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ACCA F7 short notes on exams including Mar 2021
Financial reporting (Association of Chartered Certified Accountants)
Studocu is not sponsored or endorsed by any college or university
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CHAPTER 1
Qualitative characteristics RFCTUV
FUNDAMENTAL
R – Relevance
F – Faithful representation



Complete
Neutral
Free from error
ENHANCING
C – Comparability
T – Timeliness
U – Understandable
V – Verifiability
MEASUREMENT
1) Historic cost – So normal - it is cost=x, and depreciate for 2 years
2) Current cost – ENTRY VALUE – how much could we buy asset for now, so if bought 2 years
ago, use the current cost and depreciate for x years so can compare like for like
3) Fair value – EXIT VALUE – The value of asset when selling
4) Value in Use – EXIT VALUE – The present value of future cash flows.
CAPITAL MAINTENANCE
1) Financial capital maintenance
Say opening net assets = 100
Profit = 20
Closing Net assets = 120
So you take the opening net assets, inflate it, and compare to closing net assets. The
difference is the profit. I.e Opening Net assets are now inflated to 110, therefore profit now
is only 10
2) Physical Capital maintenance
Say the 100 opening Net assets which are 100 can make 60 units. However to make 60 units
now we need assets that are worth a little more. Say we now need assets worth 112 not
100. SO now our profit can only be 8 as the other 12 has gone into ensuring we can still
make 60. This is called DEPRIVAL VALUE
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CHAPTER 2
CHAPTER 3
Nothing to worry about
CHAPTER 4
Revision of financial statements
CHAPTER 5
PPE –
Measured at recognition as cost + directly attributable costs to bring to location and condition and
costs to dismantle.
Then – choose cost model or revaluation model.
Cost model = At cost – acc depr & impairment losses
Revaluation model = At revaluation date use fair value – acc depr & impairment losses. Revalue
periodically, consistent revaluation for each class
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Depreciation
2 types – straight line and reducing balance
Depr starts when the asset is ready for use
Any change in estimate i.e straight line to reducing balance is changed in THIS year and following
years. Prospectively
Borrowing costs
If you borrow money to build an asset you can capitalise these interest costs.
You can only capitalise when you have



SPENT on the asset
Borrowing costs have been incurred
We are actually doing something to construct the asset
Capitalisation MUST STOP when the asset is ready for use
Stop capitalising if construction has stopped taking place, i.e holiday
Capitalisation for specific borrowings is calculated using the EFFECTIVE rate of interest, NOT the
coupon rate.
If you invest some of the money borrowed, then you capitalise the NET INCOME of the expense and
the interest received. i.e Interest expensed – Interest received.
FOR GENERAL BORROWINGS, i.e borrowing from a pool of funds
So 4% borrowed 25m
3% borrows 40m
Therefore 4% * 25m = £1m
And 3% * 40m = £ 1.2m
Total = £2.2m.
Therefore 2.2m/65m = 3.38%. So use this rate to work out cost of interest.
So you just work out Net interest, i.e what you paid – less what you received and this goes on SOFP.
The interest incurred in expenses (SOPL) = is the interest where you didn’t do any work. Remember
that if no work is going on than the interest income cannot be capitalise and must be expensed also.
Government grants
Recognise the grant when


Entity complies with the conditions of the grant
The grant is actually received.
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GRANTS RECOGNISED THROUGH DEFERRED INCOME (liability a/c) – this spreads the income over
the time the expense was incurred. If the grant is used to buy a depreciating asset, then it is spread
over the life of the asset. Government grants CANNOT be credited to the P/L directly.
GOVERNMENT GRANT BECOME REPAYABLE
If this happens it is treated as a change in accounting estimate
So the payment i.e CR bank is first shown against any DEFERRED income first, and then any
remaining to P/L. So clear out the deferred income first.
i.e CR Bank
DR Deferred Income
DR P/L
INVESTMENT PROPERTIES
Initially measured - at Cost + directly attributable costs
Subsequent measurement –
either
 cost method – i.e cost and then normal depreciation
 Fair value method – Revalued at EACH reporting date. REMEMBER gains/losses recognised
through P/L, NOT OCI like normal properties. The properties are NOT DEPRECIATED. So on a
loss – CR Investment prop and DR P/L and vice versa.
Transferring into and out of investment property should only be done when change of use.
So Investment prop to owner occupied or inventory – then use fair value at date of change. Any
gains/losses go to P/L
Inventory to IP – Fair value on date of change and any gains/losses to P/L.
Owner occupied to IP – Revalue under IAS 16 (normal PPE and then treat as Investment property. So
gains go to OCI. If losses then clear out OCI first and then excess to P/L.
CHAPTER 6 – Intangibles
No physical substance, i.e Patent, Brands and licenses.
Brands are NOT intangibles as CANNOT measure reliably, unless purchasing a brand with ££, then
this is measurable as intangible.
3 factors to consider:


Identifiable
Control
Recognition – Probable future benefit / Measure reliably.
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You capitalise at Cost + directly attributable costs. Amortisation is charged over useful life. WHEN
AVAILBALE for use.
Research – Expensed through P/L
Development can be capitalised when T – Technically feasible
 R – Resources to complete
 U – Use it
 M – Measure cost reliably
 P – Probable future economic benefit
 C - Commercially
 V - Viable
CHAPTER 7 – Impairments
1) Identify – Int /Ext
2) Record the impairment
If the CV of the asset > Recoverable amount then needs to be written down
Recoverable amount IS GREATER of:
 Fair value – disposal costs
 VIU = Present value of future cash flows. To work out, use the discount factor provided or
use the % rate. So Year 1 = 5000*.98 = 4900. Year 2 = 5000*.91 = 4550. Year 3 = 5000*.88 =
4400. So add them up = 13,850. This is the value in use.
INDIVIDUAL ASSET
For individual asset the reduction in CV is charged to P/L unless the asset was revalued
previously and there is a gain sitting in REVALUATION RESERVE. If this is the case then this
gain is depleted first and then any remaining to P/L. Use the 4 column approach. Narrative,
HC, Revaluation. Revaluation reserve
Cash generating units CGU
The order in which you impair a CGU which is a collective of items in a business that need
impairing. I.e fridges, ovens etc.



S – Specific
G – Goodwill
R – Remaining assets
CHAPTER 8 – NCA HFS AND DISCONTINUED OPS
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On the SOFP- Split out NCA HFS
On the SOPL – Split out profits, expenses etc in relation to discontinued operations.







To be classed as HFS – TRANCES
T – Twelve months – expect asset to be sold within 12 months
R – Reasonable price
A – Available for sale
N – No change in plan to sell
C – Committed to selling it
E – Expecting to sell it
S – Started to find a buyer




The NCA HFS is valued at LOWER of (PRUDENCE)
CV and
Fair value – disposal costs.
Any loss is recorded as impairment through P/L
Once item is HFS – it will NOT be DEPRECIATED
So item will either be held at Cost model or Reval model. For cost model it is the original
cost – acc depr. For rev model- the asset is revalued to Fair value immediately before
classification as HFS
CHAPTER 9 – CHANGE IN A/C ESTIMATES AND POLICIES
1) Accounting policy is choose LIFO, FIFO etc to value inventories retrospectovely
2) Accounting estimates, is where changing from straight line to reducing balance. As
Accounting policy is still the same – to depreciate. prospectively
So apply a policy that:

specifically deals with the transaction
Gives relevant and reliable representation. Or use a standard that a similar item uses.
1) Accounting policy change – Retrospective application. You must go back and change
prior year and comparatives
2) Accounting estimate – is prospective, so only change this year and future years.
NOTE – A change in presentation from including depr in COS to admin expenses is a CHANGE
OF ACCOUNTING POLICY
Prior period errors are changed RETROPECTIVELY.
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CHAPTER 10 Inventory and agriculture
It is measured at LOWER of


Cost including costs to location and condition
NRV (Selling price less costs to complete/sell)
Any gains or losses from biological asset (i.e apple tree/animal) OR Agricultural produce ( apples,
pears) goes straight to P/L
Agricultural land is under IAS 16 – so as land, DO NOT DEPRECIATE
Milk quotas are looked as Intangible assets
Grant income for agriculture is simply DR Bank CR Income. You do not time apportion it, via
deferred income
CHAPTER 11 – FINANCIAL INSTRUMENTS
If there is a contractual obligation to deliver cash then it is seen as a LIABILITY. If there isn’t a
contractual obligation then it is seen as EQUITY.
Buying financial assets – i.e equity or debt
Initially – recognise at Fair Value INCLUDING transaction costs and then capitalise.
Unless classified as FV through profit/loss. If this is the case then put the transaction costs through
the P/L expense immediately.
NOTE TO REMEMBER: Irredeemable pref shares are Equity
Redeemable pref shares are DEBT
Buying asset – decide if:1) Fair value through P and Loss. Here transaction costs go straight to P/L. At reporting date
remeasure to Fair value. Any gains/losses go to P/L.
Norman bought 100,000 shares in a listed entity on 1 November 2015. Each share cost $5 to
purchase and a fee of $0.25 per share was paid as commission to a broker. The fair value of
each share at 31 December 2015 was $3.50.
So initially DR Investment 500000 and CR Bank 500000
And DR Transaction costs 25000 and CR Bank 25000
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Subsequently fair value was 100,000 shs * $3.5 = $350,000. So there is a reduction in fair
value.
Therefore CR Investment $150,000
DR Expense $150,000
2) Fair value through OCI (For strategic holding of assets, NOT to flip them) Here you re
measure at each reporting date. Gains/losses go to OCI. Remember include transaction
costs as part of the asset.
Norman bought 200,000 shares in a listed entity on 1 March 2015 for $500,000, incurring
transaction costs of £40,000. Norman acquired the shares as part of a long term strategy to
realise the gains in the future. The fair value of the shares was £620,000 at 31 December. The
shares were subsequently sold for $650,000 on 31 January 2016
Initially – DR Investment $540,000 and CR Bank $540,000
Subsequently fair value is $620,000 therefore $80,000 gain. SO DR Investment $80,000 and CR OCI
$80,000.
3) Amortised cost – This is in relation to buying debt, i.e debentures.
Here the asset is measured at amortised costs if it passes 2 tests.
 Business model test – Intending to hold asset until maturity
 Contractual cash flow test – Intend on holding the asset and receiving the cash
instalments from it.
Norman bought 10,000 debentures at a 2% discount on the par value of $100. The debentures are
redeemable in four years’ time at a premium of 5%. The coupon rate attached to the debentures is
4%. The effective rate of interest on the debenture is 5.73%.
So paid cash of $980,000
Initially CR Bank $980,000 and DR Investment $980,000
Work out how much coupon interest you will receive in total = 0.04*4
years*1,000,000
Coupon interest per year = $40,000
$160,00
Total coupon interest
0
Work out total you will receive at the end of the life.
Redeemable =
1.05*1,000,000=1,050,000
coupon interest = $40,000. Therefore $1,090,000 in total at end.
Over the life of owning the asset we will have received:The difference between what we paid and what we
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received over the life is $1,210,000-$980,000 = $230,000
Workings
Year
1
2
3
4
b/f
980,000
996,154
1,013,23
4
1,031,29
2
4,020,68
0
+'
@5.73%'
Interest
received
56154
57079.6242
@4%'
-'
58058.28667
59093.02649
0
230,385
0
Cash
40000
40000
C/f
996,154
1,013,234
40000
1,090,00
0
1,210,00
0
1,031,292
0
3,040,680
Same as what we worked out earlier
So journals:Initially:INITIAL
JOURNAL
Dr Investment
Cr Bank
$980,000
$980,000
CR Interest
receivable
DR Investment
$56154
$56154
INTEREST JOURNAL
DR Bank
CR Investment
$40000
$40000
COUPON JOURNAL
So the closing year 1 balance on the Investment would be
$980,000+$56,154-$40,000 = $996,154
LIABILTIES – so issuing a debenture in order to raise money and then having to pay interest on it
Initially recognise at FV – Transaction costs (NET PROCEEDS)
Subsequently at either
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Round
differe
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


Amortised cost (default)
FVTPL (If held for trading purposes)
De-recognise if they are transferred to another party or are paid back in full.
Norma issues 20,000 redeemable debentures at their $100 par value, incurring issue costs of
$100,000. The debentures are redeemable at a 5% premium in 4 years’ time and carry a
coupon rate of 2%. The effective rate on the debenture is 4.58%.
So received cash of $1,900,000 (NET PROCEEDS)
Initially DR Bank $1,900,000 and CR Liability $1,900,000
Work out how much coupon interest you will pay in total = 0.02*4 years*2,000,000
Coupon interest per year = $40,000
Total coupon interest = $40,000 * 4 = $160,000
Work out total you pay back at the end of the life.
Redeemable = 1.05 * 2,000,000 = $2,100,000
coupon interest = $40,000. Therefore $2,260,000 in total at end.
Over the life of having the liability we will have paid:The difference between what we received and what we
PAID over the life is $2,260,000-$1,900,000 = $360,000
Workings
Year
1
2
3
4
b/f
1,900,0
00
1,947,0
20
1,996,1
94
2,047,6
19
@4.58%
Int paid
87,0
20
89,1
74
91,4
26
93,7
81
361,400
@2%
Coupon
40,0
00
40,0
00
40,0
00
2,140,0
00
2,260,000.0
0
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c/f
1,947,0
20
1,996,1
94
2,047,6
19
1,40
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So journals:Initially:$1,900,0
00
$1,900,0
00
CR Liability
DR Bank
£87,020.
00
£87,020.
00
CR Liability
DR Finance cost
CR Bank
DR Liability
$40000
$40000
So the closing year 1 balance on the liability would be
$1,900,000+$87,020-$40,000 = $1,947,020
Convertible Debenture – Combination of debt and equity. – use SPLIT ACCOUNTING
You treat it like a DEBT instrument without conversion option.
So summary you
DR Bank (NET PROCEEDS)
CR liability (PV of cash flows)
CR Equity (Balancing figure)
Alice issued one million 4% convertible debentures at the start of the accounting year at par value of
$100 million. The rate of interest on similar debt without the conversion option is 6%.
So proceeds will be = 1,000,000 shs * $100 = $100,000,000
Cash to pay = 4%*100,000,000 = $4,000,000
So work out PV discount factor = 1/(1+r)n so year 2 for e.g 1/(1.06) to power of 2
Year
1
2
3
CF
4,000,0
00
4,000,0
00
104,000,00
0
Discount
Factor
0.943
0.890
0.840
PV
3,772,0
00
3,560,0
00
87,360,00
0
94,692,00
0
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INITIAL
JOURNAL
INTEREST JOUR
COUPON JOUR
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Year
1
2
3
b/f
94,692,0
00
96,373,5
20
98,155,9
31
+'
6%
Interest paid
5,681,5
20
5,782,4
11
5,889,3
56
-'
4%
Cash
4,000,000
96,373,520
4,000,000
98,155,931
104,000,000
45,287
Rounding
Journals:Initially –
DR Bank $100,000,000
CR Liability $94,692,000
CR Equity $5,308,000 (Balancing)
Year 1
SOPL
Finance cost $5,681,520
SOFP
Liability $96,373,520
Disclosures with regard to financial risk need to be both QUALITATIVE AND QUANTITATIVE
Risk to consider
 Credit risk
 Liquidity risk
 Market risk
CHAPTER 12 – LEASES
Now in new IFRS all leases will be bought onto the Balance Sheet except:
The accounting for LOW value and short term leases is done through P/L on a straight line basis.
Banana leases out a machine to Mango under a four year lease and Mango elects to apply the lowvalue exemption. The terms of the lease are that the annual lease rentals are $2,000 payable in
arrears. As an incentive, Banana grants Mango a rent-free period in the first year. Explain how
Mango would account for the lease in the financial statements.
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c/f
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So $6,000 payable over 4 years. So expense is £1,500 p year
Year 1
DR P/L $1,500
CR Accrual $1,500 (so we show the expense, even though we haven’t paid anything)
Year 2
DR Accrual $500
DR P/L $1,500
CR Bank $2,000
Year 3
DR Accrual $500
DR P/L $1,500
CR Bank $2,000
Year 4
DR Accrual $500
DR P/L $1,500
CR bank 2,000
LESSEE ACCOUNTING when no low value or short life exemption
Initial recognition –
Right of use asset –on SOFP measured at amount of lease liability plus any direct costs less any lease
incentive
Lease liability on SOFP – measured at PV of ALL the lease payments
Subsequent measurement:Right of use asset – Cost less Acc depr straight line LESS any impairments (based on EARLIER of
Useful life and Lease term)
Lease liability – Financial liability at amortised cost.
So ON SOPL –
Depreciation
Interest
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On 1 January 2015, Plum entered into a five year lease of machinery. The machinery has a
useful life of six years. The annual lease payments are $5,000 per annum, with the first
payment made on 1 January 2015. To obtain the lease Plum incurs initial direct costs of
$1,000 in relation to the arrangement of the lease but the lessor agrees to reimburse Pear
$500 towards the costs of the lease. The rate implicit in the lease is 5%. The present value of
the minimum lease payments is $22,730. Demonstrate how the lease will be accounted in
the financial statements over the five year period.
Working
1st do
Right of use asset
DR Asset $22,730
CR Liability $22,730 (which is the PV given)
However due to incentives and extra costs the figure we depreciate is $23,230 (22730+1000-500)
Now lower of life of lease and life of asset is 5 years. So depreciation is $23,230/5 = $4,646 p.a
Amortised lease liability table W – USE LIABILITY FIGURE
Year 1
Year 2
Year 3
Year 4
Year 5
SOFP
Right of use
(23230-4646)
18,584
13,9
38
18,6
Liability
17
14,2
98
9,2
92
4,646
-
9,7
63
5,000
0
SOPL
4,6
4,6
46
4,6
Depreciation
46
Finance cost
87
1
65
Liability working
Year
b/f + interest cash
b/f
Cash
Outstanding capital
8
46
68
4,646
4,646
4
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238
5%
Interest
0
C/F
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1
2
3
4
5
22,730
18,617
14,298
9,763
5,001
-5000
-5000
-5,000
-5000
-5000
balance
17,730
13,617
9,298
4,763
0
current is
remaining of $5k
887
681
465
238
0
So Current Liability =
5000
Non current liability =
So we know non
current
18617-5000 =
13617
is 13617 then
Sale and lease back
When comp A sells asset to Comp B, and then Comp A leases it back. It’s a way to raise finance for
company A.
If in Comp A it is not a sale. Then:Comp A
 Continues to recognise the asset and carry on depreciating
 Recognise a liability as it is the same as a loan. So DR Bank Cr Liability = proceeds
Comp B
 Does NOT recognise the asset
 Recognises the asset = proceeds
If in Comp A it is a sale. Then:Comp A
 De-recognise the asset at FAIR VALUE
 Recognise Lease liability (PV of lease rental)
 Recognise a right of use asset as a proportion of the previous CV (Because when you sold the
asset it had a CV of say $8.4m, however then you sold it for $10m before leasing it back. So
now as you are leasing the asset back you have control, so recognise the right of use asset.
 Gains/loss on rights tranf to buyer (Balancing figure)
Comp B


Step 1
Step 2
Recognise the purchase of the asset
Apply lessor accounting
Recognise the proceeds
at FAIR VALUE
Derecognise the asset
CV
DR Bank
CR Asset
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18,617
14,298
9,763
5,001
0
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Step 3
Step 4
Record liability at PV
Recognise right of use
asset
CR Liability
DR Right of use
Proceed
Less Liability (Retained) in step3
Balance is transferred
Now
x
(X)
(X)
0
Liability (Step
3)
=x%'
Proceeds (Step 1)
Now x% * FV of asset (Step 2) = Right of use we have retained (Step 4
ans)
Step 5
Gain (Balancing figure)
CR SPL
Apple required funds to finance a new ambitious rebranding exercise. It’s only possible way
of raising finance is through the sale and leaseback of its head office building for a period of
10 years. The lease payments of $1 million are to be made at the end of the lease period The
current fair value of the building is $10 million and the carrying value is $8.4 million. The
interest rate implicit in the lease is 5%. Advise Apple on how to account for the sale and
leaseback in its financial statements if the office building were to be sold at the fair value
of $10 million and: (a) Performance obligations are not satisfied; or, (b) Performance
obligations are satisfied.
a) No Sale.
Continue to recognise the asset @CV (($8.4m) and continue to depreciate
Record a liability (like the $10m was a loan), do DR Bank and CR Liability and amortised
cost
b) Sale
Step 1 – Recognise proceeds at FV - DR Bank $10,000,000
Step 2 – De-recognise the asset at CV - CR Asset $8,400,000
Step 3 – Record liability at PV (so the $1m at today’s value) = $1000000 * 7.722 =
$7,721,735 CR Liability $7,721,735
Step 4 – Record right of use asset $7,721,735/$10,000,000 = 77.22%. Therefore 77.22%
* $10,000,000 = $6,486,257.
DR Right of use asset $6,486,257
Step 5 – Gain on sale (Balancing figure). CR P/L $364,522
Now what happens if the proceeds received are above the FV or below the FV.
If above the FV
Should a/c for the extra money as additional financing (so increase the liability)
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If below the FV
Should be accounted for as a PRE-PAYMENT towards the lease liability.
Apple required funds to finance a new ambitious rebranding exercise. It’s only possible
way of raising finance is through the sale and leaseback of its head office building for a
period of 10 years. The lease payments of $1 million are to be made at the end of the lea
se period The current fair value of the building is $10 million and the carrying value is
$8.4 million. The interest rate implicit in the lease is 5%. Advise Apple on how to
account for the sale and leaseback in its financial statements if the performance
obligations are satisfied and the building is sold for the following: (a) $9 million; or, (a)
$11 million.
Below FV
Step 1 – Recognise proceeds FV– DR Bank $9,000,000
Step 2 – De recognise the asset CV- CR Asset $8,400,000
Step 3 – Record liability at PV (so the $1m at today’s value) = $1000000 * 7.722 =
$7,721,735 CR Liability $7,721,735
Step 4 – $7,721,735/$10,000,000 = 77.22%. Therefore 77.22% * $10,000,000 =
$6,486,257.
DR Right of use asset $6,486,257
Step 5 – Record pre-payment (Balancing fig) DR Pre-payment $1,000,000
Above FV
Step 1 – Recognise proceeds FV– DR Bank $11,000,000
Step 2 – De recognise the asset CV- CR Asset $8,400,000
Step 3 – Record liability at PV (so the $1m at today’s value) = $1000000 * 7.722 =
$7,721,735 CR Liability $7,721,735 + Extra liability of the extra $1m received over fair
value = $8,721,735
Step 4 – Record right of use asset $7,721,735/$10,000,000 = 77.22%. Therefore 77.22%
* $10,000,000 = $6,486,257.
DR Right of use asset $6,486,257
Step 5 - Gain on sale (Balancing figure). CR P/L $364,522
CHAPTER 13 – Provision, contingent assets, liabilities
Liability
Asset
Virtually certain >
95%
Provide
Recognise
Probable 51% - 95%
Provide
Disclose
Possible 5% - 50%
Disclose
Ignore
Remote < 5%
Ignore
Ignore
With best estimates for single obligations – just choose the best possible outcome
Do NOT weight it
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For multiple outcomes – Weight it.
HR Co has a year end of 31 December 2018, and it was notified that on the 1 July 2018 a former
employee brought about a legal claim for unfair dismissal. HR Co’s legal team have said that it is
probable that that HR Co would lose the case, resulting in a payment of $495,000 on 30 June 2019.
HR Co has a cost of capital of 10% per annum. A one year discount factor at 10% is 0.9091.
So initially CR provision 495,000*.9091 = $450,000
Dr P/L $450,000
At reporting date start to unwind the provision.
CR provision $450,000*.1*(6/12) = $22,500
Dr Finance cost P/L $22,500.
In this way the provision will reflect the $495,000 at 30 June 19
3 Specifics
1) Future operating losses – No provision can be made as there is no obligation to make the
losses
2) Onerous contract. Contracts that are loss making. Here you make a provision which is
LOWER of
 PV of continuing the contract
 PV of exiting the contract
This is based on the assumption that we will always choose the cheaper option for
us.
3) Restructuring – i.e moving office, or closing a biz line. If detailed plans are announced then
we create a provision. Only include necessary costs. If not announced then NO provision.
CHAPTER 14- Events after reporting date
Assumed knowledge
CHAPTER 15 – INCOME TAXES
CURRENT TAX – Is the amount of income tax payable/recoverable in respect of taxable profit/loss of
the period.
RECOGNITION – Should be recognised based on YEAR END ESTIMATE of tax payable.
So looking at SOFP
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Non-current liabilities
Deferred Tax
x
Current liabilities
Tax payable
x (This figure is just Year end estimate from the question)
On the SOPL
Income tax expense
x
(This is made up of current tax exp and deferred tax exp)
While on the SOFP you have 2 separate balances
If looking at a trail balance the Current tax is a CREDIT then this is a over=provision. And v.v
The following trail balance (extract) relates to Clarion as at 31 March 2015:
Current tax 400 CR. The following notes are also relevant: A provision for current tax for the year
ended 31 March 2015 of $3.5 million is required. The balance on current tax in the trial balance
represents the under/over provision of the tax liability for the year ended 31 March 2014. Prepare
extracts from the statement of profit or loss for Clarion for the year ended 31 March 2015 and
from the statement of financial position as at the same date with regards tax.
SOFP
Tax payable $3,500 – Current liability – copy from question
SOPL
Income tax $3,100
Deferred tax
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So on SOFP:Calculate Tax payable will be Current liability = year end estimate – Easy – just copy from info given
Calculate Deferred Tax will be NCL
On SOPL:Calculate income tax expense
It is an ESTIMATED FUTURE tax consequence of current and previous period’s events in the financial
statements. Purely an accounting entry.
It arises because what goes into your PBT is different to profit chargeable to corporation tax (taxable
profit). As you have to add back non allowable expenses for tax purposes i.e client entertaining.
PERMANENT DIFF:e.g Client entertaining – this is used in calculating PBT but not in Taxable profit
TEMP DIFF:Items that would have been used in calculating a/c’ing profit and taxable profit BUT IN DIFFERENT
PERIODS.
We are only considering Temp difference, i.e diff between Depreciation and Capital allowance.
Remember that in accounting profit we deduct depr. However taxable profit we add back
depreciation and deduct capital allowance due to the tax rules.
So for example,
Tracy purchased an item of property, plant and equipment on 1 January 20X5 for $5 million. It was
estimated that it had a useful economic life of 5 years but according to the tax authority had a 50%
tax allowance in its first year and 20% reducing balance there after. Tracy made an accounting profit
of $2m for the year, which is expected to continue unchanged for the next two years. Income tax rate
20% Ignoring deferred tax calculate the profits after tax for Tracy for each of the three years ending
31 December 20X5 to 20X7.
Profit before Tax
+ Depr
less Capital allowance
Taxable profit
2015
2000
1000
2500
500
2016
2000
1000
500
2500
2017
2000
1000
400
2600
Tax @ 20%
100
500
520
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Therefore
Profit before tax
Income tax
Profit after tax
2000
100
1900
2000
500
1500
2000
520
1480
So profits which were steady before at $2000, are now NOT steady. This is why deferred tax is
required, to steady the profits.
STEP 1:Calculate temporary difference ( Cost – Acc depr VS Cost – Acc capital allowance)
STEP 2:Calculate the deferred tax position (Temp diff * Tax rate) = FIGURE WHICH GOES ON THE SOFP
Step 3:This deferred tax position now needs to be either a DT Liability or a DT Asset.
If CV > Tax base – temp difference = DT Liability (Taxable temp difference)
If CV < Tax base – temp difference = DT Asset (Deductible temp diff)
Reason behind this asset is that you haven’t claimed as much Capital Allowance up front, so you will
claim more later, which results in tax saving, therefore it is an asset.
STEP 4:Calculate the movement in deferred tax position
Closing deferred tax
position
Opening deferred tax
position
Movement in DT
X
X
Y
If it is an increase then: DR Income tax expense – on SOPL
CR Deferred tax provision – On SOFP
If it is a decrease then:CR Income tax expense – On SOPL
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DR Deferred tax - On SOFP
Tracy purchased an item of property, plant and equipment on 1 January 20X5 for $5 million. It was
estimated that it had a useful economic life of 5 years but according to the tax authority had a 50%
tax allowance in its first year and 20% reducing balance there after. Tracy made an accounting profit
of $2m for the year, which is expected to continue unchanged for the next two years. Income tax rate
20% Ignoring deferred tax calculate the profits after tax for Tracy for each of the three years ending
31 December 20X5 to 20X7.
So same example now including deferred tax: Step 1:-
CV (Cost less Acc depr)
TAX BASE (Cost less ACC
Capital allowance)
TEMP DIFF
2015
4000
2016
3000
2017
2000
2500
1500
2000
1000
1600
400
2015
1500
0.2
2016
1000
0.2
2017
400
0.2
300
200
80
Step 2:-
Temp diff
Tax rate
Deferred tax position (TO NCL
SOFP)
Step 3:-
Decide if asset or liability. If CV > Tax base-temp diff = liability
CV (Cost less Acc depr)
TAX BASE (Cost less ACC
Capital allowance)
TEMP DIFF
TAX BASE - Temp diff
CV Greater or smaller
2015
4000
2016
3000
2017
2000
2500
1500
1000
Liability
2000
1000
1000
Liability
1600
400
1200
Liability
Step 4:-
Closing DT position
Opening deferred tax position
MOVEMENT in DT (GOES to SOPL)
2015
300
0
300
INCREASE exp
Dr p/l
2016
200
300
-100
DECREASE exp
CR p/l
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2017
80
200
-120
DECREASE exp
CR p/l
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If an INCREASE in Deferred tax position – CR DT Liability and DR Income tax expense
In a DECREASE in Deferred tax position – Dr DT Liability and CR Income tax expense
To check
2015
2000
100
300
1600
Profit before Tax
Income tax expense
Deferred tax
Profit for the year
Smoothed out profits
2016
2000
500
-100
1600
2017
2000
520
-120
1600
from previous eg
NCL Deferred tax SOFP
2015
300
2016
200
2017
80
Current liability Tax payable
SOFP
100
500
520
Expense SOPL
300
-100
-120
Example 4 – Accelerated capital allowances Osborne buys an asset for $150,000 at the start of the
financial year. The asset has an estimated life of 6 years and an estimated residual value of $30,000.
Capital allowances are available at a rate of 25% reducing balance and the tax rate is 20%. Calculate
the deferred tax asset/liability to appear in the statement of financial position for the next three
years and the debit/credit charged to the tax expense in the statement of profit or loss for the
same period.
CV
Tax base
TEMP DIFFERENCE
Tax Rate @ 20%
DEFERRED TAX POSITION (to NCL
SOFP)
Tax base
CV is greater for all so liability
Closing DT position
Opening DT position
MOVEMENT to SOPL
Yr 1
130000
112500
17500
0.2
Yr 2
110000
84375
25625
0.2
Yr 3
90000
63281
26719
0.2
3500
5125
5344
95000
Liability
58750
Liability
36563
Liability
3500
0
3500
5125
3500
1625
5344
5125
219
CV> TWDV = TAXABLE TEMP DEIFFERENCE = DEFFERRED TAX LIABILITY
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CV< TWDV = DEDUCTAVLE TEMP DIFFERENCE = DEFERRED TAX ASSET
Example 5 – Revaluations Clarke bought a property for $500,000 on 1 January 2013. On 31
December 2015 the property had a carrying value of $470,000 and was revalued to $800,000. The
tax written down value at 31 December 2015 was $420,000 and the tax rate is 20%. Explain how the
revaluation, including any deferred tax impact, should be dealt with in Clarke’s financial
statements for the year-ended 31 December 2015.
Gain on revaluation = $330,000
so tax on this would be
0.2*330000=66000
CV
Tax base
Temp difference
Tax @ 20%
Deferred Tax position
CV is greater than tax base
800000
420000
380000
0.2
76000
LIABILITY
CR NCL - Deferred Income
DR OCI
DR P/L
76000
66000
10000
Balancing
CHAPTER 16 – REVENUE FROM CONTRACTS
Principle 5 step approach:1)
2)
3)
4)
5)
C – ID of contracts
O – ID of separate obligations
P – Price, determine transaction price
A – Allocate price to performance
R – Recognition of revenue as obligations are satisfied.
Example 2 – Allocation of price Richer Co. sells home entertainment systems including a twoyear repair and maintenance package for $10,000. The price of a home entertainment
system without the repair and maintenance contract is $9,000 and the price to renew a twoyear maintenance package is $2,000. How is the $10,000 contract price allocated to the
separate performance obligations? Note: Ignore any discounting and time value of money
Package price = $10,000
Standalone Sound system = $9,000
Standalone renewal price $ 2,000
So Sound system: 9/11 * 10000 = $8,182
So Renewal : 2/11 * 10000 = $1,818
LiverTech is a computer business that primarily sells computer hardware. As well as selling
computers, it also supplies and installs the software to its customers and provides a technical
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support package over two years. The business commonly sells the supply and installation,
and technical support in a combined goods and services contract. The combined goods and
services contract sells for $1,600, but if sold separately the supply and installation is sold for
$1,500 and the technical support for $500. If LiverTech sold a combined contract on 1 July
20X7, demonstrate how the transaction would be presented in the financial statements for
the year ended 31 December 20X7.
Total price = $1,600
Standalone price supply & install : $1500
Standalone price tech support: $500
Total = $2,000
Supply and install : 1500/2000 * 1600 = $1200
Tech support over 24 months total = 500/2000 * 1600 = $400, so $16.67 per month
DR Bank $1600
CR Revenue supply and install $1200
CR Revenue (6 months) Tech support $100
CR Deferred income (Liability) $300 of which $200 is CL (01/01/18-31/12/18) and $100 is NCL
If performance obligation is transferred over time (i.e building work), then it is using either of
the following methods.
Output =
Input =
Work certified to
date
Total contract
revenue
Costs to date
Total estimated cost
Alex commenced a three year building contract during the year-ended 31 December 20X4 and continued
the contract during 20X5. The details of the contract are as follows:
$m
Total contract value: $45m
Costs incurred to date @ 20X5: $20m
Estimated costs to completion: $12m
Work certified as completed in 20X5: $15m
Stage of completion @ 20X5: 70%
Profit recognised to date @ 20X4: $3.3m
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Show how this contract would be dealt with in the statement of profit or loss for the year ended 31 Dec
2015
ON THE SOPL
Total contract value = $45m
Total costs = $$20m+$12m = $32m
Total Profit = £13m
Stage of completion @ 2015 = 70%, therefore profit to have recognised since start in 2014 is
0.7*$13m = $9.1m. Profit recognised in 2014 is $3.3m, therefore profit recognised in 2015 = $5.8m
ON THE SOFP- As we are incurring costs we are also creating an asset.
Costs incurred to date
ADD Recognised profits to date
LESS Recognised losses to date
LESS Receivable (Amounts invoiced)
= Contract asset/liability
Therefore
Costs incurred to date: $20m
ADD Recognised profits to date: $9.1m
= CURRENT ASSET = $29.1m
Evelyn commenced a building contract in 20X5 that has seen large increases in future costs to complete.
The contract will still be completed on schedule in 20X6. The details from the year ended 31 December 20X5
are as follows:
$m
Total contract value 40m
Costs incurred to date: $25m
Estimated costs to completion: $20m
Stage of completion 45%
Show how this contract would be accounted for in the statement of profit or loss for the year ended
31 December 20X5.
Cost to date = $25m
Total estimated costs = $45m
Total contract value = $40m, therefore $5m loss. Recognise this loss straight away – PRUDENCE
So in 2015 SOPL
Revenue = 45% * $40m = $18m
Costs (Balancing figure)= $23m
Loss = $5m
In SOFP
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Costs incurred to date: $25m
LESS Recognised loss to date: $-5m
= CURRENT ASSET = $20m
Noah has a three year contract which commenced on 1 January 20X5. At 31 December 20X5 Noah extracted
the following balances from its ledger relating to the contract:
Total contract value: $140,000
Cost incurred up to 31 December 20X5:
Attributable to work completed: $52,000
Inventory purchased for use in future years: $8,000
Progress billing to date: $45,000
Cash received :$26,500
Other information:
Expected further costs to completion 48,000
At 31 December 20X5, the contract was certified as 40% complete.
Prepare extracts from the statement of profit or loss and
SOFP for year ended 31/12/15
Total contract value = $140,000
Total cost = $52,000+$8,000+$48,000 = $108,000
TOTAL PROFIT = $32,000
As 40% of work complete, profit recognised is 40% * 32000 = $12,800
SOPL
Work completed = 40% therefore on SOPL
Revenue 40%*$140,000 = $56,000
Costs: $43,200 (BALANCING FIG)
Profit = $12,800
SOFP
Costs incurred to date: $52,000 (EXC RECEIVABLE)
ADD Profits to date: $12,800
LESS Receivable: $45,000
= CONTACT ASSET = $19,800
CHAPTER 17 – FOREIGN CCY
Initially record transaction at exchange rate in place at date of transaction = HISTORIC RATE
Monetary assets (Receivable, Cash, overseas loans, payables) are then re-stated using the CLOSING
RATE at reporting date.
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Any gains/losses put through P/L. Can put through P/L as Finance costs or trading transaction costs.
NON-MONETARY assets are NOT RESTATED, unless carried at FV, if so then translate at RATE THAT
WAS USED WHEN FV WAS ESTABLISHED.
Jones Inc. has its functional currency as the $USD. It trades with several suppliers overseas and
bought goods costing 400,000 Dinar on 1 December 2017. Jones paid for the goods on 10 January
2018. Flower’s year-end is 31 December.
The exchange rates were as follows:
1 December 2017 4.1 Dinar : $1USD
31 December 2017 4.3 Dinar : $1USD
10 January 2018 4.4 Dinar : $1USD
Show how the transaction would be recorded in Jones’s financial statements.
On 01/12/17
CR Payable $97,561
DR Purchases $97,561
(400,000/4.1)=97,561
On 31/12/17 – re translate at closing rate
400,000/4.3 = $93.023
Therefore a reduction of $4,538 in payable so
DR Payables $4,538
CR SOPL $4,538
With the non-monetary item (the goods)
On 31/12/17 – leave at original figure
Inventory $97,561
On 10/01/18 – retranslate
400000/4.4 = $90,909
So CR Bank $90,909
DR Payables $93,023
CR SOPL $2,114
CHAPTER 18 – FAIR VALUE
Level 1 INPUTS – Quoted prices on active markets
Level 2 INPUTS – Quoted prices either directly/indirectly on active markets, or similar products
quoted prices. i.e interest rates
Level 3 INPUTS – No market activity. So use logic, i.e use info available.
CHAPTER 19 – EPS
BASIC EPS = Profit attributable to ord shs holders/Weighed avg No of shs IN ISSUE
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Ruth makes up its accounts to 30 June each year. On 1 July 20X5 Ruth has 500 million ordinary shares
in issue. Profits for the year to 30 June 20X6 were $250m.
There were no preference shares in issue.
Calculate the basic earnings per share assuming:
(a) Share capital has not changed during the year
(b) An issue of 50 million new shares at full market price on 1 August 20X5.
(c) A 1 for 4 bonus issue occurring on 1 November 20X5.
(d) A 1 for 5 rights issue on 1 February 20X6 held at $1.25. The price of a share immediately before
the rights issue was $1.40.
a)
EPS = $250m/500m =
$0.5
b)
1 months
500m shares
11 months
550m shares
EPS =
250/546 = $0.458 per share
=(1/12)*500m
=
=(11/12)*550m
=
42
504
546
c) NPFW
No of
shs
No of
months
01 july - 30
oct
Time
4
months
500m
4/12
01 sept - 30
jun
8
months
625m
‘8/12
Bonus
fraction
=(5/4)
Weighted avg
208333333.3
3
416666666.7
625000000
EPS =
250/625= $0.4 per shs
d)
Theoretical ex rights
price =
5 shares * $1.4=
1 share * $1.25 =
Ex-rights price
7
1.25
8.25
Theoretical ex rights
price =
$8.25/6 shares = '
$1.375
Bonus fraction =
Price before/Theoretical ex-right
price
=1.4/1.375
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per share
1.0181
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5 column approach
Date
1 July - 31
Jan
No of shs
No of months
bonus fraction
Weighted
avg
500
7/12
1.0181
297
Feb - june
600
5/12
250
546
NOTE - only apply the bonus fraction to the shares that were issued BEFORE the rights issue
Therefor
e EPS =
$250m/546m shares
= $0.458 per share'
To restate previous years EPS
“the rule to apply is:
• multiply all periods before the rights issue by the BONUS FRACTION, and
• multiply last year’s disclosed EPS by the reciprocal of the bonus fraction”
DILUTED EPS
Convertible instruments
These give the holder of these instruments ability to convert their debt into equity at some point in
the future. So you add the max no. of shares to be issued in the future so to show an accurate EPS.
REMEMBER – if the debt is converted to equity you will no longer be paying any interest for the debt.
Therefore this saving also changes the earnings.
OPTIONS
Options given to directors as incentives or employees are effectively free or discounted shares.
Flanagan makes up his accounts to 31 December each year and has calculated the basic EPS based on
actual shares of 1,000 million and earnings of $500m, for the year ended 31 Dec 20X5.
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shares
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Convertible debentures
On 31 December 20X6 Flanagan had in issue $10m of 5% convertible loan stock. The loan stock is
convertible at the following dates with the following terms: 31 Dec 20X6 125 shares for every $100 of
loan stock 31 Dec 20X7 120 shares for every $100 of loan stock The tax rate is 20%
Share options
Flanagan also granted 100m options at the same date. The option price is $2.50 but the average fair
value of a share is $4.00. Calculate the fully diluted EPS for the year to 31 December 20X6.
Convertible debt
Extra earnings = post tax int saved
=0.05*10,000,000*0.8='
$400,000
Extra shares
=10,000,000 shs/100 * 125 =
12,500,000
Ignore the no of shs on 31/12/17
It is in the following year
OPTIONS
100m shares* ($2.5/$4.00) = 62.5m
shares
Take
So effectively you get 100m shares LESS
62.5m shares = 37.5m shares free
Now put all the above into the diluted
EPS calc
EPS =
$500m + $0.4m
1000m shs + 12.5m shs + 37.5m shs
='
0.477
CHAPTER 20 - PERFORMANCE
1) Gross Profit Margin = Gross Profit/Revenue * 100%
2) Operating Profit Margin = PBIT/Revenue * 100%
3) Net Profit Margin = Profit AFTER tax/Revenue * 100%
4) Asset turnover – How well you use your assets to generate revenue.
= Revenue/ Capital Employed (All the equity + NCL) (It is in number of times)
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ROCE = PBIT/Cap Employed ( Allows biz of diff sizes to be compared. Also compare to last
year)
NOTE:- ROCE = AT * Operating profit margin
CHAPTER 21 - POSITION
Note: - Always analyse the cash balance first before working out quick ratio etc
1) Current ratio = CA/CL. It is quoted X:Y
2) Quick Ratio = CA-Inventory/CL. It is quoted X:Y
3) Inventory days = Inventory/Cost of Sales * 365 (Remember to use the number of days in
the question). If this is a high number, it means taking longer to sell inventory. This could
be for a number of reasons.
 Could hv built up inventory at year end
 Could have made bulk purchase to take advantage of discounts
 Could be a new product is not selling
 Stock holding costs will also go up if too much inv held
 If the number is falling, there is risk of stock out
 If falling – you could have issues in production and aren’t making enough
4) Average Inventory turnover = COS/ (Beg inv/ending inv/2)
5) Receivable days = Receivables/Sales * 365
If days go up: Inefficient credit control
 Selling overseas which takes longer
 As days go up higher risk of IRR debt.
If days go down: Improved credit control
 Maybe reduced credit offering.
 Prompt payment discount
6) Payable days = Payables/COS (credit purchases) * 365
If days go up: Takes us longer to pay suppliers, so good for cash flow or we have cash issues
 Negotiated better terms
 Risk of losing supplier goodwill
If days do down: Implemented new automated payment system
 Taking advantage of prompt payment discount.
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7) Working Capital = Inventory days + Receivable days+ Payable days
SOLVENCY/GEARING/RISK RATIOS
8) Gearing Ratio – Looks at ability to pay off LONGER TERM DEBT.
= Debt/Equity * 100%
Or Debt/equity+DEBT * 100%
If gearing goes up:

Shareholder dividend at risk, obtaining further borrowing is difficult
Increased borrowings
If gearing goes down: Issued new shares
 Repaid borrowing
NOTE – an increase in gearing is not always bad, as DEBT is cheaper than Equity.
9) Interest Cover – Looks at the ability to pay the interest out of profits
= PBIT/Interest (it is in times)
If interest cover goes up: Good as more secure int payments
If int cover goes down: Bad as risk of default
HOWEVER remember Profit DOES NOT EQUAL CASH.
CHAPTER 22 – INVESTOR RATIOS
1) Dividend cover – looks at the ability to pay dividends out of profits AFTER tax
= Profit AFTER tax/ Total Dividends (in times – the higher the better)
2) Dividend yield = Effectively the return you are getting on your dividends.
= Dividend/Price per share * 100%
3) EPS = Profit for the year AFTER TAX/No of ord shares
4) P/E ratio = Price per share/Earning per share
It allows investors to see how confident the mkt is in regards to future earnings.
If high then positive outlook and v.versa
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CHAPTER 23 – 25
Consolidations
SOFP
WORKING1
Note NCI% and acq date
WORKINGS 2
Net assets of sub
Equity shs
Share prem
Ret Earnings
Revaluation
reserve
At reporting date
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Column B-Column C = Column D
WORKING 3 – Goodwill
FV of consideration
cash/shs
+NCI at acquisition (W2)
FV of net assets at acq
=Goodwill
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Working 4
NCI
NCI at Acquisition
NCI share of S post acq profits
(W2)
X
X
Y
WORKING 5
GROUP RETAINED EARNINGS
100% P retained earnings
P's share of S's post acq profits
-
X
X
Y
Add 100% P and S assets and liabilities. Regardless of % ownership. However
remember NCI. in the bottom of the SOFP
Ignore the investment.
Include goodwill
REMEMBER to time apportion, i.e work out post acq figures correctly
There are 2 ways to work out NCI figure.
a) Proportionate method - You take the NCI % ownership and x by The equity section of the
sub at reporting date.
b) Fair value method – Take the NCI % ownership of shares. i.e 20% = 200,000 shs and x by
S’s share price.
Goodwill
2 ways to work this out.
a) Proportionate method
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What P Paid
+ NCI (i.e NCI % ownership of S shares at acquisition)
- Net assets at acq
This figure gives us “Partial goodwill”, i.e what belongs just to the Parent
b) Fair value method
What P Paid
+ Fair value of NCI share
- Net assets at acq
This figure gives us TOTAL goodwill, i.e including both Parent and Subs goodwill. (higher then
proportionate method)
In relation to Revaluation reserve.
If you see rev reserve then the share for P and S is worked out the same way as it is for
Retained earnings. I.e for P:
P’s revalue reserve
+ P’s share of Subs post acq reval reserve
ADJUSTMENTS
Cash in transit
If cash has been paid but not received. i.e Sub has paid P $500 but it hasn’t arrived as yet.
Then just assume that Parent HAS received the money.
SO 2 steps:1) DR Bank and CR Receivable (so removed) in the Parent
2) Remove ANY REMAINING intra company rec/pay , CR Rec and DR Payables
INVENTORY IN TRANSIT
One comp has sold goods on credit to another company.
So the selling company would have recorded the sale
DR Rec and Cr Sales
However the goods have not arrived at yet. So we need to record that the inventory has
arrived.
So DR Inventory
CR payables
Then remove any PURP as those goods have not yet been sold outside the group.
So CR inventory
DR retained earnings of the seller
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THEN – you need to remove the inter-group rec/payables.
Unrealised profits (Inventory)
I know how to work out PURP. This is deducted from INVENTORY (i.e Current assets) line.
So Cr Inventory (In group SOFP) and
DR Retained earnings of P (the seller)
If P is the seller – Adjust working 5
If S is the seller – Adjust working 2 at Reporting date
Unrealised profits on NCA PPE
When we trnf an asset from a P to a Sub. There is likely to be a profit on sale which will sit
within the group accounts. So this needs to be stripped out.
Need to remove intra group profit (so meaning 1000 profit and say depreciation on the
profit part i.e on the $1000 profit is = 200 of depreciation. The net adjustment would by
800) on transfers of NCA. So depreciate the profit element, take this away from the profit on
sale, then with this amount, CR PPE, CR COS/DR retained earnings
CR NCA 800(in the consolidated a/cs)
DR Retained earnings 800(of the seller)
FAIR VALUE ADJUSTMENTS
So we need to adjust the Subs net assets (W2)
So if a piece of equipment has a higher FV of £50k and the remaining life of the asset is 10
years. So if the PPE of the sub was actually worth 50k more at acq then its book value and it
had a remaining life of 10 years then:=
REMEMBER – we must adjust the PPE at reporting date so as to show PPE at FV rather than
Book value
WORKING 2 - Net assets of Sub
Equity shs
Ret earning
FV adjustment PPE
Extra depreciation
At reporting date
X
X
50
-5
X
At acq
Post
acquisition
50
X
X
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CONTINGENT LIABILITY
These do not appear on the face of the SOFP BUT in the notes. So with these in the GROUP
a/c’s it is recorded at Fair value. So P buys Sub at start of reporting period and there is a
CONTINGENT liability disclosed in the sub’s notes.
So
WORKING 2 - Net assets of Sub
At reporting date
X
X
-100
X
Equity shs
Ret earning
CONTINGENT LIABILITY
At acq
Post
acquisition
-100
X
X
We also need to reflect the fair value on the face of the GROUP SOFP by showing
Contingent Liability $100
SHARE FOR SHARE EXCHANGE
So Harry acquired 80% of the 10 million ordinary $1 shares of Sally by offering a share
exchange of one for every four shares acquired. The fair value of Harry’s shares is $3 per
share.
We are buying 8m shares in Sally.
(8,000,000/4)*1 = 2,000,000 shares
Therefore at Fair value this is 2m shares * $3 = $6m
So DR Investment $6m
CR Shs cap
$2m (at par)
CR Shs prem $4m
IN P’S BOOKS
REMEMBER – This CR Shs Cap and Cr Shs prem will need to be included in the Equity
number of the Parent in the consolidated SOFP
DEFERRED CASH CONSIDERATION
You know you will pay it, but in the future. We need to recognise the liability now at PV.
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So DR Investment – used in Goodwill calc
CR Deferred consideration (LIABILITY)
Pony acquired 80% of the 30 million $1 equity shares of Star on 1 January 20X5. The
consideration was through the offer of a share exchange of two shares issued for every three
shares acquired and a cash payment of $1 per share payable on 31 December 20X5. The fair
value of the Pany’s equity shares was $2 at 1 January 20X5. The present value of $1 received
in one year’s time is $0.91 at a rate of 10%. Calculate the cost of the investment in Star at 1
January 20X5
No of shares bought
24000000
share exchange
16000000
2
32000000
cash
24000000
0.91
21840000
53840000
DR Investment
CR Share cap
CR Shs prem
CR Deferred
consideration
53840000
24000000
8000000
21840000
Then over the year you need to grow the LIABILITY up to the $24m. So the interest rate is 10%
CR deferred
0.1*21840000 =
consideration
2184000
Dr fin costs
2184000
COTERMINOUS YEAR ENDS
Financial statements WITHIN 3 MONTHS of the parents year end can be consolidated, with
any significant events adjusted for.
IF HFS – then DO NOT consolidate
DO not consolidate if parent company DOES NOT HAVE CONTROL
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CONSOLIDATED SOPL
P
X
(X)
Revenue
COS
PUP (inventory)
FV adjustment - depreciation
(x)
X/12
S
X
(X)
OR (x)
(x)
Adjustment
(X)
x
Intra comp
sales
Gross Profit
(X)
(X)
(X)
X
(X)
(X)
(X)
(x)
X
(X)
X
(x)
(X)
(x)
X
(X)
X
PBT
PFY
(X)
X
Dist costs
Admin expenses
Impairment adjust
Finance costs
Investment income remove if from S or A
Dividend from Sub/Ass - Reduce by P % share of the
div
Associate (P's shs of A's PFY) LESS impairment
Tax
GROUP
X
X
(x)
(x)
(x)
X
X
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Revaluation gain (do not pro-rate this fig ever)
Associate
X
X
X
X
Profit for year
X
X
X
Profit att to NCI (their % of this number)
Profit attributable to Parent
TOTAL
X
X
X
Balancing
Regardless of % ownership, you add together line items BUT do TIME APPORTION.
Remove any dividend income from the Subs in the Group accounts.
ADJUSTMENTS
Any intergroup sales REMOVE by
DR Sales (so reduce)
CR COS (so reduce)
Same thing happens with intra group loan – remove asset and liability
Any intergroup sales and PURP
DR Cost of sales - inventory (Increasing) in the sellers column
Remember in SOFP we would have
Cr inventory
DR Retained earnings
Any intercompany loan remove from Asset and Liability on SOFP
Any Intergroup interest remove by DR Interest Income and CR Finance cost
DO NOT Pro-rate any Revaluation reserves in the Sub. Everything else you do time apportion.
Any extra depreciation from a revalued asset you have to deduct from the Sub.
GROUP PROFIT/LOSS ON DISPOSAL
Group Profit/loss on disposal
Proceeds
Add: NCI at disposal date
x
x
Less: Net assets at DISPOSAL
Less: Good will
GROUP PROFIT/LOSS ON
(x)
(x)
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DISPOSAL
ASSOCIATES
We use equity accounting. We have significant influence, however have No control. Between 20%50%
IN SOFP – shown as NCA
Cost of Investment in A
X
+ P's share of A's POST acq reserves
LESS FULL Impairment of goodwill
X
(X)
Y
Shown in working
5
Shown in working
5
This is shown on SOFP as NCA (Investment in A)
Penny bought 30% of the equity share capital of Alex on 1 January 20X5 for $250,000. Alex’s profits
for the year were $170,000. An impairment review was carried out at the end of the year and the
investment in Alex was found to be impaired by $20,000
Cost of investment
(P shs of A post acq profit
Less FULL impairment (cumulative as SOFP)
Less P’s shs of PURP
Less Ps shs of dividends received from A
Shown as Investment in associates in GROUP
SOFP
250000
51000
X
-20000
281000
The $250k would shown as investment in Assoc in INDIVIDUALS accounts.
The $281k would be shown as Investment on Assoc in GROUP a/c’s
IN SOPL
P shs of A post acq profit
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LESS: Goodwill impaired DURING the year
= PROFIT FROM ASSOCIATE
e/g
P shs of A post acq pro
Less impairment DURING the year
Shown as profit from associate
51000
-20000
31000
NOTE – This figure is shown IMMEDIATELY before Group Profit before TAX
Make sure you REMOVE any dividend received from Associate
ADJUSTMENTS for ASSOCIATES
Do NOT eliminate any intercompany TRADING transactions
However you MUST adjust for PURP
We only want to adjust for the Group Share ONLY
If PARENT sell to Associate - as we do not consolidate inventory on a line by line basis for an
associate
DR Group retained earnings in SOFP (working 5) and DR COS (Increase) in SOPL
CR Investment in associate (reduce)
If Associate sells to Parent
DR Group retained earnings in SOFP (working 5) and Reduce share of profit in Associate in SOPL
CR Group Inventory (reduce COS) – as P is holding the inventory we want to remove it.
OTHER EG OF SIGNIFICANT INFLUENCE
-
Representation on the board
Participation on policy making
Material trans taking place between 2 entities
Interchange of mgmt. personnel
Providing essential tech information
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