Professional Documents
Culture Documents
Financial Reporting
For exams in December 2014 and June 2015
Key to icons
Syllabus
Case study
Technical content
Question to consider
Diagram
Answer
Key model
Summary
Marks
40
Question Type
20 MCQs worth two marks each
2 15-mark questions
1 30-mark question
60
Syllabus 1
The F7 syllabus sections are as follows.
A
1.
2.
3.
4.
Regulatory framework
5.
Syllabus 2
B
1.
2.
Intangible assets
3.
Impairment of assets
4.
5.
Financial instruments
6.
Leasing
7.
8.
Taxation
9.
10.
Revenue
11.
Government grants
BPP LEARNING MEDIA
Syllabus 3
C
1.
2.
3.
4.
Syllabus 4
D
1.
2.
Chapter 1
The conceptual
framework
Underlying assumption
Qualitative characteristics of financial
statements
The elements of financial statements
Recognition and measurement of the
elements of financial statements
Fair presentation and compliance with
IFRS
Advantages and
disadvantages
Generally accepted
accounting practice
(GAAP)
Underlying assumption
Chapter 4: The Framework (1989) remaining text
Underlying assumption
Going concern:
The financial statements are normally prepared on the
assumption that the entity is a going concern and will
continue to trade for the foreseeable future.
It is assumed that the entity has neither the intention not
the need to liquidate the business or curtail major
operations.
If it did the financial statements would be prepared on a
different basis and this basis would be disclosed.
Faithful representation
Materiality
Information is material if omitting it
or misstating it could influence
decisions that users make on the
basis of financial information.
Verifiability
Assures users that
information faithfully
represents the
economic phenomena
it purports to
represent
Verification can be
direct or indirect
Timeliness
Understandability
Having information
available to
decision-makers in
time to be capable
of influencing their
decisions
Classifying,
characterising and
presenting
information clearly
and concisely
INCOME
Definition
Historical cost
Realisable value
Definition
Current cost
Present value
Exam details
Chapter 2
The regulatory
framework
The IASB
The IASB's
structure
Principlesbased versus
rules-based
approach
The standard
setting process
BPP LEARNING MEDIA
The IASB's
relationship with
other standard
setters
The IASB 1
The International Accounting Standards Board (IASB) is an
independent accounting standard setter established in 2001.
It has three formal objectives:
To develop, in the public interest, a single set of high quality,
understandable and enforceable global accounting standards
that require high quality, transparent and comparable
information in general purpose financial statements
To promote the use and vigorous application of those
standards
To work actively with national accounting standard setters to
bring about convergence of national accounting standards and
IFRS to high quality solutions
Setting of IFRS 1
Below are the key steps in the process used to issue an International Financial
Reporting Standard.
Issues Paper
Discussion Paper
Exposure Draft
International
After considering all comments received, and IFRS is
Financial Reporting approved by a majority of the IASB. The final standard
Standard
includes both a basis for conclusions and any dissenting
opinions.
Setting of IFRS 2
For the IASB to achieve its objective in relation to the
harmonisation of accounting standards it is important
that it works closely with other national standard setters.
The IASB is trying to co-ordinate its work plan with
national standard setters such that when it adds an item
to its agenda that national standard setters do the same
thing so that a standard can be agreed which has
international consensus.
There are also plans to review all standards where there
are significant differences between IFRS and national
standards.
Setting of IFRS 3
Current standards examinable in paper F7 are:
IAS 1 (revised)
IAS 2
IAS 7
IAS 8
IAS 10
IAS 11
IAS 12
IAS 16
IAS 17
IAS 18
BPP LEARNING MEDIA
Setting of IFRS 4
Current standards examinable in paper F7 are:
IAS 20
IAS 23
IAS 27 (revised)
IAS 28
IAS 32
IAS 33
IAS 36
IAS 37
IAS 38
Setting of IFRS 5
Current standards examinable in paper F7 are:
IAS 39
IAS 40
IAS 41
IFRS 1
IFRS 3 (revised)
IFRS 5
IFRS 7
IFRS 9
IFRS 10
IFRS 13
Exam details
Chapter 3
Presentation of
published financial
statements
IFRS financial
statements
Formats
Financial statement
preparation questions
IAS 1 (revised) 1
IAS 1 applies to the preparation and presentation of general
purpose financial statements in accordance with IFRSs and
states that a complete set of financial statements comprises:
A statement of financial position at the end of the period
A statement of profit or loss and other comprehensive
income for the period
A statement of changes in equity for the period
A statement of cash flows for the period
Notes to the financial statements including a summary of
significant accounting policies an other explanatory
information
IAS 1 (revised) 2
Financial statements should also disclose:
The name of the reporting entity
Whether the accounts relate to the single entity only or a
group of entities
The date of the end of the reporting period or the period
covered by the financial statements
The presentation currency
The level of rounding used in presenting amounts in the
financial statements
Financial statements must be prepared on a timely basis in
order to provide useful information to users.
$'000
X
X
X
X
X
$'000
X
X
X
X
X
$'000
$'000
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
They include:
Property, plant and equipment classified by class of asset
Receivables analysed between amounts receivable from trade
customers, other group members, related parties, prepayments
and other amounts
Inventories sub-classified into materials, work in progress and
finished goods
Provisions
Equity capital and reserves classified into classes of capital, share
premium and reserves
BPP LEARNING MEDIA
Assets and liabilities should be classified as either current or noncurrent on the face of the statement of financial position.
Non-current assets and liabilities are used in the long term operations
of the entity and will typically be recovered or settled after more than
twelve months.
$'000
X
Other incomeX
(X) (X)
(X) (X)
(X) (X)
20X1
$'000
$'000
X
(X) X
(X)
$'000
X
(X) X
(X) (X)
(X) (X)
(X) (X)
Changes in equity
Share
capital
$'000
X
Ret'd
earnings
$'000
X
(X)
X
Revaluation
surplus
$'000
X
Total
equity
$'000
X
(X)
X
(X)
X
X
(X)
X
(X)
X
X
(X)
X
X
X
X
(X)
X
X
(X)
X
Question: AZ Co
AZ Co is a quoted manufacturing company. Its finished
products are stored in a nearby warehouse until ordered
by customers. AZ Co has performed very well in the past,
but has been in financial difficulties in recent months and
has been reorganising the business to improve
performance.
The trial balance for AZ Co at 31 March 20X3 was as
follows.
Question: AZ Co (cont'd)
TRIAL BALANCE AT 31 MARCH 20X3
Sales
Cost of goods manufactured in the year to
31 March 20X3 (excluding depreciation)
Distribution costs
Administrative expenses
Restructuring costs
Interest received
Debenture interest paid
Land and buildings (including land $20,000,000)
Plant and equipment
Accumulated depreciation at 31 March 20X2:
Buildings
$'000
94,000
9,060
16,020
121
639
50,300
3,720
24,000
4,852
9,330
1,190
1,000
214,232
$'000
124,900
SPLOCI
1,200
6,060
1,670
20,000
430
3,125
28,077
18,250
8,120
2,400
214,232
SOFP
Question: AZ Co (cont'd)
Additional information provided:
i. The property, plant and equipment are being depreciated as follows.
Question: AZ Co (cont'd)
iv.
v.
The 7% loan notes are ten year loans due for repayment by 31
March 20X7. Interest on these loan notes needs to be accrued for
the six months to 31 March 20X3.
vi.
Question: AZ Co (cont'd)
vii. No fair value adjustments were necessary to the investment
properties during the period.
viii. During the year the company issued 2 million new ordinary shares
for cash at $1.20 per share. The proceeds have been recorded as
'proceeds of share issue'.
Question: AZ Co (cont'd)
Required
Prepare the statement of profit or loss and other
comprehensive income and statement of changes in equity
for AZ for the year to 31 March 20X3 and a statement of
financial position at that date.
Notes to the financial statements are not required, but all
workings must be clearly shown.
Answer: AZ Co
AZ STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 20X3
$'000
124,900
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Other expenses
Finance income
Finance costs
Profit before tax
Income tax expense
PROFIT FOR THE YEAR
Other comprehensive income:
Gain on property revaluation
Answer: AZ Co (cont'd)
1
Expenses
Per question
Admin
$'000
16,020
Other
$'000
121
Answer: AZ Co (cont'd)
AZ STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 20X3
$'000
Revenue
124,900
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Other expenses
1,200
Finance income
Finance costs
(639)
Profit before tax
Income tax expense
PROFIT FOR THE YEAR
Other comprehensive income:
Gain on land revaluation
Answer: AZ Co (cont'd)
2
Cost
Accumulated depreciation b/d
Carrying amount b/d
Charge for year
Land
Buildings
$'000
20,000
$'000
30,300
(6,060)
Plant &
equipment
$'000
3,720
(1,670)
Total
$'000
Answer: AZ Co (cont'd)
Non-current assets
Property, plant and equipment
Investment properties
Current assets
Inventories
Trade receivables
Cash and cash equivalents
Equity
Share capital
Share premium
Retained earnings
Revaluation surplus
Non-current liabilities
7% loan notes 20X7
Current liabilities
Trade payables
Income tax payable
Interest payable
24,000
Answer: AZ Co (cont'd)
1
Expenses
Per question
Opening inventories
Admin
$'000
16,020
Other
$'000
121
Answer: AZ Co (cont'd)
Non-current assets
Property, plant and equipment
Investment properties
Current assets
Inventories
Trade receivables
Cash and cash equivalents
Equity
Share capital (20,000
Share premium (430
Retained earnings (28,077 1,000
Revaluation surplus (3,125
Non-current liabilities
7% loan notes 20X7
Current liabilities
Trade payables
Income tax payable
Interest payable
24,000
9,330
1,190
18,250
8,120
Answer: AZ Co (cont'd)
2
Cost
Accumulated depreciation b/d
Carrying amount b/d
Charge for year 30,300 5%
2,050 25%
Revaluation (balancing figure)
Carrying amount c/d
Land
Buildings
$'000
20,000
$'000
30,300
(6,060)
20,000
24,240
(1,515)
(1,515)
(513)
(513)
Plant &
equipment
$'000
3,720
(1,670)
2,050
Total
$'000
Answer: AZ Co (cont'd)
1
Expenses
Admin
$'000
16,020
Other
$'000
121
1,515
Answer: AZ Co (cont'd)
2
Cost
Accumulated depreciation b/d
Carrying amount b/d
Charge for year 30,300 5%
2,050 25%
Revaluation (balancing figure)
Carrying amount c/d
Land
Buildings
$'000
20,000
$'000
30,300
(6,060)
20,000
24,240
Plant &
Total
equipment
$'000
$'000
3,720 54,020
(1,670)
(7,730)
2,050 46,290
(1,515)
(1,515)
(513)
(513)
22,725
22,725
1,537 44,262
4,000
1,537 48,262
20,000
4,000
24,000
Answer: AZ Co (cont'd)
Non-current assets
Property, plant and equipment (W2)
Investment properties
Current assets
Inventories
Trade receivables
Cash and cash equivalents
Equity
Share capital (20,000
Share premium (430
Retained earnings (28,077 1,000
Revaluation surplus (3,125 + (W2) 4,000)
Non-current liabilities
7% loan notes 20X7
Current liabilities
Trade payables
Income tax payable
Interest payable
48,262
24,000
9,330
1,190
7,125
18,250
8,120
Answer: AZ Co (cont'd)
AZ STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 20X3
$'000
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Other expenses
Finance income
(639
Finance costs
Profit before tax
Income tax expense
PROFIT FOR THE YEAR
Other comprehensive income:
Gain on land revaluation (W2)
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
124,900
1,200
(976)
4,000
Answer: AZ Co (cont'd)
Non-current assets
Property, plant and equipment (W2)
Investment properties
Current assets
Inventories
Trade receivables
Cash and cash equivalents
Equity
Share capital (20,000
Share premium (430
Retained earnings (28,077 1,000
Revaluation surplus (3,125 + (W2) 4,000)
Non-current liabilities
7% loan notes 20X7
Current liabilities
Trade payables
Income tax payable
Interest payable
48,262
24,000
9,330
1,190
7,125
18,250
8,120
976
Answer: AZ Co (cont'd)
3
Inventories
Defective batch
Selling price
Costs to complete repackaging
NRV
Cost
Write-off required
$'000
55
(20)
$'000
35
(50)
(15)
Answer: AZ Co (cont'd)
Non-current assets
Property, plant and equipment (W2)
Investment properties
Current assets
Inventories (5,180 (W3) 15)
Trade receivables
Cash and cash equivalents
Equity
Share capital (20,000
Share premium (430
Retained earnings (28,077 1,000
Revaluation surplus (3,125 + (W2) 4,000)
Non-current liabilities
7% loan notes 20X7
Current liabilities
Trade payables
Income tax payable
Interest payable
48,262
24,000
5,165
9,330
1,190
7,125
18,250
8,120
976
Answer: AZ Co (cont'd)
1
Expenses
Admin
$'000
16,020
Other
$'000
121
1,515
Answer: AZ Co (cont'd)
AZ STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 20X3
$'000
124,900
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Other expenses
1,200
Finance income
Finance costs (639 + ((18,250 x 7%) 639)
(1,278)
Profit before tax
Income tax expense
(976)
PROFIT FOR THE YEAR
Other comprehensive income:
4,000
Gain on land revaluation (W2)
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Answer: AZ Co (cont'd)
Non-current assets
Property, plant and equipment (W2)
Investment properties
Current assets
Inventories (5,180 (W3) 15)
Trade receivables
Cash and cash equivalents
Equity
Share capital (20,000 + (2m $1))
Share premium (430 + (2m $0.20))
Retained earnings (28,077 1,000
Revaluation surplus (3,125 + (W2) 4,000)
Non-current liabilities
7% loan notes 20X7
Current liabilities
Trade payables
Income tax payable
Interest payable (1,278 639)
48,262
24,000
5,165
9,330
1,190
22,000
830
7,125
18,250
8,120
976
639
Answer: AZ Co (cont'd)
1
Expenses
9,060
94,200
Admin
$'000
16,020
Other
$'000
121
1,515
17,535
121
Answer: AZ Co (cont'd)
AZ STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 20X3
$'000
124,900
Revenue
(94,200)
Cost of sales (W1)
30,700
Gross profit
(9,060)
Distribution costs (W1)
(17,535)
Administrative expenses (W1)
(121)
Other expenses (W1)
Finance income
1,200
(1,278)
Finance costs (639 + (18,250 7%) 639)
3,906
Profit before tax
(976)
Income tax expense
2,930
PROFIT FOR THE YEAR
Other comprehensive income:
Gain on land revaluation (W2)
4,000
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
6,930
Answer: AZ Co (cont'd)
Non-current assets
Property, plant and equipment (W2)
Investment properties
Current assets
Inventories (5,180 (W3) 15)
Trade receivables
Cash and cash equivalents
Equity
Share capital (20,000 + (2m $1))
Share premium (430 + (2m $0.20))
Retained earnings (28,077 1,000 + 2,930)
Revaluation surplus (3,125 + (W2) 4,000)
Non-current liabilities
7% loan notes 20X7
Current liabilities
Trade payables
Income tax payable
Interest payable (1,278 639)
48,262
24,000
72,262
5,165
9,330
1,190
15,685
87,947
22,000
830
30,007
7,125
59,962
18,250
18,250
8,120
976
639
9,735
87,947
Answer: AZ Co (cont'd)
AZ
STATEMENT OF CHANGES IN EQUITY
Share
Share
capital premium
$'000
$'000
20,000
430
Balance at 1 April 20X2
2,000
400
Issue of share capital
Dividends
Total comprehensive income
22,000
830
Balance at 31 March 20X3
Ret'd
Rev'n
Total
earnings surplus
$'000
$'000 $'000
28,077
3,125 51,632
2,400
(1,000)
(1,000)
2,930
4,000 6,930
30,007
7,125 59,962
Exam details
Q2 in all past
exams.
Should be in part
B under the new
format.
Questions could
be 15 or 30
marks.
Chapter 4
Non-current assets
Borrowing Costs
(IAS 23)
Investment Property
(IAS 40)
Recognition
Measurement
at recognition
Measurement
after recognition
Depreciation
Disclosure note
Question: Xavier
Xavier has a year end of 30 September and purchased a piece of
production equipment on 1 July 20X5 incurring the following costs.
$
List price of machine
8,550
Trade discount
(855)
Delivery costs
105
356
Answer: Xavier
At 30 September 20X5
Plant and equipment
8,156
(513)
7,643
At 30 September 20X8
Plant and equipment
Revalued amount (W1)
Accumulated depreciation
$
10,800
0
10,800
Equity
Revaluation surplus (10,800 (W1) 6,104 (W2))
BPP LEARNING MEDIA
4,696
15,200
(4,400)
10,800
Working 2
Carrying amount before revaluation
Cost
Accumulated depreciation (8,156 2,000) 4/12
$
8,156
(2,052)
6,104
Revalued amount
10,800
(1,100)
9,700
Equity
Revaluation surplus (4,696 (4,696 / 8 years))
4,109
Depreciation accounting 1
Definition
The systematic allocation of the depreciable amount of
an asset over its estimated useful life.
Where the depreciable amount of an asset is its
historical cost (or other amount) less the estimated
residual value.
Where the useful life is the period over which a
depreciable asset is expected to be used by the entity or
the number of production or similar units expected to be
obtained from the asset by the entity.
Depreciation accounting 2
Definition (continued)
The useful life, residual value and depreciation method
must be reviewed at least each financial year end and
adjusted where necessary.
Question: Propex Co
Propex Co has the following properties but is unsure how to account
for them:
(1) Tennant House which cost $150,000 five years ago. The property
is freehold and is let out to private individuals for six monthly
periods. The current market value of the property is $175,000.
(2) Stowe Place which cost $75,000. This is used by Propex Co as
its headquarters. The building was acquired ten years ago.
(3) Crocket Square is a recently started development which is two
thirds complete. Propex Co intends to let this out to a company
called Speedex Co in which it has a controlling interest.
Propex Co depreciates its buildings at 2% per annum on cost.
Required
Describe the most appropriate accounting treatment for each of these
properties.
BPP LEARNING MEDIA
Held for its investment potential and not for use by Propex Co
Exam questions
Nature of question
Exam details
Q2 in all past
exams under the
pre-Dec 2014
format.
Likely to appear
in 15- or 30-mark
questions under
the new format.
Exam details
Q5 June 2013
Q5 June 2010
Chapter 5
Intangible assets
Goodwill (IFRS 3)
Intangible assets
Disclosure note
Amortisation/impairment
tests
Recognition
Separate
acquisition
BPP LEARNING MEDIA
Indefinite
useful life
Acquired as part
of a business
combination
Internally
generated
goodwill
Revaluation model
Internally
generated
intangibles
Cost
Acquired as
part of
business
combination
Internally
generated
goodwill
Fair value
(IFRS 3)
NOT
recognised
Internally
generated
intangible
assets
Only
recognised
if PIRATE
criteria met
Acquired by
government
grant
Asset/grant @
FV
or
Nominal
amount + direct
expenditure
Question: Stauffer
Stauffer is a public listed company reporting under IFRSs. It has asked
for your opinion on the accounting treatment of the following items.
(a) The Stauffer brand has become well known and has developed a
lot of customer loyalty since the company was set up eight years
ago. Recently, valuation consultants valued the brand for sale
purposes at $14.6m. Stauffer's directors are delighted and plan to
recognise the brand as an intangible asset in the financial
statements. They plan to report the gain in the revaluation surplus
as they feel that crediting it to profit or loss would be imprudent.
(b) On 1 October 20X5 the company was awarded one of 6 licences
issued by the government to operate a production facility for 5
years. A 'nominal' sum of $1m was paid for the licence, but its fair
value is actually $3m.
Answer: Stauffer
(a) Stauffer brand
The Stauffer brand is an 'internally generated' intangible asset
rather than a purchased one. IAS 38 specifically prohibits the
recognition of internally generated brands, on the grounds that
they cannot be reliably measured in the absence of a commercial
transaction. Stauffer will not therefore be able to recognise the
brand in its statement of financial position.
12
5
1
18
Goodwill (IFRS 3) 1
Definition
Goodwill is the future economic benefits arising from
assets that are not capable of being individually
identified and separately recognised.
Arises due to factors such as an entity's reputation and
branding.
There are two types of goodwill:
Internally generated goodwill (IAS 38)
Purchased goodwill (IFRS 3) (Chapter 9)
Goodwill (IFRS 3) 2
Goodwill
Purchased (IFRS 3)
Positive
Capitalise and test
annually for impairment
'Negative' (acquired net
assets exceed cost)
Reassess and then credit
any remainder to profit or
loss attributable to the
parent
BPP LEARNING MEDIA
Internally generated
Not recognised in the books
Exam details
Exam details
Consolidation
questions will be
either 15 or 30
marks.
Chapter 6
Impairment of assets
Accounting treatment of an
impairment loss
After the
impairment
review
Recoverable
amount
Impairment
indicators
Cash-generating
units
Recognition of
impairment
losses
Recoverable amount
Higher of
Value in
Use
Cash-generating units
Definition
Where it is not possible to estimate the recoverable
amount of an individual asset, an entity should
determine the recoverable amount of the cashgenerating unit to which the asset belongs.
A cash-generating unit is the smallest identifiable
group of assets that generates cash inflows that are
largely independent of the cash inflows from other
assets or groups of assets.
Question: Invest
On 31 December 20X1 Invest purchased all the shares of MH for $2
million. The net fair value of the identifiable assets acquired and
liabilities assumed of MH at that date was $1.8 million.
MH made a loss in the year ended 31 December 20X2 and at 31
December 20X2 the net assets of MH based on fair values at 1
January 20X2 were as follows.
$'000
Property, plant and equipment
1,300
250
1,750
200
Answer: Invest
Asset values
at 31.12.X2
before
impairment
$'000 $'000 $'000 Goodwill
(2,000 1,800)
200
PPE
1,300
Development exp.
200
Net current assets
250
1,950
Allocation of
impairment
loss
(W1)/(W2)
Carrying
amount
after
imp. loss
(1,500)
450
Impairment loss to write off goodwill 200
Impairment loss to write off other assets
on a pro-rata basis
250
1,950
$'000 $'000
Goodwill
(2,000 1,800)
PPE
Dev exp
Net current assets
200
1,300
200
250
1,950
Allocation of
impairment
loss
(W1)/ (W2)
(200)
Carrying
amount
after
imp. loss
$'000
PPE (250 1,300 / 1,500)
1,083
217
37
Loss
allocated
$'000
180
70
250
Allocation of
impairment
loss
(W1)/(W2)
$'000
(200)
(180)
(70)
(450)
Carrying
amount
after
imp. loss
$'000
1,120
130
250
1,500
Exam details
Chapter 7
Reporting financial
performance
Accounting policies
Reporting financial
performance
Changes in
accounting policies
Changes in
accounting estimates
BPP LEARNING MEDIA
Non-current assets
held for sale
Discontinued
operations
Generally speaking the entity will determine its accounting policy for
each item in the financial statements by applying the requirements of
the relevant International Financial Reporting Standard.
960
(720)
148 240
18
(112)
128
146 82
200
2,174
2,000
380
2,380
2,010
1,800
20X3
20X2
$'m
$'m
$'m
Valuation
179
151
121
The closing inventory adjustment for 20X4 has not yet been made, but the opening
inventory adjustment re 20X3's stock balance has been made.
No dividends were paid in any of the three years. No adjustment to tax figures is
necessary as a result of the change in policy. No new share capital has been issued
since the company's incorporation.
20X4
20X3
restated
$'m
$'m
Revenue
1,150
960
Cost of sales (1,002 179 + 31)/(720 31 + 21) (854)
(710)
Gross profit
296
250
Operating expenses and income tax expense
(130) (112)
PROFIT FOR THE YEAR
166
138
Other comprehensive income for the year, net of
146
82
tax
TOTAL COMPREHENSIVE INCOME FOR THE
312
220
YEAR
BPP LEARNING MEDIA
21
21
Restated balance
200
1,821
2,021
Changes in equity for 20X3:
Total comprehensive income for the
220
220
year
Balance at 31 December 20X3
200
2,041
2,241
Changes in equity for 20X4:
Total comprehensive income for the
312
312
year
BPP LEARNING MEDIA
Weighted average
FIFO
20X4
20X3
20X2
$'m
$'m
$'m
179
151
121
(120)
(100)
179
31
21
Errors 1
Definition
Prior period errors are omissions from, and misstatements in, the
entity's financial statements for one or more prior periods arising
from a failure to use, or misuse of, reliable information that:
(a) Was available when the financial statements for those periods
were authorised for issue
(b) Could reasonably be expected to have been obtained and
taken into account in the preparation and presentation of those
financial statements
Errors 2
Errors may arise from:
Mathematical mistakes
Errors in applying accounting policies
Oversights
Misinterpretation of the facts
Fraud
Errors 3
Accounting treatment
Errors are accounted for retrospectively.
This is the same accounting treatment as for changes in
accounting policies.
The financial statements should be restated and
presented as if the error had never occurred.
Disclose separately under current assets on the face of the statement of financial
position
http://www.vodafone.com/content/dam/vodafone/investors/annual_reports/annual_report_accounts_2007.pdf
Segment revenue
Inter-segment revenue
Net revenue
Operating expenses
Depreciation and amortization(1)
Impairment loss
2007
2006
520
520
(402)
7,268
(2)
7,266
(5,667)
(1,144)
(4,900)
(4,445)
(3)
(4,448)
7
Operating profit/(loss)
118
Net financing costs
8
Profit/(loss) before taxation
126
Taxation relating to performance of discontinued operations
(15)
Loss on disposal(2)
(747)
Notes:
Taxation
relating to the classification of the discontinued operations
145
(147)
(1) Including gains and losses on disposal of fixed assets.
(3)
(491) on (4,588)
Loss
for the794
financial
year from
discontinued
operations
(2) Includes
million foreign
exchange
difference transferred
to the income statement
disposal.
(3) Amount attributable to equity shareholders for the year to 31 March 2008 was nil (2007: (494) million;
2006: (4.598 million).
http://www.vodafone.com/content/dam/vodafone/investors/annual_reports/annual_report_accounts_2007.pdf
BPP LEARNING MEDIA
2007
2006
Pence
Pence
per share
per share
(0.90)
(7.35)
(0.90)
(7.35)
http://www.vodafone.com/content/dam/vodafone/investors/annual_reports/annual_report_accounts_2007.pdf
Revenue
Expenses
Revenue
Cost of sales
Gross profit
Other income
Distribution costs
Administrative expenses
Other expenses
Finance costs
Profit before tax
Income tax expense
Profit for the year from continuing operations
Loss for the year from discontinued operations
PROFIT FOR THE YEAR
Other
comprehensive income for the year, net of tax
BPP LEARNING MEDIA
20X3
20X2
$'000
$'000
X
(X)
X
X
(X)
(X)
(X)
(X)
X
(X)
X
(X)
X
X
X
(X)
X
X
(X)
(X)
(X)
(X)
X
(X)
X
(X)
X
X
Revenue
Cost of sales
Gross profit
Other income
Distribution costs
Administrative expenses
Other expenses
Finance costs
Loss before tax
Income tax expense
Loss after tax
Post-tax gain on remeasurement and disposal of assets and disposal
groups
LOSS FOR THE YEAR
BPP LEARNING MEDIA
20X3
20X2
$'000
$'000
X
(X)
X
X
(X)
(X)
(X)
(X)
(X)
X
(X)
X
(X)
X
X
(X)
(X)
(X)
(X)
(X)
X
(X)
(X)
(X)
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Profit before tax
Income tax expense
PROFIT FOR THE YEAR
Other comprehensive income for the year, net of tax
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
BPP LEARNING MEDIA
20X1
20X0
$'000
3,000
(1,000)
2,000
(400)
(900)
700
(210)
490
40
530
$'000
2,200
(700)
1,500
(300)
(800)
400
(120)
280
30
310
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Loss before tax
Income tax expense
LOSS FOR THE YEAR
Other comprehensive income for the year, net of tax
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
20X1
20X0
$'000
$'000
320
(150)
170
(120)
(100)
(50)
15
(35)
5
(30)
400
(190)
210
(130)
(90)
(10)
3
(7)
4
(3)
$'000
2,680 1,800
(850) (510)
1,830 1,290
(280) (170)
(800) (710)
750
410
(225) (123)
525
287
(35)
(7)
490
280
40
30
530
310
$'000
320
(150)
170
(120)
(190)
(140)
42
(98)
$'000
400
(190)
210
(130)
(90)
(10)
3
(7)
63
(35)
5
(30)
(7)
4
(3)
Non-adjusting events:
These relate to conditions which arose after the reporting period.
Exam details
Q4 June 2013
Q5 Dec 2010
Q2 June 2010
Q4 June 2013
Q5 Dec 2010
Could also be
examined by
MCQ.
Chapter 8
Introduction to
groups
Group accounts
Consolidated and separate
financial statements
Content of group accounts and
group structure
Group accounts: the related
parties issue
Concept
Parent's separate
financial statements
Group financial
statements
Non-controlling interests
and mid-year acquisitions
Definition of a
subsidiary
Group accounts 1
95%
ABC International
Ltd
51%
ABC Online
Services Ltd
Group accounts 2
The method used to account for the acquisition of
shares by one company in another company depends
on the type and extent of the investment acquired.
Principal terms to be aware of are:
Investments in subsidiaries
Investments in associates
Group accounts 3
Definitions
Subsidiary: an entity that is controlled by another entity.
Control: an investor controls an investee if and only if the
investor has all of the following.
Power over the investee
Exposure, or has rights, to variable returns from its
involvement with the investee
The ability to affect those returns through its power over
the investee
Group accounts 4
Definitions (continued)
Group accounts 6
Definitions (continued)
Parent: an entity that controls one or more subsidiaries.
Group: a parent and all its subsidiaries.
Associate: an entity over which an investor has
significant influence and which is neither a subsidiary
nor an interest in a joint venture.
Significant influence: the power to participate in the
financial and operating policy decisions of an investee
but not control or joint control over those policies.
Group accounts 7
The different types of investment and the required
accounting treatment in both the parent's individual
(separate) financial statements and the group financial
statements is explained over the next few chapters.
It is also summarised as follows.
Investment
Criteria
Subsidiary
Associate
Significant influence
(20% + rule)
Investment
Question: Control?
Which one (or more) of the following would be accounted for as a
subsidiary of A?
(1) A holds no shares in B; however through an agreement with B's
shareholders, A chooses 6 of the 10 Board members.
(2) A owns 45% of C's shares. No other individual shareholder owns
more than 5%.
(3) A owns 55% of D's shares. Under an contract in place, A must make
all decisions in agreement with E, who owns 45% of the shares.
(4) A controls F, a partnership, under an agreement.
Answer: Control?
Which one (or more) of the following would be accounted for as a
subsidiary of A?
(1) A holds no shares in B; however through an agreement with B's
shareholders, A chooses 6 of the 10 Board members
(2) A owns 45% of C's shares. No other individual shareholder owns
more than 5%.
(3) A owns 55% of D's shares. Under an contract in place, A must make
all decisions in agreement with E, who owns 45% of the shares.
(4) A controls F, a partnership, under an agreement.
These:
Present the results and financial position of the group as if it
were a single entity
Are issued to the shareholders of the parent
Provide information about all companies controlled by the
parent
A parent does not need to present group accounts if and only if all
of the following are present.
The parent is itself a wholly-owned subsidiary or a partially
owned subsidiary of another entity and the owners do not
object to the parent not presenting consolidated financial
statements.
Its securities are not publically traded.
It is not in the process of issuing securities in public securities
markets.
The ultimate or intermediate parent publishes consolidated
financial statements that comply with IFRSs.
All group companies should have the same reporting date. The
financial statements of a subsidiary with a non-coterminous year
end may be consolidated provided that the gap between reporting
dates is three months or less and adjustments are made for the
effects of significant transactions or events that occur between the
two reporting periods.
P Co controls S Co
because it has > 50%
of voting power
although it does not
own all of S Co
P Co
80%
S Co
Eg if S Co pays a $100 dividend:
P Co receives $80
The non-controlling interest receive $20
Exam details
Q1 June 2011
Chapter 9
The consolidated
statement of financial
position
The consolidated
statement of financial
position
Other reserves
Exemption from
preparing
consolidated
financial statements
The effect of related
party transactions
Intragroup trading
Calculation of fair
values
Inventories sold at a
profit
Consideration
transferred
Fair value of
identifiable assets,
acquired and
liabilities assumed
Transfer of property,
plant and
equipment
Sanus
$'000
Non-current assets
Property, plant and equipment
Investment in Sanus (at cost)
56,600
13,800
70,400
16,200
16,200
2,900
3,300
1,700
7,900
1,200
1,100
100
2,400
78,300
18,600
8,000
54,100
62,100
2,400
10,600
13,000
Current assets
Inventories
Trade receivables
Cash
Equity
Share capital ($1 shares)
Reserves
Note:
1
On 31 December
20X4 Portus purchased a 100% holding in Sanus for $13.8m in cash.
Non-current
liabilities
Long-term borrowings
BPP LEARNING MEDIA
13,200
4,800
72,800
800
73,600
Current assets
Inventories (2,900 + 1,200)
Trade receivables (3,300 + 1,100)
Cash (1,700 + 100)
4,100
4,400
1,800
10,300
83,900
8,000
54,100
62,100
Non-current liabilities
Long-term borrowings (13,200 + 4,800)
18,000
Current liabilities
Trade and other payables (3,000 + 800)
3,800
83,900
Group structure
Portus
31.12.X4
100%
Cost $13.8m
Sanus
Pre acquisition
reserves
$10.6m
Goodwill
$'000
Consideration transferred
Less:
$'000
13,800
2,400
10,600
(13,000)
800
Per question
Pre-acquisition reserves
Portus
Sanus
$'000
$'000
54,100
10,600
(10,600)
0
0
54,100
Non-controlling interests 1
In Lecture example 1 Portus acquired 100% of Sanus
and we saw how the consolidated statement of
financial position would look immediately after the
acquisition.
In exam questions and in reality is it unlikely that a
parent will own 100% of the subsidiary.
Remember that you don't need to own 100% of a
company to control it.
Where a parent owns less than 100% of a subsidiary,
the portion not owned by the parent belongs to the
non-controlling interest.
Non-controlling interests 2
P Co controls S Co
because it has > 50%
of voting power
although it does not
own all of S Co
P Co
80%
S Co
Eg if S Co pays a $100 dividend:
P Co receives $80
The non-controlling interest receive $20
Non-controlling interests 3
Consolidation method
(a) Aggregate the assets and liabilities on the statement of financial position ie
100% P + 100% S irrespective of how much P actually owns.
This shows the amount of net assets controlled by the group.
(b) Share capital (and share premium if any) is that of the parent only.
(c) Calculate goodwill using the standard working.
Consideration transferred
Reserves
X
(X)
Goodwill at acquisition
Non-controlling interests 4
Consolidation method (continued)
(d) Calculate consolidated reserves
Per question
Pre-acquisition reserves
Parent
Subsidiary
X
(X)
Y
X
X
Non-controlling interests 5
Consolidation method (continued)
(e) Calculate non-controlling interests ie the extent to which assets and liabilities
have been consolidated in the consolidated statement of financial position but
are not owned by the group.
NCI at acquisition
NCI share of post acquisition reserves (Y NCI%)
X
(X)
X
Non-controlling interests 6
Mid year acquisitions
Non-controlling interests 7
Rule for mid year acquisitions
Sanus
$'000
$'000
56,600
13,800
70,400
16,200
16,200
Non-current assets
Property, plant and equipment
Investment in Sanus (at cost)
Current assets
Inventories
Trade receivables
Cash
2,900
3,300
1,700
7,900
1,200
1,100
100
2,400
78,300
18,600
8,000
54,100
62,100
2,400
10,600
13,000
Equity
Share capital ($1 shares)
Reserves
Non-current liabilities
BPP LEARNING MEDIA
$'000
Non-current assets
Property, plant and equipment (56,600 + 16,200)
Goodwill (W2)
Current assets
72,800
5,500
78,300
4,100
4,400
1,800
10,300
88,600
8,000
55,300
63,300
3,500
66,800
18,000
3,800
88,600
Group structure
Portus
1.4.X4
80%
Cost
$13.8m
Sanus
Pre acquisition
reserves
$9.1m
Goodwill
$'000
Consideration transferred
13,800
$'000
3,200
2,400
9,100
(11,500)
5,500
Consolidated reserves
Per question
Pre-acquisition reserves (10,600 (2,000 9/12))
Portus
Sanus
$'000
$'000
54,100
10,600
(9,100)
1,500
1,200
55,300
Non-controlling interests
$'000
NCI at acquisition (W2)
NCI share of post acquisition reserves ((W3) 1,500 20%)
3,200
300
3,500
It is calculated as:
$
(X)
X
Internally generated
Not recognised in the books
ABC
28.2.20X5
DEF
300,000
400,000
=75%
Consideration transferred
Cash
250,000
80,000
30,750
735,000
1,095,750
Sanus
$'000
$'000
56,600
13,800
70,400
16,200
16,200
2,900
3,300
1,700
7,900
1,200
1,100
100
2,400
78,300
18,600
8,000
54,100
62,100
2,400
10,600
13,000
13,200
4,800
Non-current assets
Property, plant and equipment
Investment in Sanus (at cost)
Current assets
Inventories
Trade receivables
Cash
Equity
Share capital ($1 shares)
Reserves
Non-current liabilities
BPP LEARNING MEDIA
Long-term borrowings
On 1 April 20X4 Portus purchased a 80% holding in Sanus for $13.8m in cash. Sanus'
total comprehensive income for the year ended 31 December 20X4 was $2.0m,
accruing evenly over the year. Sanus did not pay any dividends in the year.
At the date of acquisition, the fair value of Sanus' assets were equal to their
carrying amounts with the exception of the items listed below which exceeded
their carrying amounts as follows.
$'000
Inventories
300
The non-controlling interest in Sanus is to be valued at its fair value of $3.2m at the
date of acquisition.
An impairment test conducted at the year end revealed that the consolidated
goodwill of Sanus was impaired by $150,000.
BPP LEARNING MEDIA
Current assets
Inventories (2,900 + 1,200)
Trade receivables (3,300 + 1,100)
Cash (1,700 + 100)
73,910
3,850
77,760
4,100
4,400
1,800
10,300
88,060
8,000
54,868
62,868
3,392
66,260
Non-current liabilities
Long-term borrowings (13,200 + 4,800)
18,000
Current liabilities
Trade and other payables (3,000 + 800)
3,800
88,060
Group structure
Portus
1.4.X4
80%
Cost
$13.8m
Sanus
Pre acquisition
reserves
$9.1m
Goodwill
$'000
Consideration transferred
13,800
$'000
3,200
2,400
9,100
1,500
(13,000)
4,000
(150)
3,850
Consolidated reserves
Per question
Fair value movement (W5)
Portus
Sanus
$'000
$'000
54,100
10,600
(390)
(9,100)
1,110
888
Sanus (150 80%)
(120)
54,868
Non-controlling interests
$'000
NCI at acquisition (W2)
3,200
222
(30)
3,392
At acquisition
Movement
At year
date
Inventories
Plant and equipment
end
$'000
$'000
300
1,200
1,500
(300)
(90)*
(390)
Goodwill
COS
& reserves
SOFP
$'000
1,110
1,110
Goodwill
$'000
Consideration transferred
13,800
$'000
2,600
2,400
9,100
1,500
(13,000)
3,400
(120)
3,280
2,600
222
(0)
2,822
Intra-group trading 1
IFRS 10 Consolidated Financial Statements states, 'Intragroup
balances, transactions, income and expenses shall be
eliminated in full'.
The purpose of consolidation is to present the parent and its
subsidiaries as if they are trading as one entity.
Therefore, only amounts owing to or from outside the group
should be included in the statement of financial position, and
any assets should be stated at cost to the group.
Intra-group trading 2
These two balances should be cancelled on consolidation as intragroup receivables and payables should not be shown.
Where current accounts do not agree at the year end this will be due
to items such as inventories in transit and cash in transit.
Intra-group trading 3
The accounting entries to do this are:
Intra-group trading 4
Inventories must be valued at the lower of cost and net realisable
value to the group.
Inventories transferred at a profit within group
Sold to a
third party
Remain in
inventories
Profit realised
Profit unrealised
Intra-group trading 5
Method
Calculate the unrealised profit included in inventories and mark
the adjustment to inventories on your proforma answer and to
retained earnings in your workings.
To eliminate the unrealised profit from retained earnings and
inventories a provision is usually made in the books of the
company making the sale (IFRS 10 is not specific).
This adjustment is only done as a consolidation adjustment, no
changes are recorded to the company's separate financial
statements.
Intra-group trading 6
Method (continued)
The entries required on consolidation are:
If the inventories are sold by P to S. Make the adjustment in
P's books:
DEBIT Cost of sales/retained earnings of P
CREDIT Consolidated inventories
Intra-group trading 7
Method (continued)
If the inventories are sold by S to P. Make the adjustment in
S's books:
DEBIT Cost of sales/retained earnings of S
CREDIT Consolidated inventories
Where S is the seller the non-controlling interest will be
affected by this adjustment because the amount of the
subsidiary's retained earnings which have been
consolidated are reduce and this will impact the share of
post acquisition profits allocated to the non-controlling
interest.
Sanus
$'000
$'000
56,600
13,800
70,400
16,200
16,200
2,900
3,300
1,700
7,900
1,200
1,100
100
2,400
78,300
18,600
8,000
54,100
62,100
2,400
10,600
13,000
Non-current assets
Property, plant and equipment
Investment in Sanus (at cost)
Current assets
Inventories
Trade receivables
Cash
Equity
Share capital ($1 shares)
Reserves
Non-current liabilities
BPP LEARNING MEDIA
On 1 April 20X4 Portus purchased a 80% holding in Sanus for $13.8m in cash. Sanus'
total comprehensive income for the year ended 31 December 20X4 was $2.0m,
accruing evenly over the year. Sanus did not pay any dividends in the year.
At the date of acquisition, the fair value of Sanus' assets were equal to their carrying
amounts with the exception of the items listed below which exceeded their carrying
amounts as follows.
$'000
Inventories
300
1,200
1,500
Sanus has not adjusted the carrying amounts as a result of the fair value exercise.
The inventories were sold by Sanus before the year end.
3
The non-controlling interest in Sanus is to be valued at its fair value of $3.2m at the
date of acquisition.
An impairment test conducted at the year end revealed that the consolidated goodwill
of Sanus was impaired by $150,000.
BPP LEARNING MEDIA
On 1 October 20X4, Sanus sold goods to Portus for $200,000 at a gross profit margin
of 40%. The goods were still in Portus' inventories at the year end. No other sales
were made between Portus and Sanus in the year.
At 31 December 20X4 Portus' current account with Sanus was $130,000 (credit). This
did not agree with the equivalent balance in Sanus' books due to cash in transit of
$70,000 which was not received by Sanus until after the year end.
Current assets
Inventories (2,900 + 1,200 (W6) 80)
Trade receivables (3,300 + 1,100 (W6) 70 (W6) 130)
Cash (1,700 + 100 + (W6) 70)
73,910
3,850
77,760
4,020
4,200
1,870
10,090
87,850
8,000
54,804
62,804
3,376
66,180
Non-current liabilities
Long-term borrowings (13,200 + 4,800)
18,000
Current liabilities
Trade and other payables (3,000 + 800 (W6) 130)
3,670
87,850
Group structure
Portus
1.4.X4
80%
Cost
$13.8m
Sanus
Pre acquisition
reserves
$9.1m
Goodwill
$'000
Consideration transferred
13,800
$'000
3,200
2,400
9,100
1,500
(13,000)
4,000
(150)
3,850
Consolidated reserves
Per question
Fair value movement (W5)
Portus
Sanus
$'000
$'000
54,100
10,600
(390)
(80)
(9,100)
1,030
824
Sanus (150 80%)
(120)
54,804
Non-controlling interests
$'000
NCI at acquisition (W2)
3,200
206
(30)
3,376
At acquisition
Movement
At year
date
Inventories
Plant and equipment
end
$'000
$'000
300
1,200
1,500
(300)
(90)*
(390)
Goodwill
& reserves
COS
SOFP
$'000
1,110
1,110
Intragroup trading
(1) Cash in transit
$'000
DEBIT Group cash
70
70
130
130
80
80
(X)
Then make the adjustment in the books of the company making the
sale:
DEBIT Retained earnings
CREDIT Property, plant and equipment
75
75
Working
1
Unrealised profit
$'000
Profit on transfer (200 120)
80
(5)
75
Exam details
Q1 all pre-Dec
2014 exams.
Will now be 15 or
30-mark
question.
Chapter 10
The consolidated
statement of profit or
loss and other
comprehensive
income
Introduction
Intra-group trading
Intra-group loans
and interest
Approach to the
consolidated
statement of
profit or loss and
other
comprehensive
income
$'000
28,500
(17,100)
11,400
(4,400)
(400)
6,600
(2,100)
4,500
$'000
11,800
(7,000)
4,800
(2,200)
(200)
2,400
(800)
1,600
900
5,400
400
2,000
Required
Prepare the consolidated statement of comprehensive income for the
Portus Group for the year ended 31 December 20X4 (excluding
consolidation adjustments).
$'000
37,350
(22,350)
15,000
(6,050)
(550)
8,400
(2,700)
5,700
1,200
1,200
6,900
5,460
240
5,700
6,600
300
6,900
Group structure
Portus
1.4.X4
80%
Cost $13.8m
Sanus
Pre acquisition
reserves
$9.1m
1.1.X4
1.4.X4
31.12.X4
Sanus
acquired
$'000
1,200
20%
240
Total comp
income
$'000
1,500
20%
300
Sanus
$'000
28,500
(17,100)
11,400
(4,400)
(400)
6,600
(2,100)
4,500
$'000
11,800
(7,000)
4,800
(2,200)
(200)
2,400
(800)
1,600
900
5,400
400
2,000
At the date of acquisition, the fair value of Sanus' assets were equal to their
carrying amounts with the exception of the items listed below which exceeded
their carrying amounts as follows.
$'000
Inventories
300
Plant and equipment (ten year remaining useful life)
1,200
1,500
Sanus has not adjusted the carrying amounts as a result of the fair value exercise.
The inventories were sold by Sanus before the year end.
$'000
37,150
(22,620)
14,530
(6,200)
(550)
7,780
(2,700)
5,080
1,200
1,200
6,280
4,964
116
5,080
Total
comprehensive
income attributable to:
BPP LEARNING
MEDIA
Group structure
Portus
1.4.X4
80%
Cost $13.8m
Sanus
Pre acquisition
reserves
$9.1m
1.4.X4
1.7.X4
31.12.X4
$'000
1,200
(150)
(390)
(80)
580
20%
116
Total comp
income
$'000
1,500
(150)
(390)
(80)
880
20%
176
Goodwill
Note. The goodwill and reserves SOFP workings are not needed for
this SOCI example but are reproduced here for clarity
$'000
Consideration transferred
13,800
Less:
3,200
$'000
Per question
Less
impairment
losses
Fair value
movement
(W5)
2,400
9,100
Portus
1,500
Sanus
$'000
$'000
54,100
10,600
(390)
(80)
(9,100)
1,030
824
(12,000)
4,000
(150)
3,850
Inventories
Plant and equipment
At acquisition
date
$'000
300
1,200
1,500
Movement
Goodwill
COS
& reserves
$'000
(300)
(90)*
(390)
At year
end
$'000
1,110
1,110
*Extra depreciation
$1,200,000 1/10 9/12
SOFP
Cash in transit
$'000
(2)
70
70
200
200
$'000
(3)
130
130
Sanus:
$'000
$'000
1,200
(150)
1,500
(150)
(390)
(390)
(80)
(80)
600 580
960 880
20%
132 116
BPP LEARNING MEDIA
20%
192 176
PPE
investment in S
4% loan to S
Current assets
Share capital
Retained earnings
Non-current liabilities bank loan
4% loan from P
Current liabilities
P
$'000
6,200
1,000
400
7,600
1,350
8,950
S
$'000
3,050
3,050
850
3,900
Consol
$'000
9,250
9,250
2,200
11,450
800
6,900
7,700
200
200
1,050
8,950
1,000
1,800
2,800
400
400
700
3,900
800
8,700
9,500
200
200
1,750
11,450
P
$'000
2,200
(1,540)
660
16
(20)
656
(196)
460
S
$'000
1,100
(770)
330
(16)
314
(94)
220
Consol
$'000
3,300
(2,310)
990
(20)
970
(290)
680
Exam details
Chapter 11
Accounting for
associates
Definition
Significant
influence
Accounting
treatment
Consolidated
financial
statements
Working
Cost of associate
Share of post-acquisition retained reserves
Less impairment losses on associate to date
X
X/(X)
(X)
X
The value of the adjustment at all times is the group percentage of the
unrealised profit amount. So if there was a 30% associate and the
unrealised profit was $100 the adjustment would be:
PUP A%, ie $100 30% = $30
Portus
Sanus
Allus
$'000
$'000
$'000
56,600
13,800
70,400
16,200
16,200
16,100
16,100
2,900
3,300
1,700
7,900
1,200
1,100
100
2,400
500
1,100
300
1,900
78,300
18,600
18,000
8,000
54,100
62,100
2,400
10,600
13,000
2,800
9,200
12,000
Non-current assets
Property, plant and equipment
Investment in Sanus (at cost)
Current assets
Inventories
Trade receivables
Cash
Equity
Share capital ($1 shares)
Reserves
Non-current liabilities
BPP LEARNING MEDIA
At the date of acquisition, the fair value of Sanus' assets were equal to their
carrying amounts with the exception of the items listed below which
exceeded their carrying amounts as follows.
$'000
Inventories
300
Plant and equipment (ten-year remaining useful life)
1,200
1,500
Sanus has not adjusted the carrying amounts as a result of the fair value
exercise. The inventories were sold by Sanus before the year end.
$'000
Non-current assets
Property, plant and equipment (56,600 + 16,200 + (W6) 1,110)
Goodwill (W2)
Investment in associate (W3)
73,910
3,850
4,840
82,600
Current assets
Inventories (2,900 + 1,200 (W7) 80 (W7) 6)
Trade receivables (3,300 + 1,100 (W7) 70 (W7) 130)
Cash (1,700 + 100 + (W7) 70)
4,014
4,200
1,870
10,084
92,684
8,500
4,200
54,938
67,638
3,376
71,014
Non-current liabilities
Long-term borrowings (13,200 + 4,800)
18,000
Current liabilities
Trade and other payables (3,000 + 800 (W7) 130)
3,670
92,684
Portus
Cost
1.4.X4
80%
$13.8m
1.7.X4
30%
Sanus
Pre acquisition
reserves
$9.1m
$8.6m
($10.6m ($2.0m 9/12))
or (10.6m $2.0m + ($2.0 3/12))
(W8) $4.7m
Allus
Goodwill
$'000
Consideration transferred
Non-controlling interests (at fair value)
$'000
13,800
3,200
2,400
9,100
1,500
(13,000)
4,000
(150)
3,850
Investment in associate
Cost of associate
Add post-acquisition reserves (W4)
Less impairment losses on associate to date
$'000
4,700
180
(40)
4,840
Consolidated reserves
Per question
Fair value movement (W6)
Provision for unrealised profit (W7)
Portus
Sanus
Allus
$'000
$'000
$'000
54,100
10,600
(390)
9,200
(6)
(80)
Pre-acquisition reserves
(10,600 (2,000 9/12))
(9,100)
1,030
824
180
(120)
(40)
54,938
(8,600)
600
$'000
3,200
206
(30)
3,376
Inventories
Plant and equipment
At acquisition
date
$'000
300
1,200
1,500
Movement
Goodwill
COS
& reserves
$'000
(300)
(90)*
(390)
At year
end
$'000
1,110
1,110
*Extra depreciation
$1,200,000 1/10 9/12
SOFP
Intra-group trading
(1)
Cash in transit
$'000
(2)
70
70
200
200
$'000
130
130
80
80
Allus:
Profit element in inventories: $400,000 25% / 125% = $20,000
Associate share $20,000 30% = $6,000
$'000
DEBIT Cost of sales (and reserves) (of Allus the
seller)
6 (ie in share of
profit of
associate)
6 (as the
inventories are
Acquisition of Allus
$'000
DEBIT Investment in Allus (500 $9.40)
CREDIT Share capital (500 $1)
CREDIT Share premium (500 $8.40)
4,700
500
4,200
Sanus
Allus
$'000
$'000
$'000
Revenue
Cost of sales
Gross profit
Expenses
Finance costs
Dividend income from Allus
28,500
(17,100)
11,400
(4,400)
(400)
60
11,800
(7,000)
4,800
(2,200)
(200)
9,500
(5,800)
3,700
(1,600)
(200)
6,660
(2,100)
4,560
2,400
(800)
1,600
1,900
(600)
1,300
900
400
300
37,150
(22,620)
14,530
(6,200)
(550)
149
7,929
(2,700)
5,229
1,200
45
1,245
5,113
116
5,229
6,298
176
6,474
Timeline
1.1.X4
1.4.X4
1.7.X4
31.12X4
PUP
adjustment
1,200
(150)
1,500
(150)
(390)
(390)
(80)
(80)
580
880
20%
20%
116
176
Exam details
Q1 June 2010
Q1 Dec 2011
Q1 June 2012
Chapter 12
Inventories and
biological assets
Inventories
Valuation
Interchangeable
items
Biological assets
Accounting
treatment
(X)
(X)
X
*Marketing, selling and distribution costs
Cost
NRV
Lower
$
27
32
27
14
43
55
43
4
29
40
29
The inventories figure is $107 not $113.
113
135
107
BPP LEARNING MEDIA
Exam details
Q2 Dec 2011
Q2 June 2011
Q5 June 2011
Chapter 13
Provisions
Provisions,
contingent liabilities
and contingent
assets
Provisions
Contingent assets
Future
operating
losses
Onerous
contracts
Restructuring
Decommissioning
and environmental
costs
Provisions 1
Issue
When an entity makes a provision, generally speaking,
the double entry is 'DEBIT Expense, CREDIT
Provision'.
This reduces an entity's profit.
When an entity releases a provision the double entry is
'DEBIT Provision, CREDIT Expense'.
This increases an entity's profit.
Businesses were creating and releasing provisions to
manipulate profit figures.
Provisions 2
What was the solution?
A strict definition of what a provision is.
Three criteria which must be satisfied before a
provision can be recognised in the financial
statements.
Provisions 3
A provision is a liability of uncertain timing or
amount.
A provision should be recognised in the financial
statements when all three recognition criteria are
satisfied:
An entity has a present obligation (legal or
constructive) as a result of a past event.
It is probable that an outflow of economic
resources will be required to settle the obligation.
A reliable estimate can be made of the amount of
the obligation.
Provisions 4
An obligation can be legal or constructive:
A legal obligation is one that derives from a
contract or legislation.
A constructive obligation is one that derives from
the actions of an entity where:
An established pattern of past practice, published
policies or a specific statement has indicated to
other parties that the entity will accept certain
responsibilities
The entity has created a valid expectation on the
part of those other parties that it will discharge
those responsibilities
BPP LEARNING MEDIA
Question: Services Co
Under new legislation enacted on 30 June 20X0, Services
Co is required to fit smoke filters to its factories by 30
June 20X1. The entity has not fitted the filters.
Should a provision be recognised at the end of the
reporting period:
(a) 31 December 20X0?
(b) 31 December 20X1?
Answer: Services Co
(a) At 31 December 20X0, there is no obligation as there is no
obligating event either for the costs of fitting the smoke filters
(the filters have not yet been fitted) or for fines under the
legislation.
No provision should be recognised.
(b) At 31 December 20X1 there is still no obligation for the costs
of fitting the filters as no obligating event has occurred (the
fitting of the filters).
However, an obligation may arise to pay fines or penalties
under the legislation because the obligating event has
occurred (the non compliant operation of the factory).
A provision is made for the best estimate of any fines or
penalties that are more likely than not (probable) to be
imposed under the legislation.
BPP LEARNING MEDIA
Provisions 5
The amount recognised as a provision should be the
best estimate of the cost required to settle the
obligation at the end of the reporting period.
Where the provision involves a large population of
items, such as a warranty provision, the provision
should be calculated using expected values.
Where a single obligation is being measured, such as
the outcome of a court case, the individual most
likely outcome should be provided.
The amount of the provision should be discounted
where the time value of money is material.
Question: Proviso Co
Discuss the accounting treatment of the above situations:
(1) Proviso Co issued a one-year guarantee for faulty workmanship
on an item of specialist equipment that it delivered to its
customer. At Proviso's year end, the company is being sued by
the customer for refusing to replace or repair the item of
equipment within the guarantee period, as Proviso believes the
fault is not covered by the guarantee, but instead has arisen
because of the customer not following the operating instructions.
Proviso's lawyer has advised them that it is more likely than not
that they will be found liable. This would result in Proviso being
forced to replace or repair the equipment plus pay court costs
and a fine amounting to approximately $10,000.
Based on past experience with similar items of equipment,
Proviso estimates that there is a 70% chance that the central
core would need to be replaced which would cost $40,000 and a
30% chance that the repair would only cost about $15,000.
BPP LEARNING MEDIA
Answer: Proviso Co
(1) At the end of the reporting period, Proviso disputes liability
(and therefore whether a present obligation exists).
However, given that it is more likely than not that Proviso will
be found guilty, a present obligation is assumed to exist
(IAS 37 Para 1516).
Given that a single obligation is being measured, a
provision is made for the outflow of the most likely outcome
(IAS 37 Para 40).
Consequently a provision is recognised for
$10,000 + $40,000 = $50,000.
Provisions 6
Specific situations
Future operating losses:
Provisions should not be recognised for future operating losses.
They do not meet the definition of a liability or the recognition
criteria.
Onerous contracts:
An onerous contract is a contract where the unavoidable costs
of completing the contract exceed the benefits expected to be
received under it.
Where an onerous contract exists, the entity should provide for
the net loss which is the lower of the costs of fulfilling the
contract and the penalties from failing to fulfill the contract.
Question: China Co
You have a contract to buy 300 metres of silk from China
Co each month for $9 per metre. From each metre of silk
you make one shirt. You also incur labour and other direct
variable costs of $8 per shirt.
Usually you can sell each shirt for $22 but in late July
20X8 the market price falls to $14. You are considering
ceasing production since you think the market may not
improve.
If you decide to cancel the silk purchase contract without
two months' notice you must pay a cancellation penalty of
$1,200 for each of the next two months.
Answer: China Co
Honour contract
Revenue (300 m $14 2 months)
Costs (300 m ($9 + $8) 2 months)
Loss
Cancel contract
$8,400
($10,200)
($1,800)
Provisions 7
Specific situations (continued)
Decommissioning and other environmental costs:
Provisions for these costs should only be recognised
from the date on which the obligating event occurs.
Question: Oilfield Co
An entity operates an offshore oilfield where its licensing
agreement requires it to remove the oil rig at the end of
production and restore the seabed. 90% of the eventual costs
of this work relate to the removal of the oil rig and restoration
of damage caused by building it, and 10% through the
extraction of oil. At the year end, the rig has been constructed
but no oil has been extracted.
(1) When do the obligations arise in respect of the two
portions of the cost?
(2) How should these be dealt with in the financial
statements?
Answer: Oilfield Co
(1) The obligation for 90% of the cost which relates to the removal
of the oil rig arises at the point when the oil rig is constructed,
as there is a legal obligation to incur these costs.
The obligation for the final 10% of the cost relating to the
rectification of damage caused by extraction of the oil only
arises as the oil extraction progresses.
(2) At the year end a provision should be recognised for the best
estimate of the 90% of the costs relating to the removal of the
rig and restoration of the damage caused by building it. These
costs should be included as part of the cost of the oil rig.
The 10% of costs that arise through extraction of the oil will be
recognised as a liability in future periods over the period the oil
is extracted.
BPP LEARNING MEDIA
Question: Restructuring Co
On 12 December 20X0 the board of an entity decided to
close down a division.
Explain the appropriate accounting treatment.
(1) Assuming that no steps were taken to implement the
decision and the decision was not communicated to
any of those affected by the end of the reporting period
31 December 20X0.
(2) If a detailed plan had been agreed by the board on 20
December 20X0, letters sent to notify customers and
the staff of the division have received redundancy
notices.
BPP LEARNING MEDIA
Answer: Restructuring Co
(1) There has been no obligating event, so no provision is
recognised.
(2) The communication of the decision to the customers
and employers gives rise to a constructive obligation
because it creates a valid expectation that the division
will be closed.
The outflow of resources embodying economic benefits is
probable so, at 31 December 20X0 a provision should
be recognised for the best estimate of the costs of
closing the division.
Treatment:
Virtually certain
Recognise
Probable
Disclose
Possible
Do nothing
No
Yes
Yes
Probable
outflow?
No
Yes
Provide
Remote?
Yes
No
Yes
Reliable
estimate?
Possible
obligation?
No
No (rare)
Disclose
contingent
liability
Do nothing
Exam details
Q2 June 2013
Q4 (c) June 2013
Q5 Dec 2012
Q4 Dec 2011
Decommissioning costs
Provisions for closure costs and future
operating losses
Q2 Dec 2010
Q5 Dec 2010
Chapter 14
Financial instruments
Financial
instruments
Presentation of financial
instruments
Recognition and measurement of
financial instruments
Definitions
Financial asset
Financial liability
Types of
financial asset
Debt
instruments
Classification
Equity
instruments
Convertible
debt
Financial instruments 1
Issue
In recent years there have been many changes to number
and variety of financial instruments which are available to
companies.
The main issues have surrounded how they are measured
and classified/presented in the financial statements.
Whether a financial instrument should be classified as
debt or equity is an important consideration mainly
because of the effect this decision could have on a
company's gearing ratio.
There is a definite need for consistency.
Financial instruments 2
Definitions
A financial instrument is:
A contract that gives rise to both a financial asset of
one entity and a financial liability or equity instrument of
another
For example a loan agreement from a bank signed by a
company would be a financial instrument because the
bank would show a financial asset in its financial
statements (in the form of a receivable) and the company
would show a financial liability (in the form of a loan).
Financial instruments 3
Definitions:
A financial asset is:
(a) Cash
(b) An equity instrument of another entity (for example
shares, share options or share warrants)
(c) A contractual right to receive cash or another financial
asset from another entity (for example a trade
receivable)
(d) A derivative standing at a gain
Financial instruments 4
Definitions
A financial liability is:
(a) A contractual obligation to deliver cash or another
financial asset to another entity (for example a trade
payable, debenture loan and redeemable preference
shares)
(b) A derivative standing at a loss
An equity instrument is any contract that gives the holder
a residual interest in the assets of an entity after deducting
all of its liabilities.
Here there is no indication that the shares have limited rights or that
the company has any obligations in relation to the shareholders.
100,000
157,000
$
Non-current liabilities
Financial liability component of convertible bond
(W1)
270,180
Equity
Equity component of convertible bond
(300,000 (W1) 270,180)
29,820
$
220,500
13,890
12,855
11,910
11,025
49,680
270,180
$
Finance costs (profit or loss)
Effective interest on financial liability component of
convertible bond (W2)
21,614
Non-current liabilities
Financial liability component of convertible bond (W2)
Working 2
1.1.X1
1.1.X1 31.12.X1
31.12.X1
31.12.X1
BPP LEARNING MEDIA
Liability b/d
Interest at 8%
Coupon interest paid (5%)
Liability c/d
276,794
$
270,180
21,614
(15,000)
276,794
Common sense should also be applied and where there are a large
number of similar financial instrument transactions they may be
grouped together. Similarly where a single significant transaction
requires full disclosure this should also be made.
The examiner has stated that he will not set questions relating to the
risks of financial instruments.
This is used where the financial assets are held for trading,
comprise derivatives and all other financial assets.
Financial asset
Cash
445,867
445,867
445,867
41,466
(25,000)
462,333
42,997
(25,000)
480,330
44,670
(525,000)
Exam details
Q2 Dec 2012
Q1 June 2012
Q2 Dec 2011
Q2 Dec 2010
Q2 June 2010
Chapter 15
Revenue
Government grants
Recognition
Sale of goods
Measurement
Rendering of
services
IAS 17 Leases
If under a lease, the lessee bears substantially all of the risks and
rewards of ownership, they should recognise the asset and
associated liability in the financial statements even though they do
not legally own the asset.
IAS 18 Revenue
Revenue from the sale of goods is recognised once the risks and
rewards of ownership of the good have been transferred to the
buyer.
It defines both assets and liabilities and states the criteria which must
be met in order for new assets and liabilities to be recognised in the
financial statements and for existing assets and liabilities to be
changed.
It is also important to realise that IFRSs and IASs are based on the
Conceptual Framework.
Considerations:
In order to identify the correct accounting treatment (namely which
party should record the inventory) it is necessary to determine the
point at which distributor acquired the benefits of the inventory
rather than the point at which they acquired legal title.
You should also consider whether the manufacturer has the right
to require the return of the inventories and whether that right is
likely to be exercised. If it is then the inventories are not the assets
of the distributor.
Furthermore if the distributor is rarely required to return the
inventories, then this part of the transaction has little effect on the
substance of the transaction and so can be ignored for accounting
purposes.
Where it appears that the risks and rewards of ownership have
been passed to the distributor they should recognise the
inventories and the associated liability.
BPP LEARNING MEDIA
Legal title passes when the cars are either used by Rover Co for
demonstration purposes or sold to a 3rd party.
The price of vehicles is fixed at the date of transfer.
Rover Co has no right to return vehicles.
Rover Co pays a finance charge between delivery and the date that
legal title passes.
Required
(i) What are the risks inherent in holding inventories?
(ii) What features of the arrangement indicate risk?
(iii) On the basis of the above how should Rover Co account for the
transaction?
BPP LEARNING MEDIA
(ii)
(iii)
Definition:
An arrangement under which company sells the asset to another
person on terms that allow the company to repurchase the asset in
certain circumstances.
Considerations:
Is the transaction a straightforward sale or is it a secured loan.
Examine the scenario in the exam question to determine which
party has the rights to the economic benefits which the asset
generates and the terms on which the asset is to be repurchased.
If the seller has the right to the benefits of the use of the asset and if
the repurchase terms are such that repurchase is likely to take place,
the transaction should be accounted for as a secured loan.
Definition:
An arrangement where the original creditor sells the debts to the
factor.
The sales price may be fixed at the outset of may be adjusted later.
It is also common for the factor to offer a credit facility that allows
the seller to draw upon a proportion of the amounts owed.
Considerations:
Has the benefit of the debts been passed on to the factor or is the
factor providing a loan on the security of the receivables balances.
Examine the scenario in the exam question to determine whether
the seller has to pay interest on the difference between the
amounts advanced to him and the amounts the factor has
received.
Also determine if the seller bears the risks of non-payment by the
receivable.
If the seller appears to retain substantially all the risks and rewards
of ownership of the receivables then this would indicate that the
transaction is, in effect, a loan rather than the sale of the debts.
Slow payment
The scenario indicates that both these risks are borne by Apple Co
because Factor Co will pass back any amounts not collected after 90
days and also Apple Co has to pay interest on a daily basis for any
monies outstanding.
Revenue recognition 1
Revenue recognition 2
Sale of goods
Revenue from the sale of goods is recognised when all of the
following are met:
(a) The entity has transferred the significant risks and rewards
of ownership to the buyer.
(b) The entity retains no continuing managerial involvement nor
effective control over the goods sold.
(c) The amount of revenue can be measured reliably.
(d) It is probable that economic benefits associated with the
transaction will flow to the entity; and
(e) Costs incurred in the transaction can be measured reliably.
Revenue recognition 3
Rendering of services
Once the outcome of a transaction involving the rendering of
services can be estimated reliably, revenue is recognised
according to the stage of completion.
Unlike the sale of goods there are no risks and rewards of
ownership to transfer and no managerial involvement to give up
however the other criteria are still relevant:
(c) The amount of revenue can be measured reliably.
(d) It is probable that economic benefits associated with the
transaction will flow to the entity.
(e) Costs incurred in the transaction can be measured reliably.
Additionally the stage of completion must be measured reliably.
BPP LEARNING MEDIA
Revenue recognition 4
Stage of completion
This can be determined in various ways, the most reliable method
should be used:
Surveys of work performed;
Services performed to date as a percentage of total services to
be performed; or
Costs incurred to date and a percentage of total costs.
Note that where the latter method is used the costs incurred to date
must reflect the services performed to date.
Where the outcome of the rendering of services cannot be
estimated reliably, revenue is recognised only to the extent that the
expenses recognised are expected to be recoverable.
BPP LEARNING MEDIA
Revenue recognition 5
Interest, royalties and dividends
Revenue is recognised on the following bases:
Interest is recognised on a time proportion basis that takes
into account the effective yield on the asset.
Royalties are recognised on an accruals basis in
accordance with the substance of the relevant agreement.
Dividends are recognised when the shareholder's right to
receive payment is established.
Revenue recognition 6
Measurement of revenue
Revenue should be measured at the fair value of the
consideration received or receivable.
Where revenue is receivable more than 12 months after it has
been earned, it will usually be discounted to present value.
For example, if an entity sells goods for $1,000 today and the
payment will be received in two year's time, this amount should
be discounted to present value.
Assuming an interest rate of 5%, this amounts to $907.03
calculated as:
$1,000 [1 / (1.05)2]
Revenue recognition 7
Measurement of revenue (continued)
Revenue (and receivables) would be recognised as $907.03.
The difference between the revenue recognised and the $1,000
which will be received in Year 2 is accounted for as interest
income in profit or loss.
In Year 1, interest income would be $45.35:
$907.03 5% = $45.35
In Year 2, interest income would be $47.62:
($907.03 + $45.35) 5% = $47.62
The interest is added on to the receivable so that the receivable
is stated at $1,000 ($907.03 + $45.35 + $47.62) when the
payment falls due from the customer.
Revenue recognition 8
If you need to discount an amount to its present value the
interest rate will be provided in the exam.
You will however need to be confident calculating the
appropriate discount factor and present value amount.
$
Revenue (x% Total contract revenue)
(X)
(X)
Expected loss
(X)
X
X
(X)
X/(X)
Trade receivables
(X)
X
100,000
48,000
32,000
Progress billings
58,000
Cash received
50,000
60%
(a) Prepare relevant extracts from the statement of profit or loss and
statement of financial position.
(b) Show how the statement of financial position would differ if progress
billings were $64,000 (of which $50,000 was received).
Stage of completion
60% per question
$
100,000
(80,000)
20,000
$
STATEMENT OF PROFIT OR LOSS (extract)
Revenue (60% 100,000)
Expenses (60% 80,000)
Profit
Trade receivables
60,000
(48,000)
12,000
48,000
12,000
60,000
(58,000)
2,000
58,000
(50,000)
Current liabilities
4,000
(50,000)
14,000
48,000
12,000
60,000
(64,000)
(4,000)
100,000
72,000
48,000
Progress billings
58,000
Cash received
50,000
60%
Required
(a) Prepare relevant extracts from the statement of profit or loss and
statement of financial position.
Stage of completion
60% per question
Recognise full loss immediately
100,000
(120,000)
(20,000)
60,000
(72,000)
(8,000)
(20,000)
58,000
(50,000)
8,000
Current liabilities
Gross amounts due to customers
Contract costs incurred to date
Recognised losses
Less progress billings to date
72,000
(20,000)
52,000
(58,000)
(6,000)
850
(850)
0
1,130
(675)
455
850
0
850
(1,130)
(280)
Exam details
Q2 Dec 2012
Q2 Dec 2011
Q2 June 2011
Q2 June 2010
Chapter 16
Leasing
Types of lease
Lessees
Leases
Finance lease
Operating leases
Definition
Definition
Accounting
treatment
Accounting
treatment
Sale and
leaseback
transactions
Types of lease 1
IAS 17 is another example of the concept of substance over
form as assets held under leases are accounted for according
to their economic substance rather than their legal form.
There are two types of lease: a finance lease and an operating
lease.
Definition:
A finance lease is a lease that transfers substantially all the
risks and rewards incident to ownership of an asset (to the
lessee). Title may or may not be eventually be transferred.
Definition:
An operating lease is a lease other than a finance lease.
Types of lease 2
Identifying a finance lease
IAS 17 identifies five situations which would normally lead to a lease
being classified as a finance lease:
(a) The lease transfers ownership of the asset to the lessee at the end of
the lease term.
(b) The lessee has the option to purchase the asset at a price
sufficiently below fair value at exercise date, that it is reasonably
certain the option will be exercised.
(c) The lease term is for the major part of the asset's economic life even
if title is not transferred.
(d) The present value of the minimum lease payments amounts to
substantially all of the asset's fair value at inception.
(e) The leased asset is so specialised that it could only be used by the
lessee without major modifications being made.
BPP LEARNING MEDIA
Types of lease 3
Why does the type of lease matter?
The type of lease has a huge impact on the accounting
treatment in the financial statements.
The accounting treatment is covered in more detail later in this
chapter, however:
A finance lease is essentially accounted for as if the entity
had acquired the non-current asset outright and funded the
acquisition with a 'loan'
With an operating lease the entity is essentially just renting
the asset and so the costs incurred are treated as rental
expense in profit or loss
Types of lease 4
Land and buildings
Under IAS 17 the land and buildings elements of a lease of land and buildings
are considered separately for the purposes of lease classification.
The lease relating to the land is treated as a operating lease unless, as may
be the case with a long lease, it is considered that the risks and rewards of
ownership have been transferred, in which case it will be treated as a finance
lease.
Where the land and buildings elements are classified as different types of
leases the minimum lease payments are allocated between the land and
buildings elements in proportion to the relative fair values of the leasehold
interests in the land and buildings.
Lessees 1
Finance leases - accounting treatment
The leased property is capitalised at
OR
(if lower)
The asset is also depreciated as a normal asset but over the shorter of the
lease term and the useful life of the asset. If ownership will be transferred at
the end of the lease term, the asset is depreciated over its useful life.
BPP LEARNING MEDIA
Lessees 2
Lessees 3
The capital element of the lease payment reduces the amount owed
to the finance lease company and reduces the finance lease liability in
the statement of financial position.
To do this you must first identify from the question whether the lease
payments are made:
In arrears (ie at the end of the reporting period); or
In advance (ie at the beginning of the reporting period).
Lessees 4
Calculation of lease liability
Payments
in arrears
$
Payments
in advance
$
1.1.X1
1.1.X1
(X)
(X)
1.1.X1
Instalment in advance
(X)
(X)
1.1.X131.12.X1
Interest at x%
31.12.X1
Instalment in arrears
31.12.X1
Liability c/d
1.1.X2
Instalment in advance
(X)
1.1.X231.12.X2
Interest at x%
31.12.X2
Instalment in arrears
(X)
31.12.X2
Can be
analysed
separately as
interest payable
as not paid at
y/e, but no IAS
requirement to
do so
$
1,037
7,393
Current liabilities
Finance lease liability (Working) (8,462 7,393)
1,069
Liability b/d
Non-refundable deposit
1.1.X131.12.X1
31.12.X1
31.12.X1
1.1.X231.12.X2
31.12.X2
31.12.X2
Interest at 11%
Instalment 1 (in arrears)
Liability c/d
Interest at 11%
Instalment 2 (in arrears)
Liability c/d
$
10,000
(575)
9,425
1,037
(2,000)
8,462
931
(2,000)
7,393
1 January 20X1
Five years at $2,000 per annum payable
Fair value:
$8,000
Useful life:
Eight years
$
1,600
720
6,400
Non-current liabilities
Finance lease liability (Working)
4,720
Current liabilities
Finance lease liability (Working)
2,000
Liability b/d
Instalment 1 (in advance)
1.1.X131.12.X1
31.12.X1
1.1.X2
1.1.X2
Interest at 12%
Liability c/d
Instalment 2 (in advance)
Liability c/d
$
8,000
(2,000)
6,000
720
6,720
(2,000)
4,720
Lessees 5
Sale and leaseback transactions
These describe the situation where an entity sells an asset to a
third party and then leases it back from them.
The accounting treatment depends on two key elements:
Whether the asset is leased back under a finance lease
arrangement or an operating lease arrangement
For an operating leaseback how the sales proceeds
compare to the fair value of the asset
Lessees 6
Leaseback as a finance lease
If the leaseback transaction is a finance lease then the entity
still bears substantially all of the risks and rewards of ownership
of the asset just as it did before the sale and leaseback.
In substance therefore the asset has not been sold.
Therefore the asset should remain in the statement of financial
position at its previous value.
The 'sales proceeds' received should be treated as a finance
lease liability and the following entry made.
DEBIT Cash, CREDIT Finance lease liability
The finance lease is then accounted for in the same way as
any other finance lease would be
BPP LEARNING MEDIA
Lessees 7
Leaseback as a finance lease (continued)
When the 'sales proceeds' are compared to the carrying value
of the asset a 'notional' profit or loss may be made.
This apparent profit or loss is deferred and amortised over the
lease term.
The previous carrying amount of the asset continues to be
depreciated as normal however it may be necessary to restrict
the asset's useful life to the period of the lease term.
Lessees 8
If leaseback is operating lease
Compare sales proceeds (SP) to the fair value (FV) of the asset
SP = FV
SP < FV
SP > FV
Sale is an arm's
length transaction.
Excess over FV
defer excess and
amortise over period
the asset is
expected to be used
Recognise any
profit or
loss immediately.
BPP LEARNING MEDIA
Exam details
Q2 June 2012
Q3 June 2010
Chapter 17
Current tax
Accounting for
taxation
Deferred tax
Deductible temporary differences
Measurement and recognition of
deferred tax
Taxation in company accounts
Current tax
Recognition
Deferred tax
Depreciating
assets
Revaluations of
non-current
assets
Presentation
Current tax 1
IAS 12 Income Taxes covers both current tax and deferred
tax.
Current tax relates to the 'proper' tax paid to the
taxation authorities.
Deferred tax is an accounting adjustment.
Current tax 2
Definition
Current tax is the amount of income taxes payable or
recoverable in respect of taxable profit or loss for the
period.
Taxable profit (or loss) is the profit (or loss) for a period,
determined in accordance with the rules established by
the taxation authorities, upon which income taxes are
payable (recoverable).
Current tax is essentially the amount of tax an entity will
need to pay to the tax authorities in respect of its profit for
the period.
Current tax 3
The tax charge for the period is shown as an expense in
profit or loss.
Any unpaid amounts of tax are recognised as a liability in
the statement of financial position.
The accounting entry to record the tax expense is:
DEBIT Tax expense
CREDIT Tax liability
Deferred tax 1
Deferred tax is not a tax which is paid, rather it is an
accounting adjustment.
It deals with situations where the accounting treatment of
a transaction is different from the tax treatment.
Some differences are permanent (for example customer
entertaining), while others are temporary differences
because of the timing of when a transaction is recognised
for accounting purposes and when it is considered for tax.
Deferred tax 2
Temporary differences
Differences between
Carrying amount of
an asset/liability
Tax base of an
asset/liability
There are two types
Taxable
temporary
differences
Deductible
temporary
differences
Deferred tax 3
The temporary difference is calculated by comparing the
carrying amount of an asset or liability in the statement of
financial position to its tax base.
The carrying value of an asset or liability is its value in
the statement of financial position at the reporting date.
The tax base of an asset is its value for tax purposes at
the reporting date.
Deferred tax is provided on temporary differences.
Deferred tax 4
Definition
Deferred tax liabilities are amounts of income taxes
payable in future periods in respect of taxable temporary
differences.
Deferred tax assets are the amounts of income taxes
recoverable in future periods in respect of:
Deductible temporary differences
The carry forward of unused tax losses
The carry forward of unused tax credits
Leisure Tours 1
Illustration
Leisure Tours buys a coach on 1 January 20X1 for
$60,000. The coach has a useful life of four years and will
be scrapped at the end of its life.
The company pays tax at 25% and tax depreciation is
available at 50% of cost in Year 1 and 25% on cost less
tax depreciation in Year 2 onwards. Leisure Tours has a
profit before tax of $100,000 in each of the years 20X1
and 20X2.
Leisure Tours 2
Scenario 1
If we ignore all tax adjustments, Leisure Tours would
have the following financial statements.
20X1
20X2
$
$
100,000 100,000
(25,000) (25,000)
75,000
75,000
Leisure Tours 3
Scenario 2
If we adjust for tax depreciation but ignore deferred taxation, Leisure
Tours would have the following financial statements.
20X1
20X2
$
$
Profit before tax
100,000
100,000
Add back depreciation (W1)
15,000
15,000
Less tax depreciation (W2)
(30,000)
(7,500)
Taxable profit
85,000
107,500
Tax at 25%
21,250
26,875
Leisure Tours 4
Here you can see that effectively some of the tax that
should have been paid in 20X1 has been 'deferred' to
20X2.
This is due to the timing as to when the accounting and
tax depreciation fall.
This is a temporary difference because eventually, over
the asset's life accounting depreciation of $60,000 will be
charged and tax depreciation of $60,000 will be given.
Deferred tax cannot be ignored because it does not seem
reasonable that a company which has the same
accounting profit before tax in 20X1 and 20X2 should
have such different tax charges.
BPP LEARNING MEDIA
20X1
20X2
20X1
$
20X2
$
Carrying
amount
$
Tax at
25%
$
20X1
$
3,750
20X1
$
100,000
(21,250)
(3,750)
75,000
20X2
$
1,875
20X2
$
100,000
(26,875)
1,875
75,000
Carrying
amount
$
Tax value
$
60,000
60,000
(15,000)
30,000
At 31 December 20X1
Accounting depreciation
45,000
(15,000)
CREDIT
30,000
15,000
3,750*
7,500
1,875^
7,5000
At 31 December 20X2
DEBIT
Difference
$
Tax at
25%
$
3,750
3,750
22,500
$'000
33
21
54
Temporary
differences
20X1
Accounting
carrying
amount
$'000
$'000
$'000
Cost
1,000
1,000
110
(33)
180
(54)
Depreciation
c/d
(W2)
(90)
(W3)
Deferred
tax liability
@ 30%
$'000
(200)
910
800
b/d
910
800
Depreciation
(90)
c/d
820
20X2
(W3)
(160)
640
Depreciation
$1,000,000 cost $100,000 residual value / 10 years = $90,000
per annum
20X2:
$'000
850
100
(30)
70
920
500
Equity
Revaluation surplus (100 30)
70
Non-current liabilities
Deferred tax liability (Working)
(30)
$'000
500
(400)
100
(30)
DEBIT
$'000
30
30
2,500
$'000
700
$'000
9,600
82,400
14,000
The directors have estimated the provision for current tax for the year ended 30
September 20X6 at $5.4m. The balance of current tax in the trial balance
represents the under/over provision of the current tax liability for the year ended
30 September 20X5.
The deferred tax figure is the amount brought down from the year ended 30
September 20X5. During the year the company's taxable temporary differences
increased by $8m of which $5m related to gains on the revaluation of property.
The deferred tax relating to the remainder of the increase should be taken to
profit or loss. The applicable income tax rate is 20%.
BPP LEARNING MEDIA
30,000
(6,700)
23,300
5,000
(1,000)
4,000
27,300
105,700
18,000
(11,200)
(5,400)
Exam details
Chapter 18
Basic EPS
Diluted EPS
Presentation, disclosure and other
matters
EPS as a
performance
measure
Diluted earnings
per share
Convertible debt
Share
option/warrants
Changes in equity
share capital
Bonus issue
Rights issue
Limitations
Basic EPS
Calculation:
The basic earnings per share figure should be calculated as follows.
Profit or loss for the period attributable to ordinary shareholders
Weighted average number of ordinary shares in issue during the period
Where the profit or loss for the period is the consolidated profit after
income tax, non-controlling interest and preference dividends.
Bonus issue
Use
weighted
average
Apply
retrospectively
(use bonus
fraction)
Rights issue
Treat as a FMP
issue followed by
bonus issue
No. shares
Time
Weighted
Bal b/d
600,000
period
9/12
average
450,000
300,000
900,000
3/12
225,000
1.1.X2
Narrative
675,000
10 cents 20 cents
$46.50 = $9.30
5
$
40.00
6.50
46.50
10
9.3
9.3
10
Date
Narrative
Shares
1.1.X1
Time
4/12
Bonus fraction
2,000,000
30.4.X1
3.00
3/12
270,000
3.10 21/20
Weighted
average
723,333
(W2)
3.10 21/20
615,738
3.00
(W2)
2,270,000
31.7.X1
2/12
21/20
436,975
227,000
2,497,000
30.9.X1
3/12
124,850
2,621,850
655,462
10 @ $3.10
31.00
1 @ $2.00
2.00
11
TERP
$3.00
33.00
Diluted EPS 1
The basic EPS is calculated by comparing the profits with the
weighted average number of shares currently in issue.
However it is possible that an entity might have a commitment
to issue shares in the future, for example on the exercise of
share options or the conversion of convertible debt.
These commitments are known by IAS 33 as 'potential ordinary
shares' and they may result in a change to the basic EPS.
The diluted EPS shows how the basic EPS would change if
the 'potential ordinary shares' such as convertible debt became
ordinary shares.
The diluted EPS therefore warns current shareholders of what
may happen to the EPS in the future.
Diluted EPS 2
The most efficient way to calculate the diluted EPS is to:
Take the earnings figure used in the basic EPS
calculation and determine how it would change if the
'potential ordinary shares' became shares
Take the weighted average number of shares used in
the basic EPS calculation and increase it for the
number of 'potential ordinary shares'
Diluted EPS 3
Convertible debt
Adjustments to basic earnings and number of shares
where an entity has convertible debt:
Earnings:
Basic earnings X
Add back loan interest saved net of tax X
Diluted earnings X
Diluted EPS 4
Convertible debt (continued)
Number of shares:
Basic weighted average number of shares X
Add additional shares on conversion
(use maximum dilution)
$'000
980
(60)
920
(276)
644
$644,000 = 6.4c
10,000,000
Basic
Interest saving 1,200,000 @ 5% 70%
Number of shares
Basic
On conversion
Diluted EPS = $686,000 = 4.64c
14,800,000
$
644,000
42,000
686,000
10,000,00
4,800,000
14,800,000
Diluted EPS 5
Share options or warrants
Where an entity has issued share options or warrants,
individuals will have the right to buy shares at a certain point in
the future.
The price they will be required to pay will almost certainly be
below the current market price.
This amounts to a situation where some of the shares can be
deemed to have been issued at full price and the remainder will
effectively have been issued for no consideration.
It is only the shares deemed to have been issued for no
consideration which are dilutive.
These are added on to the basic weighted average number of
shares.
BPP LEARNING MEDIA
Diluted EPS 6
Share options or warrants (continued)
Proforma calculation:
Number of shares under option X
Number that would have been issued at average
market price (AMP)
[(no. of options exercise price) AMP)]
(X)
$3,000,000 = $2.14
1,400,000
Diluted EPS
Number of shares under option
No. that would have been issued at average market price
[(250,000 $15)/$20]
No. shares treated as issued for nil consideration
$3,000,000
= $2.05
Diluted EPS = 1,400,000
+ 62,500
250,000
(187,500)
62,500
Exam details
Q4 June 2011
Exam details
Chapter 19
Analysing and
interpreting financial
statements
Financial ratios
Approach to
interpretation
questions
1.4
times
35%
12%
1.25:1
3 times
64 days
8,300
43,900
52,200
(10,200)
$'000
56,000
(42,000)
14,000
(9,800)
(800)
3,400
(1,000)
2,400
$'000
$'000
Assets
Non-current assets
Property and shop fittings
25,600
5,000
30,600
Current assets
Inventory
Bank
Total assets
10,200
1,000
11,200
41,800
Note. The deferred development expenditure relates to an investment in a process to manufacture artificial
precious gems for future sale by Quartile in the retail jewellery market.
15,000
3,000
Retained
earnings
BPP LEARNING
MEDIA
8,600
These ratios measure the company's use of its assets and control of
its expenses to generate an acceptable rate of return.
Meaning:
The gross profit margin measures how well a company is running its core
operations. The gross profit percentage should be similar from year to
year for the same company.
Significant change may be due to:
A change in sales price
A change in product mix
An incorrect inventory valuation (will affect two years of results)
A change in cost of sales due to efficiency or price movements
BPP LEARNING MEDIA
Meaning:
The operating profit margin is usually compared to the gross profit margin
to determine how well the company is controlling its overheads.
The ratio uses PBIT because it avoids distortion when comparisons are
made between two different companies where one is heavily financed by
means of loans and the other is financed entirely by ordinary share
capital.
Significant change may be due to:
The reasons previously stated for the movement in gross profit
margin
Changes in control over administration and distribution costs
Meaning:
The return on capital employed measures how efficiently a company uses
its capital to generate profits.
A potential investor/ lender should compare the return to a target return or
a return on other investments/ loans.
Consider the industry carefully the ROCE for a manufacturing company
is likely to be lower than that of a services company as the manufacturing
company tends to have a higher level of assets (factories, plant and
machinery and inventories).
Significant change may be due to:
New assets acquired during the year which are not yet running at
capacity
Meaning:
The return on equity focuses on the return for the ordinary shareholders.
Significant change may be due to:
The reasons previously stated for the changes in ROCE
Considerations of changes in interest paid and gearing (debt :
equity) levels
This is because the ROE uses profit after tax in the ratio whereas the
ROCE uses PBIT.
Meaning:
This ratio measures the efficiency of the use of net assets in generating
revenue. Ideally the ratio should be increasing but you need to be careful
when making assessments based on this ratio due to timing issues as
stated below.
Significant change (especially a decrease) may be due to:
The company buying new assets late in the year these assets will
be included in the total assets less current liability figures but may
not yet have had sufficient time to start generating revenue.
These ratios measure the company's ability to meet its debts in both
the short term (liquidity) and the longer term (gearing).
Current ratio
Calculation:
Meaning:
The current ratio measures a company's ability to pay its current liabilities
out of its current assets.
Working capital is needed by all companies in order to finance day-to-day
trading activities and hold adequate inventories, allow credit to its
customers and pay its suppliers on the due date.
The industry in which the entity operates is particularly relevant in terms
of the expected levels of inventories, receivables and payables.
Significant change may be due to:
A change in the levels of inventories, receivables and payables held
BPP LEARNING MEDIA
Meaning:
This is similar to the current ratio except that it omits the inventories figure
from current assets.
This is because inventories are the least liquid current asset that a
company has, because they have to be sold, turned into receivables and
then the cash has to be collected.
A ratio of less than 1:1 could indicate that the company would have
difficulty paying its debts as they fall due.
Significant change may be due to:
A change in the levels of receivables and payables held
Meaning:
This ratio measures the number of days inventories are held on average
by a company before they are sold.
This figure will depend on the type of goods sold by the company. A
company selling fresh fruit and vegetables should have a low inventory
holding period as these goods will quickly become inedible.
A manufacturer of aged wine will by default have very long inventory
holding periods. It is important for a company to keep its inventory days as
low as possible whilst still meeting customer demand.
Significant change may be due to:
A change in the type of inventory held
Improved or worsened inventory controls
Meaning:
This ratio shows, on average how long it takes for the trade receivables to
settle their account with the company.
The average credit term granted to customers should be taken into
account as well as the efficiency of the credit control function within the
company.
Significant change may be due to:
Increased/decreased credit terms offered to customers
A change in the mix between cash and credit transactions
Better/worse credit control.
Meaning:
This ratio measures the time it takes the company to settle its trade
payable balances.
Trade payables provide the company with a valuable source of short term
finance, but delaying payment for too long a period of time can cause
operational problems as suppliers may stop providing goods and services
until payment is received.
Significant change may be due to:
Increased/decreased credit terms from suppliers
Increase/decrease the cash the company has available to make
payments
Better/worse management of the payables ledger
BPP LEARNING MEDIA
Inventory days
Receivables days Receive
Buy
Sell
inventories
inventories
cash from
receivables
Payables
days
Pay
payables
Working
capital cycle
Notes
2008
2007
Non-current assets
Goodwill and other intangible assets
Property, plant and equipment
Investment property
Investments in joint ventures and associates
Other investments
Derivative financial instruments
Deferred tax assets
2,336
10
2,045
11 19,787 16,976
1,112
12
856
305
13
314
4
14
8
216
20
104
6
32
23,864
20,231
2,430
1,311
97
1,931
1,079
108
360
1,783
1,042
Current assets
Inventories
Trade and other receivables
Derivative financial instruments
15
16
20
17
5,992
Current liabilities
Trade and other payables
18
(7,277) (6,046)
19
20
(2,084) (1,554)
(443)
(87)
Financial liabilities
Borrowings
Derivative financial instruments and other liabilities
Current tax liabilities
Provisions
22
(455)
(461)
(4)
(4)
(10,263) (8,152)
Net current liabilities
(3,963) (3,576)
Meaning:
This ratio measures a company's gearing and is concerned with the long
term financial stability of the company.
It looks at how much debt the company has in relation to its equity funding
and gives a percentage for gearing.
Interest bearing debt describes the long term debt on which a company is
required to pay interest. In some cases a persistent bank overdraft may be
classified as long term debt.
Significant change may be due to:
An issue of shares during the year
Repayment or taking out of new debt financing
BPP LEARNING MEDIA
Meaning:
This ratio is simply a different method used to calculate gearing.
Significant change may be due to:
An issue of shares during the year
Repayment or taking out of new debt financing
Meaning:
This ratio considers the number of times a company could pay its interest
payments using its profit from operations.
A company should always ensure that it does not have so much debt
finance that it risks not being able to settle the debt as it falls due.
Significant change may be due to:
Factors which have a significant impact on profit before interest and
tax
A change in interest bearing debt
Dividend yield
Calculation:
Meaning:
The dividend yield ratio expresses the dividend per share as a percentage
of the current mid market price of the share and provides an indication of
the return the investment is giving relative to the company's share price.
Significant change may be due to:
A change in the levels of dividends paid by the company
Fluctuations in the company's share price
Meaning:
This ratio shows the proportion of profit for the year that is available for
distribution to shareholders that has been paid or proposed and what
proportion will be retained in the business to finance future growth.
For example a dividend cover of two times would indicate that the
company has paid 50% of its distributable profits as dividends and
retained 50% in the business to help finance future operations.
Significant change may be due to:
A change in the level of profits earned by the business
The need to keep the dividend level consistent year on year
Meaning:
This ratio compares the company's current share price to the earnings per
share.
A high P/E ratio indicates strong shareholder confidence in the company
and its future because the market has valued its shares at a high price
relative to the earnings per share made by the company.
Significant change may be due to:
A change in the level of profits earned by the company
A change in value shareholders' perceive in the company
(d)
(e)
(f)
(g)
Read requirements
Step 2
Step 3
Step 5
Step 6
Depreciation
Cost of sales
$m
300
Revenue
Manufacturing costs
$m
$m
120
261
83
7
(270)
(90)
30
30
(28)
(10)
20
(10)
(2)
(8)
18
(4)
(6)
Gross profit
Other expenses
Profit before interest and tax
Finance costs
PROFIT/LOSS
TOTAL COMPREHENSIVE
BPP LEARNING MEDIA
20X6
20X5
$m
$m
5
58
5
38
63
43
18
94
6
118
12
25
8
45
181
88
Non-current assets
Land and buildings
Plant and equipment
Current assets
Inventories
Receivables
Deferred expenditure
Bank
25
10
(12)
23
25
11
8
44
32
19
80
12
34
126
181
15
10
25
88
Non-current liabilities
Finance lease liabilities
Current liabilities
Trade payables
Other payables
Bank overdraft
20X6
$m
18
40
58
20X5
$m
10
28
38
Business Consultant
Date:
May 20X6
Calculation 20X5
ROCE
3.6%
31.7%
5.5
1.9
300/63
4.8
120/43
2.8
30 / 300 100
10%
30 / 120 100
25%
2/300 100
0.7%
20 / 120 100
16.7%
Current ratio
118 / 126
0.9
45/25
1.8
Acid test
0.8
(45 12) / 25
1.3
Inventory days
18 / 270 365
24 days
12 / 90 365
49 days
Receivables days
94 / 300 365
114 days
25 / 120 365
76 days
Payables days
80 / 270 365
108 days
15 / 90 365
61 days
32 / 23 100
139%
19 / 44 100
43%
Interest cover
2/10
0.2 times
20/2
10 times
Exam details
Chapter 20
Limitations of
financial statements
and interpretation
techniques
Related party
transactions
Creative
accounting
Limitations of
interpretation
techniques
BPP LEARNING MEDIA
Unrepresentative
figures
Events after the
reporting period
Often the desired effect is to provide markets and analysts with what
they expect to see. Examples include:
A trend of steady profit growth
A stable level of dividends
Either no changes in key ratios or improvements therein
Under IAS 8 an entity should only change its accounting policy if the
new policy will present the information in the financial statements in a
more relevant and more reliable way.
Exam details
Chapter 21
Statements of cash
flows
Interpretation of
statements of cash
flows
Definitions
Formats
Approach to
preparation of
statements of cash
flows
IAS 7 Statement of Cash Flows splits cash flows into the following
headings:
Cash flows from operating activities:
Taxes paid
Depreciation and write-ups of non-current assets
Capital gains/losses
Change in provisions for pensions
Change in other provisions
Other effects
Change in net working capital
Cash flow from operating activities
http://www.bertelsmann.de/
2006
3,028
2005
1,671
(301)
730
(1,410)
(64)
8
(128)
(190)
1,673
(253)
699
(258)
(22)
52
(46)
(52)
1,791
Intangible assets
Property, plant and equipment
Financial assets
Purchase price for consolidated investments (net of acquired cash)
(154)
(204)
(502)
(568)
(31)
(59)
(405)
(1,734)
1,648
122
20
353
83
(200)
498
(360)
(2,489)
http://www.bertelsmann.de/
1,488
(50)
1,587
(291)
(4,506)
495
(185)
(120)
(165)
(385)
(41)
(2,198)
(414)
(39)
(428)
(27)
(1,126)
(23)
1,036
986
70
2,092
1,036
http://www.bertelsmann.de/
$'000
$'000
$'000
$'000
15
Interest payable is shown in the statement of profit or loss and
other comprehensive income of 20X3 as being $30,000.
There are no bank loans or overdrafts.
Additionally you are told that a new finance lease agreement was
taken out in the year. Total repayments are $5,000, of which
$1,500 is interest only. At present all $5,000 has been debited to
the finance lease liability account.
BPP LEARNING MEDIA
31.5
X
(46.5)
(3.5)
$'000
45 b/d
0 P/L
45
$'000
15
30
45
31 December
20X2
20X1
$'000
$'000
94
87
62
81
156
168
The total charge for income taxes in the year ended 31 December
20X2 was $104,000.
None of the deferred tax liability movement was taken to reserves
in 20X2.
BPP LEARNING MEDIA
$'000
87
81
104
272
20X3
20X2
$'000
280
(111)
169
$'000
200
(80)
120
X
40
3
(100)
8
92
Profit/loss on disposal:
$'000
Carrying amount of asset sold
Sale proceeds
BPP LEARNING MEDIA
Loss
on sale
11
(8)
(3)
$'000
b/d
200 Disposal
20
Additions
100 c/d
280
300
300
9 b/d
111 charge
120
$'000
80
40
120
20X2 20X1
$'000
$'000
2,000
1,200
400
100
9,600
10,000
12,000
11,300
700
When using the direct method the key difference from the indirect
method is the way in which the cash generated from operations is
presented.
The amount of cash generated from operations is the same
regardless as to which method you use!
$'000
20X8
$'000
20X7
$'000
ASSETS
Non-current assets
Property, plant and equipment
Development costs
528
110
638
447
93
540
Inventories
Trade receivables
Investments
Cash
413
238
28
111
790
380
215
4
599
TotalBPP
assets
LEARNING MEDIA
1,428
1,139
Current assets
240
140
100
538
1,018
200
120
530
850
30
150
180
25
25
37
193
230
32
232
264
1,428
1,139
Non-current liabilities
Provision for warranties
6% loan notes
Current liabilities
Income tax payable
Trade payables
BPP LEARNING MEDIA
900
(550)
350
(245)
(9)
7
103
(30)
73
100
173
$'000
103
Adjustments for:
Depreciation (W1)
135
Amortisation
Interest expense
Profit on disposal of equipment
25
9
(7)
265
(23)
(33)
(39)
5
175
(9)
$'000
$'000
(42)
(167)
58
(151)
60
320)
150
(65)
Dividends paid
Net cash from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at the
145
135
beginning of year
BPP LEARNING
Cash
andMEDIA
cash equivalents at end of year
4
139
447
c/d
528
93
c/d
110
$'000
(23)
(33)
$'000
$'000 $'000
60
4
139
$'000
(23)
(33)
5
$'000
$'000 $'000
4
139
c/d
37
32
$000
103
(23)
(33)
(39)
5
$'000
c/d
37
b/d
32
P/L
30
447
Rev'n (OCI)
100
c/d
528
$'000
103
25
(23)
(33)
(39)
5
$'000
93
Amortisation
25
c/d
110
447
Additions
167
Rev'n (OCI)
100
Disposal (58 7) 51
c/d
528
$'000 $'000
(167)
58
4
139
$'000
103
25
9
(7)
(23)
(33)
(39)
5
(9)
$'000
$'000 $'000
(167)
58
4
139
447
Disposal (58 7) 51
Additions
167
Depreciation
135
Rev'n (OCI)
100
c/d
528
714
714
$'000
103
135
25
9
(7)
(23)
(33)
(39)
5
(9)
$'000
93
Paid
42
135
Amortisation
25
c/d
110
135
$'000 $'000
(42)
(167)
58
4
139
25
c/d
37
62
b/d
32
P/L
30
62
$'000
$'000
103
135
25
9
(7)
265
(23)
(33)
(39)
5
175
(9)
(25)
141
$'000 $'000
(42)
(167)
58
(151)
145
135
(0 + 4)
Net increase in cash and cash equivalents
4
Cash and cash equivalents at beginning of year
(28 + 111)
Cash and cash equivalents at end of year
139
BPP LEARNING MEDIA
$'000
Sales
12
865
238
1,115
$'000
865
$'000
193
232
(380)
(135)
(5)
c/d
193
883
232
651
883
$'000
$'000
865
(690)
175
(9)
(25)
141
Exam details
Q3 June 2013
Q3 June 2012
Q3 Dec 2011
Q3 June 2011
Q3 June 2010
Chapter 22
Alternative models
and practices
Capital maintenance
Financial capital
maintenance
Current value
accounting
Operating capital
maintenance
Asset valuation
methods
Key ratios such as the return on capital employed and the return
on assets both use revenue, cost and asset figures in their
calculation and use of historical cost accounting can mean that
these ratios are distorted.
FINANCIAL
CAPITAL
A fund attributable to
shareholders
OPERATING
CAPITAL
Physical operating
capital
40
Reserves
60
100
30
Inventories
20
50
100
CPP
$'000
$'000
90
(75)
15
(5)
10
90
(78)
12
(5)
4
11
225
85
310
234
85
319
200
10
210
208
11
219
Equity
Share capital (200 104%)
Profit for the year
BPP LEARNING MEDIA
Replacement
cost (RC)
Higher of
Value in use
(VIU)
CPP
CCA
$'000
$'000
$'000
90
(75)
15
(5)
10
90
(78)
12
(5)
4
11
90
(82)
8
(5)
225
85
310
234
85
319
246
85
331
200
10
210
208
11
219
200
3
28
231
Equity
Share capital (200 104%)
Profit for the year
CCA reserve (328 300)
BPP LEARNING MEDIA
Assets carried at
Historical cost
Fair value
Current cost
Assets carried at
Net realisable
value
Present value of
future cash flows
(a)
(b)
(c)
(d)
(e)
Asset valuation
$
78,750
44,000
84,375
43,500
84,240
1.1.X3
1.1.X331.12.X3
b/d /
(180,000
100%/120%)
Current cost
(restated)
$
150,000
140,000
Dep'n @ 25%
(37,500)
(35,000)
31.12.X3
Carrying amount
112,500
Discount
factor
Present value
$
31.12.20X5
20,000
0.943
18,860
31.12.20X6
20,000
0.890
17,800
31.12.20X7
20,000
0.840
16.800
31.12.20X8
20,000
0.792
15,840
31.12.20X9
20,000
0.747
14,940
84,240
Exam details
Chapter 23
Primary aims
Performance measurement
Regulatory framework
Relevance of IFRS
accounting
Approach to
performance
measurement
Primary aims 1
Examples and objectives of not-for-profit and public sector entities
Public sector entities
Examples include:
Primary aims 2
Examples and objectives of not-for-profit and public sector entities
(continued)
Private sector entities
Examples include:
Charities
Primary aims 3
Conceptual framework for not-for-profit entities
The Conceptual Framework for Financial Reporting we saw in Chapter 1 and
the accounting standards which are based on it are aimed at profit-making
organisations.
However Phase G of the new Conceptual Framework is entitled 'Application to
not-for-profit entities in the public and private sector' and is trying to adapt the
Conceptual Framework so that it can be used by not-for-profit entities.
There are several issues to consider.
Primary aims 4
Conceptual framework for not-for-profit entities (continued)
There are also several specific issues in applying the proposals to not-forprofit entities:
(1) There is insufficient emphasis on accountability and stewardship.
Unlike for-profit entities not-for-profit entities do not report to
shareholders however they must be able to account for the funds
received and show how they have been spent, especially where funds
are designated.
(2) There is a need to broaden the definitions of users and user groups.
The main user group of financial statements relating to for-profit
entities is the shareholder. With not-for-profit entities however the
main user group is providers of funds. This is the taxpayers in the
case of public sector bodies and financial supporters and potential
future supporters in the case of charities. Another user group is those
receiving the goods and services provided by the not-for-profit entity.
Primary aims 5
Conceptual framework for not-for-profit entities cont.
(3) The emphasis on future cash flows is inappropriate to not-for-profit
entities.
Not-for-profit entities do need to generate future cash flows however it
is more important to focus on being able to deliver future goods and
services and meeting its organisational objectives.
(4) There is insufficient emphasis on budgeting.
Currently financial reporting does not require the inclusion of forecast
financial information. Budgets are extremely important for not-for-profit
entities and it is sometimes the case that funding is supplied on the
basis of a formal, published budget.
Regulatory framework 1
Many private not-for-profit entities produce financial
statements on a cash basis and so there is a need to get
them to report under the accruals basis.
Regulation of public not-for-profit entities and
government departments and agencies is carried out
by the International Public Sector Accounting
Standards Board (IPSASB), which is part of the
International Federation of Accountants (IFAC)
They are developing a set of International Public Sector
Accounting Standards (IPSASs) which are based on
IFRSs.
Regulatory framework 2
To date the following IPSASs have been issued
1
Borrowing costs
10
MEDIA
11BPP LEARNING
Construction
contracts
Regulatory framework 3
To date the following IPSASs have been issued
12
Inventories
13
Leases
14
15
16
Investment property
17
18
Segment reporting
19
20
21
Regulatory framework 4
Private not-for-profit entities tend to be regulated
nationally.
For example in the United Kingdom charities are regulated
by the Charities Commission.
In the United Kingdom there is a Statement of
Recommended Practice (SORP) which gives guidance on
how to prepare financial statements for charities. Whilst it
is not compulsory, it is seen as best practice.
In other countries the requirements will be different.
Performance measurement
The 'Three E's' (or value for money) are often a good way of
assessing the performance of not-for-profit and public sector entities:
Economy buying the resources needed at the cheapest cost
Efficiency using the resources purchased as wisely as possible
Effectiveness fulfilling the organisation's objectives
Exam details
Q5 June 2012
Q3 June 2010