FRS 3

REPORTING FINANCIAL PERFORMANCE

Copyright: Pru Marriott University of

Introduction
FRS 3 attempts to improve the quality of financial information provided to shareholders. It is applied in conjunction with CA.

The standard addresses the following issues: New structure to the profit and loss account; Extraordinary items; Statement of total recognised gains and losses; Other disclosure requirements:

A note of historical cost profits and losses; A reconciliation of movements in shareholders funds;
Earnings per share; Covers prior period adjustments.

Copyright: Pru Marriott University of Glamorgan

New Structure to the P&L A/c

Number of important components of financial performance highlighted:
i. results of continuing operations; ii. results of acquisitions during the year; iii. results of discontinued operations*; iv. certain exceptional items#: v. extraordinary items@

Copyright: Pru Marriott University of Glamorgan

* Discontinued Operations
Operations sold or terminated satisfying all the following:

Completed in period or before maximum of 3 months into following period (or date directors sign the accounts if earlier); Activities ceased permanently; Material effect; Clearly distinguishable.

Copyright: Pru Marriott University of Glamorgan

# Exceptional Items
Material Sale or termination of an Abnormal write-offs: Stock and operation Bad debts Within the ordinary activities Fundamental reorganisation or Abnormal provisions for losses on Identified because of size or incidence restructuring Long-term contracts Disposal of fixed asset Settlement of insurance claims
Items requiring Separate disclosure Items NOT requiring Separate disclosure

Super Exceptionals

Shown after Operating profit

Allocate to appropriate statutory format headings & attributed to continuing or discontinued operations as appropriate. If sufficiently material show on face of P&L

Copyright: Pru Marriott University of Glamorgan

@ Extraordinary Items
Material High degree of abnormality Fall outside ordinary activities Not expected to recur

This would be exceptional. That would be extraordinary.

Copyright: Pru Marriott University of Glamorgan

@ Extraordinary Items if they occurred:

Shown on the face of the profit and loss account before dividends (tax on extraordinary item shown separately):

Profit or ordinary activities after tax Extraordinary item (gross) on extraordinary item

xxx xxx (xxx) xxx Tax

Copyright: Pru Marriott University of Glamorgan

Example 1 Mop and Bucket

2005 Turnover: Continuing operations Acquisition 2004

385,000 500 100 1515,000 = 385

400,000 100,000 500,000 (160,000)

285,000
360 75 = 285 . 285,000 75,000 360,000 (180,000)

Discontinued operations

Cost of sales 340,000 Gross Profit ( 50,000) Distribution costs ( 75,300) Administrative expenses Operating profit 100 15 10 + 0.3214,700 = 75.3 Continuing operations 229.7 Acquisitions 5 Discontinued ( 20) Provision for loss on operations to be discontinued ( 20,000) Profit on sale of fixed asset 300 Major reorganisation costs ( 15,000) Loss on sale of discontinued operations Copyright: Pru Marriott University ( 10,000) of Glamorgan 170,000 75 (10)

180,000 ( 40,000) ( 75,000) 65,000

. 65,000

Statement of Total Recognised Gains and Losses

Prior Year Adjustments Primary financial statement It includes profit and loss for the period, together MATERIAL adjustments applicable to prior periods with all other movements on reserves reflecting arising from: recognised gains and losses attributable to Changes in accounting policy shareholders. Correction of fundamental errors Unrealised surplus or deficit on revaluation of They doassets not include normal recurring adjustments or fixed corrections surplus of accounting estimates made in prior Unrealised or deficit on revaluation of periods. investment properties Prior year adjustments
Copyright: Pru Marriott University of Glamorgan

Statement of Total Recognised Gains and Losses

Profit and loss for the year Items taken directly to reserves: Surplus on revaluation of fixed assets Surplus/deficit on revaluation of investment properties

XXX

XXX XXX XXX Total recognised gains and losses XXX Prior period adjustments XXX Total gains and losses recognised since last statement XXX

Copyright: Pru Marriott University of Glamorgan

Reconciliation of Movements in Shareholders Funds

This reconciliation is included in the accounts as a note intended to bring together the financial performance of the entity as reflected in: Profit and loss account; STRGL; All other changes in shareholders funds not recognised above.

Copyright: Pru Marriott University of Glamorgan

Reconciliation of Movements in Shareholders Funds XXX (XXX) XXX XXX XXX XXX XXX XXX

Profit for the financial year Dividends*

Other recognised gains and losses (from STRGL) New share capital* Net addition to shareholders funds Opening shareholders funds Closing shareholders funds * Items not included in the STRGL

Copyright: Pru Marriott University of Glamorgan

EXAMPLE 2 Extracts from Dustpan Ltds profit and loss account for the year ended 31 December, 2004 were as follows: 000 Profit after tax 1,024 Dividend ( 240) Retained profit 784

During the year the following events took place: (a) Assets were revalued upwards by 190,000. (b) 450,000 share capital was issued during the year. (c) Certain stock items relating to 2004 had been overvalued by 80,000. This overvaluation has been taken into account in the opening stock of 2005 but not in the closing stock of 2004. (d) The companys investment properties previously revalued by 181,000 were written down by 181,000. (e) Shareholders funds on 1 January 2005 amounted to 1,700,000.
REQUIRED: Show how the above events for the year would be recorded in the Statement of Total Recognised Gains and Losses and the Reconciliation of Movements in Shareholders Funds. Copyright: Pru Marriott University
of Glamorgan

Dustpan Ltd Statement of Total Recognised Gains and Losses period ending 31 December 2004

Profit and loss for the year 1,024 Items taken directly to reserves: Surplus on revaluation of fixed assets 190 Deficit on the revaluation of investment properties ( 181) Total recognised gains and losses 1,033 ( 80) Prior period adjustments 953 Total gains and losses recognised since last statement

Copyright: Pru Marriott University of Glamorgan

Dustpan Ltd Reconciliation of Movements in Shareholders Funds period ending 31 December 2004 1,024 ( 240) 784 ( 71) 450 1,163 1,700 2,863

Profit for the financial year Dividends Other recognised gains and losses (from STRGL) New share capital Net addition to shareholders funds Opening shareholders funds Closing shareholders funds
Copyright: Pru Marriott University of Glamorgan

Note of Historical Cost Profits and Losses

Memorandum item only. It presents an abbreviated profit and loss account which adjusts profit or loss for the:
realisation of revaluation gains arising from previous periods (i.e. difference between the profit on disposal of a revalued fixed asset and that which would have been recorded had the asset not been revalued);

difference between historical cost annual depreciation charge and the depreciation charge calculated on Copyright: the revalued amount. Pru Marriott University
of Glamorgan

Note of Historical Cost Profits and Losses XXX

Reported profit before tax Realisation of revaluation gains arising from previous periods Difference between historic cost depreciation and depreciation based on the revalued amount

XXX
XXX

XXX

Copyright: Pru Marriott University of Glamorgan

ILLUSTRATION An asset purchased five years ago at a cost of 10,000 has an estimated life of ten years and an even pattern of usage with no estimated residual value. Two years ago the asset was revalued to 14,000. It is now sold for 9,000. (a) Calculate the realisation of revaluation gains arising from the sale of the revalued fixed asset. Reconcile the figure calculated in part (a). To do this you need to calculate:
The accumulated depreciation figure based on (1) historic cost and (2) revalued amount. The profit or loss on sale of the asset at (1) historic cost and (2) revalued amount.
Copyright: Pru Marriott University of Glamorgan

(b)

Realisation of property revaluation gain: Revalued amount Historical NBV @ date of revaluation 14,000 7,000 7,000

Realisation of Revaluation Gains

Accumulated Depreciation: 10,000 / 10 x 3 = 3,000

Net Book Value at date of revaluation 10,000 3,000 Copyright: = 7,000 Pru Marriott University
of Glamorgan

Depreciation pa based on historic cost:

10,000 / 10 = 1,000

Depreciation pa based on revalued amount:

14,000 / 7 = 2,000

Copyright: Pru Marriott University of Glamorgan

The profit or loss on sale of the asset at historic cost 10,000 Historical cost 5,000 Accum Depn Net carrying value Proceeds from sale PROFIT ON SALE

10,000 / 10 x 5 = 5,000

5,000 9,000 4,000

The profit or loss on sale of the asset at revalued amount

14,000 Revalued amount 4,000 14,000 / 7 x 2 = 4,000 Accum Depn 10,000 Net carrying value 9,000 Proceeds from sale 1,000 LOSS ON SALE
Copyright: Pru Marriott University of Glamorgan

The realisation gain calculated in part (a) can now be reconciled as follows:

Profit on historic cost Loss on revalued amount Difference Add: Additional depreciation charged on revalued amount over 2 years

4,000 (1,000) 5,000

2,000

7,000 5,000 = 2,000

7,000

Copyright: Pru Marriott University of Glamorgan

EXAMPLE 3
Brush Ltd. reported a profit before tax of 268,000 for the year ended 31 December 2004. During the year the following transactions in fixed assets took place. (a) An asset with a book value of 80,000 was revalued to 120,000. The remaining useful life is estimated to be five years. (b) An asset (with a five year useful life at the date of revaluation) that was revalued by 50,000 (book value 40,000) was sold one year after revaluation for 78,000. REQUIRED: Show the reconciliation of profit to historical cost profit Copyright: Pru Marriott University for the year ended 31 December, 2004. of Glamorgan

Realisation of property revaluation gain: Revalued amount Historical NBV @ date of revaluation 90,000 40,000 50,000

Realisation of Revaluation Gains

Copyright: Pru Marriott University of Glamorgan

Accumulated depreciation figure based on historic cost: 40,000 / 5 = 8,000 x 1 = 8,000

Accumulated depreciation figure based on revalued amount:

90,000 / 5 = 18,000 x 1 = 18,000

Copyright: Pru Marriott University of Glamorgan

The profit or loss on sale of the asset at historic cost 40,000 Historical cost 8,000 Accum Depn Net carrying value Proceeds from sale PROFIT ON SALE

40,000 / 5 x 1 = 8,000

32,000 78,000 46,000

The profit or loss on sale of the asset at revalued amount

90,000 Revalued amount 18,000 90,000 / 5 x 1 = 18,000 Accum Depn 72,000 Net carrying value 78,000 Proceeds from sale 6,000 PROFIT ON SALE
Copyright: Pru Marriott University of Glamorgan

The realisation gain calculated in part (a) can now be reconciled as follows:

Profit on historic cost Profit on revalued amount Difference Add: Additional depreciation charged on revalued amount for 1 year

46,000 6,000 40,000

10,000

18,000 8,000 = 10,000

50,000

Copyright: Pru Marriott University of Glamorgan

Brush Ltd Note of Historical Cost Profits and Losses

Reported profit before tax Realisation of revaluation gains arising from previous periods Difference between historic cost depreciation and depreciation based on the revalued amount 120,000 80,000 / 5 = 8,000
Copyright: Pru Marriott University of Glamorgan

268,000
50,000

8,000 326,000