ACCA F7 (INT & UK)

Course overview

Chapter 1

REGULATORY FRAMEWORK

Regulatory Bodies
International Financial Reporting Standards Foundation

International Accounting Standards Board (IASB)

International Financial Reporting Interpretation Committee (IFRIC)

IFRS Advisory Council (IAC)

Chapter 2

CONCEPTUAL FRAMEWORK

Conceptual Framework

Chapter 3

ACCOUNTING CONCEPTS AND POLICIES

Accounting Concepts

IAS 8 Changes in accounting policies, accounting estimates & errors

Changes in accounting policies Adjust opening balance on retained earnings & restate comparative

Changes in accounting estimates

Change applied in current year & disclosure note if material

Errors

Adjust opening balance on retained earnings & restate comparative

Chapter 4

PRINCIPLES OF CONSOLIDATION

The key principle underlying group accounts is the need to reflect the economic substance of the relationship.

S
P is an individual legal entity S is an individual legal entity P controls S and therefore they form a single economic entity the Group.

Summary
Investment Subsidiary > 50% Control 20 50% Significant influence < 20% Criteria Treatment Full consolidation

Associate

Equity accounting

Investment

IAS 32/39 / IFRS 7/9 treatment

Chapter 5

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

Basic Principle

CSFP Workings
Working: (W1) (W2) (W3) (W4) (W5) Group Structure Net Assets Goodwill Non-controlling Interests Group Reserves

IFRS 3 Business Combinations

Goodwill valuation

Proportion of net assets method

Full goodwill method

Parent holding X NCI fair value X (NCI % FV NT at acq) Less: FV NA @acq (X) Goodwill on acq X

Parent holding X NCI fair value X (% NCI shares x sub share price) Less: FV NA @acq (X) Goodwill on acq X

CSFP Implications

Chapter 6

CONSOLIDATED INCOME STATEMENT

Basic Principle
The aim of the CIS is to show the results of the group for an accounting period as if it were a single entity. Add 100% of the parent to 100% of the subsidiary from revenue to PAT.
Adjust for NCI at the foot of the income statement. Mid-year acquisition.

Chapter 7

ASSOCIATES

Associates Overview
An entity over which the investor has significant influence but not control.
Significant influence: 20 50% shareholding active management participation.

The associate is never consolidated but equity accounted for instead.

Equity Accounting CSFP

Investment in associate Cost of investment Post-acquisition profits (W5) X X

Less impairment
Less PURP (P = seller)

(X)
(x) X

Also:
Update W5 to include parents share of associates profit.

Equity Accounting CIS

Replace dividend income received from associate with: Share of associates profit:

Parents % of Associate PAT Less:

Impairment of goodwill PURP (A = seller)

X
(X) (X) X

Chapter 8

TANGIBLE NON-CURRENT ASSETS

IAS 16 Non-Current Assets

IAS 20 Government Grants

IAS 23 Borrowing Costs

Borrowing costs must be added to the cost of an asset, if the asset is one that takes a substantial time to get ready.

Capitalise when following conditions met: Expenditure being incurred Borrowing costs being incurred

Activities to get the asset ready for use are in progress

IAS 40 Investment Property

Investment property is land or buildings held to earn rentals, capital gain or both.

Chapter 9

INTANGIBLE ASSETS

IAS 38 Intangible Assets

An intangible asset has a value to the business but no physical substance. 2 TYPES Internally Generated
Capitalise if market value exists (rare) Exception: Research & Development

Purchased
Capitalised at cost

Research = expense Development = Capitalise (if criteria are met).

Research & Development

Recognition criteria: Separately identifiable project Expenditure identifiable

Commercially viable
Technically feasible Overall profitable Resources available to complete

Chapter 10

IMPAIRMENT OF ASSETS

IAS 36 Impairment

Indicators of Impairment

Cash Generating Units

A CGU is the smallest identifiable group of assets which generates cash inflows independent of those of other assets.

Chapter 11

REPORTING FINANCIAL PERFORMANCE

Chapter 12

LEASES

Finance Lease
A finance lease is one where substantially all the risks and rewards of ownership are transferred to the lessee. Record NCA and finance lease liability. Account for depreciation on NCA. Account for finance lease depending on: In advance In arrears

Chapter 13

SUBSTANCE OVER FORM

Substance Over Form

Commercial substance should be shown in some situations rather than the strict legal form of a transaction.

Consider:

Definition of an asset
Definition of a liability

IAS 18 Revenue
Recognition occurs when it is probable that future economic benefits will flow to the entity and when these benefits can be reliably measured.
IAS 18 covers revenue from:
Sale of goods

Provision of services Interest, royalties & dividends

Chapter 14

FINANCIAL ASSETS & FINANCIAL LIABILITIES

Financial assets & liabilities

A financial instrument as defined by IAS 32 is: any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another.

Financial Instruments

Compound Instruments

Financial Assets
Initially recognise at fair value through progit and loss (FVTPL)

Subsequent measurement

Debt instruments

Equity instruments

FVTPL

Amortised cost

FVTPL

FVTOCI

Chapter 15

INVENTORIES & CONSTRUCTION CONTRACTS

IAS 2 Inventory

IAS 11 Construction Contracts

A construction contract is a contract specifically negotiated for the construction of an asset or a combination of asset for use by another entity. A contract normally spans at least one accounting period so revenue recognition needs to be addressed.

Construction Contract Revenue Recognition

Construction Contract Revenue Recognition

Chapter 15

PROVISIONS, CONTINGENT LIABILITIES & CONTINGENT ASSETS

IAS 37 Provisions
A provision is a liability of uncertain timing or amount.
Probability of occurrence Probable Liability
Provide*

Asset
Contingent asset (Disclose) Do Nothing

Possible

Contingent liability (Disclose) Do nothing

Remote

Do nothing

Chapter 16

TAXATION

IAS 12 Taxation
Tax charge:

Year-end estimate
Under/over provision Deferred tax movement

X
X/(X) X/(X) X

Deferred tax

Chapter 18

EARNINGS PER SHARE

Basic EPS
IAS 33 aims to improve the comparison of different entities.

Basic EPS:

Profit attributable to ordinary shareholders Weighted average no of shares in issue

Diluted EPS
Diluted EPS deals with potential, future ordinary shares due to a company holding: Convertibles Options Warrants

Chapter 19

INTERPRETATION OF FINANCIAL STATEMENTS

Interpretation Ratios

ROCE

OPERATING PROFIT MARGIN Profitability

ROE

GROSS PROFIT MARGIN

ASSET TURNOVER

Chapter 20

STATEMENT OF CASH FLOW