acca paper f7 financial reporting complete text -...

ACCA

Paper F7

Financial Reporting

Complete Text

British library cataloguinginpublication data

A catalogue record for this book is available from the British Library.

Published by: Kaplan Publishing UK Unit 2 The Business Centre Molly Millars Lane Wokingham Berkshire RG41 2QZ

ISBN 9781784152154

© Kaplan Financial Limited, 2015

The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials.

Printed and bound in Great Britain

Acknowledgements

We are grateful to the Association of Chartered Certified Accountants and the Chartered Institute of Management Accountants for permission to reproduce past examination questions. The answers have been prepared by Kaplan Publishing.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of Kaplan Publishing.

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Contents

Page

Chapter 1 Introduction to published accounts 1

Chapter 2 Tangible noncurrent assets 23

Chapter 3 Intangible assets 61

Chapter 4 Impairment of assets 75

Chapter 5 Noncurrent assets held for sale and discontinued operations

95

Chapter 6 A conceptual and regulatory framework 113

Chapter 7 Conceptual framework – Measurement of items 139

Chapter 8 Other standards 157

Chapter 9 Leases 179

Chapter 10 Financial assets and financial liabilities 205

Chapter 11 Revenue 245

Chapter 12 Provisions, Contingent Liabilities and Contingent Assets

285

Chapter 13 Taxation 313

Chapter 14 Earnings per share 341

Chapter 15 Statement of cash flows 373

Chapter 16 Principles of consolidated financial statements 431

Chapter 17 Consolidated statement of financial position 445

Chapter 18 Consolidated statement of profit or loss 505

Chapter 19 Associates 539

Chapter 20 Interpretation of financial statements 581

Chapter 21 Appendix 633

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Paper Introduction

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Syllabus

Paper introduction

Paper background

The aim of ACCA Paper F7, Financial reporting, is to develop knowledge and skills in understanding and applying accounting standards and the theoretical framework in the preparation of financial statements of entities, including groups and how to analyse and interpret those financial statements.

Objectives of the syllabus

• Discuss and apply a conceptual and regulatory framework for financial reporting.

• Account for transactions in accordance with International accounting standards.

• Analyse and interpret financial statements.

• Prepare and present financial statements for single entities and business combinations which conform with International Financial Reporting Standards.

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Core areas of the syllabus

Syllabus objectives and chapter references

We have reproduced the ACCA’s syllabus from September 15 to June 16. Below shows where the objectives are explored within this book. Within the chapters, we have broken down the extensive information found in the syllabus into easily digestible and relevant sections, called Content Objectives. These correspond to the objectives at the beginning of each chapter.

A A CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

1 The need for a conceptual framework

• A conceptual framework for financial reporting.

• A regulatory framework for financial reporting.

• Financial statements.

• Business combinations.

• Analysing and interpreting financial statements.

(a) Describe what is meant by a conceptual framework of accounting.[2] Ch. 6

(b) Discuss whether a conceptual framework is necessary and what an alternative system might be.[2] Ch. 6

(c) Discuss what is meant by relevance and faithful representation and describe the qualities that enhance these characteristics.[2] Ch. 6

(d) Discuss whether faithful representation constitutes more than compliance with accounting standards.[1] Ch. 6

(e) Discuss what is meant by understandability and verifiability in relation to the provision of financial information.[2] Ch. 6

(f) Discuss the importance of comparability and timeliness to users of financial statements.[2] Ch. 6

(g) Discuss the principle of comparability in accounting for changes in accounting policies.[2] Ch. 8

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2 Recognition and measurement

3 Specialised, notforprofit and public sector entities

4 Regulatory framework

(a) Define what is meant by ‘recognition’ in financial statements and discuss the recognition criteria.[2] Ch. 6

(b) Apply the recognition criteria to.[2] Ch. 6

(i) assets and liabilities

(ii) income and expenses.

(c) Explain the following measures and compute amounts using.[2] Ch. 7 (i) historical cost

(ii) fair value/current cost

(iii) net realisable value

(iv) present value of future cash flows.

(d) Describe the advantages and disadvantages of the use of historical cost accounting.[2] Ch. 7

(e) Discuss whether the use of current value accounting overcomes the problems of historical cost accounting.[2] Ch. 7

(f) Describe the concept of financial and physical capital maintenance and how this affects the determination of profits.[1] Ch. 7

(a) Distinguish between the primary aims of notfor profit and public sector entities and those of profit oriented entities.[1] Ch. 1

(b) Discuss the extent to which International Financial Reporting Standards (IFRSs) are relevant to specialised, notforprofit and public sector entities.[1] Ch. 1

(a) Explain why a regulatory framework is needed also included the advantages and disadvantages of IFRS over a national regulatory framework.[2] Ch. 6

(b) Explain why accounting standards on their own are not a complete regulatory framework.[2] Ch. 6

(c) Distinguish between a principles based and a rules based framework and discuss whether they can be complementary.[1] Ch. 6

(d) Describe the IASB’s standard setting process including revisions to and interpretations of standards.[2] Ch. 6

(e) Explain the relationship of national standard setters to the IASB in respect of the standard setting process.[2] Ch. 6

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5 The concepts and principles of groups and consolidated financial statements

B ACCOUNTING FOR TRANSACTIONS IN FINANCIAL STATEMENTS

1 Tangible noncurrent assets

(a) Describe the concept of a group as a single economic unit.[2] Ch.16(b) Explain and apply the definition of a subsidiary within relevant

accounting standards.[2] Ch.16(c) Identify and outline using accounting standards the circumstances in

which a group is required to prepare consolidated financial statements as required by applicable accounting standards and other regulation.[2] Ch.16

(d) Describe the circumstances when a group may claim exemption from the preparation of consolidated financial statements.[2] Ch.16

(e) Explain why directors may not wish to consolidate a subsidiary and when this is permitted by accounting standards and other applicable regulation.[2] Ch.16

(f) Explain the need for using coterminous year ends and uniform accounting policies when preparing consolidated financial statements.[2] Ch.16

(g) Explain why it is necessary to eliminate intra group transactions.[2] Ch.16

(h) Explain the objective of consolidated financial statements.[2] Ch.16(i) Explain why it is necessary to use fair values for the consideration for an

investment in a subsidiary together with the fair values of a subsidiary's identifiable assets and liabilities when preparing consolidated financial statements.[2] Ch.17

(j) Define an associate and explain the principles and reasoning for the use of equity accounting.[2] Ch.19

(a) Define and compute the initial measurement of a noncurrent (including a selfconstructed and borrowing costs) asset.[2] Ch. 2

(b) Identify subsequent expenditure that may be capitalised, distinguishing between capital and revenue items.[2] Ch. 2

(c) Discuss the requirements of relevant accounting standards in relation to the revaluation of noncurrent assets.[2] Ch. 2

(d) Account for revaluation and disposal gains and losses for noncurrent assets.[2] Ch. 2

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2 Intangible assets

3 Impairment of assets

4 Inventory and biological assets

(e) Compute depreciation based on the cost and revaluation models and on assets that have two or more significant parts (complex assets).[2] Ch. 2

(f) Discuss why the treatment of investment properties should differ from other properties.[2] Ch. 2

(g) Apply the requirements of relevant accounting standards for investment property.[2] Ch. 2

(a) Discuss the nature and accounting treatment of internally generated and purchased intangibles.[2] Ch. 3

(b) Distinguish between goodwill and other intangible assets.[2] Ch. 3(c) Describe the criteria for the initial recognition and measurement of

intangible assets.[2] Ch. 3(d) Describe the subsequent accounting treatment, including the principle

of impairment tests in relation to goodwill.[2] Ch. 3, Ch. 17(e) Indicate why the value of purchase consideration for an investment may

be less than the value of the acquired identifiable net assets and how the difference should be accounted for.[2] Ch. 17

(f) Describe and apply the requirements of relevant accounting standards to research and development expenditure.[2] Ch. 3

(a) Define an impairment loss.[2] Ch. 4(b) Identify the circumstances that may indicate impairments to assets.

[2] Ch. 4(c) Describe what is meant by a cash generating unit.[2] Ch. 4(d) State the basis on which impairment losses should be allocated, and

allocate an impairment loss to the assets of a cash generating unit.[2] Ch. 4

(a) Describe and apply the principles of inventory valuation.[2] Ch. 8(b) Apply the requirements of relevant accounting standards for biological

assets.[2] Ch. 8

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5 Financial instruments

6 Leasing

(a) Explain the need for an accounting standard on financial instruments.[1] Ch. 10

(b) Define financial instruments in terms of financial assets and financial liabilities.[1] Ch. 10

(c) Explain and account for the factoring of receivables.[1] Ch. 10(d) Indicate for the following categories of financial instruments how they

should be measured and how any gains and losses from subsequent measurement should be treated in the financial statements.[1] Ch. 10 (i) amortised cost

(ii) fair value through other comprehensive income (including where an irrevocable election has been made for equity investments that are not held for trading).

(iii) fair value through profit or loss

(e) Distinguish between debt and equity capital.[2] Ch. 10(f) Apply the requirements of relevant accounting standards to the issue

and finance costs of.[2] Ch. 10 (i) equity

(ii) redeemable preference shares and debt instruments with no conversion rights (principle of amortised cost).

(iii) convertible debt

(a) Explain why recording the legal form of a finance lease can be misleading to users (referring to the commercial substance of such leases).[2] Ch. 9

(b) Describe and apply the method of determining a lease type (i.e. an operating or finance lease).[2] Ch. 9

(c) Discuss the effect on the financial statements of a finance lease being incorrectly treated as an operating lease.[2] Ch. 9, Ch. 20

(d) Account for assets financed by finance leases in the records of the lessee.[2] Ch. 9

(e) Account for operating leases in the records of the lessee.[2] Ch. 9(f) Account for sale and leaseback agreements. Ch. 9

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7 Provisions and events after the reporting period

8 Taxation

9 Reporting financial performance

(a) Explain why an accounting standard on provisions is necessary.[2] Ch. 12

(b) Distinguish between legal and constructive obligations.[2] Ch. 12(c) State when provisions may and may not be made and demonstrate how

they should be accounted for.[2] Ch. 12(d) Explain how provisions should be measured.[1] Ch. 12(e) Define contingent assets and liabilities and describe their accounting

treatment.[2] Ch. 12(f) Identify and account for: [2] Ch. 12

(i) warranties/guarantees

(ii) onerous contracts

(iii) environmental and similar provisions

(iv) provisions for future repairs or refurbishments

(g) distinguish between and account for:

(i) adjusting and nonadjusting events after the reporting date.[2] Ch. 12(ii) identify items requiring separate disclosure, including their accounting

treatment and required disclosures.[2] Ch. 12

(a) Account for current taxation in accordance with relevant accounting standards.[2] Ch. 13

(b) Explain the effect of taxable temporary differences on accounting and taxable profits.[2] Ch. 13

(c) Compute and record deferred tax amounts in the financial statements.[2] Ch. 13

(a) Discuss the importance of identifying and reporting the results of discontinued operations.[2] Ch. 5

(b) Define and account for noncurrent assets held for sale and discontinued operations.[2] Ch. 5

(c) Indicate the circumstances where separate disclosure of material items of income and expense is required.[2] Ch. 5

(d) Account for changes in accounting estimates, changes in accounting policy and correction of prior period errors.[2] Ch. 8

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10 Revenue

11 Government grants

(e) Earnings per share (EPS) (i) calculate the EPS in accordance with relevant accounting

standards (dealing with bonus issues, full market value issues and rights issues).[2] Ch. 14

(ii) explain the relevance of the diluted EPS and calculate the diluted EPS involving convertible debt and share options (warrants).[2] Ch. 14

(a) Explain and apply the principles of recognition of revenue: (i) identification of contracts Ch. 11

(ii) identification of performance obligations Ch. 11

(iii) determination of transaction price Ch. 11

(iv) allocation of the price to performance obligations Ch. 11

(v) recognition of revenue when/as performance obligations are satisfied Ch. 11

(b) Explain and apply the criteria for recognising revenue generated from contracts where performance obligations are satisfied over time or at a point in time.[2] Ch. 11

(c) Describe the acceptable methods for measuring progress towards complete satisfaction of a performance obligation.[2] Ch. 11

(d) Explain and apply the criteria for the recognition of contract costs.[2] Ch. 11

(e) Prepare financial statement extracts for contracts where performance obligations are satisfied over time.[2] Ch. 11

(f) Apply the principles of recognition of revenue, and specifically account for the following types of transaction: [2] Ch. 11 (i) principle versus agent

(ii) bill and hold arrangements

(iii) consignments

(g) Prepare financial statement extracts for contracts where performance obligations are satisfied over time.[2] Ch. 11

(a) Apply the provisions of relevant accounting standards in relation to accounting for government grants.[2] Ch. 2

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C ANALYSING AND INTERPRETING FINANCIAL STATEMENTS

1 Limitations of financial statements

2 Calculation and interpretation of accounting ratios and trends to address users’ and stakeholders’ needs

3 Limitations of interpretation techniques

(a) Indicate the problems of using historic information to predict future performance and trends.[2] Ch. 20

(b) Discuss how financial statements may be manipulated to produce a desired effect (creative accounting, window dressing).[2] Ch. 20

(c) Explain why figures in a statement of financial position may not be representative of average values throughout the period for example, due to: (i) seasonal trading

(ii) major asset acquisitions near the end of the accounting period.[2] Ch. 20

(a) Define and compute relevant financial ratios.[2] Ch. 20(b) Explain what aspects of performance specific ratios are intended to

assess.[2] Ch. 20(c) Analyse and interpret ratios to give an assessment of an entity’s

performance and financial position in comparison with.[2] Ch. 20 (i) an entity’s previous period’s financial statements

(ii) another similar entity for the same reporting period

(iii) industry average ratios.

(d) Interpret an entity’s financial statements to give advice from the perspectives of different stakeholders.[2] Ch. 20

(e) Discuss how the interpretation of current value based financial statements would differ from those using historical cost based accounts.[1] Ch. 20

(a) Discuss the limitations in the use of ratio analysis for assessing corporate performance.[2] Ch. 20

(b) Discuss the effect that changes in accounting policies or the use of different accounting policies between entities can have on the ability to interpret performance.[2] Ch. 20

(c) Indicate other information, including nonfinancial information, that may be of relevance to the assessment of an entity’s performance.[2] Ch. 20

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4 Specialised, notforprofit and public sector entities

D PREPARATION OF FINANCIAL STATEMENTS

1 Preparation of single entity financial statements

2 Preparation of consolidated financial statements including an associate

(d) Compare the usefulness of cash flow information with that of a statement of profit or loss or a statement of profit or loss and other comprehensive income.[2] Ch. 15

(e) Interpret a statement of cash flows (together with other financial information) to assess the performance and financial position of an entity.[2] Ch. 15

(f) (i) explain why the trend of eps may be a more accurate indicator of performance than a company's profit trend and the importance of eps as a stock market indicator.[2] Ch. 14

(ii) discuss the limitations of using eps as a performance measure.[2] Ch. 14

(a) Discuss the different approaches that may be required when assessing the performance of specialised, notforprofit and public sector organisations.[1] Ch. 6 & 20

(a) Prepare an entity's statement of financial position and statement of profit or loss and other comprehensive income in accordance with the structure prescribed within IFRS and content drawing on accounting treatments as identified within A, B and C. Ch. 1

(b) Prepare and explain the contents and purpose of the statement of changes in equity. Ch. 1

(c) Prepare a statement of cash flows for a single entity (not a group) in accordance with relevant accounting standards using the direct and the indirect method.[2] Ch. 15

(a) Prepare a consolidated statement of financial position for a simple group (parent and one subsidiary) dealing with pre and post acquisition profits, noncontrolling interests (at fair value or proportionate share of subsidiaries net assets) and consolidated goodwill.[2] Ch. 17

(b) Prepare a consolidated statement of profit or loss and consolidated statement of profit or loss and other comprehensive income for a simple group dealing with an acquisition in the period and noncontrolling interest.[2] Ch. 18

(c) Explain and account for other reserves (e.g. share premium and revaluation reserves).[1] Ch. 17

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The numbers in square brackets indicate the intellectual depth at which the subject area could be assessed within the examination. Level 1 (knowledge and comprehension) broadly equates with the Knowledge module, Level 2 (application and analysis) with the Skills module and Level 3 (synthesis and evaluation) to the Professional level. However, lower level skills can continue to be assessed as you progress through each module and level.

(d) Account for the effects in the financial statements of intragroup trading.[2] Chs. 17 & 18

(e) Account for the effects of fair value adjustments (including their effect on consolidated goodwill) to: [2] Chs. 17 & 18 (i) depreciating and nondepreciating noncurrent assets

(ii) inventory

(iii) monetary liabilities

(iv) assets and liabilities not included in the subsidiary’s own statement of financial position, including contingent assets and liabilities

(f) Account for goodwill impairment.[2] Chs. 17 & 18(g) Describe and apply the required accounting treatment of consolidated

goodwill.[2] Chs. 17 & 18

The Examination

Examination format

The examination is a threehour paper. All questions are compulsory. It will contain both computational and discursive elements.

Some questions will adopt a scenario/case study approach.

Section A of the exam comprises 20 multiple choice questions of 2 marks each.

Section B of the exam comprises two 15 mark questions and one 30 mark question.

The 30 mark question will examine the preparation of financial statements for either a single entity or a group. The section A questions and remaining section B questions can cover any areas of the syllabus.

Section B questions may test different areas of the syllabus. For example, the preparation of an entity's financial statements could include matters relating to several accounting standards.

Questions may ask candidates to comment on the appropriateness or acceptability of management's opinion or chosen accounting treatment. An understanding of accounting principles and concepts and how these are applied to practical examples will be tested.

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Questions on topic areas that are also included in Paper F3 will be examined at an appropriately greater depth in this paper.

Candidates will be expected to have an appreciation of the need for specific accounting standards and why they have been issued. For detailed or complex standards, candidates need to be aware of their principles and key elements.

Paperbased examination tips

Divide the time you spend on questions in proportion to the marks on offer. One suggestion for this examination is to allocate 1.8 minutes to each mark available, so a 15mark question should be completed in approximately 27 minutes.

Unless you know exactly how to answer the question, spend some time planning your answer. Stick to the question and tailor your answer to what you are asked. Pay particular attention to the verbs in the question.

If you get completely stuck with a question, leave space in your answer book and return to it later.

If you do not understand what a question is asking, state your assumptions. Even if you do not answer in precisely the way the examiner hoped, you should be given some credit, if your assumptions are reasonable.

You should do everything you can to make things easy for the marker. The marker will find it easier to identify the points you have made if your answers are legible.

Short narrative response: Your answer should be concise but specific, explaining terms where required. Short narrative responses will often require comment on the correct accounting treatment of items, so an ability to discuss this is essential, rather than simply providing calculations.

Computations: It is essential to include all your workings in your answers. Many computational questions require the use of a standard format. Be sure you know these formats thoroughly before the exam and use the layouts that you see in the answers given in this book and in model answers.

Number of marks Section A – Twenty 2mark multiple choice questions 40 Section B – Two 15mark questions 30 Section B – One 30mark question 30

––– Total time allowed: 3 hours 100

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Interpretation style response: Longer form responses are likely to contain some form of interpreting information. A good interpretation answer takes account of the information contained within the question and is structured well, with good use of headings and sections.

Study skills and revision guidance

This section aims to give guidance on how to study for your ACCA exams and to give ideas on how to improve your existing study techniques.

Preparing to study

Set your objectives

Before starting to study decide what you want to achieve – the type of pass you wish to obtain. This will decide the level of commitment and time you need to dedicate to your studies.

Devise a study plan

Determine which times of the week you will study.

Split these times into sessions of at least one hour for study of new material. Any shorter periods could be used for revision or practice.

Put the times you plan to study onto a study plan for the weeks from now until the exam and set yourself targets for each period of study – in your sessions make sure you cover the course, course assignments and revision.

If you are studying for more than one paper at a time, try to vary your subjects as this can help you to keep interested and see subjects as part of wider knowledge.

When working through your course, compare your progress with your plan and, if necessary, replan your work (perhaps including extra sessions) or, if you are ahead, do some extra revision/practice questions.

Effective studying

Active reading

You are not expected to learn the text by rote, rather, you must understand what you are reading and be able to use it to pass the exam and develop good practice. A good technique to use is SQ3Rs – Survey, Question, Read, Recall, Review:

(1) Survey the chapter – look at the headings and read the introduction, summary and objectives, so as to get an overview of what the chapter deals with.

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You may also find it helpful to reread the chapter to try to see the topic(s) it deals with as a whole.

Notetaking

Taking notes is a useful way of learning, but do not simply copy out the text. The notes must:

Trying to summarise a chapter without referring to the text can be a useful way of determining which areas you know and which you don't.

Three ways of taking notes:

Summarise the key points of a chapter.

Make linear notes – a list of headings, divided up with subheadings listing the key points. If you use linear notes, you can use different colours to highlight key points and keep topic areas together. Use plenty of space to make your notes easy to use.

Try a diagrammatic form – the most common of which is a mindmap. To make a mindmap, put the main heading in the centre of the paper and put a circle around it. Then draw short lines radiating from this to the main subheadings, which again have circles around them. Then continue the process from the subheadings to subsubheadings, advantages, disadvantages, etc.

(2) Question – whilst undertaking the survey, ask yourself the questions that you hope the chapter will answer for you.

(3) Read through the chapter thoroughly, answering the questions and making sure you can meet the objectives. Attempt the exercises and activities in the text, and work through all the examples.

(4) Recall – at the end of each section and at the end of the chapter, try to recall the main ideas of the section/chapter without referring to the text. This is best done after a short break of a couple of minutes after the reading stage.

(5) Review – check that your recall notes are correct.

• be in your own words

• be concise

• cover the key points

• be wellorganised

• be modified as you study further chapters in this text or in related ones.

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Highlighting and underlining

You may find it useful to underline or highlight key points in your study text – but do be selective. You may also wish to make notes in the margins.

Revision

The best approach to revision is to revise the course as you work through it. Also try to leave four to six weeks before the exam for final revision. Make sure you cover the whole syllabus and pay special attention to those areas where your knowledge is weak. Here are some recommendations:

Read through the text and your notes again and condense your notes into key phrases. It may help to put key revision points onto index cards to look at when you have a few minutes to spare.

Review any assignments you have completed and look at where you lost marks – put more work into those areas where you were weak.

Practise exam standard questions under timed conditions. If you are short of time, list the points that you would cover in your answer and then read the model answer, but do try to complete at least a few questions under exam conditions.

Also practise producing answer plans and comparing them to the model answer.

If you are stuck on a topic find somebody (a tutor) to explain it to you.

Read good newspapers and professional journals, especially ACCA's Student Accountant this can give you an advantage in the exam.

Ensure you know the structure of the exam – how many questions and of what type you will be expected to answer. During your revision attempt all the different styles of questions you may be asked.

Further reading

'A student's guide to International Financial Reporting Standards' by Clare Finch.

'A student's guide to Preparing Financial Statements' by Sally Baker.

'A student's guide to Group Accounts' by Tom Clendon.

You can find further reading and technical articles under the student section of ACCA's website.

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International Examinable Documents FINANCIAL REPORTING

Knowledge of new examinable regulations will not be required until at least six calendar months after the last day of the month in which the document was issued, or the legislation passed.

The relevant last day of issue for the June examinations is 30 November of the previous year, and for the December examinations, it is 31 May.

The study guide offers more detailed guidance on the depth and level at which the examinable documents will be examined. The study guide should be read in conjunction with the examinable documents list.

For the most uptodate list of examinable documents please visit the student section of the ACCA website: http://www.accaglobal.com/students/.

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Introduction to published accounts Chapter learning objectives

Upon completion of this chapter you will be able to:

• prepare an entity’s financial statements in accordance with prescribed structure and content

• prepare and explain the contents and purpose of the statement of changes in equity

• distinguish between the primary aims of notforprofit and public sector entities and those of profitorientated entities.

1

chapter

1

1 Preparation of financial statements for companies

IAS 1 Presentation of financial statements

A complete set of financial statements comprises:

IAS 1 (revised) does not require the above titles to be used by companies. It is likely in practice that many companies will continue to use the previous terms of balance sheet rather than statement of financial position, income statement instead of statement of profit or loss, and cash flow statement rather than statement of cash flows.

Exceptional items

Exceptional items is the name often given to material items of income and expense of such size, nature or incidence that disclosure is necessary in order to explain the performance of the entity.

• a statement of financial position

• either – a statement of profit or loss and other comprehensive income, or

– a statement of profit or loss plus a statement showing other comprehensive income

• a statement of changes in equity

• a statement of cash flows

• accounting policies and explanatory notes.

Introduction to published accounts

2 KAPLAN PUBLISHING2 KAPLAN PUBLISHING

The accounting treatment is to:

In some cases it may be more appropriate to show the item separately on the face of the statement of profit or loss.

Examples include:

• include the item in the standard statement of profit or loss line

• disclose the nature and amount in notes.

• write down of inventories to net realisable value (NRV)

• write down of property, plant and equipment to recoverable amount

• restructuring

• gains/losses on disposal of noncurrent assets

• discontinued operations

• litigation settlements

• reversals of provisions.

The statement of financial position

A recommended format is as follows:

XYZ Statement of Financial Position as at 31 December 20X2

Assets $ $ Noncurrent assets: Property, plant and equipment X Investments X Intangibles X

––– X

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KAPLAN PUBLISHING 3

Note that IAS 1 requires an asset or liability to be classified as current if:

Current assets: Inventories X Trade receivables X Cash and cash equivalents X

–– X ––

Total assets X ––

Equity and liabilities Capital and reserves: Share capital X Retained earnings X Other components of equity X

–– X ––

Total equity X ––

Noncurrent liabilities: Longterm borrowings X Deferred tax X

–– X Current liabilities: Trade and other payables X Shortterm borrowings X Current tax payable X Shortterm provisions X

–– X ––

Total equity and liabilities X ––

• it will be settled within 12 months of the reporting date, or

• it is part of the entity's normal operating cycle.


4 KAPLAN PUBLISHING

Within the equity section of the statement of financial position, other components of equity include:

• revaluation surplus

• investment reserve (seen in financial instruments, chapter 10).

Statement of changes in equity (SOCIE)

The statement of changes in equity provides a summary of all changes in equity arising from transactions with owners in their capacity as owners.

This includes the effect of share issues and dividends.

Other nonowner changes in equity are disclosed in aggregate only.

XYZ Group Statement of changes in equity for the year ended 31 December 20X2

Share capital

Share premium

Revaluation surplus

Retained earnings

Total equity

$ $ $ $ $ Balance at 31 December 20X1

X X X X X

Change in accounting policy/prior year error (IAS 8)

(X) (X)

–– –– –– –– –– Restated balance X X X X X Dividends (X) (X) Issue of share capital

X X X

Total comprehensive income

X X X

Transfer to retained earnings

(X) X –

–– –– –– –– –– Balance at 31 December 20X2

X X X X X

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KAPLAN PUBLISHING 5

Statement of profit or loss and other comprehensive income

Total comprehensive income is the realised profit or loss for the period, plus other comprehensive income.

Other comprehensive income is income and expenses that are not recognised in profit or loss (i.e. they are recorded in reserves rather than as an element of the realised profit for the period). For the purposes of F7, other comprehensive income includes any change in the revaluation of noncurrent assets (IAS 16, covered in chapter 2) and fair value through other comprehensive income financial assets (IFRS 9, covered in chapter 10).

The amendments to IAS 1 revised change how items of OCI are presented in the financial statements – they do not change which items should be presented in OCI. In principle, items of OCI must be classified into two groups as follows:

• Items that might be reclassified (or recycled) to profit or loss in subsequent accounting periods. – Foreign exchange gains and losses arising on translation of a

foreign operation (IAS 21) (not on F7 syllabus).

– Effective parts of cash flow hedging arrangements (IAS 39) (not on F7 syllabus).

• Items that will not be reclassified (or recycled) to profit or loss in subsequent accounting periods. – Changes in revaluation surplus (IAS 16 & IAS 38).

– Remeasurement of equity instruments designated to be classified as fair value through OCI (IFRS 9).

IAS 1 Presentation of financial statements requires that you prepare either:

(1) A statement of profit or loss and other comprehensive income showing total comprehensive income; or

(2) A statement of profit or loss showing the realised profit or loss for the period PLUS a statement showing other comprehensive income.


6 KAPLAN PUBLISHING

Presentation of other comprehensive income

Statement of profit or loss

A recommended format is as follows:

XYZ: Statement of profit or loss and other comprehensive income for the year ended 31 December 20X2

$ Revenue X Cost of sales (X)

–– Gross profit X

Distribution costs (X) Administrative expenses (X)

–– Profit from operations X Finance costs (X) Investment income X

–– Profit before tax X Income tax expense (X)

–– Profit for the year X

Other comprehensive income Gain/loss on revaluation (IAS 16) X Gain/loss on fair value through other comprehensive income financial assets (IFRS 9)

X

––

Total comprehensive income for the year X ––

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KAPLAN PUBLISHING 7

Statement of profit or loss plus statement of comprehensive income

A recommended format for the statement of profit or loss is as follows:

A recommended format for the presentation of other comprehensive income is:

XYZ Statement of profit or loss for the year ended 31 December 20X2

$ Revenue X Cost of sales (X)

–– Gross profit X Distribution costs (X) Administrative expenses (X)

–– Profit from operations X Finance costs (X) Investment income X

–– Profit before tax X Income tax expense (X)

–– Profit for the year X

XYZ Statement of other comprehensive income for the year ended

31 December 20X2 $

Profit for the year X Other comprehensive income Gain/loss on property revaluation X Gain/loss on fair value through other comprehensive income financial assets

X

– Total comprehensive income for the year X

–


8 KAPLAN PUBLISHING

Alternative presentation

2 Introduction to published accounts

The following questions enable preparation of published accounts utilising knowledge gained at F3 Financial Accounting. In order to be able to complete an F7 published accounts question these basic preparation techniques must be followed and the accounting standards in chapters 2 – 14 must first be learned.

The following information has been extracted from the books of Picklette for the year to 31 March 20X9.

Dr Cr $000 $000

Administrative expenses 170 Interest paid 5 Called up share capital (ordinary shares of $1 each)

200

Dividend 6 Cash at bank and in hand 9 Income tax (remaining balance from previous year)

10

Warranty provision 90 Distribution costs 240 Land and buildings: at cost (Land $110,000, Buildings $100,000)

210

accumulated depreciation (at 1 April 20X8) 48 Plant and machinery: at cost 125 accumulated depreciation (at 1 April 20X8) 75 Retained earnings (at 1 April 20X8) 270 10% Loan (issued in 20X7) 80 Purchases 470 Sales 1,300 Inventory (at 1 April 20X8) 150 Trade payables 60 Trade receivables 728

––––– ––––– 2,123 2,123 ––––– –––––

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KAPLAN PUBLISHING 9

Example 1 – Published accounts

Additional information

Required:

Prepare Picklette plc’s statement of profit or loss for the year to 31 March 20X9 and a statement of financial position as at that date.

Solution

Picklette statement of profit or loss

(1) Inventory at 31 March 20X9 was valued at $250,000.

(2) Buildings and plant and machinery are depreciated on a straightline basis (assuming no residual value) at the following rates:On cost: Buildings 5%

Plant and machinery 20% (3) There were no purchases or sales of noncurrent assets during the

year to 31 March 20X9.

(4) The depreciation charges for the year to 31 March 20X9 are to be apportioned as follows:Cost of sales 60% Distribution costs 20% Administrative expenses 20%

(6) Income taxes for the year to 31 March 20X9 (at a rate of 30%) are estimated to be $135,000.

(7) The loan is repayable in five years.

(8) The year end provision for warranty claims has been estimated at £75,000. Warranty costs are charged to administrative expenses.

$000 Revenue 1,300 Cost of sales (470 + 150 – 250 + (60% × 30)) (388)

––––– Gross profit 912 Distribution ((20% × 30) + 240) (246) Administration ((20% × 30) + 170 – 15) (161)

–––––


10 KAPLAN PUBLISHING

Statement of financial position

Profit from operations 505 Finance costs (80 × 10%)

(8)

––––– Profit before tax 497 Income Tax (135 + 10) (145)

––––– Profit for the year 352

–––––

$000 $000 Noncurrent assets Tangible (W1) 182 Current assets Inventory 250 Receivables 728 Bank 9

––––– 987

––––– 1,169 –––––

Share capital 200 Retained earnings (W2) 616

––––– 816

Noncurrent liabilities Loan 80 Provision for warranties 75

––––– 155

Current liabilities (60 + 135 + (3 accrued interest))

198

––––– 1,169 –––––

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KAPLAN PUBLISHING 11

Working 1

Working 2

Land and buildings

Plant and machinery

Total

$000 $000 $000 Cost b/f 210

–––– 125 ––––

335 ––––

Depreciation b/f 48 75 123 Charge 5

–––– 25

–––– 30

–––– c/f 53

–––– 100 ––––

153 ––––

Carrying amount c/f 157

–––– 25

–––– 182 ––––

$000 Profit for the year 352 Dividends (6)

–––– 346

Retained earnings b/f 270 ––––

Retained earnings c/f 616 ––––



The following trial balance has been extracted from the books of Arran as at 31 March 20X7:

$000 $000 Administration expenses 250 Distribution costs 295 Share capital (all ordinary shares of $1 each) 270 Share premium 80 Revaluation surplus 20 Dividend paid 27 Cash at bank and in hand 3 Receivables 233 Interest paid 25 Dividends received 15 Interest received 1 Land and buildings at cost (land 380, buildings 100) 480 Land and buildings: accumulated depreciation 30 Plant and machinery at cost 400 Plant and machinery: accumulated depreciation 170 Retained earnings account (at 1 April 20X6) 235 Purchases 1,260 Sales 2,165 Inventory at 1 April 20X6 140 Trade payables 27 Bank loan 100

––––– ––––– 3,113 3,113 ––––– –––––

chapter 1


Test your understanding 1

Additional information

Buildings 5% on cost (straight line)

Plant and machinery 30% on carrying amount (reducing balance)

Prepare the statement of profit or loss and other comprehensive income, statement of changes in equity and statement of financial position for year ended 31 March 20X7.

Note: Show all workings but notes are not required.

(1) Inventory at 31 March 20X7 was valued at a cost of $95,000. Included in this balance were goods that had cost $15,000. These goods had become damaged during the year and it is considered that following remedial work the goods could be sold for $5,000.

(2) Depreciation for the year to 31 March 20X7 is to be charged against cost of sales as follows:

(3) Income tax of $165,000 is to be provided for the year to 31 March 20X7.

(4) Land is to be revalued upwards by $100,000.

3 Notforprofit and public sector entities

Comparison of aims

The main aims of notforprofit and public sector entities are very different to those of profitorientated entities:

Profitorientated sector Notforprofit/public sector

Financial aim is to make profit and increase shareholder wealth.

Directors are accountable to shareholders.

External finance freely available in the form of loans and share capital.

Financial aim is to achieve value for money/provide service.

Managers are accountable to trustees/government/public.

Finance limited to donations/ government subsidies.



Notforprofit and public sector entities

Accounting standards and notforprofit and public sector entities

Accounting standards are designed to:

Notforprofit and public sector organisations:

Some measurement accounting standards will be relevant such as those relating to inventory, noncurrent assets, leasing, etc. Others relating purely to reporting such as earnings per share (EPS) will not be so relevant.

• measure financial performance accurately and consistently

• report the financial position accurately and consistently

• account for the directors' stewardship of the resources and assets.

• do not aim to achieve a profit but will have to account for their income and costs

• will have to account for their effectiveness, economy and efficiency

• do not have to produce financial statements for the public (but in many cases may do so).

chapter 1


Chapter summary



The following trial balance relates to P at 31 March 20X1:

The following information should also be taken into account:

Required:

Prepare, in a form suitable for publication, the statement of profit or loss and other comprehensive income, statement of financial position and statement of changes in equity for the year ended 31 March 20X1.

Dr Cr $000 $000

Revenue 5,300 Cost of sales 1,350 Dividends received 210 Administration expenses 490 Distribution costs 370 Interest paid 190 Prepayments 25 Dividends paid 390 Property, plant and equipment 4,250 Shortterm investments 2,700 Inventory at 31 March 20X1 114 Trade receivables 418 Cash and cash equivalents 12 Trade payables 136 Longterm loans (repayable 20X9) 1,200 Share capital 1,500 Share premium 800 Retained earnings at 31 March 20X0 1,163 –––––––– –––––––– 10,309 10,309

–––––––– ––––––––

(1) The tax charge for the year has been estimated at $470,000.

(2) The directors declared a final dividend of $270,000 on 3 April 20X1.

chapter 1



Test your understanding answers

Statement of profit or loss and other comprehensive income for the year ended 31 March 20X7

$000 Revenue 2,165 Cost of sales (W1) (1,389)

–––––– Gross profit 776 Administration (250) Distribution (295)

–––––– Operating profit 231 Finance cost (25) Interest receivable 1 Investment income 15

–––––– Profit before tax 222 Income tax expense (165)

–––––– Profit for the year 57

–––––– Other comprehensive incomeGain on land revaluation 100

–––––– Total comprehensive income for the year 157

––––––




Statement of changes in equity

Statement of financial position as at 31 March 20X7

Share capital

Share premium

Revaluation surplus

Retained earnings

Total equity

$000 $000 $000 $000 $000 B/f 270 80 20 235 605 Total comprehensive income for the year

100 57 157

Dividends (27) (27) ––– ––– ––– ––– –––

C/f 270 80 120 265 735

$000 Noncurrent assets: Property, plant and equipment (W2) 706 Current assets: Inventory 85 Receivables 233 Bank 3

–––– 321 –––– 1,027 ––––

Share capital (from SOCIE) 270 Share premium (from SOCIE) 80 Revaluation surplus (from SOCIE) 120 Retained earnings (from SOCIE) 265

–––– 735

Noncurrent liabilities 100 Current liabilities 27 Tax liability 165

–––– 1,027 ––––

chapter 1


Workings

(W1) Cost of sales

(W2) Property, plant and equipment

$ Opening inventory 140 Purchases 1,260 Closing inventory (95 – 10) (85) Depreciation (5% × 100) + (400 – 170) × 30% 74

––––– Total 1,389

–––––

Land and buildings

Plant and machinery

Total

$000 $000 $000 Carrying amount b/f 450 230 680 Revaluation 100 100 Depreciation charge (5) (69) (74)

––––– ––––– –––– Carrying amount c/f 545 161 706



P Ltd Statement of profit or loss and other comprehensive income for the year ended 31 March 20X1

P Ltd Statement of changes in equity for the year ended 31 March 20X1

Note: Dividends declared after the year end will not be adjusted for.

$000 Revenue 5,300 Cost of Sales (1,350) ––––– Gross profit 3,950 Distribution costs (370) Administration expenses (490) ––––– Profit from operations 3,090 Income from investments 210 Finance cost (190) ––––– Profit before tax 3,110 Income tax expense (470) ––––– Profit for period 2,640 Other comprehensive income –

––––– Total comprehensive income for the period 2,640 –––––

Share capital

Share premium

Retained earnings

Total

$ $ $ $ Balance at 1 April 20X0 1,500 800 1,163 3,463 Total comprehensive income 2,640 2,640 Dividends (390) (390) ––––––– ––––––– ––––––– ––––––– Balance at 31 March 20X1 1,500 800 3,413 5,713 ––––––– ––––––– ––––––– –––––––

chapter 1



P Ltd Statement of financial position as at 31 March 20X1

$000 $000 Noncurrent assets

Property, plant and equipment 4,250 Current assets

Inventories 114 Trade receivables 418 Prepayments 25 Investments 2,700 Cash and cash equivalents 12

–––––– 3,269 ––––––– Total assets 7,519 ––––––– Equity and liabilities Capital and reserves

Issued ordinary share capital 1,500 Share premium 800 Retained earnings 3,413

–––––– 5,713 Noncurrent liabilities

Longterm loans 1,200 Current liabilities

Trade payables 136 Income tax 470

–––––– 606 ––––––– Total equity and liabilities 7,519 –––––––

