s financial statements for the years ending 31 December 20X5 and 20X6.
Example 3 – Discontinued operations

Ruta Co Statement of Profit or Loss and Other Comprehensive Income for the year ended 31
December 2017
$000 $000
2017 2016
Revenue 700 550
Cost of sales (300) (260)
Gross profit 400 290
Distribution costs (100) (70)
Administrative expenses (70) (60)
Profit from operations 230 160
During the year the entity ran down a material business operation with all activities ceasing on 30
March 2017
The results of the operation for 2017 and 2016 were as follows:
$000 $000
2017 2016
Revenue 60 70
Loss from operations (3) (1)
The entity made gains of $7,000 on the disposal of non-current assets of the discontinued
operation. These have been netted off against administrative expenses.
Prepare the Statement of Profit or Loss and Other Comprehensive Income for the year ended
31 December, 2017 for Ruta Co, complying with the provisions of IFRS 5, disclosing the
information on the face of the Statement of Profit or Loss and Other Comprehensive Income.
Ignore taxation.
Chapter 9
IAS 10 EVENTS AFTER THE REPORTING
PERIOD
IAS 10
Adjusting Non-adjusting
Information relating to a condition that Doesn’t reflect conditions that existed at

existed at the reporting date the reporting date
๏ Fall in value of investments
๏ Settlement of outstanding court case
๏ Major purchase of assets
๏ Bankruptcy of a customer
๏ Announcing a discontinued operation
๏ Sale of inventory at below cost
๏ Announcing a restructuring
๏ Determination of purchase/sale price
of PPE
Disclose nature and financial effect if MATERIAL
Example 1 – Events after the reporting period

The following events took place between the 31 December 20X5 reporting date and the date the
financial statements were authorised for issue.
1. The company makes an issue of 100,000 shares which raises $200,000 shortly after the
Statement of Financial Position date.
2. A legal action had been brought against the company for breach of contract prior to the year
end. The outcome was decided shortly after the Statement of Financial Position date, and as a
result the company will have to pay costs and damages totalling $80,000. No provision has
currently been made for this event.
3. Inventory included in the accounts at the year end at cost $25,000 was subsequently sold for
$15,000.
4. A building in use at the Statement of Financial Position date and valued at $500,000 was
completely destroyed by fire. Unfortunately, only half of the value was covered by insurance.
The insurance company has agreed to pay $250,000 in accordance with the company’s policy.
Explain how each of the above items should be treated in the financial statements for the
year ended 31 December 20X5.
Chapter 10
IAS 2 INVENTORIES
Measure @ lower of
Cost NRV
Costs incurred in bringing inventory
to its present condition and location Selling price X
Less:
๏ Materials
Costs to complete (X)
๏ Labour
Costs of selling (X)
๏ Manufacturing overheads
NRV X
(based on normal output)
๏ Transport costs
๏ Irrecoverable taxes
Costs specifically excluded include:

๏ Abnormal costs
๏ Storage costs
๏ Administration costs
๏ Selling expenses
Line-by-line basis
Example 1 – Inventory Valuation

Neil paid $3 per unit for the raw materials of its products. To complete each unit incurred $2 per
unit in direct labour.
Production overheads for the year based on normal output of 12,000 units was $72,000.
Due to industrial action only 10,000 units were produced and 1,000 units were in inventory at the
end of the year.
As a result of the industrial action some units were badly stored and became damaged. It’s is
estimated that 200 of the units will now only be sold for $12 each after minor repairs of $2 each
What figure for closing inventory would be shown in the Statement of Financial Position?
Chapter 11
IFRS 16 LEASES
1. Introduction
IFRS 16 Leases is to be adopted for accounting periods starting on or after 1 January 2019. It can be
adopted earlier but only if the entity has already adopted IFRS 15 Revenue from contracts with
customers.
The new standard on leases is replacing the old standard (IAS 17) where the existence of operating
leases meant that significant amounts of finance were held off the balance sheet. In adopting the
new standard all leases will now be brought on to the statement of financial position, except in the
following circumstances:
๏ leases with a lease term of 12 months or less and containing no purchase options – this
election is made by class of underlying asset; and
๏ leases where the underlying asset has a low value when new (such as personal computers or
small items of office furniture) – this election can be made on a lease-by-lease basis.
2. Low-value assets and short-term leases

The accounting for low value or short-term leases is done through expensing the rental through
profit or loss on a straight-line basis.
Example 1 – Low-value assets

Banana leases out a machine to Mango under a four year lease and Mango elects to apply the low-
value exemption. The terms of the lease are that the annual lease rentals are $2,000 payable in
arrears. As an incentive, Banana grants Mango a rent-free period in the first year.
Explain how Mango would account for the lease in the financial statements.
3. Lessee accounting
3.1. Initial recognition
At the start of the lease the lessee initially recognises a right-of-use asset and a lease liability. [IFRS
16:22]
Right of use asset Lease liability

Measured at the amount of the lease liability Measured at the present value of the lease
plus any initial direct costs incurred by the payments payable over the lease term,
lessee. discounted at the rate implicit in the lease
๏ Lease liability ๏ Fixed payments less incentives
๏ Initial direct costs ๏ Variable payments (e.g. CPI/rate)
๏ Estimated costs for dismantling ๏ Expected residual value guarantee
๏ Payments less incentives before ๏ Penalty for terminating (if reasonably
commencement date certain)
๏ Exercise price of purchase option (if
reasonably certain)
Note: if the rate implicit in the lease cannot
be determined the lessee shall use their
incremental borrowing rate
3.2. Subsequent measurement
Right of use asset Lease liability

Cost less accumulated depreciation Financial liability at amortised cost
Note: Depreciation is based on the earlier
of the useful life and lease term, unless
ownership transfers, in which case use the
useful life.
Example 2 – Lessee accounting

On 1 January 2015, Plum entered into a five year lease of machinery. The machinery has a useful
life of six years. The annual lease payments are $5,000 per annum, with the first payment made on
1 January 2015. To obtain the lease Plum incurs initial direct costs of $1,000 in relation to the
arrangement of the lease but the lessor agrees to reimburse Pear $500 towards the costs of the
lease.
The rate implicit in the lease is 5%. The present value of the minimum lease payments is $22,730.
Demonstrate how the lease will be accounted in the financial statements over the five year
period.
Chapter 12
IAS 7 STATEMENT OF CASH FLOWS
Statement of cash flows for the year ended [date]
$m $m
Operating Activities
Profit before tax X
Depreciation X
Impairment X
Gain/loss on disposal of PPE (X)/X
Finance cost X
Inventory (X)/X
Receivables (X)/X
Payables X/(X)
Cash generated from operations X
Interest paid (X)
Tax paid (X)
Cash generated from operating activities X
Investing Activities
Proceeds from sale of PPE X
Purchase of PPE (X)
Dividends received X
Cash generated from investing activities X
Financing Activities
Proceeds from issue of shares X
Loan issue/repayment X/(X)
Dividend paid (X)
Cash generated from financing activities X
Change in cash and cash equivalents X/(X)

Opening cash and cash equivalents X
Closing cash and cash equivalents X
1. Cash and cash equivalents

Cash – Cash on hand and demand deposits
Cash equivalents – Short term, highly liquid investments that are readily convertible to known
amounts of cash and which are subject to an insignificant risk of changes in value.
Example 1 – Cash and cash equivalents

Statement of financial position at 31 December 20X5 (extract)
20X5 20X4
$’000 $’000
Current assets
Government bonds 1,200 1,000
Cash 400 -
Current liabilities
Overdraft - 150
Calculate the movement in cash and cash equivalents
2. Operating activities
The principal revenue producing activities of the entity and other activities that are not investing or
financing activities.
IAS 7 allows two methods to calculate the cash generated from operations.
๏ Direct method – using nominal ledger T-accounts
๏ Indirect method – using the financial statements
2.1. Direct method
$000
Cash received from customers X
Cash payments to suppliers and employees X
Cash from operating activities X
Example 2 – Direct method

Extracts from a company’s general ledger show the following information:
$’000
Sales for the year 4,700
Purchases for the year 3,300
Wages and salaries 580
Other operating expenses 430
Receivables @ start year 400
Receivable @ year-end 500
Payables @ start year 300
Payables @ year-end 450
Calculate the cash from operating activities to appear in the company’s statement of cash
flows.
2.2. Indirect method
$000
Profit before taxation X
Depreciation X
Investment income (X)
Finance cost X
Increase in inventories (X)
Increase in receivables (X)
Increase in payables X
Cash from operating activities X
Example 3 – Indirect method

Statement of profit or loss (extract) for the year-ended 31 December 20X5
$’000
Profit before interest and tax 3,200
Finance cost (500)
Investment income 150
Profit before tax 2,850
Income tax (350)
Profit for the year 2,500
Statement of financial position (extract) as at 31 December 20X5
20X5 20X4
$’000 $’000
Current assets
Inventory 6,500 7,200
Receivables 4,300 3,900
Cash 250 500
Current liabilities
Trade payables 5,200 6,500
Depreciation for the year was $850,000.
Calculate the cash from operating activities to appear in the company’s statement of cash
flows.
2.3. Interest and tax paid
Interest payable
B/f X
Bank (β) X Finance cost (SPL) X
C/f X
X X
Tax payable
B/f – current tax X
Bank (β) X Tax expense (SPL) X
C/f – current tax X
X X
Example 4 – Interest/tax paid

Statement of profit or loss (extract) for the year-ended 31 December 20X5
$’000
Profit before interest and tax 3,200
Finance cost (500)
Investment income 150
Income tax (350)
Profit for the year 2,500
20X5 20X4
$’000 $’000
Current liabilities
Trade payables 5,200 6,500
Tax payable 180 210
Interest payable 120 90
Calculate the interest paid and tax paid to appear in the company’s statement of cash flows.
3. Investing activities
The acquisition and disposal of non-current assets (PPE, intangibles and investments)
3.1. Disposal of PPE
Profit/loss on disposal = Proceeds − Carrying value
Example 5 – Profit or loss on disposal

DBA disposed of a piece of plant and equipment in the year for $250,000 with a carrying value of
$225,000.
Show how this would be presented in the statement of cash flows for DBA.
3.2. Acquisition of PPE
PPE (CV)
B/f X
Depreciation X
Revaluation X
Disposal X
Cash - additions (β)
C/f X
X X
Example 6 – Acquisition of PPE

20X5 20X4
$’000 $’000
Non-current assets
Property, plant and equipment 13,200 12,500
Equity
Revaluation surplus 500 150
Additional information:
1. Depreciation of $850,000 has been charged in the year
2. An item of machinery was disposed of for $120,000 with a carrying value of $100,000
Calculate the cash outflow for the purchase of property, plant and equipment to appear in
the statement of cash flows.
3.3. Interest received
Interest receivable
B/f X
Interest income (SPL) X Bank (β) X
C/f X C/f X
X X
4. Financing activities
Activities that result in changes in the size and composition of the contributed equity and
borrowings of the entity
Debt
Issue of debt = increase in borrowings
Repayment of debt = decrease in borrowings
Equity
Issue of shares = movement in share capital and share premium
Dividend paid
Retained earnings
B/f X
Dividend paid (β) X PFY (SPL) X
C/f X
X X
Example 7 – Statement of cash flows

Statement of profit or loss for the year ended 31 December 20X5
$000
Revenue 360
Cost of sales and other expenses 150
Profit from operations 210
Finance costs 14
Profit before tax 196
Income tax expense 62
Profit after tax 134
Statement of financial position as at 31 December 20X5
31 December 20X5 31 December 20X4

$000 $000 $000 $000
Non-current assets
Cost 798 780
Depreciation 159 112
639 668
Current assets
Inventory 12 10
Trade receivables 34 26
Bank 24 70 28 64
709 732
Share capital 180 170

Share premium 18 12
Retained earnings 343 245
541 427
Non-current liabilities
Bank loan 100 250
Current liabilities
Trade payables 21 15
Income tax 47 68 40 55
709 732
Additional information:
1. During the year, the company paid a dividend of $36,000
2. Included within expenses are a loss on disposal of $9,000 and depreciation of $59,000
3. Property, plant and equipment includes $45,000 for the purchase of a new piece of
machinery
Prepare a statement of cash flow for the year ended 31 December 20X5 in accordance with
the requirements of IAS 7.
C. PRINCIPLES OF TAXATION
Chapter 13
TAXATION
1. What is Taxation?
Taxation is a contribution by individuals, property or businesses to state revenue. It can be
collected by the state/government either directly or indirectly and is the main way in which it raises
money to fund its expenditure.
Taxation can also be used as a means of influencing economic decision making or promoting social
values and priorities in a country. Hence, no two countries tax systems will be identical.
Note: Specific tax rules in different countries are not required in F1. Exam questions are focused on
fictitious countries and so it is only important to understand the general principles of how taxation
works.
Principles of taxation
The general principles of good taxation (Adam Smith) are that it should show:
๏ Equity Fair to different individuals, reflecting their ability to pay
๏ Efficient Cheap and easy to administer with regards collection and timing
๏ Economic effects Consideration to different business sectors should be considered in tax
policies
2. Direct Taxation vs. Indirect Taxation

Direct Taxes
These are taxes which fall directly on the person or entity who is expected to pay it .
๏ Tax on trading income the tax paid by a company based on its taxable profits.
๏ Capital taxes a tax paid by a company based on taxable gains made on disposing of an
asset at above its original cost.
Indirect Taxes
An indirect tax is one that is levied on one part of the economy with the intention that it will be
passed on to another e.g. sales tax.
Taxable Person
This is the person accountable for the payment of a tax. It could be a business entity or an
individual.
Incidence
Incidence of tax is the distribution of the tax burden and can be divided into two elements
๏ Formal incidence the person or business having direct contact with the tax
authorities.
๏ Effective (or actual) incidence the person or business which actually ends up bearing the
cost of the tax.
Competent Jurisdiction
An authority whose tax laws apply to an individual or a company is referred to as a competent
jurisdiction.
Example 1 – Good taxation

Which one of the following is not one of Adam Smith’s characteristics of good tax?
A Certainty
B Equity
C Simplicity
D Efficiency
Example 2 – Indirect tax

An indirect tax is a tax that:
A Is levied on an individual
B Is based on earnings of an individual
C Is paid indirectly to the tax authorities
D Is levied on one person with the intention that it is passed on to another
3. Types of taxation
๏ Progressive taxes – these take an increasing proportion of income as income rises.
๏ Proportional taxes – these take the same proportion of income as income rises.
๏ Regressive taxes – these take a decreasing proportion of income as income rises.
Example 3 – Types of taxation

ABC and XYZ are two businesses that are resident in the same tax jurisdiction.
ABC has taxable profits of $45,000 and has a tax liability of $4,500.
XYZ has taxable profits of $70,000 and has a tax liability of $8,750.
What type of tax could this be said to be?
4. Indirect taxation
๏ Unit taxes – based on either a number or weight of items, e.g. import/excise duties
๏ Ad valorem taxes – based on the value of the items, e.g. sales tax
๏ Excise duties – a tax charged on the amount of commodity (alcohol, tobacco, oil
products and motor vehicles)
๏ Property taxes – a tax charged on the value of an individual’s or company’s property
(land and buildings)
๏ Wealth taxes – a tax charged on the value of an individual’s or company’s wealth
(asset value)
๏ Consumption taxes – a tax charged on the purchase of goods or services by either an
individual or a company.
5. Value added tax - VAT

The mechanism of VAT is that it is an indirect, consumption tax that is collected in stages along the
supply chain.
VAT is applied on the purchase of goods and services (taxable supplies) and is a tax on the final
consumer of the goods.
5.1. VAT rates
Each supply of goods or services in the course of business falls into one of the following types of
supply:
๏ Standard rated – taxed at the standard rate
๏ Higher rated – taxed at the appropriate higher rate
๏ Zero rated – taxed at the zero rate
๏ Exempt – not taxed
Although it may not be obvious there is a difference between zero rated and exempt supplies. If an
entity makes zero rated supplies it can register for VAT and therefore reclaim input VAT incurred
relating to those supplies.
If an entity makes wholly exempt supplies it cannot register for VAT and therefore cannot reclaim
input VAT incurred relating to the exempt supplies.
5.1. Partially Exempt Trades
If an entity conducts several activities some being standard rated, some zero rated and some
exempt, it can register for VAT but its right to offset input tax is restricted.
It can reclaim input tax relating to all standard rated and zero rated supplies. It cannot reclaim
input tax relating to exempt supplies.
Other input tax incurred in the production of all supplies e.g. heat/light expenses, is reclaimed on a
pro-rata basis.
Example 4 – VAT
AB is resident in County X, where monthly VAT returns are required. At the end of each month, AB
pays the net VAT due to the local tax authorities.
In the last month, AB purchase raw material costing $120,000, excluding VAT which is chargeable at
the standard rate of 15%.
The raw materials were converted into two products X and T. Produt X is zero rated and product t
is standard rated for VAT purposes.
Product X was sold for $90,000 and product T for $130,000, both excluding VAT.
Calculate the amount of VAT that AB should pay, assuming there to be no other VAT-related
transactions.
6. Direct taxation
6.1. Corporate income tax and capital tax computations
Companies pay corporate tax on the following:
๏ Profits from trade and other activities
๏ Gains on the sale of investments and assets
๏ Other non-business income
6.1. Tax on profits from trade and other activities
๏ Taxable profit – The profits calculated by the tax authorities using their rules, on which
they will apply the specific rate of tax to calculate the income tax liability.
๏ Accounting profit – The profits calculated under accounting rules using IFRS or local
GAAP, which follow accounting conventions (accruals, substance) and are very subjective.
To calculate the corporate income tax liability it will be first necessary to calculate the taxable
trading profit from the accounting profit.
Income and expenses for non-trading activities are ignored in the computation.
$
Accounting profit X
Less: non-trading income (X)
X
Add: disallowable expenditure X
Adjusted trading profit X
Less capital allowances (X)
Taxable trading profit X
6.1. Non-trading income

The following are classified as non-trading income:
๏ Rental income (taxable under Schedule A)
๏ Interest receivable (taxable under Schedule DIII)
๏ Dividends
๏ Capital profit (e.g. on the sale of an asset)
6.1. Disallowable expenditure

๏ Items of expenditure incurred by the business that are not allowed as a taxable deduction:
๏ Entertaining (except staff entertaining)
๏ Depreciation and amortisation
๏ Taxes paid to other public bodies
๏ Donations to political parties
6.1. Allowable Expenditure

The following items of expenditure are often allowed:
๏ Interest paid for trading purpose
๏ Staff wages and employer national insurance contributions
๏ Legal expenses
๏ Advertising
๏ Audit and accountancy costs
๏ Trade subscriptions
๏ Repairs
๏ Taxes paid to lower levels of government
Example 5 – Income tax computation (1)

Company M is resident in Country X and makes an accounting profit of $350,000 during the year.
This included depreciation of $45,000 and disallowable expenses of $20,000.
If the tax allowable depreciation totals $30,000, what is the tax payable?
Example 6 – Income tax computation (2)

Company B is resident in Country X and makes accounting profit of $360,000 during the year. This
includes non-taxable income of $35,000 and depreciation of $40,000. In addition, $10,000 of the
expenses are disallowable for tax purposes.
If the tax allowable depreciation totals $30,000, what is the tax payable?
6.1. Accounting Depreciation vs. Tax Depreciation

Accounting depreciation and amortisation are subjective being applied using straight line or
reducing balance methods as well as at different rates.
Accounting depreciation and amortisation are therefore both disallowable trading expense.
Tax depreciation follows the same principles as accounting depreciation but specific rules are laid
out by the tax authorities to remove any subjectivity.
Example 7 – Tax depreciation

Sunflower commenced business on 1 January 20X7 and entered into the following transactions for
plant and machinery:
Purchases $
1 January 20X7 Industrial Building 260,000
1 January 20X7 Stitching machine (plant) 47,000
1 January 20X9 Packing machine (plant) 58,000
Sales
1 January 20X9 Stitching machine bought on 1 January 20X7 9,500
1 January 20X9 Industrial building bought on 1 January 20X7 240,000
Sunflower qualifies for accelerated tax depreciation in the first-year on the plant at the rate of 50%.
The second and subsequent years will be at 25% on the reducing balance method.
The industrial building qualifies for an annual tax depreciation allowance of 5% on the straight line
basis.
Calculate Sunflower’s tax depreciation for the three years ended 31 December 20X7, 20X8
and 20X9.
6.2. Trading Losses

If a business makes a trading loss instead of a trading profit no tax is payable in that year. The loss
is then allowed to be offset and loss relief claimed. The methods of loss relief include:
๏ Carry forward of trading loss to offset against future trading income
๏ Offset against other income and gains of the same accounting period
๏ Offset against other income and gains of one or more previous accounting period
๏ Group relief (see later)
7. Gains on the sale of assets and investments (capital taxes)

Taxable capital gains of a company are subject to corporate tax. A capital gain is the taxable profit
on the disposal of an asset or investment.
Most assets or investments being disposed of are chargeable assets, however, some key
exemptions exist:
๏ Private motor cars
๏ Qualifying corporate bonds
๏ Chattels bought and sold for less than £6,000
๏ Wasting chattels (tangible moveable property with a life expectance of less than 50 years e.g.
a horse)
Some disposals are also exempt from tax:
๏ Gifts to charities of land, buildings and certain works of art
๏ Gifts of any type of asset to government institutions and museums
Capital tax computations

Capital gain = Disposal proceeds less cost of the asset less allowable costs
Note: Some tax jurisdictions ๏ Initial purchase costs

allow the initial cost to be incurred
adjusted up to its current cost
๏ Improvements and
(indexation)
enhancements (not repairs)
๏ Costs incurred to sell the
asset
Example 8 – Capital tax computation

A company resident in Country X purchases land and buildings in January 20X5 for $155,000, of
which $55,000 was attributable to the land. The company incurred in the same month $55,000 for
refurbishment of the building, which was classified as capital expenditure according to local tax
regulators.
The land and buildings were sold for $425,000 in January 20X9, $100,000 of this price was
attributable to the land. The company paid $8,000 in disposal costs which were allowable for tax
purposes.
Local tax regulations allow for indexation of the purchase and refurbishment costs of the building.
The index has increased by 35% between January 20X5 and January 20X9. Capital gains are taxed
at the corporate income tax rate applicable in Country X.
Calculate the taxable gain arising on the sale of the land and buildings and the tax payable.
Rollover relief
Countries may allow for capital gains to be deferred where a business asset has been sold and
subsequently replaced.
Deferral is allowed as businesses often use the cash from the sale of the asset to buy the
replacement one thus leaving no cash available to pay any tax liability.
The company is allowed to roll the gain arising on the sale against the base cost of the replacement
asset.
The effect is that when the replacement asset is sold in the future, a larger gain will arise at that
time, resulting in more tax payable in the future, effectively deferring the tax due on the original
gain.
Capital Losses
Capital losses are calculated in the same way as capital gains. In most countries capital losses are
only ever offset against capital gains arising in the same accounting period or are carried forward
and offset against capital gains arising in future accounting period(s). Capital losses are never
carried back or offset against other income.
Example 9 – Capital losses

Country X has the following tax regulations:
Taxable profits are subject to tax at 25%.
Capital gains are added to profits from trading to give taxable profits.
Trading losses can be carried forward indefinitely but cannot be carried back to previous years.
Capital gains/losses cannot be offset against trading gains/losses or visa versa.
JKL is resident in Country X and has no brought forward losses as 1 January 20X7. JKL has the
following results for 20X7 to 20X8:
Trading profit / Capital profit/
(loss) $000 (loss) $000
20X7 (300) 400
20X8 550 0
20X9 700 (150)
Calculate JKL’s corporate income tax due for each of the years ended 31 December 20X7 to
20X9.
Chapter 14
REGULATORY ENVIRONMENT AND
INTERNATIONAL TAXATION ISSUES
1. Sources of taxation rules

The nature of tax rules vary considerably from one country to another; however, it is possible to
categorise the sources and influences on those rules. Within any country the balance between each
source will be different, but in most countries the same elements will be present to a greater or
lesser extent. The main sources of tax rules in a country are usually as follows:
All tax systems are based on domestic primary legislation either at the central government level or
at the local authority level or both. In some countries the legislation is very detailed and specific,
setting out every possible item of income and expense. In other countries the legislation is less
detailed and is supplemented by court rulings or case law.
The practice of the relevant taxing authority will create precedents which will be followed in the
future. Tax authorities sometimes issue guidelines or interpretations which are aimed at clarifying
the taxation legislation.
Supranational bodies may issue directives which the government of a country has to include in the
legislation, for example, European Union (EU) directives on VAT.
International tax treaties signed with other states are also a source of tax rules as the agreements
often vary from the country’s own tax regulations.
2. Administration of Taxation
2.1. Principles of record keeping
Tax legislation usually required businesses to retain records. Records will usually be kept for:
๏ Corporate tax
๏ VAT or sales tax
๏ Excise duties
๏ Employee taxes
Corporate Income Tax
A business must keep all records required to support its financial statements and all records to
support adjustments made to the financial statements for tax purpose.
Sales Tax
In many countries adequate records must be kept including business documentation such as:
๏ Orders and delivery notes
๏ Purchases and sales books
๏ Cash books and other account books
๏ Invoices
๏ Bank statements
Excise duties
If a business has an overseas subsidiary, it will also need to retain records relating to transfer pricing
policy between the two entities.
Employee Taxes and Social Security
Employers keep detailed records of employees pay and amounts of tax and social security
deductions.
2.1. Deadlines and Penalties

Deadlines are set by tax authorities, to ensure that taxpayers submit tax returns and pay
outstanding tax on time.
In some countries tax is paid by way of self-assessment where the entity prepares the tax return
and files that with the amount of tax it thinks is due.
In other countries the tax authorities raise the assessment after the entity has submitted certain
information regarding its financial statements etc. to the tax authority.
3. Powers of tax authorities

Revenue authorities generally have powers to inflict penalties for various offences related to
corporation tax and sales tax/VAT. In addition to this they have the following powers:
๏ Power to review and query filed returns
๏ Power to request special reports or returns
๏ Power to examine records (generally extending back some years)
๏ Power to enter and search
๏ Power to exchange information with foreign tax authorities
4. Tax Evasion and Avoidance

4.1. Tax Evasion
Tax evasion is the illegal manipulation of the tax system to avoid paying tax and can include
falsifying tax returns and claiming fictitious expenses.
4.2. Tax Avoidance
Tax avoidance is tax planning to minimise the tax liability. It is strictly legal but usually exploits
loopholes in legislation.
4.3. Anti-Avoidance Provisions
As well as legislating, tax authorities use other administration methods to minimise evasion and
avoidance.
๏ Reducing the opportunity by deducting tax at source and simplifying the tax structure.
๏ Increasing the perceived risk by auditing tax returns and payments.
๏ Reducing the overall gain by regularly reviewing the penalty structure.
๏ Changing social attitudes towards evasion and avoidance by developing an honest, equitable
and customer friendly tax administration.
4.1. Ethical considerations
Ethical considerations can arise when businesses try to reduce their tax liability through use of tax
legislation.
It is felt that businesses may pursue an aggressive form of tax avoidance to try and reduce their tax
liability to amounts that public opinion may consider to be unfair.
Recent examples can be looked at with regards Google, Facebook and Starbucks in the UK.
5. International Taxation Issues

5.1. Concept of Corporate Residence and Determining Residence
Corporate income tax is usually residence based. The test for establishing residence of an entity
varies from one country to another. The main types of test are as follows:
Place of effective management and control – the country from where control of the group is
exercised is deemed to be the country of residence for tax purposes.
Place of incorporation – if a country uses this as a basis any entity registered in that country will be
deemed to be resident for tax purposes.
Place of permanent establishment (trade carried out or decisions made) – if a business wholly or
partly conducts business through a fixed place of business
Permanent establishment includes:
๏ A place of management
๏ A branch
๏ An office
๏ A factory
๏ A workshop
๏ A mine, oil or gas well
๏ A building or construction site
It is therefore possible for an entity to be resident for tax purposes in more than one country which
will lead to the problem of double taxation. It is possible that an entity has income taxed in the
country it was earned and also in a different company where the company is resident.
5.1. Double Taxation
Double taxation relief exists to reduce the incidence of tax being paid twice. Often the taxpayer is
allowed to deduct form its total tax liability, an amount equal to the tax already paid overseas, thus
eliminating tax being paid twice.
The OECD has suggested a model tax convention which states can adopt in their dealings with
each other for tax purposes.
The OECD model suggests that business profits of an enterprise can only be taxed in a country
where permanent establishment is apparent.
5.2. Foreign Taxation

Withholding Tax
In many countries, payments made abroad are subject to a ‘withholding tax’. The type of payments
normally subject to withholding tax include interest, dividends and capital gains.
Double taxation treaties between countries aim to reduce or eliminate withholding taxes and
double taxation.
Underlying Tax
Dividends are paid out of post-tax profits. If a company in Country A receives a dividend from a
company in Country B, the dividend would have been taxed in Country B before receipts. The
foreign tax paid in relation to this dividend receipt is called underlying tax.
The overseas dividend would be included as income for corporate tax purposes in the receiving
company’s tax computation and would therefore be taxed again. This leads to double taxation.
Example 1 – Withholding and underlying tax (CIMA P7 5/06)

CW owns 40% of the equity share in Z, an entity resident in a foreign country.
CW receives a dividend of $45,000 from Z; the amount received after deduction of withholding tax
of 10%. Z had before tax profits for the year of $500,000 and paid corporate income taxes of
$100,000
Required
(a) Calculate the amount of withholding tax paid by CW.
(b) Calculate the amount of underlying tax that relates to CW’s dividend
5.3. Branch vs. Subsidiary
Branch Subsidiary
๏ Same legal entity ๏ Separate legal entity
๏ Branch profits liable in main entity’s tax ๏ Parent liable to tax on foreign dividends
computation received
๏ Branch taxable gains liable in main ๏ Parent not subject to capital gains made
entity’s tax computation by subsidiary
๏ Losses can be set off in main entity’s tax ๏ Losses cannot usually be set off against
return the parent’s profits
๏ Transfer of assets is not usually subject to ๏ Transfer of assets may become subject to
tax on capital gains tax on capital gains
๏ Transfer pricing issues may arise
D. MANAGING CASH AND WORKING CAPITAL
Chapter 15
CASH MANAGEMENT
A business can be profitable whilst at the same time be losing cash. It is vitally important for a
business therefore to ensure that it does not just focus on profitability but also manage its cash
position.
To ensure that the business can determine if it is generating or spending cash overall it will need to
prepare cash flow forecasts.
A cash flow forecast will identify exactly when the cash inflows and outflows will arise which can
then help identify when the business will have either cash surpluses or cash deficits.
1 2 3
Inflows
Cash sales X X X
Cash from credit customers X X X
Outflows
Cash purchases (X) (X) (X)
Cash payments to credit suppliers (X) (X) (X)
Cash expenses (X) (X) (X)
Capital expenditure (X) - -
Interest (X) (X) (X)
Taxation (X) (X) (X)
Net movement X/(X) X/(X) X/(X)

Opening balance X X X
Closing balance X X X
1. Cash receipts from credit customers

Information from predicted future sales and the cash settlement by customer is used to calculate
the cash received from credit customers.
Example 1 – Cash inflows

Sales in December were $10,000 and are expected to increase by 10% each month from the start of
the year
90% of the sales are made on credit terms, the remainder for cash, and credit customers settle the
balance as follows:
1. 60% in the month of sale
2. 40% in the month following sale
Calculate the cash inflows for January and February.
2. Cash payments to credit suppliers

Information from predicted sales can be used to calculate the cost of sales using cost structures.
Stock holding policies can be used to determine purchases and from this we can determine the
cash payments to credit suppliers.
Example 2 - Cash outflows

Sales in December were $10,000 and are expected to increase by 10% each month from the start of
the year
A constant gross profit margin on 40% is expected
Inventory levels are maintained at 20% of the following month’s sales
Suppliers are paid in the month following purchase.
Calculate the cash payments to credit suppliers for January and February.
Chapter 16
SHORT-TERM FINANCE AND CASH
INVESTMENT
On preparation of the cash flow forecast the businesses can then identify whether it needs to raise
short-term finance is there is a cash deficit or alternatively deposit cash if it has a surplus cash
balance.
1. Short-term finance
1.1. Trade payables
A company can delay the payment due to suppliers, which effectively acts as a source of finance. It
is therefore using the credit terms on offer by its supplier.
This is a risky strategy as if cash flow difficulties occur then the supplier may no longer supply the
company.
1.2. Overdrafts
An overdraft is a facility provided to the company by a bank whereby the company can borrow up
to a predetermined limit on its bank account.
Interest is paid on any amounts of cash lent by the bank and the bank has the right to recall the
overdraft facility on demand.
1.3. Short-term loans
A short-term loan is an agreement between the company and the bank to borrow a set amount of
cash that is then repayable over a fixed period.
1.4. Debt factoring
Debt factoring is where a company’s receivables are sold to a third party (a debt factoring
company) for cash. The debt factoring company then collects the cash on behalf of the company
for an agreed fee.
The factor is often more successful at enforcing credit terms leading a lower level of debts
outstanding. Factoring is therefore not only a source of short-term finance but also an external
means of controlling or reducing the level of debtors.
2. Short-term cash investment

A company needs to consider the following principles of investing when deciding on how to invest
short-term cash:
๏ Maturity
๏ Risk
๏ Security
๏ Yield
2.1. Interest bearing deposits
A company can deposit excess funds at a high street bank and receive interest on the amounts
deposited.
It is very low risk as banks will be able to repay the amounts deposited but also carries a low level of
return.
The liquidity of the funds depends on the specific nature of the deposit account offered.
2.2. Short-term treasury bills
A company can purchase treasury bills which are issued weekly by governments. The bills do not
pay interest but the company pays less than the face value that is repaid on maturity.
They are highly liquid as they can be sold before their maturity date.
2.3. Bills of exchange
A bill of exchange is simply an agreement to pay a certain amount at a certain date in the future, in
essence an IOU. No interest is payable on the note but is implicit in the terms of the bill.
2.4. Certificates of deposit
A fixed-term (one-month, three-month, six-month) investment with a bank or credit union, carrying
a fixed rate of interest. The deposit is usually insured and so carries minimal risk, making it similar
to a bank deposit.
2.5. Commercial paper
A fixed-term investment of less than 270 days, which is purchased at a discount and carries lower
interest rates than bonds. The interest rate is higher for longer dated commercial papers.
Example 1 – Short-term cash investment

A company has surplus funds to invest for a short-term period of 3 months and has the two
following investments to consider:
Treasury bills
Purchase the central bank’s treasury bills for $995 per $1,000 today for a period of 91 days.
Bank deposit account
Invest in a 30 day notice bank deposit account with a variable rate of interest of 2.5% per annum,
payable quarterly.
Explain the advantages and disadvantages to the company of each of the investments, using
calculations where relevant.
Chapter 17
WORKING CAPITAL
1. Definition
Working capital is the amount of current assets (inventory, receivables and payables) that a
business needs to maintain in order to fund its debts as they fall due.
The ability of a company to pay its obligations as and when they fall due (its liquidity) is a major
concern of any credit analysis.
Short term liquidity can be assessed by comparing current assets with current liabilities in a variety
of forms:
Working Capital = Current Assets - Current Liabilities.
A working capital surplus represents a cushion of protection for current creditors; it indicates the
amount by which the value of current assets could decrease still leaving enough to repay current
liabilities from the sale of current assets.
The optimum amount of working capital varies considerably from company to company and from
industry to industry, thus the nature of the company's business and the quality of its assets must be
considered.
Companies functioning within industry sectors with short production/sales cycles (e.g.
supermarkets) can generally function satisfactorily with a much smaller amount of working capital
than those with a long production cycle (e.g. heavy engineering).
2. Working capital policies

Inventory needs to be managed to ensure the correct amount is held to meet customer demand,
without holding too much that results in additional costs to the business.
Cash from credit customers needs to be collected on a regular basis to ensure the risk of
irrecoverable debts is kept to a minimum.
Payment made to credit suppliers need to be made on a regular basis as any delay or default could
lead to the loss of supplier goodwill.
The business needs to finely balance the requirements of having the correct level of current assets,
whilst ensuring the finance used to fund the investment in current assets is appropriate.
A HIGH level of working capital will mean the business is always able to respond to changes in
requirements but holding high levels of inventory/receivables/cash is expensive.
A LOW level of working capital is less expensive but the company may not be able to respond to a
change in demand.
A company’s policy on working capital will be influenced by the risk relating to working capital and
will lead to one of the following approaches:
๏ Conservative – Attempts to reduce the risk by holding high levels of working capital.
‣ High levels of finished goods
‣ Generous customer payment terms
‣ Prompt payment to suppliers
Unproductive assets, increased finance cost and cash flow issues
๏ Aggressive – Attempts to reduce the finance cost and increase profitability.
‣ Reduction in inventory levels
‣ Improved credit control
‣ Delaying payment to suppliers
Increased risk of system breakdown and loss of goodwill with suppliers and customers
3. Working capital financing

The financing of working capital is done with either short-term or long-term financing, with short-
term financing being usually cheaper.
๏ Permanent current assets – a core level of investment in inventory and receivables e.g. a
buffer level of inventory, a minimum level of cash kept in the bank
๏ Fluctuating current assets – the increases/decreases in receivables/payables
Fluctuating current
Assets ($) assets
Short-term
funds
Short-term
Permanent current assets funds or long-
term funds?
Non-current assets Long-term

funds
Time
๏ Conservative - Mostly long term finance used. All permanent and most fluctuating current
assets are funded using long term finance.
‣ Short-term finance when current assets increase
‣ Cash surplus if current assets are low
๏ Aggressive - Mostly short term finance used. All fluctuating and part of the permanent
current assets are funded using short term finance.
‣ Increased risk of liquidity problems
‣ Cheaper and flexible
๏ Moderate - Permanent current assets are funded using long term finance. Fluctuating
current assets are funded using short term finance.
4. Measuring working capital

Working capital ratios can be calculated to determine how much working capital a business is
holding and to see if it has too much or too little.
4.1. Current ratio
Current assets
Current ratio =
Current liabilities
A current ratio of over one indicates that a company has a higher level of current assets than
current liabilities and should, therefore, be in a position to meet its short term obligations as and
when they fall due. However, some companies function adequately on current ratios of less than
one whilst others need a much higher ratio. Generally the more liquid the current assets are the
higher this ratio will be.
Trends are difficult to analyse but generally higher ratios indicate greater liquidity. However, an
increase may reflect a high level of unsaleable stock or overdue receivables whereas a decrease
may result from greater efficiency.
Some factors to consider:
๏ Asset quality
๏ Seasonality
4.1. Quick ratio (acid test)
Current assets - inventory

Quick ratio (acid test) =
Current liabilities
This quick ratio shows how easily a company can meet its current obligations using funds raised
from quick assets (those assets which can be converted quickly into cash).
A comparison of the quick ratio and current ratios which shows increases in both, but with the
current ratio increasing more, would indicate that the company has been building up stock.
4.2. Inventory days
Inventory
Inventory days = x 365
Cost of sales
Shows how long a business is holding its inventory. A higher number of days inventory might
indicate holdings of obsolete or unsaleable inventory, but it might also signify a purchase of raw
materials now in anticipation of an increase in price later.
4.3. Trade receivables collection period
Trade receivables
Trade receivables collection period = x 365
Revenue
Providing revenue is evenly spread throughout the year the ratio will indicate how effectively debts
are being collected.
An increase in the ratio of receivables to revenue could, providing the proportion of cash sales has
not increased, indicate one of the following:
๏ Receivables are being given or are taking longer to pay. What are the terms of trade?
๏ The total receivables figure includes long outstanding debts. Should provisions be made?
4.1. Trade payables payment period
Trade payables
Trade payables payment period = x 365
Cost of sales
If purchases are spread evenly throughout the year, this ratio will show the length of credit the
company is taking. An increase in the ratio may indicate that more reliance is being placed upon
the payables to finance the business. A drop in days may indicate that a company is taking cash
discounts or may indicate suppliers are cutting credit terms because of the company's decreased
creditworthiness.
Example 1 – Liquidity ratios

Ariel has the following balances under current assets and current liabilities:
$
Current assets
Inventory 50,000
Trade receivables 70,000
Bank 10,000
Current liabilities
Trade payables 88,000
Interest payable 7,000
Calculate the current ratio and the quick ratio.
Example 2 – Efficiency ratios

Extracts from a company’s trial balance at the end of its financial year are given below:
$’000
Sales revenue (85% on credit) 2,600
Cost of sales 1,800
Purchases (90% on credit) 1,650
Inventory of finished goods 220
Trade receivables 350
Trade payables 260
Calculate the following working capital ratios:

(i) Inventory days
(ii) Trade receivables days
(iii) Trade payables days
Example 3– Working capital requirement

Profit and loss account extract
$000
Revenue 250
Gross profit 90
The operating cycle has been calculated as:

Inventory 68 days
Receivables 88 days
Payables 114 days
Calculate the investment in working capital.
5. Cash operating cycle

The operating cycle is the length of time between the company’s outlay on raw materials, wages
and other expenditures and the inflow of cash from the sale of goods.
Inventory days Receivable days
Credit purchase Credit sale Cash receipt
Cash payment
Payable days
Operating cycle
An increase in the operating cycle shows that cash is not being recovered as quickly from business
activities, which can cause cash flow problems.
A business will try to reduce the length of the cash operating cycle through careful management of
inventory, receivables and payables.
Chapter 18
WORKING CAPITAL MANAGEMENT
1. Inventory management
Many companies, particularly those involved in manufacturing, will hold levels of stock to meet
expected customer demand. It is an important consideration as holding stock incurs costs but in
order to reduce level of inventory and the associated cost the risk of stock out arises.
The costs of inventory management that will need to be controlled are as follows:
๏ Ordering costs (independent of order size)
‣ Administrative
‣ Delivery
๏ Holding costs
‣ Cost of the investment in stock
‣ Storage
‣ Insurance
‣ Deterioration
‣ Obsolescence
‣ Theft
๏ Stock shortage costs
‣ Lost sales/contribution
‣ Loss of customers
‣ Purchase costs of new supply
‣ Production stoppages
๏ Purchase cost
‣ Bulk discounts
2. Economic order quantity (EOQ)

The order quantity that minimizes the total annual cost (annual holding cost plus annual ordering
cost).
Annual ordering cost = no. orders per annum x cost per order
Annual holding cost = average stock x annual holding cost per unit
Cost
TAC
holding cost
ordering cost
Order size
2C o D
Q=
Ch
Co = Cost per order

D = Annual demand
Ch = Cost of holding one unit for one year
Example 1 - EOQ
The annual demand for an item of inventory is 32,000 units. The item costs $40 per unit to
purchase with order costs of $15 per order. The annual inventory holding costs are $1.20 per unit.
Calculate the economic order quantity for this item and the total annual cost of inventory.
3. Bulk discounts
If a quantity discount is offered by a supplier, we can evaluate the discount simply by comparing
the total annual cost that would arise if the discount were accepted, against the corresponding
total annual cost at the EOQ.
Example 2 – Bulk discounts

Annual demand is 120,000 units. Ordering costs are $30 per order and holding costs are $20/unit/
annum. The material can normally be purchased for $10/unit, but if 1,000 units are bought at one
time they can be bought for $9,800. If 5,000 units are bought at one time, they can be bought for
$47,500.
What reorder quantity would minimize the total cost?
4. Trade receivables
A company will offer credit to its customers to increase the level of sales but this then introduces an
increased level of risk as the customer may default on payment.
To ensure that the business grants the correct amount of credit it should:
๏ Assessing the credit status of its customer
๏ Consider the specific terms it offers its customers
๏ Plan on how it will management the collection of cash on a day to day basis.
4.1. Assessing credit status
The creditworthiness of all new customers must be assessed before credit is offered.
Existing customers must also be re-assessed on a regular basis.
The following may be used to assess credit status of a company:
๏ Bank references
๏ Trade references
๏ Published accounts
๏ Credit rating agencies
๏ Company’s own sales record.
4.1. Offering credit terms
Upon deciding to grant a customer credit status a business must then determine the specific credit
terms to be offered, which may include:
๏ Credit limit value
๏ Number of days credit
๏ Discount on early payment
๏ Interest on overdue account.
4.1. Collecting debts

The collection of the debt is dependent on the credit controllers implementing a set of simple but
rigorous procedures.
Consideration should be given to the following actions at specific points in time following initial
invoicing and despatch of goods:
๏ Send statement of account
๏ Reminder letter
๏ Send a second reminder letter
๏ Threaten legal action
๏ Take action to recover funds
Control of trade receivable information
Trade receivables are usually analysed by the age of the debt to monitor the specific level and
amount of outstanding debt and aid collection.
This is simply a list of the customers who currently owe money, showing the total amount owed,
and the period of time for which money has been owed.
There is no set proforma for an age analysis of trade receivables, but a typical exam question is
shown below.
5. Costs of financing receivables

Consideration needs to be given to the two costs that arise from offering customers trade credit:
๏ Interest cost
๏ Settlement discounts
5.1. Interest cost
The receivables balance needs to be financed, usually via short-term finance. Any change to the
receivables balance will lead to a change in the financing cost of the business.
Interest cost = Receivables balance × Interest rate
Example 3 – Interest cost

EFG has year-end receivable of $10m based on total sales for the year of $42m. Any increase in the
receivables is financed from an overdraft carrying an interest rate of 10%.
(a) Calculate EFG’s receivable days
(b) Calculate the interest cost associated with financing the receivables.
5.2. Settlement discounts

Cash discounts are often given to encourage early payment by customers.
Advantages
๏ Decrease in receivables and interest charge.
๏ Reduction of irrecoverable debts.
Disadvantages
๏ Difficulty in setting the terms.
๏ Increased uncertainty with regards the cash receipts being received.
๏ May not reduce bad debt in practice.
๏ Customers may pay over normal terms but still take the cash discount.
Example 4 – Settlement discounts

EFG has year-end receivable of $10m based on total sales for the year of $42m. Any increase in the
receivables is financed from an overdraft carrying an interest rate of 10%.
EFG offers a discount of 2% for payment within 10 days.
Using the compound interest method, calculate the effective annualised cost of offering the
discount.
Example 5 – Annual interest

Dory’s customers all pay their accounts at the end of 60 days. To try and improve its cash flow, Dory
is considering offering all customers a 1.5% discount for payment within 14 days. Assume overdraft
interest is 15%.
Calculate the implied annual (interest) cost to Dory of offering the discount, using compound
interest methodology and assuming a 365 day year and an invoice value of $500.
6. Factoring
6.1. CIMA Official Definition
The sale of debts to a third party (the factor) at a discount, in return for prompt cash. A factoring
service may be with recourse, in which case the supplier takes the risk of the debt not being paid,
or without recourse, when the factor takes the risk.
Advantages
๏ Saving in internal administration costs.
๏ Reduction in the need for day to day management control.
๏ Particularly useful for small and fast growing businesses where the credit control department
may not be able to keep pace with volume growth.
Disadvantages
๏ Should be more costly than an efficiently run internal credit control department.
๏ Factoring has a bad reputation associated with failing companies, using a factor may suggest
your company has money worries.
๏ Customers may not wish to deal with a factor.
๏ Once you start factoring it is difficult to revert easily to an internal credit control.
๏ The company may give up the opportunity to decide to whom credit may be given.
6.1. Invoice discounting
Selected invoices are used as security against which the company may borrow funds. This is a
temporary source of finance repayable when the debt is cleared. The key advantage of invoice
discounting is that it is a confidential service, the customer need not know about it. The service is
also provided by a factoring company.
Example 6 - Factoring
Coral limited currently has turnover of $25m. Receivables turnover is currently 40 days. Interest is
charged on the overdraft at 12%.
A factoring company has offered its services for an annual fee of 1% of turnover. The factoring
company can reduce receivables turnover to 15 days.
The factor will also generate an admin saving for the company of $15,000.
Should Coral limited accept the factors offer?
7. Payables
Payables may be used as a source of short-term finance. If a company delays payment by a further
month then they now have a further months use of the cash.
However, delaying payment may lose the company it’s credit status with the supplier and could
result in supplies being stopped.
Additionally, the company could lose the benefit of any settlement discount offered by the supplier
for early payment.
In exactly the same way as for receivables, we can calculate the annual effective cost of refusing any
settlement discount offered, and compare this with the cost of financing working capital.
8. Overtrading
Overtrading is the term applied to a company which rapidly increases its turnover without having
sufficient capital backing, hence the alternative term “under-capitalisation”.
Output increase are often obtained by more intensive utilisation of existing fixed assets, and
growth tends to be financed by more intensive use of working capital.
Overtrading companies are often unable or unwilling to raise long-term capital and thus tend to
rely more heavily on short-term sources such as overdraft and trade creditors. Debtors usually
increase sharply as the company follows a more generous trade credit policy in order to win sales,
while stock tends to increase as the company attempts to produce at a faster rate ahead of increase
demand.
Overtrading is thus characterised by rising borrowings and a declining liquidity position in terms of
the quick ratio, if not always according to the current ratio.
Symptoms of overtrading
๏ Rapid increase in turnover
๏ Fall in liquidity ratio or current liabilities exceed current assets
๏ Sharp increase in the sales-to-fixed assets ratio
๏ Increase in the trade payables period
๏ Increase in short term borrowing and a decline in cash balance
๏ Fall in profit margins.
Overtrading is risky because short-term finance may be withdrawn relatively quickly if creditors
lose confidence in the business, or if there is general tightening of credit in the economy resulting
to liquidity problems and even bankruptcy, even though the firm is profitable.
The fundamental solution to overtrading is to replace short-term finance with long-term finance
such as term loan or equity funds.
ANSWERS TO EXAMPLES
A. Regulatory environment of financial reporting
Chapter 1
Regulatory environment
Answer 1 – Regulatory bodies

C The IASB is not responsible for overall supervisory body of the IFRS organisations, this is the
responsibility of the IFRS Foundation
Chapter 2
Professional Ethics’
Answer 1 – Ethics
D Independence is not one of the fundamental principles in CIMA’s code of ethics.
Chapter 3
Corporate Governance
No examples
B. Financial statements
Chapter 4
Conceptual Framework for Financial Reporting
Answer to example 1 – Framework (1)

A The format of financial statements is covered in IAS 1 Presentation of Financial Statements
Answer to example 2 – Qualitative characteristics (1)

A Timely information is not an element of reliability.
Answer to example 3 – Qualitative characteristics (2)

Answer B – For information to faithfully represent the transaction it needs to be complete, free
from bias and neutral.
Answer to example 4 – Measurement

Answer B
Answer to example 5 – Application of Framework

IAS 2 Inventories
Definition (asset) - A present economic resource controlled by the entity as a result of past events
An economic resource is a right that has the potential to produce economic benefits.
Measurement - Valued at lower of cost and net realisable value
IAS 16 Property, plant and equipment

Definition (asset) - A present economic resource controlled by the entity as a result of past events
An economic resource is a right that has the potential to produce economic benefits.
Definition (depreciation) - Decreases in assets, or increases in liabilities, that result in decreases in
equity, other than those relating to distributions to holders of equity claims
Measurement – Historic cost or fair value (revaluation model)
Disclosure – Gains on revaluation recognised though profit or loss (prudence)
Chapter 5
IAS 1 Presentation of Financial Reporting
No examples
Chapter 6
IAS 16 Property, plant and equipment
Answer 1 – Initial Recognition

$
Purchase price (net of trade discount) 90,000
Shipping & handling charges 3,500
Pre-production testing 12,000
Site preparation costs (excl. error) 14,000
Total 119,500
Answer 2 – Change in useful life

To calculate the new depreciation charge under the change in usefule life we apply the new life to
the carrying value at the date of change.
$25,000,000
Annual depreciation (old) = = $2,500,000 per annum
10 years
Carrying value @ 31 December 2014 = $25,000,000 − (3 x $2,500,000)

= $17,500,000
$17,500,000
Annual depreciation (new) = = $3,500,000 per annum
5 years
Carrying value @ 31 December 2015 = $17,500,000 − $3,500,000

= $14,000,000
Answer 3 – Change in method

To calcualte the new deprecition charge the new method is applied to the carrying value at the
date of change.
$
Cost (1 Jan X4) 80,000
Depn (X4)
(16,000)
= 80,000 x 20%
Carrying value (31 Dec X4) 64,000
Depn (X5)
(12,800)
= 64,000 x 20%
Depn (X6)
(10,240)
= 51,200 x 20%
Depn (X7)
(8,192)
= 40,960 x 20%
Depn (X8)
(6,554)
= 32,768 x 20%
$26,214 – $10,000 (RV)

Annual depreciation (new) = = $3,243
5 years
Answer 4 – Revaluation
SFP (extract) SPLOCI(extract)
$ $
Non-current assets
PPE (W) 573,913 Depreciation (PL) (26,087)
Equity Revaluation gain (OCI) 140,000

Revaluation surplus 133,913
SOCE (extract)
Retained Revaluation
earnings surplus
$ $
B/F X -
Revaluation in the year - 140,000
Reserve transfer 6,087 (6,087)
C/F X 133,913
Workings
$ $ $
Cost (1.1.X5) 500,000
Accumulated depreciation
(40,000)
(=500,000/25 x 2 years)
Carrying value (31.12.X6) 460,000 600,000 140,000
Dereciation
(20,000) (26,087) (6,087)
(=600,000/23)
Carrying value (31.12.X7) 573,913 133,913
Answer 5 – Disposal of a revalued asset

SPLOCI(extract)
$
Profit on disposal
93,478
(=550,000 – 456,522 (W))
SOCE (extract)
Retained Revaluation
earnings surplus
$ $
B/F X 120,522
Reserve transfer 120,522 (120,522)
C/F X -
Workings
$ $ $
Cost (1.1.X5) 400,000
Accumulated depreciation
(32,000)
(=400,000/25 x 2 years)
Carrying value (31.12.X6) 368,000 500,000 132,000
Dereciation
(32,000) (43,478) (11,478)
(=500,000/23 x 2 years)
Carrying value (31.12.X8) 456,522 120,522
Chapter 7
IAS 36 Impairment of Assets
Answer 1 – Impairment
SFP (extract) SPLOCI(extract)
$ $
Non-current assets
PPE (W) 18,995 Depreciation (W) 5,000
Impairment (W) 6,045
Workings
$50,000
Annual depreciation = = $5,000 per annum
10 years
Carrying value @ 31 December 20X9 = $50,000 − ($5,000 x 5 years)

= $25,000
Fair value less costs to sell

= $24,000
($26,000 - $2,000)
Value in use = $5,000 X 3,791

= $18,995
Recoverable amount (lower) = $18,995
Impairment = $25,000 − $18,995

= $6,045
Chapter 8
IFRS 5 Non-current assets held for sale and discontinued operations
Answer 1 – Non-current assets held for sale and discontinued operations

SFP (extract) SPL(extract)
$ $
Current assets
NCA-HFS (W) 68,000 Depreciation (W) 11,000
Impairment (W) 5,000
Workings
Annual depreciation = $120,000 / 10 years = $12,000 p.a.
Carrying value (30 November 20X4) = 120,000 – (12,000 x 3 years) – (12,000 x 11/12) = $73,000
Fair value less costs to sell = 70,000 – 2,000 = $68,000
NCA-HFS (lower) = $68,000
Impairment = 73,000 – 68,000 = $5,000
Answer 2 – Discontinued operations

31 December 2015
The operation is not being sold so cannot be classified as held for sale and neither is it a
discontinued operation as it is still operating until 31 March 2016. Angola is firmly committed to
the closure but it hasn’t taken place and so is included in continuing operations. A disclosure in the
notes can be made of the intention to close the operation in the following year.
31 December 2016
The operation is now classified as a discontinued operation as it has now ceased operating.
Answer 3 – Discontinued operations

Ruta Co Statement of Profit or Loss and Other Comprehensive Income for the year ended 31
December 2017
$000 $000
2017 2016
Revenue 640 480
Gross Profit 380 265
Profit from continuing operations 233 161
Discontinued operations (3) (1)
Profit for the year 230 160
Chapter 9
IAS 10 Events after the reporting period
Answer 1 – Events after the reporting period
(i) Non-adjusting events as the issue of shares does not give evidence of a condition that existed
at the year-end. The company would use the issue of shares in its calculation of basic EPS.
(ii) An adjusting event as the legal action and its outcome give evidence of a condition the
existed at the reporting date. A provision of $80,000 would be made.
(iii) An adjusting event that reduces the value of year-end inventory by $10,000 as it gives
evidence of the fall in value of the inventory held at the reporting date. Inventory included in
the accounts at the year-end would now be included at $15,000.
(iv) A non-adjusting event as the condition did not exist at the reporting date. As the item is
material a disclosure of its nature and financial impact would be made in the notes.
Chapter 10
IAS 2 Inventories
Answer 1 – Inventory valuation

$/unit
Material cost 3
Labour cost 2
Overheads
6
(=72,000/12,000)
Total cost 11
NRV = $12 - $2 = $10
Total inventory valuation = (800 undamaged units x $11) + (200 damaged units x $10) = $10,800
Chapter 11
IFRS 16 Leases
Answer to example 1 – Low-value assets

An expense of $1,500 would be recognised through profit or loss for each of the four year lease. At
the end of year one an accrual of $1,500 would be recognised on the statement of financial
position of which $500 would be released over the remaining three years of the lease.
$2,000 x 3
Expense (p.a.) = = $1,500
4
Answer to example 2 – Lessee accounting

Initial recognition
Record the right of use asset and lease liability
DR Right-of-use asset $22,730
CR Lease liability $22,730
Record the initial direct costs

DR Right-of-use asset $1,000
CR Cash $1,000
Record the incentive payments received

DR Cash $500
CR Right-of-use asset $500
Right-of-use asset = 22,730 + 1,000 – 500 = 23,230
Subsequent measurement
Depreciate the asset over the earlier lease term of five years.
$23,230
Expense (p.a.) = = $4,646
5
Record finance lease payments and interest using the rate implicit in the lease
Year B/f Payment Capital Finance cost C/f
balance (5%)
1 22,730 (5,000) 17,730 887 18,617
2 18,617 (5,000) 13,617 681 14,298
3 14,298 (5,000) 9,298 465 9,763
4 9,763 (5,000) 4,763 237 5,000
5 5,000 (5,000) - - -
Chapter 12
IAS 7 Statement of Cash Flows
Answer 1 – Cash and cash equivalents
20X5 20X4 Movement

$’000 $’000 $’000
Government bonds 1,200 1,000
Cash 400 -
Overdraft - (150)
Total 1,600 850 750
Increase
Answer 2 – Direct Method

$000
Cash received from customers
4,600
(400 + 4,700 – 500)
Cash payments to suppliers
(3,150)
(300 + 3,300 – 450)
Cash payments to employees (580)
Cash payments for operating expenses (430)
Cash from operating activities 440
Answer 3 – Indirect Method

$000 $000
Depreciation 850
Finance cost 500
Inventory ↓ 700
Receivables↑ (400)
Payables (1,300)
Cash generated from operations 3,200
Interest paid (500)
Tax paid (350)
Cash generated from operating activities 2,350
Answer 4 – Interest/tax paid

Cash generated from operations X
Interest paid (W) (470)
Tax paid (W) (380)
Cash generated from operating activities X
Workings Interest paid
Interest payable
B/f 90
Bank (β) 470 Finance cost (SPL) 500
C/f 120
590 590
Workings Tax paid
Tax payable
B/f – current tax 210
Bank (β) 380 Tax expense (SPL) 350
C/f – current tax 180
560 560
Answer 5 – Profit or loss on disposal

$ $
Operating Activities (extract)
Gain/loss on disposal of PPE (25,000)
(Profit = 250,000 – 225,000)
Investing Activities (extract)

Proceeds from sale of PPE 250,000
Answer 6 – Acquisition of PPE

PPE (CV)
B/f 12,500
Depreciation 850
Revaluation
350
(500 – 150)
Disposal 100
Cash - additions (β) 1,300
C/f 13,200
14,150 14,150
Answer 7 – Statement of cash flows

Statement of cash flows for the year ended 31 December 20X5
$000s $000s
Profit before tax 196
Depreciation 59
Loss on disposal of PPE 9
Finance cost 14
Inventory ↑ (2)
Receivables ↑ (8)
Payables ↑ 6
Cash generated from operations 274
Interest paid (14)
Tax paid (= 40 + 62 – 47) (55)
Cash generated from operating activities 205
Investing Activities
Proceeds from sale of PPE (W) 6
Purchase of PPE (45)
Cash generated from investing activities (39)
Financing Activities
Proceeds from issue of shares
16
= (180 + 18) – (170 + 12)
Loan issue/repayment (150)
Dividend paid (36)
Cash generated from financing activities (170)
Change in cash and cash equivalents (4)

Opening cash and cash equivalents 28
Closing cash and cash equivalents 24
Workings
Profit/loss on disposal = Proceeds − Carrying value
(9,000) = Proceeds − (27,000 – 12,000)
Proceeds = 15,000 − 9,000
PPE (Cost)
B/f 780
Disposal (β) 27
Cash - additions (β) 45
C/f 798
825 825
PPE (Acc depn)

B/f 112
Depreciation 59
Disposal (β) 12
C/f 159
171 171
D. Principles of taxation
Chapter 13
Taxation
Answer 1 – Good taxation

A
Answer 2 – Indirect taxes

D
Answer 3 – Types of taxation

Progressive tax
Answer 4 – VAT
Input VAT = 15% x $120,000 = $18,000
Output VAT = 15% x $130,000 = $19,500
VAT payable = $1,500
Answer 5 – Income tax computation (1)

$
Accounting profit 350,000
Add: disallowable expenditure
Depreciation 45,000
Disallowable expenses 20,000
Less: tax allowable depreciation (30,000)
Taxable trading profit 385,000
Tax payable @ 25% 96,250
Answer 6 – Income tax computation (2)

$
Accounting profit 360,000
Less: non-trading income (35,000)
Add: disallowable expenditure
Depreciation 40,000
Disallowable expenses 10,000
Less: tax allowable depreciation (30,000)
Taxable trading profit 345,000
Tax payable @ 25% 86,250
Answer 7 – Tax depreciation

Building Stitching Packing Total
machine machine
Cost 260,000 Cost 47,000
(1.1.X7) (1.1.X7)
Tax depreciation (13,000) Tax depreciation (23,500) 36,500
@ 5% cost (X7) @ 50% (X7)
247,000 23,500
Tax depreciation (13,000) Tax depreciation (5,875) 18,875
(X8) @ 25% (X8)
234,000 17,625 Cost (1.1.X9) 58,000
Balancing 6,000 Balancing -8,125 Tax depreciation (29,000) 32,500
charge (β) allowance (β) (X9)
Proceeds 240,000 Proceeds 9,500 29,000
Answer 8 – Capital tax computation

Land
Cost = $55,000
Buildings
Cost = 155,000 – 55,000 = 100,000
Refurbishment = $55,000
Total building cost = $155,000
Indexed cost = 155,000 x 1.35 = 209,250
Capital gain
Capital gain = 425,000 – (209,250 + 55,000) – 8,000 = 152,750
Tax payable = 25% x 152,750 = $38,187.5
Answer 9 – Capital losses

20X7 20X8 20X9
Trading profit nil 550 700
Loss relief nil (300) nil
Capital gains 400 nil Nil
Taxable profit 400 250 700
Tax @ 25% 100 62.50 175
Capital losses c/f 150
Chapter 14
Regulatory Environment and International Taxation Issues
Answer 1 – Withholding and underlying tax

Withholding tax
$
Dividend received 45,000
Withholding tax
5,000
(45,000/90 x 10)
50,000
50,000
Underlying tax = x 100,000 = 12,500
(500,000 – 100,000)
E. Managing cash and working capital
Chapter 15
Cash Management
Answer 1 – Cash inflows

January February
Inflows
Cash sales 1,100 1,210
Cash from credit customers 9,540 10,494
10,640 11,704
Workings
December January February
11,000 12,100
Sales 10,000
(10,000 x 1.1) (11,000 x 1.1)
1,000 1,100 1,210
Cash sales
(10% x 10,000) (10% x 11,000) (10% x 12,100)
9,000 9,900 10,890

Credit sales
(90% x 10,000) (90% x 11,000) (90% x 12,100)
5,400 5,940 6,534
Cash receipts
(60% x 9,000) (60% x 9,900) (60% x 10,890)
3,600 3,960
(40% x 9,000) (40% x 9,900)
9,540 10,494
Answer 2 – Cash outflows

December January February March
11,000 12,100 13,310

Sales 10,000
(10,000 x 1.1) (11,000 x 1.1) (12,100 x 1.1)
Cost of sales (60%) 6,000 6,600 7,260 7,986
Closing inventory 2,200 2,420 2,662 -

Opening inventory 2,000 2,200 2,420 -
Purchases 6,200 6,820 7,502 -
Payment - 6,200 6,820 7,502
Chapter 16
Short-term nance and cash investment
Answer 1 – Short-term cash investment

In general terms, the company should carefully consider the following criteria:
Risk – as these funds can only be invested for 3 months, it would be inappropriate to consider high
risk investments.
Return – clearly, the company will wish to maximize return. However, high returns can usually only
be achieved with high risk. As noted above, it is therefore likely that only relatively low returns will
be possible.
Liquidity – the company needs to consider how easily the funds can be withdrawn. This will
depend on: the terms of the investments (ie how long are the funds tied up for?), what penalties
are there for early withdrawal and can the investment be sold on before maturity date?
Applying these principles to the specific investments:

Investment 1
Assuming the company is in a country with a stable economy, treasury bills are likely to be very low
risk. They are also highly liquid, as they can be readily sold on the money markets. The price
achieved would depend on general interest rates at the time of sale.
No interest is paid on bills, so the return will be earned purely by buying at a discount to the
redemption value. In this sense, the return is fixed (if held to redemption).
The annualised return = (1 + 5/1000)4 - 1 = 2.02%
Investment 2
A bank deposit is also likely to be very low risk, though maybe slightly higher than the treasury bill.
It is probably less liquid, as there will be penalty charges, and possible loss of interest, for early
withdrawal. Also, the deposit cannot be sold on.
The return can vary, which increases risk.
Assuming the annual interest of 2.5% does not vary, then it is higher than the return on the treasury
bill.
At the end of the 30 day period, the company will then need to review its investment again.
Chapter 17
Working Capital
Answer 1 – Liquidity ratios

(50,000 + 70,000 + 10,000)
Current ratio = = 1.37:1
(88,000 + 7,000)
(70,000 + 10,000)
Quick ratio = = 0.84:1
(88,000 + 7,000)
Answer 2 – Efficiency ratios

220
Inventory days = x 365 = 44.6 days
1,800
350
Receivable days = x 365 = 57.8 days
0.85 x 2,600
260
Payable days = x 365 = 63.9 days
0.90 x 1,650
Answer 3 – Working capital requirement
Working capital investment = $20,493 + $60,274 - $64,356 = $145,123
114 days
Payables = x 110,000 = $64,356
365 days
88 days
Receivables = x 250,000 = $60,274
365 days
68 days
Inventory = x 110,000 = $20,493
365 days
Chapter 18
Working Capital Management
Answer 1 – EOQ
Q = 2 x $15 x 32,000
$1.20
Q = 894 units
Answer 2 – Bulk discounts

Ordering cost Holding cost Purchase Cost Total Cost
Co x D Ch x Q
Q 2
Q
600* £6,000 £6,000 £1,200,000 £1,212,000

£30 x 120,000 £20 x 600 120,000 x £10.00
600 2
1,000 £3,600 £10,000 £1,176,000 £1,189,600

£30 x 120,000 £20 x 1,000 120,000 x £9.80
1,000 2 (£9,800 / 1,000)
5,000 £720 £50,000 £1,140,000 £1,190,720

£30 x 120,000 £20 x 5,000 120,000 x £9.50
5,000 2 (£47,500 / 5,000)
*EOQ = √ (2 x £30 x 120,000) / £20 = 600 units
Therefore the company should choose a reorder quantity of 1,000 as this minimizes the total cost.
Answer 3 – Interest cost
10
Receivable days = x 365 = 86.9 days
42
Interest cost = 10% x $10 million = $1 million
Answer 4 – Settlement discounts

Effective annual cost = (1 + 2/98)365/(87-10) – 1 = 0.1005 = 10.1%
Offering the discount costs 10.1% and reduces the investment in receivables but these are financed
by the overdraft at a cost of 10%, which is fractionally cheaper and therefore the discount should
not be offered.
Answer 5 – Annual interest

r = (1 + 1.5/98.5)365/(60-14) – 1 = 0.1274 = 12.7%
Therefore, Dory should offer the discount to customers as it is cheaper than the overdraft at 15%.
Answer 6 – Factoring
Reduction in Receivables
= Sales x (Days / 365)

= $25m x (40-15) / 365
= $1,712,329
$
Reduction in overdraft interest 205,479
$1,712,329 x 12%
Admin Saving 15,000
Fee (250,000)
(26,521)
Therefore Coral Limited should not accept the factors offer.

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A. REGULATORY ENVIRONMENT OF FINANCIAL

1. Regulation of financial reporting information

3.1. Standard setting process for IFRS

Example 1 – Regulatory bodies

A Responsible for all IFRS technical matters

The ethical framework recognises that there are:

๏ Ethical principles to be followed.

2. Sources of professional codes for ethics

3. CIMA Code of Ethics for Professional Accountants

3.4. Professional behaviour

4. Threats to ethical behaviour

Safeguards fall into two broad categories:

1. Approach to Corporate Governance

2. Corporate governance regulation in different markets

1. Objective of financial reporting

2. Qualitative characteristics – make information useful

3. Financial statements and the reporting entity

4. Elements of financial statements

5. Recognition and derecognition

Historical cost Current value

7. Presentation and disclosure

Example 1 – Framework (1)

Example 2 – Qualitative characteristics (1)

Example 3 – Qualitative characteristics (2)

A (1) and (2)

A (1) and (2)

Example 5 - Application of Framework

Statement of financial position as at [date]

EQUITY AND LIABILITIES

Other comprehensive income

Total comprehensive income for the period X

Statement of changes in equity for the year ended [date]

Equity Share Revaluation Retained Total

Example 1 – Initial recognition

Example 2 – Change in useful life

Example 3 – Change in method

Cost Model Revaluation Model

Carried at cost less Carried at revalued amount

๏ Review periodically and keep revaluations up to date

5. Accounting for a revaluation

6. Disposal of a previously revalued asset

Example 5 – Disposal of revalued asset

3. Record the impairment

2. Non-current assets held for sale

To be classified as ‘held for sale’ it must be:

For a sale to be highly probable

Cost Model Revaluation Model

๏ Once classified as a non-current asset held for sale it is no longer depreciated.

Definition When discontinued Disclosure

Separate major line Single co-ordinated plan to Is a subsidiary acquired

Disposed of in the year Held for sale

Disclose in year of Disclose in year

Revenue, expenses, Not fully disposed of →

Example 2 – Discontinued operations

Example 3 – Discontinued operations

Information relating to a condition that Doesn’t reflect conditions that existed at