FINANCIAL REPORTING (F7)
S. No
Topic
1
IAS 40 – Investment Property
2
IAS 23 – Borrowing Costs
3
IAS – 16 Property, Plant & Equipment (PPE)
4
IAS 36 – Impairment of Assets
5
IAS 38 – Intangible Assets
6
IFRS 05 – NCA held for sale
7
IAS 41 – Agriculture
8
IAS 02 – Inventories
9
IAS 37 – Provision, Contingent Assets & Contingent Liabilities
10
IFRS 15 – Revenue from Contracts with Customers
11
IAS 21 – Foreign Currency
12
IAS 08 – Accounting Policies, Estimates & Errors
13
IAS 10 – Events after Reporting
14
IAS 32, IFRS 9(IAS 39) – Financial Instruments
15
IAS 20 – Government Grants
16
IFRS 16 – Leases
17
IAS 12 – Income Tax
18
IFRS 13 – Fair Value Measurement
19
IAS 01 – Presentation of Financial Statements
20
Frameworks
21
Final accounts
22
Group Accounts / Consolidation
23
IAS 07 – Cash Flows
24
Ratio Analysis / Interpretation of Financial Statements
25
IAS 33 – Earning Per Share (EPS)
26
Group Disposal + Factoring + Sales or Return Basis + Consignment Inventory
+ Sale & Lease back
ACCA FR (F7): Financial Reporting
By:
Zya Rana
IAS 40: INVESTMENT PROPERTY
DECISION TREE:
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Scope of IAS 40:
Land or building, or part of a building, or both, held by the owner or to earn rentals and/or for capital
appreciation, rather than for;
-
Use in production or supply of goods and services or
-
For administrative purposes or
-
For sale in the ordinary course of business
Case Study 1:
XYZ Inc. and its subsidiaries have provided you, their IFRS specialist, with a list of the properties they
own:
(a) Land held by XYZ Inc. for undetermined future use
(b) A vacant building owned by XYZ Inc. and to be leased out under an operating lease
(c) Property held by a subsidiary of XYZ Inc., a real estate firm, in the ordinary course of its business
(d) Property held by XYZ Inc. for the use in production
Required: Advice XYZ Inc. and its subsidiaries as to which of the above-mentioned properties would
qualify under IAS 40 as investment properties. If they do not qualify thus, how should they be treated
under IFRS?
Recognition Criteria:
Investment property shall be recognized as an asset when and only when
•
It is probable that future economic benefits will flow to the entity; and
•
The cost of the investment property can be measured reliably.
Recognition principles are similar to those contained in IAS 16.
Components of Total Cost (As per IAS 16):
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Initial Measurement:
-
An investment property shall be measured initially at cost, including transaction charges.
-
Again, the principles for determining cost are similar to those contained in IAS 16, in particular
for replacement and subsequent expenditure.
Subsequent Measurement:
For subsequent measurement of Investment Property, An entity shall select either the
-
Cost Model or the
-
Fair Value model for all its investment property
Few Important Points:
-
It depends upon the management to use any of the above models
But, same class of assets should accounted under same treatment
Management can change/transfer from one model to another model but there should be an
appropriate reason for the change.
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Subsequent Measurement Under Cost Model:
-
Under the cost model the asset should be accounted for in line with the cost model laid out in
IAS 16
• The property will be depreciated as normal and
• Shown in the statement of financial position at NBV (Cost Less Accumulated Depreciation)
Subsequent Measurement Under Fair value Model:
Under the fair value model:
-
Fair value is normally established by reference to current prices on an active market for
properties of in the same location and condition
• The asset is revalued to fair value at the end of each year
• The gain or loss is shown directly in the income statement
• No depreciation is charged on the asset
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Case study 2:
Celine, a manufacturing company, purchases a property for $1 million on 1 January 20X1 for its
investment potential. The land element of the cost is believed to be $400,000, and the buildings
element is expected to have a useful life of 50 years. At 31 December 20X1, local property indices
suggest that the fair value of the property has risen to $1.1 million. Show how the property would be
presented in the financial statements as at 31 December 20X1 if Celine adopts:
(a) The cost model
(b) The fair value model
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Case Study 3:
Investors Galore Inc., a listed company in Germany, ventured into construction of a mega shopping
mall in south Asia, which is rated as the largest shopping mall of Asia. The company’s board of directors
aftermarket research decided that instead of selling the shopping mall to a local investor, who had
approached them several times during the construction period with excellent offers which he
progressively increased during the year of construction, the company would hold this property for the
purposes of earning rentals by letting out space in the shopping mall to tenants. For this purpose it
used the services of a real estate company to find an anchor tenant (a major international retail chain)
that then attracted other important retailers locally to rent space in the mega shopping mall, and
within months of the completion of the construction the shopping mall was fully let out.
The construction of the shopping mall was completed and the property was placed in service at the
end of 20X1. According to the company’s engineering department the computed total cost of the
construction of the shopping mall was $100 million. An independent valuation expert was used by the
company to fair value the shopping mall on an annual basis. According to the fair valuation expert the
fair values of the shopping mall at the end of 20X1 and at each subsequent year-end thereafter were
20X1
20X2
20X3
20X4
$100 million
$120 million
$125 million
$115 million
The independent valuation expert was of the opinion that the useful life of the shopping mall was 10
years and its residual value was $10 million.
Required: What would be the impact on the profit and loss account of the company if it decides to
treat the shopping mall as an investment property under IAS 40:
(a) Using the “fair value model”; and
(b) Using the “cost model.”
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Transfer TO / FROM Investment Property:
Transfers to and from investment property shall be made when and only when there is a change of use
evidenced by
• Commencement of owner occupation (transfer from investment property to property, plant, and
equipment)
• Commencement of development with a view to sale (transfer from investment property to
inventories)
• End of owner occupation (transfer from property, plant, and equipment to investment property)
• Commencement of an operating lease to another party (transfer from inventories or property, plant,
and equipment to investment property)
• End of construction or development (transfer from property under construction, covered by IAS 16,
to investment property)
In cases where the fair value model is not used, transfers between classifications are made at the
carrying value: the lower of cost and net realizable value if inventories, or cost less accumulated
depreciation and impairment losses if property, plant, and equipment.
If owner-occupied property is transferred to investment property that is to be carried at fair value,
then, up to the change, IAS 16 is applied. That is to say, any revaluation in fair value is treated in
accordance with IAS 16.
Transfers from investment property at fair value to property, plant, and equipment shall be at fair
value, which becomes deemed cost.
For transfers from inventories to investment properties that are to be carried at fair value, the remeasurement to fair value is recognized in the income statement.
When a property under construction is completed and transferred to investment property to be
carried at fair value, the re-measurement to fair value is recognized in the income statement.
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Examples  Transfer TO / FROM Investment Property:
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Disposals:
An investment property shall be derecognized on disposal or at the time that no benefit is expected
from future use or disposal. Any gain or loss is determined as the difference between the net disposal
proceeds and the carrying amount and is recognized in the income statement.
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
IAS 23: BORROWING COST
Objective of IAS 23:
-
The objective of IAS 23 is to prescribe the accounting treatment for borrowing costs (finance cost).
-
Borrowing cost are interest and other costs that an entity incurs in connection with the borrowing of
funds
-
This standard applies where the particular borrowing are applied to the construction of certain assets;
so called Self-Constructed assets.
Qualifying Asset:
-
A qualifying asset is an asset that takes a substantial period of time to get ready for its intended use or
sale
-
That asset could be property, plant, and equipment and investment property during the construction
period, intangible assets during the development period, or "made-to-order" inventories
Capitalization of Borrowing Cost to the Cost of Asset:
-
Borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset form part of the cost of that asset and, therefore, should be capitalised.
-
Other borrowing costs are recognised as an expense
Borrowing Cost and Interest Income on Short-Term Investment of
Funds:
Costs eligible for capitalization are
-
the actual costs incurred less any income earned on the temporary investment of such borrowings
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Case Study 1:
On 1 January 20X6 Stremans Co borrowed $1.5m to finance the production of two assets, both of which were
expected to take a year to build. Work started during 20X6. The loan facility was drawn down and incurred on
1 January 20X6, and was utilised as follows, with the remaining funds invested temporarily.
Asset A
$'000
250
250
1 January 20X6
1 July 20X6
Asset B
$'000
500
500
The loan rate was 9% and Stremans Co can invest surplus funds at 7%.
Required: Ignoring compound interest, calculate the borrowing costs which may be capitalized for each of the
assets and consequently the cost of each asset as at 31 December 20X6.
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Commencement of Capitalization:
-
expenditures are being incurred
-
borrowing costs are being incurred and
-
activities that are necessary to prepare the asset for its intended use or sale are in progress (may
include some activities prior to commencement of physical production).
Suspension of Capitalization:
-
Capitalisation should be suspended during periods in which active development is interrupted. –
-
Capitalisation should cease when substantially all of the activities necessary to prepare the asset for
its intended use or sale are complete.
-
If only minor modifications are outstanding, this indicates that substantially all of the activities are
complete.
Cessation of Capitalization:
-
Where construction is completed in stages, which can be used while construction of the other parts
continues, capitalisation of attributable borrowing costs should cease when substantially all of the
activities necessary to prepare that part for its intended use or sale are complete.
Disclosure
The accounting policy adopted [required only until 1 January 2009 if immediate expensing model is used]


Amount of borrowing cost capitalised during the period
Capitalisation rate used
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Case Study 2:
On December 1, 20X4, Compassionate Inc. began construction of homes for those families that were hit by the
tsunami disaster and were homeless. The construction is expected to take 3.5 years. It is being financed by
issuance of bonds for $7 million at 12% per annum. The bonds were issued at the beginning of the construction.
The project is also financed by issuance of share capital with a 14% cost of capital. Compassionate Inc. has opted
under IAS 23 to capitalize borrowing costs.
Required
Compute the borrowing costs that need to be capitalized under IAS 23.
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Case Study 3:
On 1 January 20X5, Sainsco began to construct a supermarket which had an estimated useful life of 40 years. It
purchased a leasehold interest in the site for $25 million. The construction of the building cost $9 million and the
fixtures and fittings cost $6 million. The construction of the supermarket was completed on 30 September 20X5
and it was brought into use on 1 January 20X6.
Sainsco borrowed $40 million on 1 January 20X5 in order to finance this project. The loan carried interest at 10%
pa. It was repaid on 30 June 20X6.
Calculate the total amount to be included at cost in property, plant and equipment in respect of the
development at 31 December 20X5.
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
2 Types of Borrowing:
-
General Borrowing (from different bank or financial institutions)
e.g.
15 million @ 10%
10 million @ 9.5%
25 million @ 9%
50 million
In this situation; we will use “Weighted Average Rate”.
-
Specific Borrowing (It is a project specific borrowing @ specified rate)
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Case Study 4:
A socially responsible multinational corporation (MNC) decided to construct a tunnel that will link two sides of
the village that were separated by a natural disaster years ago. Realizing its role as a good corporate citizen, the
MNC has been in this village for a couple of years exploring oil and gas in the nearby offshore area. The tunnel
would take two years to build and the total capital outlay needed for the construction would be not less than
$20 million. To allow itself a margin of safety, the MNC borrowed $22 million from three sources and used the
extra $2 million for its working capital purposes. Financing was arranged in this way:
• Bank term loans: $5 million at 7% per annum
• Institutional borrowings: $7 million at 8% per annum
• Corporate bonds: $10 million at 9% per annum
In the first phase of the construction of the tunnel, there were idle funds of $10 million, which the MNC invested
for a period of six months. Income from this investment was $500,000.
Required
How would it capitalize the borrowing costs, and what would it do with the investment income?
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ACCA FR: Financial Reporting
IAS 16 PPE
By:
Zya Rana
IAS 16: PROPERTY PLANT AND EQUIPMENT
Objective of IAS 16:
The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and
equipment.
The principal issues are;
-
the timing of recognition of assets
-
the determination of their carrying amounts, and
-
the depreciation charges to be recognised in relation to them
Scope
The requirements of IAS 16 are applied to accounting for all property, plant and
equipment but there are certain exceptions as follows:

Property, plant and equipment classified as held for sale

Biological assets
Property, plant and equipment:
-
Tangible assets that are held for
-
use in production or supply of goods and services
-
for rental to others, or
-
for administrative purposes and are
-
expected to be used during more than one period.
Cost:
The amount paid or fair value of other consideration given to acquire or construct an
asset.
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ACCA FR: Financial Reporting
IAS 16 PPE
By:
Zya Rana
Useful life:
-
The period over which an asset is expected to be utilized or
-
the number of production units / hours expected to be obtained from the use of
the asset
Residual Value:
The estimated amount, less disposal cost that could be currently realized from the
asset„s disposal if the asset were already of an age and condition expected at the end
of its useful life.
Depreciable amount:
Total cost – Residual value
Depreciation:
The systematic allocation of the depreciable amount of an asset over its expected
useful life.
2
ACCA FR: Financial Reporting
IAS 16 PPE
By:
Zya Rana
Recognition Criteria:
Items of property, plant, and equipment should be recognised as assets when it is
probable that:

the future economic benefits associated with the asset will flow to the enterprise;
and

The cost of the asset can be measured reliably
Initial Measurement:
An item of property, plant and equipment that satisfies the recognition criteria should be
recognized initially at its TOTAL COST.
Components of Total Cost:

Purchase price, including import duties nonrefundable purchase taxes, less trade
discount and rebates.

Costs directly attributable to bringing the asset to asset to the location and
condition necessary for it to be used in a manner intended by the entity

Initial estimates of dismantling, removing, and site restoration if the entity has an
obligation that it incurs on acquisition of the asset to the extent that it is
recognized as a provision under IAS 37.
3
ACCA FR: Financial Reporting
IAS 16 PPE
By:
Zya Rana
Example of directly attributable costs includes:





Cost of site preparation
Initial delivery and handling costs
Cost of testing, less the net proceed from the sale of any product arising from
test production
Borrowing costs to the extent permitted by IAS 23
Professional fees
Examples of costs that are not directly attributable costs and
therefore must be expensed in the income statement include:








Costs of opening a new facility
Costs of introducing a new product or services
Advertising and promotional costs
Costs of conducting business in a location or with a new class of customer
Training
Administration and other general overheads
Initial operating losses
Costs of relocating or reorganization part or all of an entity‟s operations.
If an asset is acquired in exchange for another asset, then the acquired asset is
measured at its value unless the exchange lacks commercial substance or the fair value
cannot be reliably measured in which case the acquired asset should be measured at
the carrying amount of the asset given up.
4
ACCA FR: Financial Reporting
IAS 16 PPE
By:
Zya Rana
QUESTION 1:
On 1 October 20X6, Omega began the construction of a new factory. Costs relating to
the factory, incurred in the year ended 30 September 20X7, are as follows:
$000
Purchase of the land
10,000
Costs of dismantling existing structures on the site
500
Purchase of materials to construct the factory
6,000
Employment costs (Note 1)
1,800
Production overheads directly related to the construction (Note 2)
1,200
Allocated general administrative overheads
600
Architects‟ and consultants‟ fees directly related to the construction 400
Costs of relocating staff who are to work at the new factory
300
Costs relating to the formal opening of the factory
200
Interest on loan to partly finance the construction of the factory (Note 3)
1,200
Note 1
The factory was constructed in the eight months ended 31 May 20X7. It was brought
into use on 30 June 20X7. The employment costs are for the nine months to 30 June
20X7.
Note 2
The production overheads were incurred in the eight months ended 31 May 20X7. They
included an abnormal cost of $200,000, caused by the need to rectify damage resulting
from a gas leak.
Note 3
Omega received the loan of $12m on 1 October 20X6. The loan carries a rate of interest
of 10% per annum.
Note 4
The factory has an expected useful economic life of 20 years. At that time the factory
will be demolished and the site returned to its original condition. This is a legal
obligation that arose on signing the contract to purchase the land. The expected costs
of fulfilling this obligation are $2m. (Ignore discounting)
Requirement
Compute the initial total cost of the factory.
5
ACCA FR: Financial Reporting
IAS 16 PPE
By:
Zya Rana
Question 2: Accounting year operates from 1 October to 30 September.
On 1 October 2005 Dearing acquired a machine under the following terms:
Manufacturer‟s base price
Trade discount (applying to base price only)
Early settlement discount taken
Freight charges
Electrical installation cost
Staff training in use of machine
Pre-production testing
Purchase of a three-year maintenance contract
$
1,050,000
20%
5%
30,000
28,000
40,000
22,000
60,000
Estimated residual value
Estimated life in machine hours
20,000
6,000 Hours
Hours used during 30 September 2006
Hours used during 30 September 2007
1,200
1,800
On 1 October 2007 Dearing decided to upgrade the machine by adding new
components at a cost of $200,000.This upgrade led to a reduction in the production time
per unit of the goods being manufactured using the machine. The upgrade also
increased the estimated remaining life of the machine at 1 October 2007 to 4,500
machine hours and its estimated residual value was revised to $40,000.
Hours used during 30 September 2008
850
Required:
Prepare extracts from the income statement and statement of financial position for the
above machine for each of the three years to 30 September 2008.
6
ACCA FR: Financial Reporting
IAS 16 PPE
7
By:
Zya Rana
ACCA FR: Financial Reporting
IAS 16 PPE
By:
Zya Rana
Change in Estimations:
Residual
Value
Straight Line
Method,
&
Units Method
Used In
Useful life
&
(Both are
Estimates)
Hours
Method
But, at time of change in Estimations, calculate the
-
NBV of that time
and then
-
Revised Depreciation
QUESTION 3:
An item of plant was acquired for $220,000 on 1 January 2012. The estimated useful life
of the plant was five years and the estimated residual value was $20,000. The asset is
depreciated on a straight line basis. On 31 December 2012 the future estimate of the
useful life of the plant was changed to three years, with an estimated residual value of
$12,000.
Required:
Compute the depreciation expense for 2012 and 2013?
8
ACCA FR: Financial Reporting
IAS 16 PPE
By:
Zya Rana
Change in Method of Depreciation:
-
Is allows, because it is an estimation
-
Should reflect consistency
-
Same class of assets should accounted under same treatment
But, at time of change in method of depreciation, calculate the
-
NBV of that time
and then
-
Revised Depreciation
QUESTION 4:
A piece of PPE purchased for $300,000 on 1 January 2017. The estimated useful life of
the plant was five years with a NIL residual value. The asset is being depreciated @
10% on a reducing balance method for first two years and on 31 December 2018, entity
decided to depreciate the asset on straight line basis.
Required:
-
Compute the depreciation expense for 2017 and 2018?
How to incorporate the change in method of depreciation for calculating
depreciation expense for the year ended 2019 and onwards?
9
ACCA FR: Financial Reporting
IAS 16 PPE
Component Accounting:
10
By:
Zya Rana
ACCA FR: Financial Reporting
IAS 16 PPE
By:
Zya Rana
Subsequent Measurement:
IAS 16 permits two accounting models for subsequent measurement of PPE:
Cost Model:
The asset is carried at cost less accumulated depreciation and impairment.
Revaluation Model:
The asset is carried at a revalued amount, being its fair value at the date of revaluation
less subsequent depreciation, provided that fair value can be measured reliably.
 KEY POINT:
Once selected, the policy shall apply to an entire class of property, plant and equipment.
Deprecation: For all depreciable assets:







Each part of an item of property, plant and equipment with a cost that is
significant in relation to the whole shall be depreciated separately.
Both the useful life and the residual value shall be reviewed annually and the
estimates revised as necessary in accordance with IAS 8.
Depreciation commences when an asset is in the location and condition that
enables it to be used in the manner intended by management.
Depreciation should be charged to the income statement, unless it is included in
the carrying amount of another asset
The depreciation method should be reviewed at least annually and, if the pattern
of consumption of benefits has changed, the depreciation method should be
changed prospectively as a change in estimate under IAS 8.
The depreciation method used should reflect the pattern in which the asset's
economic benefits are consumed by the enterprise
Depreciation shall cease at the earlier of it‟s derecognition (Sale or scrapping) or
its reclassification as “held for Sale” (IFRS 5)
11
ACCA FR: Financial Reporting
IAS 16 PPE
By:
Zya Rana
Subsequent Measurement under Revaluation Model:
Under the revaluation model, revaluations should be carried out regularly, so that the
carrying amount of an asset does not differ materially from its fair value at the balance
sheet date.
If an item is revalued, the entire class of assets to which that asset belongs should be
revalued.
Revalued assets are depreciated in the same way as under the cost model (see below).
If a revaluation results in an increase in value, it should be credited to equity under the
heading "revaluation surplus" unless it represents the reversal of a revaluation decrease
of the same asset previously recognised as an expense, in which case it should be
recognised as income.
A decrease arising as a result of a revaluation should be recognised as an expense to
the extent that it exceeds any amount previously credited to the revaluation surplus
relating to the same asset.
The revaluation reserve may be released to retained earnings in one of two ways:
1)
2)
When the asset is disposed of or otherwise derecognized, the surplus can be
transferred to retained earnings.
The difference between the depreciation charged on the revaluation amount and
that based on cost can be transferred from the revaluation reserve to retained
earnings. The transfer to retained earnings should not be made through the
income statement (that is, no "recycling" through profit or loss).
12
ACCA FR: Financial Reporting
IAS 16 PPE
Revaluation of a Non-Depreciable Asset:
Example:
PPE Initial total cost
Revaluation @ end if year 3
Revaluation @ end if year 4
Revaluation @ end if year 7
Revaluation @ end if year 9
Revaluation @ end if year 14
Revaluation @ end if year 15
=
=
=
=
=
=
=
100k
130k
150k
125k
90k
94k
105k
13
By:
Zya Rana
ACCA FR: Financial Reporting
IAS 16 PPE
By:
Zya Rana
Revaluation of a Depreciable Asset:
QUESTION 5:
At 1 January 2001, an item of plant acquired at a total cost of $500,000. Estimated
useful life is 25 years with no scrap value.
At 31 December 2013, company decided to revalue the asset at revalued amount of
$750,000.
Required:
1. NBV at time of revaluation?
2. Calculate revaluation reserve?
3. Calculate depreciation expense for year 14
4. Calculate excess depreciation
5. Adjustment of excess depreciation against revaluation reserve of asset
14
ACCA FR: Financial Reporting
IAS 16 PPE
15
By:
Zya Rana
ACCA FR: Financial Reporting
IAS 16 PPE
By:
Zya Rana
Revaluation Reserve Decrease Due To:
-
When excess depreciation is adjusted
-
Disposal of asset
-
Fall in value of asset (Impairment of asset)
-
Deferred tax liability
De-recognition (Retirements and Disposals):
An asset should be removed from the balance sheet on disposal or when it is withdrawn
from use and no future economic benefits are expected from its disposal. The gain or
loss on disposal is the difference between the proceeds
16
ACCA FR: Financial Reporting
IAS 36
By:
Zya Rana
IAS 36: IMPAIRMENT OF ASSETS
Objective:
To ensure that assets are carried at no more than their recoverable amount, and to
define how recoverable amount is calculated.
Scope:
IAS 36 applies to (among other assets):








land
buildings
machinery and equipment
investment property carried at cost
intangible assets
goodwill
investments in subsidiaries, associates, and joint ventures
assets carried at revalued amounts under IAS 16 and IAS 38
IAS 36 does not apply to the following assets:






investment property carried at fair value
inventories
assets held for sale
deferred tax assets
financial assets
certain agricultural assets carried at fair value
(IAS 40)
(IAS 02)
(IFRS 5)
(IAS 12)
(IAS 39)
(IAS 41)
Impairment:
An asset is impaired when its carrying amount exceeds its recoverable amount.
Carrying Amount:
The amount at which an asset is recognised in the balance sheet after deducting
accumulated depreciation and accumulated impairment losses
1
ACCA FR: Financial Reporting
IAS 36
By:
Zya Rana
Recoverable Amount:
The higher of:
or
-
Fair Value Less Costs to Sell (NRV)
Value in use
Fair Value less Costs to Sell:




If there is a binding sale agreement, use the price under that agreement less
costs of disposal.
If there is an active market for that type of asset, use market price less costs of
disposal. Market price means current bid price if available, otherwise the price in
the most recent transaction.
If there is no active market, use the best estimate of the asset's selling price less
costs of disposal.
Costs of disposal are the direct added costs only (not existing costs or
overhead).
Value in Use:
The discounted present value of estimated future cash flows expected to arise from:


the continuing use of an asset, and from
its disposal at the end of its useful life
Indications / Factors of Impairment:
External Factors:




market value declines
negative changes in technology, markets, economy, or laws
increases in market interest rates
company stock price is below book value
Internal Factors:



obsolescence or physical damage
asset is part of a restructuring or held for disposal
worse economic performance than expected
2
ACCA FR: Financial Reporting
IAS 36
By:
Zya Rana
Recognition of an Impairment Loss

An impairment loss should be recognised whenever recoverable amount is below
carrying amount. The impairment loss is an expense in the income statement
(unless it relates to a revalued asset where the value changes are recognised
directly in equity).

Adjust depreciation for future periods.
3
ACCA FR: Financial Reporting
IAS 36
By:
Zya Rana
Question 1
On 1 January 2018, Big Company acquired a NCA at a total cost of $50,000.
Depreciation for the year ended is $5,000.
At year end date i.e. on 31 December 2018, there were some indications of impairment.
Company conducted an impairment test review which revealed that the asset may
generate estimated cash inflows $7000 per year till next 3 years and then could be sold
at end of year 3 for a sum of $10,000 (ignoring PV).
Company also checked the fair value less cost to disposal of asset and observed that
the asset may generate proceeds of $40,000 and a cost of $5,000 needs to be incurred
before disposal.
Required:
1.
2.
3.
4.
5.
6.
Net book value at 31 December 2018 (as per IAS 16)?
Value in use at 31 December 2018?
Fair value less cost to sell at 31 December 2018?
Impairment loss (if any)?
Double entry to record the impairment loss?
Book value of asset after considering the implications of IAS 16 & IAS 36?
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ACCA FR: Financial Reporting
IAS 36
By:
Zya Rana
Question 2
A company that extracts natural gas and oil has a drilling platform in the Caspian Sea. It
is required by legislation of the country concerned to remove and dismantle the platform
at the end of its useful life.
Accordingly, the company has included an amount in its accounts for removal and
dismantling costs, and is depreciating this amount over the platform's expected life.
The company is carrying out an exercise to establish whether there has been an
impairment of the platform.
(a) Its carrying amount in the statement of financial position is $3m.
(b) The company has received an offer of $2.8m for the platform from another oil
company. The bidder would take over the responsibility (and costs) for dismantling and
removing the platform at the end of its life.
(c) The present value of the estimated cash flows from the platforms continued use is
$3.3m (before adjusting for dismantling costs).
(d) The carrying amount in the statement of financial position for the provision for
dismantling and removal is currently $0.6m.
Required:
What should be the value of the drilling platform in the statement of financial position,
and what, if anything, is the impairment loss?
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ACCA FR: Financial Reporting
IAS 36
By:
Zya Rana
Question 3
DR
$“m”
Land and buildings: cost (including Rs.90m land)
840
Accumulated depreciation at 1 January 2002
Plant and equipment: cost
CR
$“m”
120
258
Accumulated depreciation at 1 January 2002
126
Adjustments:
(i) Depreciation rates as per the company's accounting policy note are as follows:
Buildings
Plant and equipment
Straight line over 50 years
20% reducing balance
Company accounting policy is to charge a full year's depreciation in the year of an
asset's purchase and none in the year of disposal. Company’s land and buildings were
eight years old on 1 January 2002.
(ii) On 31 December 2002 the company revalued its land and buildings to $760m
(including $100m for the land). The company follows the revaluation model of IAS 16 for
its land and buildings, but no revaluations had previously been necessary.
(iii) At the beginning of the year, Company disposed of some malfunctioning equipment
for $7m. The equipment had cost $15m and had accumulated depreciation brought
forward at 1 January 2002 of $3m.
There were no other additions or disposal to property, plant and equipment in the year.
(iv) Due to a change in the company's product portfolio plans, an item of plant with a
carrying value $22m at 31 December 2002 (after adjusting for depreciation for the year)
may be impaired due to a change in use. An impairment test conducted at 31
December, revealed its fair value less costs of disposal to be $16m. The asset is now
expected to generate an annual net income stream of $3.8m for the next five years at
which point the asset would be disposed of for $4.2m. An appropriate discount rate is
8%. Five-year discount factors at 8% are:
Simple
Cumulative
0.677
3.993
Required: Show the treatment of above NCA for the year ended 31 December
2002.
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ACCA FR: Financial Reporting
IAS 36
7
By:
Zya Rana
ACCA FR: Financial Reporting
IAS 36
By:
Zya Rana
Cash-Generating Units:

Recoverable amount should be determined for the individual asset, if possible.

If it is not possible to determine the recoverable amount (fair value less cost to
sell and value in use) for the individual asset, then determine recoverable amount
for the asset's cash-generating unit (CGU).

The CGU is the smallest identifiable group of assets:

that generates cash inflows from continuing use, and

that are largely independent of the cash inflows from other assets or groups of
assets.
Examples of CGU:
Note:
Whenever there is impairment in a CGU, then the allocation of impairment should as
follows:
1.
Impairment due to a specific asset
2.
Goodwill
3.
Impairment on remaining NCA on Prorate Basis
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ACCA FR: Financial Reporting
IAS 36
By:
Zya Rana
Question 4
An impairment loss of £60,000 arises in connection with an IGU. The carrying amount of
the assets in the IGU, before the impairment, is as follows:
Goodwill
Patent (with no market value)
Tangible fixed assets
£000
20
10
40
–––
70
Show the impact of the impairment on 1 January.
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ACCA FR: Financial Reporting
IAS 36
By:
Zya Rana
Question 5
A company runs a unit that suffers a massive drop in income due the failure of its
technology on 1 January. The following carrying values were recorded in the books
immediately prior to the impairment:
£m
Goodwill
20
Technology
5
Brands
10
Land
50
Buildings
30
Other net assets
40
The recoverable value of the unit is estimated at £80 million. The technology is
worthless, following its complete failure. The other net assets include stock, debtors and
creditors. It is considered that the book value of other net assets is a reasonable
representation of its NRV.
Show the impact of the impairment on 1 January.
10
ACCA FR: Financial Reporting
IAS 36
By:
Zya Rana
Impairment of Goodwill:
Goodwill should be tested for impairment annually.
To test for impairment, goodwill must be allocated to each of the acquirer's cashgenerating units, or groups of cash-generating units, that are expected to benefit from
the synergies of the combination.
A cash-generating unit to which goodwill has been allocated shall be tested for
impairment at least annually by comparing the carrying amount of the unit, including the
goodwill, with the recoverable amount of the unit:
The impairment loss is allocated to reduce the carrying amount of the assets of the unit
(group of units) in the following order:


first, reduce the carrying amount of any goodwill allocated to the cash-generating
unit (group of units); and
Then, reduce the carrying amounts of the other assets of the unit (group of units)
pro rata on the basis.
The carrying amount of an asset should not be reduced below the highest of:



its fair value less costs to sell (if determinable);
its value in use (if determinable); and
zero.
If the preceding rule is applied, further allocation of the impairment loss is made pro rata
to the other assets of the unit (group of units).
Reversal of an Impairment Loss:





Same approach as for the identification of impaired assets: assess at each
balance sheet date whether there is an indication that an impairment loss may
have decreased. If so, calculate recoverable amount.
The increased carrying amount due to reversal should not be more than what the
depreciated historical cost would have been if the impairment had not been
recognised.
Reversal of an impairment loss is recognised as income in the income statement.
Adjust depreciation for future periods.
Reversal of an impairment loss for goodwill is prohibited.
11
ACCA FR (F7): Financial Reporting
By:
Zya Rana
IAS 38: INTANGIBLE ASSETS
Objective:
-
The objective of IAS 38 is to prescribe the accounting treatment for intangible assets that are not dealt
with specifically in another IAS.
-
The Standard requires an enterprise to recognise an intangible asset if, and only if, certain criteria are
met.
-
The Standard also specifies how to measure the carrying amount of intangible assets and requires
certain disclosures regarding intangible assets.
Scope:
IAS 38 applies to all intangible assets other than:


financial assets
intangible assets covered by another IAS, such as intangibles held for sale, deferred tax assets, lease
assets, assets arising from employee benefits, and goodwill. Goodwill is covered by IFRS 3
Intangible Asset:
-
An identifiable nonmonetary asset without physical substance.
An asset is a resource that is controlled by the enterprise as a result of past events (for example, purchase or
self-creation) and from which future economic benefits (inflows of cash or other assets) are expected. Thus,
the three critical attributes of an intangible asset are:



Identifiability
control (power to obtain benefits from the asset)
future economic benefits (such as revenues or reduced future costs)
Identifiability:
An intangible asset is identifiable when it:
is separable (capable of being separated and sold, transferred, licensed, rented, or exchanged, either
individually or as part of a package) or arises from contractual or other legal rights, regardless of
whether those rights are transferable or separable from the entity or from other rights and obligations.
Examples of possible intangible assets include:








computer software
patents
copyrights
motion picture films
customer lists
licenses
import quotas
franchises
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ACCA FR (F7): Financial Reporting
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Zya Rana
Intangibles can be acquired:





by separate purchase
as part of a business combination
by a government grant
by exchange of assets
by self-creation (internal generation)
Recognition Criteria:
-
-
IAS 38 requires an enterprise to recognise an intangible asset, whether purchased or self-created (at
cost) if, and only if:

it is probable that the future economic benefits that are attributable to the asset will flow to the
enterprise; and

the cost of the asset can be measured reliably.
This requirement applies whether an intangible asset is acquired externally or generated internally. IAS
38 includes additional recognition criteria for internally generated intangible assets (see below).
If recognition criteria not met:
-
If an intangible item does not meet both the definition of and the criteria for recognition as an
intangible asset, IAS 38 requires the expenditure on this item to be recognised as an expense when it is
incurred
Initial Recognition – Research and Development Costs:
-
Charge all research cost to expense
-
Development costs are capitalised only if the following criteria are met:






There is a clearly defined project
Expenditure is separately identifiable
The project is commercially viable
The project is technically feasible
Project income is expected to outweigh cost
Resources are available to complete the project
If an enterprise cannot distinguish the research phase of an internal project to create an intangible asset from
the development phase, the enterprise treats the expenditure for that project as if it were incurred in the
research phase only.
Initial Recognition: Internally Generated Brands, Titles, Lists
-
Brands, publishing titles, customer lists and items similar in substance that are internally generated
should not be recognised as assets.
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ACCA FR (F7): Financial Reporting
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Zya Rana
Measurement Subsequent to Acquisition: Cost Model and Revaluation
Models Allowed:
An entity must choose either the cost model or the revaluation model for each class of intangible asset.
Cost Model:
-
After initial recognition the intangible assets should be carried at cost less any amortisation and
impairment losses
-
This method is more commonly used in practice
Revaluation Model:
-
Intangible assets may be carried at a revalued amount (based on fair value) less any subsequent
amortisation and impairment losses only if fair value can be determined by reference to an active
market. Such active markets are expected to be uncommon for intangible assets.
-
Under the revaluation model, revaluation increases are credited directly to "revaluation surplus" within
equity except to the extent that it reverses a revaluation decrease previously recognised in profit and
loss. If the revalued intangible has a finite life and is, therefore, being amortised (see below) the
revalued amount is amortised.
Classification of Intangible Assets Based on Useful Life:
Intangible assets are classified as:
-
Indefinite life:
No foreseeable limit to the period over which the asset is expected to generate net cash inflows for the
entity
-
Finite life:
A limited period of benefit to the entity
Measurement Subsequent to Acquisition: Intangible Assets with Finite
Lives:
-
The cost less residual value of an intangible asset with a finite useful life should be amortised over that
life
-
The amortisation method should reflect the pattern of benefits


If the pattern cannot be determined reliably, amortise by the straight line method.
The amortisation charge is recognised in profit or loss unless another IFRS requires that it be
included in the cost of another asset
-
The amortisation period should be reviewed at least annually
-
The asset should also be assessed for impairment in accordance with IAS 36
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Measurement Subsequent to Acquisition: Intangible Assets with Indefinite
Lives:
-
An intangible asset with an indefinite useful life should not be amortised
-
Its useful life should be reviewed each reporting period to determine whether events and circumstances
continue to support an indefinite useful life assessment for that asset
-
If they do not, the change in the useful life assessment from indefinite to finite should be accounted for
as a change in an accounting estimate.
-
The asset should also be assessed for impairment in accordance with IAS 36
Subsequent Expenditure:
-
Subsequent expenditure on an intangible asset after its purchase or completion should be recognised as
an expense when it is incurred, unless it is probable that this expenditure will enable the asset to
generate future economic benefits in excess of its originally assessed standard of performance and the
expenditure can be measured and attributed to the asset reliably.
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Practice Question – Biogenics
(Part – A)
Over the last 20 years many companies have spent a great deal of money internally developing new intangible
assets such as software. The treatment for these assets is prescribed by IAS 38 Intangible assets.
Required: In accordance with IAS 38, discuss whether internally-developed intangible assets should be
recognised, and if so how they should be initially recorded and subsequently accounted for.
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Practice Question – Biogenics
(Part – B)
Biogenics is a publicly listed pharmaceutical company. During the year to 31 December 20X9 the following
transactions took place:
(i) $6m was spent on developing a new obesity drug which received clinical approval on 1 July 20X9 and is
proving commercially successful. The directors expect the project to be in profit within 12 months of the
approval date. The patent was registered on 1 July 20X9. It cost $1.5m and remains in force for three years.
(ii) A research project was set up on 1 October 20X9 which is expected to result in a new cancer drug. $200,000
was spent on computer equipment and $400,000 on staff salaries. The equipment has an expected life of four
years.
(iii) On 1 September 20X9 Biogenics acquired an up-to-date list of GPs at a cost of $500,000 and has been visiting
them to explain the new obesity drug. The list is expected to generate sales throughout the life-cycle of the
drug.
Required: Prepare extracts from the statement of financial position of Biogenics at 31 December 20X9 relating
to the above items and summarise the costs to be included in the statement of profit or loss for that year.
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ACCA FR (F7): Financial Reporting
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Zya Rana
Answer: Biogenic
(a) To be recognised, an intangible asset must first of all meet the definition of an intangible asset in IAS 38. It
must be controlled by the entity, it must be separably identifiable and it must be something from which the
entity expects future economic benefits to flow. It must then meet the recognition criteria of having a cost that
can be measured reliably.
For this reason internally-generated intangibles are not normally recognised as assets. They have not been
acquired for a consideration and therefore do not have a cost or value that can be measured reliably. For this
reason, a brand name that has been acquired can be capitalised, a brand name that has been internally
developed cannot be capitalised. The exception to this is development costs which can be capitalised if/when
they meet the IAS 38 criteria. They are initially recognised at cost.
After initial recognition development costs are amortised over the life cycle of the product. If at any point it
becomes apparent that the development costs no longer meet the capitalisation criteria, they should be written
off. Intangible assets with an indefinite useful life are not amortised but tested annually for impairment.
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
IFRS-05: Non-Current Asset Held For Sale and
Discontinued Operations
Held-For-Sale Classification:
IFRS 5 establishes a classification for non-current assets 'held for sale’. The following conditions must be met for
an asset (or 'disposal group') to be classified as held for sale:

Management is committed to a plan to sell

The asset is available for immediate sale

An active programme to locate a buyer is initiated

The sale is highly probable, within 12 months of classification as held for sale (subject to limited
exceptions)

The asset is being actively marketed for sale at a sales price reasonable in relation to its fair value

Actions required to complete the plan indicate that it is unlikely that plan will be significantly changed or
withdrawn.
The assets need to be disposed of through sale. Therefore, operations that are expected to be wound down or
abandoned would not meet the definition (but may be classified as discontinued once abandoned).
Disposal group:
-
A 'disposal group' is a group of assets, possibly with some associated liabilities
-
which an entity intends to dispose of in a single transaction
Question 1:
An entity is committed to a plan to sell a building and has started looking for a buyer for that building.
The entity will continue to use the building until another building is completed to house the office staff located
in the building. There is no intention to relocate the office staff until the new building is completed.
Required
Would the building be classified as held for sale?
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Question 2:
An entity is planning to sell part of its business that is deemed to be a disposal group. The entity is in a business
environment that is heavily regulated, and any sale requires government approval. This means that the sale time
is difficult to determine. Government approval cannot be obtained until a buyer is found and known for the
disposal group and a firm purchase contract has been signed. However, it is likely that the entity will be able to
sell the disposal group within one year.
Required
Would the disposal group be classified as held for sale?
Question 3:
An entity has an asset that has been designated as held for sale in the financial year to December 31, 20X5.
During the financial year to December 31, 20X6, the asset still remains unsold, but the market conditions for the
asset have deteriorated significantly. The entity believes that market conditions will improve and has not
reduced the price of the asset, which continues to be classified as held for sale. The fair value of the asset is $5
million, and the asset is being marketed at $7 million.
Required
Should the asset be classified as held for sale in the financial statements for the year ending December 31,
20X6?
Measurement of NCA as Held For Sale:
IFRS 05 says; classify NCA as held for sale at  LOWER OF
-
Carrying Value (NBV)
Or
-
Fair Value Less Cost To Sell (FVLCTS)
Impairment:
Impairment must be considered both at the time of classification as held for sale and subsequently.
Non-depreciation:
Non-current assets or disposal groups that are classified as held for sale shall not be depreciated.
SOFP presentation:
Assets classified as held for sale, and the assets and liabilities included within a disposal group classified as held
for sale, must be presented separately on the face of the balance sheet.
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ACCA FR (F7): Financial Reporting
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Zya Rana
Question 4:
An asset has a carrying value of $600,000.
It is classified as held for sale on 30 September 20X6. At that date its fair value less costs to sell is estimated at
$550,000. The asset was sold for $555,000 on 30 November 20X6. The year end of the entity is 31 December
20X6.
Requirement 1:
How would the classification as held for sale, and subsequent disposal, be treated in the 20X6 financial
statements?
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3
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Question 4:
Requirement 2:
How would the answer differ if the carrying value of the asset at 30 September 20X6 was $500,000, with all
other figures remaining the same?
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ACCA FR (F7): Financial Reporting
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Zya Rana
Subsidiaries Held for Disposal:
IFRS 5 applies to accounting for an investment in a subsidiary for which control is intended to be temporary
because the subsidiary was acquired and is held exclusively with a view to its subsequent disposal in the near
future. For such a subsidiary, if it is highly probable that the sale will be completed within 12 months then the
parent should account for its investment in the subsidiary under IFRS 5 as an asset held for sale, rather than
consolidate it under IAS 27.
However, IAS 27 still requires that if a subsidiary that had previously been consolidated is now being held for
sale, the parent must continue to consolidate such a subsidiary until it is actually disposed of. It is not excluded
from consolidation and reported as an asset held for sale under IFRS 5.
An entity that is committed to a sale involving loss of control of a subsidiary that qualifies for held-for-sale
classification under IFRS 5 shall classify all of the assets and liabilities of that subsidiary as held for sale, even if
the entity will retain a non-controlling interest in its former subsidiary after the sale.
Classification as Discontinuing:
A discontinued operation is a component of an entity that either has been disposed of or is classified as held for
sale, and:



represents a separate major line of business or geographical area of operations,
is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area
of operations, or
is a subsidiary acquired exclusively with a view to resale and the disposal involves loss of control
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
IAS-41: Agriculture
Scope:
Agriculture standardizes the accounting for agricultural activity:

that is the conversion of biological assets into agricultural produce

as a generalization, the standard requires biological assets to be

measured at “fair value less costs to sell”
Definitions:

biological assets – living plants and animals

agricultural produce – the produce harvested from the biological assets

costs to sell – incremental costs directly attributable to the disposal of an asset excluding finance
costs and taxation
Initial Recognition:
An entity should recognise a biological asset or agricultural produce only when the entity:

controls the asset

as a result of past events

it is probable that future economic inflows will result

the asset and inflows are capable of reliable measurement
Measurement of Biological Assets:

On initial recognition and on subsequent reporting dates, should be measured at fair value less
estimated costs to sell, unless fair value cannot be reliably measured (see below)*
Measurement of Agricultural Produce:

should be measured at fair value less estimated costs to sell at the point of harvest

because harvested produce is a marketable commodity, there is no exception for measurement
unreliability

any gain on initial recognition of biological assets at fair value less costs to sell, and any changes
during a period in fair value less costs to sell of biological assets are reported in the statement of
profit or loss

similarly, any gain on initial recognition of agricultural produce at fair value less costs to sell
should be included in the statement of profit or loss for the period in which it arises

all costs related to biological assets measured at fair value are recognised as expenses in the
period in which they are incurred with the exception of the purchase cost of those assets
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ACCA FR (F7): Financial Reporting
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Zya Rana
* From above,
There remains a problem with measurement of a biological asset for which fair value cannot be
reliably measured it is conceivable that, at initial measurement, there is no quoted price in an active
market for the biological asset and no alternative appropriate and workable method exists,

in this case, the asset should be measured at cost less accumulated depreciation and
impairment losses but the entity must still measure all of its other biological assets at fair
value less costs to sell

and if circumstances change and fair value becomes reliably measurable, a switch to fair
value less costs to sell is required
Guidance on the Measurement of Fair Value:

best measure is “quoted market price in an active market”

if no active market, a market–based price such as the most recent market price for that type (or
similar) asset

if market–based prices not available, the net present value of related cash flows from that asset,
discounted at the entity’s current cost of capital

in rare circumstances, cost may be taken as fair value where there has been little or no change
to the biological asset since acquisition or where such change is not likely to have a material
effect on value

the fair value of a biological asset is based on current prices and is not reflective of actual prices
agreed in binding sales contracts requiring delivery at some time in the future
Sundry Points:

change in fair value of biological assets is part due to physical change (asset is one year older)
and part due to market price change separate disclosure of the two elements is encouraged but
not required

fair value measurement stops at harvest. After that, IAS on inventory applies

agricultural land is accounted for under IAS on PPE

but agricultural assets attached to the land (for example fruit trees) are measured separately
from the land

intangible agricultural assets (for example milk quotas) are accounted for under IAS 38 intangible
assets

government grants unconditionally received in respect of biological assets measured at fair value
less costs to sell are accounted for as income in the period when the grant is receivable

but if the grant is conditional, it shall be recognised as income only when the conditions have
been met, this includes grants receivable where an entity is required NOT to engage in
agricultural activities
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ACCA FR (F7): Financial Reporting
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Case Study 1
A Colombian entity is considering the valuation of its harvested coffee beans. Industry practice is to
value the coffee beans at market value. The national accounting body has always used this practice
and uses as its source of reference “Accounting for Successful Farms,” a local publication.
Required
The entity wishes to adopt IAS 41 but does not know what the impact will be on its inventory of coffee
beans.
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ACCA FR (F7): Financial Reporting
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Zya Rana
Case Study 2
An entity has these balances in its financial records:
$m
Value of biological asset at cost 12/31/X1
600
Fair valuation surplus on initial recognition at fair value 12/31/X1
700
Change in fair value to 12/31/X2 due to growth and price fluctuations
100
Decrease in fair value due to harvest
90
Required
Show how these values would be incorporated into the financial statements at December 31, 20X2.
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ACCA FR (F7): Financial Reporting
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Case study 3
Show the treatment of transactions at year start, during the year and at year-end.
Information regarding fair values is as follows:
Item
Fair value less point of sale costs
1 October 2012
1 April 2014
30 September 2014
$
$
$
Land
47
51.7
55.4
New born calves (per calf )
47
49.35
51.7
Six month old calves (per calf )
54.05
56.4
58.15
Two year old cows (per cow)
211.5
216.2
220.9
Three year old cows (per cow)
218.55
223.25
227.95
1.41
1.29
1.29
Milk (per litre)
At year start, on 1 October 2012, Numbers carried out the following transactions:

Purchased a large piece of land for $47 million

Purchased 10,000 dairy cows (average age at 1 October, 2012 two years) for $2.35 million

Received a grant of $940,000 towards the acquisition of the cows. This grant was non–returnable
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ACCA FR (F7): Financial Reporting
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During the year ending, Numbers incurred the following costs and on 30 September 2013, the
calves were also born:

$1,175,000 to maintain the condition of the animals (food and protection).

$705,000 in breeding fees to a local farmer

On 1 April, 2013 5,000 calves were born. There were no other changes in the number of animals
during the year ended 30 September, 2013
At year end date, on 30 September 2013, apart from above assets (Land, Cows and Calves)

Numbers had 10,000 litres of unsold milk in inventory
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ACCA FR (F7): Financial Reporting
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IAS 2: Inventories
1.
Objective
The objective of IAS 2 is to prescribe the accounting treatment for inventories. It provides
guidance for determining the cost of inventories and for subsequently recognising an expense,
including any write down to net realisable value. It also provides guidance on the cost
formulas that are used to assign costs to inventories.
2.
Scope
IAS 2 applies to all inventories other than
 Financial instruments (IAS 39)
 Biological assets (IAS 41)
3.
Key definitions
Inventories include
 Finished goods (assets held for sale in normal course of business)
 Work in process (assets in production process for sale in the ordinary course of
business)
 Raw materials (materials and supplies that are consumed in production)
4.
Net Realisable Value
The estimated selling price in the normal course of business less estimated cost of completion
and estimated cost of disposal.
5.
Measurement of Inventories
Inventories are required to be stated at the lower of cost and NRV (Net Realisable Value).
6.
Cost of Inventories
Cost should include all:
 Costs of purchase (including taxes, transport and handling) net of trade discount
received.
 Costs of conversion (including fixed and variable manufacturing overheads) and
 Other costs incurred in bringing the inventories to their present location and condition.
1
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ACCA FR (F7): Financial Reporting
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Cost of conversion of inventory
Cost of conversion of inventory includes costs directly attributable to the unit production for
example direct labor. The allocation of overhead to the cost of inventory is based on the
normal capacity of the facility.
8.
Excluded costs form inventory valuation
Inventory costs should not include:






9.
Abnormal waste
Storage costs
Selling costs
Administrative overheads unrelated to production
Interest cost when inventories are purchased with deferred settlement terms
Foreign exchange differences arising directly on the recent acquisition of inventories
invoiced in a foreign currency.
Methods for the Inventory Valuation:
FIFO  (First In, First Out)  Heterogeneous Nature Inventory  Separately
Identifiable
AVCO  (Weighted Average)  Homogeneous Nature Inventory  Cannot be
Separately Identifiable
10.
Systems for Valuation:
Perpetual System  Continuous System
Periodic System
11.
Inventory should be recorded at Lowe of:
- Total Cost
- NRV (Net Realizable Value)
NRV = Estimated Selling Price – Estimated Cost to Sell
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Inventory Relationship  COGS and Profits
Normal I/S
Sales
Situation 1
Situation 2
2000
COGS
Opening stock
400
A: Purchases
200
L: Closing stock
(150)
COGS
(450)
Gross profit
1550
Expenses
(200)
Net Profit
1350
LAST YEAR  Closing Stock  Error found this year;
3
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ACCA FR (F7): Financial Reporting
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1.
A)
B)
C)
D)
Inventory should be stated at:
Lower of cost and fair value
Lower of cost and NRV
Lower of cost and nominal value
Lower of cost and net selling price
2.
A)
B)
C)
D)
Which of the following costs of conversion cannot be included in cost of inventory?
Cost of direct labor
Factory rent and utilities
Salaries of sales staff (sales deptt. Shares the building with factory supervisors).
Factory overheads based on normal capacity
3.
A)
B)
C)
D)
E)
F)
G)
Inventories are assets:
Used in the production or supply of goods and services for administrative purposes
Held for sale in ordinary course of business
Held for long-term capital appreciation
In the process of production for such sales
In the form of materials or supplies to be consumed in the production or the rendering
of services
Choices B and D
Choices B, D and E
4.
A)
B)
C)
D)
E)
F)
G)
The cost of inventory should not include:
Purchase Price
Import duties and other taxes
Abnormal amounts of wasted materials
Administrative overheads
Fixed and variable production overheads
Selling costs
Choices C, D and F
5.
ABC Co’ manufactures and sells paper envelopes. The stock of envelopes was included
in the closing inventory as of December 31, 2005, at a cost of $50 each per pack. During the
final audit, the auditors noted that the subsequent sales price for the inventory at January 15,
2006, was $40 each per pack. Furthermore, inquiry reveals that during the physical stock take,
a water leakage has created damages to the paper and the glue. Accordingly, in the following
week, ABC Co’ has spent a total of $15 per pack for repairing and reapplying glue to the
envelopes. The net realisable value and inventory write-down (loss) amount to:
A)
B)
C)
D)
E)
$40 and $10 respectively
$45 and $10 respectively
$25 and $25 respectively
$35 and $25 respectively
$30 and $15 respectively
4
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ACCA (FR) F7: Financial Reporting
By:
Zya Rana
IAS 37: Provisions, Contingent Liabilities and Contingent Assets
Objective:
The objective of IAS 37 is to ensure that appropriate recognition criteria and measurement bases are applied to;
-
provisions, contingent liabilities and contingent assets and
-
that sufficient information is disclosed in the notes to the financial statements to enable users to
understand their nature, timing and amount
-
The Standard aims to ensure that only genuine obligations are dealt with in the financial statements planned future expenditure, even where authorised by the board of directors or equivalent governing
body, is excluded from recognition.
Provision:
Is a liability of
-
Uncertain time OR
Amount
Examples:
-
Provision of warranty claims
Legal claims provisions
Liability:
A present obligation arose due
- Past event &
- Future economic benefits outflow  when? Yes
Liability:
-
How much? Yes
Possible obligation
arose due to past events
whose existence will depend upon future uncertain event &
event is not in entity’s control
Recognition of a Provision:
An enterprise must recognise a provision if, and only if:
o
a present obligation (legal or constructive) has arisen as a result of a past event (the obligating event),
payment is probable ('more likely than not'), and
o
the amount can be estimated reliably.
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ACCA (FR) F7: Financial Reporting
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Obligation:
Depends on the obligatory events
Types of obligatory events:
1.
Legal obligation ---------Defined by law
2.
Constructive obligation --------Written policies, Established pattern of past practices
Provisions:
Recurring nature events ----------Probability of past history
Examples:
- Warranty claims
- Provision of bad debts
-
One off nature events -------------Management best judgment of estimate
Examples:
- Dismantling cost
Onerous Contracts:
Means, Loss making contracts
Should we make provisions for onerous contracts?
YES
Restructuring:
Means, major change in business.
Examples:
Operation close
Automation
Subsidiary sale
Redundancy
Dismantling
Should we make provision for restructuring?
YES; If the following conditions met:
-
-
Detailed formal plan
affected parties should informed
public announcement
sale binding agreement
Future operating losses ----should not be taken in restructuring provisions
If losses arise on the sale of fixed assets, then to cover that loss, No provision should be made
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ACCA (FR) F7: Financial Reporting
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Zya Rana
Some Examples of Provisions
Circumstance
Accrue a Provision?
Restructuring by sale of an operation
Accrue a provision only after a binding sale agreement
Restructuring by closure or reorganization
Accrue a provision only after a detailed formal plan is
adopted and announced publicly. A Board decision is not
enough
Warranty
Accrue a provision (past event was the sale of defective
goods)
Customer refunds
Accrue if the established policy is to give refunds (past
event is the customer's expectation, at time of purchase,
that a refund would be available)
Offshore oil rig must be removed and sea bed Accrue a provision when installed, and add to the cost of
restored
the asset
Future operating losses
No provision (there is no obligation)
Staff training
No provision (there is no obligation to provide the training)
A chain of retail stores is self-insured for fire No provision until a an actual fire (no past event)
loss
Self-insured
restaurant,
people
were Accrue a provision (the past event is the injury to
poisoned, lawsuits are expected but none customers)
have been filed yet
Major overhaul or repairs
No provision (no obligation)
Environmental provisions
Accrue a provision if there is an obligation (legal or
constructive)
Onerous (loss-making) contract
Accrue a provision
Contingent liability:
a possible obligation depending on whether some uncertain future event occurs, or
a present obligation but payment is not probable or the amount cannot be measured reliably
Contingent asset:
a possible asset that arises from past events, and whose existence will be confirmed only by the occurrence or
non-occurrence of one or more uncertain future events not wholly within the control of the enterprise.
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ACCA (FR) F7: Financial Reporting
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Zya Rana
Summary in table form:
Probability of outcome
Assets
Liabilities
Virtually certain
Recognise
Recognise as a provision *
Probable
Disclose as a contingent
asset
Recognise as a provision *
Possible
Ignore
Disclose as a contingent
liability
Remote
Ignore
Ignore
Case 1: Justina supplies fish to a local restaurant. In August 2004 she supplied the restaurant with some shellfish, and now she has heard that some of the restaurant’s customers have suffered attacks of food-poisoning.
The restaurant has claimed that this is because of Justina’s shell-fish, and has commenced a legal action against
her.
Algirdas, a local solicitor who specialises in food-poisoning cases, has advised Justina that she has a 42% chance
of losing the case, and that, if she does lose, she will probably have to pay $300,000 to settle the liability.
What is the nature of Justina’s liability, if any, and how should it be treated in her financial statements for the
year ended 31 August, 2004?
CASE 1:
-
Justina should only DISCLOSE it as a Contingent Liability, as the chances are less than 50% “i.e. Possible
chances”.
Do not record any accounting entry
Case 2: Ginta, an Australian mining business, was fined $130,000 by the Lithuanian government for polluting the
River Nerys. The Seimas is about to pass new legislation which will require Australian miners to clear up their
mining sites, and to change their mining processes in order to avoid a repetition of the river pollution incident.
Advise Ginta of the correct accounting treatment in her financial statements for the year ended 31 December,
2004 of
(a) the $130,000 fine
(b) the costs of clearing up her mining sites
(c) the costs of changing her mining processes
CASE 2:
(a)
We will create provision
Legal Exp
DR
Provision for legal exp CR
130000
130000
(b)
Cost of clearing-up site is not measured reliably
So, DO NOTHING
(c)
Changing Mining Process
Same as (b)
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
IFRS 15: Revenue from Contract with Customers
Contract:
Contract is an agreement between two or more parties that creates enforceable rights and
obligations.
Customer:
Customer is a party that has contracted with an entity;
-
to obtain goods or services that are an output of that entity’s ordinary activities
in exchange for consideration
Income:
Income is increases in economic benefits during the accounting period;
-
in the form of inflows or
enhancements of assets or
decreases of liabilities that result in an increase in equity,
other than those relating to contributions from equity participants
Performance obligation:

A promise in a contract with a customer to transfer to the customer either: a good or service
(or a bundle of goods or services) that is distinct, or

a series of distinct goods or services that are substantially the same and that have the same
pattern of transfer to the customer
Transaction price:
It is the amount of consideration to which an entity expects to be entitled
-
in exchange for transferring promised goods or services to a customer,
excluding amounts collected on behalf of third parties
Control:
Control of an asset is defined as;
-
the ability to direct the use of and obtain substantially all the remaining benefits from the
use of the asset
as well as the ability to exclude others from the use of the asset
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ACCA FR (F7): Financial Reporting
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Revenue:
Revenue is income arising in the course of an entity’s ordinary activities and specifically:

Includes sales, services, interest, royalties and dividends

Excludes trade discounts and VAT

Should be measured at fair value of consideration received

If consideration is deferred, amount should be discounted

The difference between apparent sale value and fair value where sales are financed by the
seller
Revenue from the sale of goods recognised when all criteria are met:

Transfer of significant risks and rewards

No continuing managerial involvement nor effective control of goods sold

Revenue can be reliably measured

Probable inflow of related economic benefits

Reliable measurement of transaction costs
5 Step Model for Recognizing Revenue from Contracts:
Step 1: Identify the contract with the customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations in the contract
Step 5: Recognise revenue when the entity satisfies a performance obligation
Example:
Machine sold (legal title transferred) on 01 January 2020 for $3,000 as well as a servicing
contract made that day for next 12 months for an agreed price of $1,200.
Customer paid full amount of $4,200 ($3,000 + $1,200) on 01 January 2020.
Required: Show the treatment of above contract as per IFRS 15.
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ACCA FR (F7): Financial Reporting
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Zya Rana
Step 1 - Identify the Contract With the Customer:
A contract with a customer falls within the IFRS if the following 5 conditions are met;

the contract has been approved by the parties to the contract

each party’s rights in relation to the goods to be transferred can be identified

the payment terms for the goods to be transferred can be identified

the contract has commercial substance

it is probable that the consideration to which the entity is entitled in exchange for the goods
will be recoverable
Step 2 - Identify the Performance Obligations in the Contract:
At the time the contract is entered into, the entity should assess the goods and services to be
delivered and identify as a performance obligation:

goods (or bundles of goods) that are distinct, and

a series of distinct services that are substantially the same and that have the same pattern of
transfer to the customer
Step 3 - Determine the Transaction Price:
Essentially, this is the price agreed within the contract in respect of the transfer of the goods in
satisfaction of the performance obligation but the contract may contain elements of the
consideration that are variable.
Step 4 - Allocate the Transaction Price to the Performance Obligations in the Contract:
Where a contract has multiple performance obligations, it is necessary to allocate the transaction
price to those separate obligations.
Step 5 - Recognise Revenue when the Entity Satisfies a Performance Obligation:
Revenue shall be allocated over a time period if any one of the following criteria is satisfied;





entity gains the right to payment for the asset
customer is recognised as having legal ownership of the asset
entity has transferred physical possession of the asset
significant risks and rewards of ownership have been transferred by the entity to the
customer
customer has accepted delivery of the asset
3
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Discount and Bundling of Sales:
A company sale Machine and its one year warranty for $95,000 and $30,000 respectively.
However, if company sale these as bundling sales, then it charge $100,000.
Required: Show the treatment of discount of $25,000 given on bundling sales?
There are 2 treatments for such a discount:
1.
General Treatment:
The discount is allocated across each component of transaction
2.
Special Treatment:
The discount should only be allocated to specific component, if
company regularly sale that component at discounted price
4
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Past Exam Question – September 2016 (Mighty IT Co)
Mighty IT Co provides hardware, software and IT services to small business customers.
Mighty IT Co has developed an accounting software package. The company offers a supply and
installation service for $1,000 and a separate two-year technical support service for $500.
Alternatively, it also offers a combined goods and services contract which includes both of these
elements for $1,200. Payment for the combined contract is due one month after the date of
installation.
Q1: In accordance with IFRS 15 Revenue from Contracts with Customers, when should
Mighty IT Co recognise revenue from the combined goods and services contract?
A
Supply and install: on installation
Technical support: over two years
B
Supply and install: when payment is made
Technical support: over two years
C
Supply and install: on installation
Technical support: on installation
D
Supply and install: when payment is made
Technical support: when payment is made
Q2: For each combined contract sold, what is the amount of revenue which Mighty IT Co
should recognise in respect of the supply and installation service in accordance with
IFRS 15?
A
B
C
D
$700
$800
$1,000
$1,200
Q3: Mighty IT Co sells a combined contract on 1 January 20X6, the first day of its
financial year.
In accordance with IFRS 15, what is the total amount for deferred income which will
be reported in Mighty IT Co’s statement of financial position as at 31 December
20X6?
A
B
C
D
$400
$250
$313
$200
5
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Performance Obligation Satisfied Over Time / Long-Term Contracts:
Contract Revenue: The amount of revenue agreed in the contract.
Contract Costs:
Costs that are directly related to the specific asset
Contract Asset:
Value of asset constructed under contract
Contract Receivable: The amounts which are to be received by the customer under the contract
Contract Liability: If customer pays at initial stage and the related performance obligations
are yet to be completed, then the amount received should be recognised as
contract liability
Methods to deal with Long-Term Contracts:
1.
Output Method
2.
Input Method
Output Method:
-
It works on the basis of “Work Certified”
Work certified based on the “Surveys of Performance”
In exam, use the amount of work certified (if given), otherwise;
Work certified % is calculated as

work certified / total contract price * 100
Input Method:
-
Works on the basis of “Cost Incurred to Date”
Cost to date / estimated total costs * 100
6
ACCA FR (F7): Financial Reporting

Income Statement Extract
Contract sale revenue
=
xx
Contract cost of sales
=
(x)
Contract profit for the year
=
xx
By:
Zya Rana
Long Term Contracts
Balance Sheet Extract

Actual cost to date
=
xx
Profit/loss to date
=
x/(x)
Less: Invoice billed to customer
=
(xx)
Contract Asset / (Contract Liability) =
x/(x)
Contract Receivable
Unpaid invoices by customers
=
Long Term Contracts
7
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Example 1
The following information relates to a construction contract:
$
Estimated contract revenue
800,000
Cost to date
320,000
Estimated cost to complete
280,000
Estimated stage of completion
60%
Required:
What amount of revenue, costs and profit should recognized in the statement of profit or loss?
8
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Example 2
Sunsan Company has a contract in process with the following details:
Total contract price
$
750
Costs incurred to date
225
Estimated cost to completion
340
Payments invoiced and received
290
Required:
A.
Estimated profit / (loss) of the contract
B.
Is there any %age for estimated stage of completion?
C.
In the absence of (B), what will be appropriate step for calculating %age?
YES
NO
9
ACCA FR (F7): Financial Reporting
D.
Income statement extract
E.
Balance sheet extract
By:
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Example 3 (No profit estimation)
The following information relates to a construction contract:
Estimated contract revenue
$
800,000
Cost to date
320,000
Estimated cost to complete
280,000
Estimated stage of completion
60%
Take the same contract but now assume that the business is not able to reliably estimate the outcome of
the contract although it is believed that all costs incurred will be recoverable from the customer.
Required:
What amounts should be recognized for revenue, costs and profit in the statement of profit or loss?
11
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Example 4 (Loss making contract)
Fahad & Co. has a contract in process with the following details:
Total contract price
$
550
Costs incurred to date
225
Estimated cost to completion
340
Payments invoiced and received
290
Required:
A.
Estimated profit / (loss) of the contract
B.
Is there any %age for estimated stage of completion?
C.
In the absence of (B), what will be appropriate step for calculating %age?
YES
NO
12
ACCA FR (F7): Financial Reporting
D.
Income statement extract
E.
Balance sheet extract
By:
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Example 5
The main business of Sona Co is building work. At the end of September 20X3 there is an uncompleted
contract on the books, details of which are as follows.
Date commenced
Expected completion date
1 April 2001
23 December 2003
Total contract revenue
$
290,000
Costs to 30 September 2003
210,450
Value of performance obligations satisfied to 30 September 2003 230,000
Amounts invoiced for work certified to 30 September 2003
210,000
Cash received to 30 September 2003
194,000
Estimated costs to completion at 30 September 2003
20,600
Sona calculates satisfaction of performance obligations based on work certified as a percentage of
contract price.
Required:
A.
Estimated profit / (loss) of the contract
B.
Is there any %age for estimated stage of completion?
YES
NO
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
C.
In the absence of (B), what will be appropriate step for calculating %age?
D.
Income statement extract
E.
Balance sheet extract
15
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Example 6
Vivi Co has two contracts in progress, the details of which are as follows.
Happy (profitable)
$'000
Sad (loss-making)
$'000
Total contract revenue
300
300
Costs incurred to date
90
150
Estimated costs to completion
135
225
Payments invoiced and received
116
116
Vivi measures satisfaction of performance obligations based on percentage of work certified as complete.
Required:
Show extracts from the statement of profit or loss and other comprehensive income and the
statement of financial position for each contract, assuming they are both certified as:
(a) 40% complete; and
(b) 36% complete
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Happy Contract:
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Sad Contract:
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
IAS 21: The Effects of Changes in Foreign Exchange Rates
Objective:
IAS 21 objective is to provide rules that an entity should follow in Translation of foreign
currency transactions.
Currency
Functional Currency
Presentation Currency
Currency of the country in which a company
operates
- E.g.
Careem Pakistan 
Currency in which financial statements are
prepared
- E.g.
- Careem Pakistan 
There are 3 types of Exchange Rate:
-
Historic Rate 
Average Rate 
Closing Rate 
Translation of Foreign Currency Transaction
-
Group Transactions
Individual Transactions
Settled Transactions
Un-Settled Transactions
Transaction occurred during the year and
settled before year end.
Translation at transaction time:
(sale/purchase time)
Transaction occurred during the year and
remained un-settled at year end.
Translation at transaction time:
(sale/purchase time)
Using the Historic Rate
Using the Historic Rate
Translation at settlement time:
(Cash paid/received time)
Translation at year-end:
Using the rate at day/date of settlement
Using the closing rate
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Treatment of Exchange Differences
If arises due to Trading Activity
If arises due to Non-Trading Activity
Will be reported to P/L, as an
-
Will be adjusted from
Operating Expense or
Operating Income
-
Interest Income or
similar finance cost
Items
Monetary Items
Items which are directly converted into cash
are monetary items; such as
-
Receivables
Payables
Loans
Non-Monetary Items
Items which are not directly converted into
cash are non-monetary items; such as
-
Inventory
PPE
At year-end, if transaction remained un-settled, then only Monetary Items are
translated and nothing to do with non-monetary items.
Non-Monetary Items:
-
They are never translated &
-
are dealt under Cost Model; means
-
Initially recorded at cost (using historic rate) &
-
and same treatment subsequently
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Example 1: (Settled Transaction)
Company A
Company B


Functional Currency = $
Functional Currency = Kronits (Kr)
On 1 April 2008, Company A bought goods from company B for kr54,000 and company A will
pay after 2 months i.e. on 31 May 2008. Company A’s year-end date is 31 December 2008.
Exchanges Rates are as follows:
Transaction date rate (1 April 2008) Kr 1.80 : $1
Payment date rate (31 May 2008) Kr 1.75 : $1
Required:
Show the treatment at transaction time and at settlement time.
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Example 2: (Un-Settled Transaction)
Company X functional currency is $, buys goods from an overseas Company Z on 1 March
2018. The goods are invoiced at Kr54,000. Payment is still outstanding at year end date 30
June 2008.
Exchanges Rates are as follows:
Transaction date rate (1 March 2008)
Year-end date rate (30 June 2008)
Kr 1.80 : $1
Kr 1.70 : $1
Required:
Show the treatment at transaction time and at year-end.
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Example 3:
Company D’s functional currency is $ and the year-end date is 31 December.
On 25 October 2001, company D purchased goods from a Swedish supplier for Swedish
Krona (SWK) 286,000.
Exchanges Rates are as follows:
25 October 2001
16 November 2001
31 December 2001
$1
$1
$1
=
=
=
SWK11.16
SWK 10.87
SWK11.02
Required: Accounting Treatment, if;
a.
The payment of SWK286,000 is made during the year on 16 November 2001
b.
The payment owed remains outstanding at year-end
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
IAS 08: Accounting Policies, Changes in Accounting Estimates and Errors
Accounting policies:
Accounting policies are the principles, bases, conventions, rules and practices applied by an entity which specify
how the effects of transactions and other events are reflected in the financial statements.
Changing Accounting Policies:
The general rule is that accounting policies are normally kept the same from period to period to ensure
comparability of financial statements over time.
IAS 8 requires accounting policies to be changed only if the change:
•
is required by IFRSs or
•
will result in a reliable and more relevant presentation of events or transactions.
A change in accounting policy occurs if there has been a change in:
•
Recognition, e.g. an expense is now recognised rather than an asset
•
Presentation, e.g. depreciation is now included in cost of sales rather than administrative expenses, or
•
Measurement basis, e.g. stating assets at replacement cost rather than historical cost.
Accounting For a Change in Accounting Policy:
The required accounting treatment is that:
•
The change should be applied retrospectively, with an adjustment to the opening balance of retained
earnings in the statement of changes in equity
•
Comparative information should be restated unless it is impracticable to do so
•
If the adjustment to opening retained earnings cannot be reasonably determined, the change should be
adjusted prospectively, i.e. included in the current period’s income statement.
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ACCA FR (F7): Financial Reporting
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Zya Rana
Accounting Estimate:
Accounting Estimate is a method adopted by an entity to arrive at estimated amounts for the financial
statements.
Most figures in the financial statements require some estimation:
•
The exercise of judgment based on the latest information available at the time
•
At a later date, estimates may have to be revised as a result of the availability of new information, more
experience or subsequent developments.
Changes in accounting estimates
The requirements of IAS 8 are:
•
The effects of a change in accounting estimate should be included in the income statement in the period
of the change and, if subsequent periods are affected, in those subsequent periods.
•
The effects of the change should be included in the same income or expense classification as was used
for the original estimate.
•
If the effect of the change is material, its nature and amount must be disclosed.
Examples of changes in accounting estimates are changes in:
•
The useful lives of noncurrent assets
•
The residual values of noncurrent assets
•
The method of depreciating noncurrent assets
•
Warranty provisions, based upon more up-to-date information about claims frequency
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ACCA FR (F7): Financial Reporting
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Zya Rana
Prior Period Errors:
Prior Period Errors are omissions from and misstatements in, the financial statements for one or more prior
periods arising from a failure to use information that:
•
Was available when the financial statements for those periods were authorised for issue and
•
Could reasonably be expected to have been taken into account in preparing those financial statements.
Such errors include mathematical mistakes, mistakes in applying accounting policies, oversights and fraud.
Current period errors that are discovered in that period should be corrected before the financial statements are
authorised for issue.
Correction of Prior Period Errors
Prior period errors are dealt with by:
•
restating the opening balance of assets, liabilities and equity as if the error had never occurred, and
presenting the necessary adjustment to the opening balance of retained earnings in the statement of
changes in equity
•
restating the comparative figures presented, as if the error had never occurred
•
disclosing within the accounts a statement of financial position at the beginning of the earliest
comparative period. In effect this means that three statements of financial position will be presented
within a set of financial statements:
– At the end of the current year
– At the end of the previous year
– At the beginning of the previous year.
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ACCA FR (F7): Financial Reporting
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Zya Rana
IAS 10: Events after the Reporting Period
Events Occurring After the Reporting Period:
Are those events, both favourable and unfavourable, that occur between the end of the reporting period and
the date on which the financial statements are authorized for issue.
Two Types of Events:

Those that provide evidence of conditions that existed at the end of the reporting period – adjusting
Examples of adjusting events would be:

evidence of a permanent diminution in property value prior to the year end

sale of inventory after the reporting period for less than its carrying value at the year end

insolvency of a customer with a balance owing at the year end

amounts received or paid in respect of legal or insurance claims which were in negotiation at
the year end

determination after the year end of the sale or purchase price of assets sold or purchased
before the year end

evidence of a permanent diminution in the value of a long-term investment prior to the year
end

discovery of error or fraud which shows that the financial statements were incorrect
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ACCA FR (F7): Financial Reporting

By:
Zya Rana
Those are indicative of conditions that arose after the reporting period – non-adjusting
Examples of events which do not require adjustments:

acquisition of, or disposal of, a subsidiary after the year end

announcement of a plan to discontinue an operation

major purchases and disposals of assets

destruction of a production plant by fire after the reporting period

announcement or commencing implementation of a major restructuring

share transactions after the reporting period

litigation commenced after the reporting period
If non-adjusting events after the reporting period are material, non-disclosure could influence the economic
decisions of users taken on the basis of the financial statements. Accordingly, an entity shall disclose the
following for each material category of non-adjusting event after the reporting period:
(a) The nature of the event; and
(b) An estimate of its financial effect or a statement that such an estimate cannot be made.
Case Study:
The following events have occurred after the balance sheet date. Identify whether they are adjusting or nonadjusting?
Adjusting
1.
Insolvency of a customer after the year end
2.
Uninsured loss of inventory in a fire
3.
Detailed public announcement of any redundancies
that had been decided by the board prior
to the year end
4.
Proposal of a final equity dividend
5.
Change in foreign exchange rates
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Non- Adjusting
5
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Financial Instruments
IAS 32 Financial Instruments – Presentation
Financial Instrument:
Any contract that gives rise to a financial asset of one entity and a financial liability or equity
instrument of another entity.
Financial Asset:
Any asset that is
(a) Cash;
(b) An equity instrument of another entity;
(c) A contractual right to receive cash or another financial asset from another entity, or to
exchange financial assets or financial liabilities with another entity under conditions that are
potentially favorable to the entity; or
(d) A contract that may or will be settled in the entity’s own equity instrument and is not
classified as an equity instrument of the entity
Examples of Financial Assets:
• Cash, see (a) above
• Investment in shares or other equity instrument issued by other entities, see (b) above
• Receivables, see (c) above
• Loans to other entities, see (c) above
• Investments in bonds and other debt instruments issued by other entities, see (c) above
• Derivative financial assets, see (c) above
• Some derivatives on own equity, see (d) above
Financial Liability:
Any liability that is
(a) A contractual obligation to deliver cash or another financial asset to another entity; or to
exchange financial assets or financial liabilities with another entity under conditions that are
potentially unfavorable to the entity; or
(b) A contract that will or may be settled in the entity’s own equity instruments and is not
classified as an equity instrument of the entity
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ACCA FR (F7): Financial Reporting
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Examples of Financial Liabilities:
• Payables (e.g., trade payables), see (a) above
• Loans from other entities, see (a) above
• Issued bonds and other debt instruments issued by the entity, see (a) above
• Derivative financial liabilities, see (a) above
• Obligations to deliver own shares worth a fixed amount of cash, see (b) above
• Some derivatives on own equity, see (b) above
Loan
Notes
Redeemable
Preference
Shares
Irredeemable
Preference
Shares
Ordinary
Shares
Fixed amount of
return each
year?
Repayment of
principal
amount?
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ACCA FR (F7): Financial Reporting
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Zya Rana
Hybrid Instruments / Compound Instruments:
-
Sometimes issued financial instruments contain both liability and equity elements.
-
Such instruments are referred to as compound instruments
-
Examples: Convertible Loan Notes /
-
The approach to accounting for compound instruments is to apply split accounting,
-
That is to present the liability and equity elements separately.
Convertible Preference Shares
When an entity Issued a Compound Instrument, record that at Fair Value and the following
Double Entry should be made at Inception (Start):
Cash
DR
XX
Equity
Liability (PV)
CR
CR
XX
XX
Present Value (PV) of liability is calculated using PV factor. 
F.V (1+r)-n
Let’s take an example:
Convertible loan notes issued for $110 which is repayable after 1 year. Effective interest rate is
10%.
PV of liability?
F.V (1+r)-n
Double Entry at Inception:
Cash
DR
Equity
Liability (PV)
CR
CR
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3
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Case 1
Convert issues a convertible loan that attracts interest of 2%. The market rate is 8%, being the
interest rate for an equivalent debt without the conversion option. The loan of $5 million is
repayable in full after three years or convertible to equity.
Discount factors are as follows:
Year
1
2
3
Discount factor at 8%
0.923
0.857
0.794
Double Entry at Inception:
Cash
DR
Equity
Liability (PV)
CR
CR
Where the time period is more than 1 year, then a PV Table should be followed to find the PV
of liability:
PV Table
Year
Cash Outflow (2%)
Discount Factor (8%)
PV
PV of Liability
Next step is to un-winding the liabilities  means, initially the liability is recorded at PV and
then unwind to take to its future value upto its redemption or conversion, using the following
table:
Year
Liability at Start
Un-Winding
Finance Cost (8%)
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Cash Outflow (2%)
Liability at End
4
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Case 2
A company issues 2% convertible bonds at their nominal value of $36,000. The bonds are
convertible at any time up to maturity into 120 ordinary shares for each $100 of bond.
Alternatively the bonds will be redeemed at par after 3 years. Similar nonconvertible bonds
would carry an interest rate of 9%.
The present value of $1 payable at the end of year, based on rates of 2% and 9% are as follows:
End of year
2%
9%
1
0.98
0.92
2
0.96
0.84
3
0.94
0.77
Double Entry at Inception:
Cash
DR
Equity
Liability (PV)
CR
CR
Where the time period is more than 1 year, then a PV Table should be followed to find the PV
of liability:
PV Table
Year
Cash Outflow
Discount Factor
PV
PV of Liability
Next step is to un-winding the liabilities  means, initially the liability is recorded at PV and
then unwind to take to its future value upto its redemption or conversion, using the following
table:
Year
Liability at Start
Un-Winding
Finance Cost
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Cash Outflow
Liability at End
5
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Case 3
A company issues 4% convertible bonds at their nominal value of $5 million. Each bond is
convertible at any time up to maturity into 400 ordinary shares. Alternatively the bonds will be
redeemed at par after 3 years. The market rate applicable to nonconvertible bonds is 6%.
The present value of $1 payable at the end of year, based on rates of 4% and 6% are as follows:
End of year
4%
6%
1
0.96 0.94
2
0.92 0.89
3
0.89 0.84
Double Entry at Inception:
Cash
DR
Equity
Liability (PV)
CR
CR
Where the time period is more than 1 year, then a PV Table should be followed to find the PV
of liability:
PV Table
Year
Cash Outflow
Discount Factor
PV
PV of Liability
Next step is to un-winding the liabilities  means, initially the liability is recorded at PV and
then unwind to take to its future value upto its redemption or conversion, using the following
table:
Year
Liability at Start
Un-Winding
Finance Cost
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Cash Outflow
Liability at End
6
ACCA FR (F7): Financial Reporting
Loan
Notes
Company
Paying
Interest @
Market
Interest
Rate @
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Par Value
of Loan
Notes
By:
Zya Rana
Issue Value Redemption
of Loan
Value of
Notes
Loan Notes
Investor
Benefit
7
ACCA FR (F7): Financial Reporting
By:
Zya Rana
IAS 39 & IFRS 09 – Measurement of Financial Instruments (F.I)
-
IFRS 09 replaced IAS 39
Initial Measurement of Financial Instruments (F.I) Under IFRS 09
Long-Term Investment Purposes
Financial Asset
= Fair Value + Transaction Cost
Financial Liability = Fair Value – Transaction Cost
Short-Term Investment Purposes
Financial Asset
= Fair Value through P/L
Financial Liability = Fair Value through P/L
Subsequent Measurement of Financial Instruments (F.I) Under IFRS 09
Long-Term Investment Purposes
Financial Asset
= At Amortized Cost
Financial Liability = At Amortized Cost
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Short-Term Investment Purposes
Financial Asset
= Fair Value through P/L
Financial Liability
=
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Financial Assets:
IFRS 9 divides all financial assets that are currently in the scope of IAS 39 into two classifications

those measured at amortised cost and

those measured at fair value
Classification is made at the time the financial asset is initially recognised, namely when the
entity becomes a party to the contractual provisions of the instrument.
Debt Instruments:
A debt instrument that meets the following two conditions can be measured at amortised cost:
1.
Business Model Test:
The objective of the entity's business model is to hold the financial asset to collect the
contractual cash flows (rather than to sell the instrument prior to its contractual
maturity to realise its fair value changes).
2.
Cash Flow Characteristics Test:
The contractual terms of the financial asset give rise on specified dates to cash flows
that are solely payments of principal and interest on the principal outstanding.
All other debt instruments must be measured at fair value through profit or loss (FVTPL).
Fair value option:
Even if an instrument meets the two amortised cost tests, IFRS 9 contains an option to
designate a financial asset as measured at FVTPL if doing so eliminates or significantly reduces a
measurement or recognition inconsistency (sometimes referred to as an 'accounting
mismatch') that would otherwise arise from measuring assets or liabilities or recognising the
gains and losses on them on different bases.
Equity instruments:
All equity investments in scope of IFRS 9 are to be measured at fair value in the statement of
financial position, with value changes recognised in profit or loss, except for those equity
investments for which the entity has elected to report value changes in 'other comprehensive
income'. There is no 'cost exception' for unquoted equities.
'Other comprehensive income' (OCI) option:
If an equity investment is not held for trading, an entity can make an irrevocable election at
initial recognition to measure it at fair value through other comprehensive income (FVTOCI)
with only dividend income recognised in profit or loss.
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ACCA FR (F7): Financial Reporting
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Financial Liabilities:
Two measurement categories continue to exist:


Fair value through profit or loss (FVTPL) and
Amortised cost.
Financial liabilities held for trading are measured at FVTPL, and all other financial liabilities are
measured at amortised cost unless the fair value option is applied.
Fair value option:
IFRS 9 contains an option to designate a financial liability as measured at FVTPL if:
 doing so eliminates or significantly reduces a measurement or recognition inconsistency
(sometimes referred to as an 'accounting mismatch') that would otherwise arise from
measuring assets or liabilities or recognising the gains and losses on them on different
bases, or
 the liability is part or a group of financial liabilities or financial assets and financial
liabilities that is managed and its performance is evaluated on a fair value basis, in
accordance with a documented risk management or investment strategy, and
information about the group is provided internally on that basis to the entity's key
management personnel.
De-recognition of Financial Assets:
Once an entity has determined that the asset has been transferred, it then determines whether
or not it has transferred substantially all of the risks and rewards of ownership of the asset. If
substantially all the risks and rewards have been transferred, the asset is derecognised. If
substantially all the risks and rewards have been retained, derecognition of the asset is
precluded.
De-recognition of Financial Liabilities:
A financial liability should be removed from the balance sheet when, and only when, it is
extinguished, that is, when the obligation specified in the contract is either discharged or
cancelled or expires.
Reclassification:
For financial assets, reclassification is required between FVTPL and amortised cost, or vice
versa, if and only if the entity's business model objective for its financial assets changes so its
previous model assessment would no longer apply.
If reclassification is appropriate, it must be done prospectively from the reclassification date. An
entity does not restate any previously recognised gains, losses, or interest.
IFRS 9 does not allow reclassification where:
 the 'other comprehensive income' option has been exercised for a financial asset, or
 the fair value option has been exercised in any circumstance for a financial assets or
financial liability.
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ACCA FR (F7): Financial Reporting
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Case 4 (Financial Assets @ FVTPL)
-
During the year, 10000 ordinary shares purchased @ 10.5 each
Value of each share at end of year 1 is 10.8
Value of each share at end of year 2 is 10
Initial Measurement
Subsequent Measurement at
End of Y1 @ FVTPL
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Subsequent Measurement at
End of Y2 @ FVTPL
11
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Case study 5 (Financial Asset @ Amortized cost)
A company invests $5,000 in 10% debentures. The debentures are repayable at a premium
after 3 years. The effective rate of interest is 12%.
Initial Measurement at ____________________________________:
Subsequent Measurement at ____________________________________:
Amortization Table
Year
Asset at Start
Finance Income
Cash Inflow
Asset at End
1
2
3
What amounts will be shown for financial asset from year 1-3 in?
Year
Income Statement
SOFP
Cash Flow Statement
1
2
3
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ACCA FR (F7): Financial Reporting
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Case study 6 (Financial Asset @ Amortized Cost)
On 1 January 20X1 Abacus Co purchases a debt instrument for its fair value of $1,000. The debt
instrument is due to mature on 31 December 20X5. The instrument has a principal amount of
$1,250 and the instrument carries fixed interest at 4.72% that is paid annually. The effective
rate of interest is 10%.
How should Abacus Co account for the debt instrument over its five year term?
Initial Measurement at ____________________________________:
Subsequent Measurement at ____________________________________:
Amortization Table
Year
Asset at Start
Finance Income
Cash Inflow
Asset at End
1
2
3
4
5
What amounts will be shown for financial asset from year 1-5 in?
Year
Income Statement
SOFP
Cash Flow Statement
1
2
3
4
5
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13
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Case study 7 (Financial Liability @ Amortized Cost)
A company issues 5% redeemable preference shares at their nominal value of $10,000. The
shares are redeemable at a premium of $1,760 after 5 years. The effective rate of interest is
8%.
Initial Measurement at ____________________________________:
Subsequent Measurement at ____________________________________:
Amortization Table
Year
Liability at Start
Finance Cost
Cash Outflow
Liability at End
1
2
3
4
5
What amounts will be shown for financial liability from year 1-5 in?
Year
Income Statement
SOFP
Cash Flow Statement
1
2
3
4
5
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14
ACCA (FR) F7: Financial Reporting
By:
Zya Rana
IAS 20: Government Grants
-
Government grants are grants received from government.
-
Government 
Federal / Provincial / Dist Govt. / Foreign Govt. / Govt. Agencies
Accounting Treatment:
Government grants are to be recognized as income.
Conditional Grant:
-
Subject to the fulfillment of conditions
-
Recognize income over the period when conditions are fulfilled
Unconditional Grant:
-
Not subject to any condition
-
Immediately recognize as Income.
Further Classification:
Asset Related Grant:
-
Pertains to acquisition / construction / upgradation of a Non Current Asset
Income/ Revenue Related Grant:
-
Any grant other than Asset Related Grant
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ACCA (FR) F7: Financial Reporting
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Asset Related Grant:
Example:
Asset value is $10,000 and life 10 years. Grant received of $1,000.
Accounting Treatment – Either:
1)
Deduct from cost of the asset ; or
2)
Record as income as the asset is utilized
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ACCA (FR) F7: Financial Reporting
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Income Related Grant:
Either:
1)
Record separately as Income ; or
2)
Deduct from the related Expense
Presentation of Government Grant:
-
Advance – Unearned Income (Liability)
-
Split b/w current and non-current portion in the F/S
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ACCA FR (F7): Financial Reporting
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IFRS 16: LEASES
Previously  Leases Accounting under IAS 17, but IFRS 16 replaced IAS 17.
-
Lessee
Lessor
Sale and Lease Back
Types of Leases
Finance Lease
Operating Lease
Where risks and rewards are transferred to
lease.
Where risks and rewards are retained by
lessor.
What are Risks and Rewards?
Theft

Damage

Outdated asset

Decline in asset value

Increase in asset value

Usage of asset

1
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ACCA FR (F7): Financial Reporting
In FR 
By:
Zya Rana
Only Accounting for Lessee
-
For lessee, there is no difference between Finance and Operating lease
-
Lessee account for leases on the basis of

Right – of – use (ROU)
What is Right – of – use (ROU)?
ROU of NCA means that lessee will record the asset the value can be determined as follows:
-
PV of lease payment
=
xx
-
Directly attributable costs
=
xx
-
Dismantling cost
=
xx
ROU – NCA
=
xx
What is the Double Entry to record the ROU of NCA?
Once the ROU of NCA is recorded then  Asset Depreciation  YES or NO
If yes, then how to depreciate the asset?
-
Title transferred at the end of lease term

-
No title transferred at the end of lease term

2
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
There are few Exceptions to ROU of NCA:
Means, there are circumstances / situations where lessee does not account for leased asset
on ROU and will not depreciate the NCA.
The following are 2 exceptions:
What is the accounting treatment in these
situations?
1.
Short – Term Lease:
Upto / less than 12 months lease
2.
Lease of Smaller Value:
It’s a judgmental area
e.g.
-
Mobile Phones
-
Tablets
-
Personal Computers
Example: (Accounting under IFRS-16)
A lessee enters into a five-year lease of a building which has a remaining useful life of ten
years. Lease payments are $50,000 per annum, payable at the beginning of each year.
The lessee incurs initial directs costs of $20,000 and receives lease incentives of $5,000.
There is no transfer of the asset at the end of the lease and no purchase option.
The interest rate implicit in the lease is not immediately determinable but the lessee’s
incremental borrowing is 5%.
At the commencement date the lessee pays the initial $50,000, incurs the direct costs and
receives the lease incentives.
3
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Required:
(a)
Initial accounting and year-one-endaccounting of above transaction under IFRS-16?
4
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ACCA FR (F7): Financial Reporting
(b)
By:
Zya Rana
How the accounting treatment would differ if the payment made ($50,000) in
arrears?
5
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
IAS 12: Income Taxes
Objective of IAS 12:
The objective of IAS 12 (Revised 1996) is to prescribe the accounting treatment for income
taxes. The subject matter of IAS 12 is to calculate the Tax Expense for the year.
Tax Expense:
Tax expense is calculated on the basis of following 2 types:
Current year tax expense
xxx
Deferred tax expense
xxx
Total tax expense for the year
xxx
Current Year Tax Expense
Provision / Estimation for tax each year
xxx
Adjustment of Over / Under provision of previous year
xxx
xxx
Example on Current Tax:
A business started on 1 January 2020 and the accounting year-end date is 31 December 2020.
Tax estimation during the year?  Is it necessary? 
Yes
or
No?
If yes, explain why?
Assume tax estimation during the year 1 is $100. What would be the double entry to record the
provision?
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1
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Let say, Actual figure of tax liability calculated at the end of year 1 as under;
Case 1 = 80
Case 2 = 115
Now, year 2 started and provision for tax made during the year 2 is $150.
Double entry to record this provision:
Finally, now we can understand the concept of the adjustment of Over / Under provision of
previous year, which is to be adjusted in the tax estimation of year 2 as under:
Adjustment Under Case 1
Adjustment Under Case 2
This is how we treat the current tax expense provision and the adjustment of over and under
provisions of previous year tax estimations.
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2
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Case 1:
In 20X7, Darton Co income tax on profits had been estimated as $30,000
In the year 20X8 Darton Co had taxable profits of $120,000.
Tax rate is 30%.
Double entry to record the tax provision in 2007:
Calculate tax payable if the actual tax due on 20X7 profits was subsequently agreed with the
tax authorities as:
Case A = $35,000
Case B = $25,000
Double entry to record the tax provision in 2008:
Calculate income tax charge for 20X8 after taking adjustment according to the following
cases:
Adjustment Under Case A
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Adjustment Under Case B
3
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Case 2:
Simple has estimated its income tax liability for the year ended 31 December 20X8 at $180,000,
based on taxable profits of $600,000. The tax rate is 30%.
Extract from the trial balance as at 31 December 20X8:
Dr
$
Sales
Cost of sales, distribution and
Administration expenses
Income tax
Cr
$
1,500,000
900,000
3,000
Show the income statement for the year ended 31 December 20X8 and the liability for
income taxes in the statement of financial position at that date.
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4
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Deferred Taxation:
-
Future tax consequences are dealt under deferred taxation
-
Deferred taxation arises due to two types of differences/reasons:
1.
Temporary Differences / Timing Differences:
-
These are for the time being differences and reconcile in later time
-
Arise due to difference between the carrying amount of an asset or liability and
tax base of an asset or liability
-
2.
Example: Accounting Depreciation and Tax Depreciation (Capital Allowances)
Permanent Differences
-
There are always few differences of treating of transactions under tax laws and
accounting, called permanent differences and a business has to make
adjustment as per tax laws.
-
Example: Customer Entertainment
Note:
In deferred taxation;
We only need to deal with temporary differences year on year (see next slide)
A business has always to adjust permanent differences according to tax laws
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5
ACCA FR (F7): Financial Reporting
Treatment of Temporary Differences:
-

By:
Zya Rana
Summary of Deferred Taxation
There could be 4 possible scenarios:
Scenario 1 and 2 is that when comparing the Accounting NBVs of Assets with the Tax NBVs of
Assets:
1.
Accounting Base
of Asset
>
Tax Base
of Asset
2.
Accounting Base
of Asset
<
Tax Base
of Asset
Taxable
Temporary
Difference
Deductable
Temporary
Difference
Tax
Rate
Deferred
Tax Liability
Tax
Rate
Deferred
Tax Asset
Taxable Temporary Difference:
A temporary difference that will result in taxable amounts in the future when the carrying
amount of the asset is recovered or the liability is settled.
Deductible Temporary Difference:
A temporary difference that will result in amounts that are tax deductible in the future when
the carrying amount of the asset is recovered or the liability is settled.
Note:
The Impact of DTL or DTA is always on Tax Expense:
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6
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Case 3:
A company purchased an asset costing $1,500. At the end of 20X8 the carrying amount is
$1,000. The cumulative depreciation for tax purposes is $900 and the current tax rate is 25%.
Calculate the deferred tax liability for the asset:
Case 4:
As at 30 September, Grace has noncurrent assets with a carrying value of $1,100 but a tax
written down value of $700. The brought forward balance on the deferred tax account is $300.
Assume a tax rate of 30%.
Compute the effect of deferred tax on the financial statements for the year end 30
September.
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7
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Case 5:
An entity has annual profits of $1,000 (before depreciation) and on 1 January, Year 1 has
purchased a noncurrent asset for $400 which has a two year useful life. Tax is at the rate of 30%
and the company can claim 100% tax depreciation on the non-current asset.
Show the effect on the income statement of accounting for the deferred taxation.
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8
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Scenario 3 and 4 is that when comparing the Accounting NBVs of Liabilities with the Tax NBVs
of Liabilities:
3.
Accounting Base
of Liability
>
Tax Base
of Liability
4.
Accounting Base
of Liability
<
Tax Base
of Liability
Deductable
Temporary
Difference
Taxable
Temporary
Difference
Tax
Rate
Deferred
Tax Asset
Tax
Rate
Deferred
Tax Liability
Taxable Temporary Difference:
A temporary difference that will result in taxable amounts in the future when the carrying
amount of the asset is recovered or the liability is settled.
Deductible Temporary Difference:
A temporary difference that will result in amounts that are tax deductible in the future when
the carrying amount of the asset is recovered or the liability is settled.
Note:
The Impact of DTL or DTA is always on Tax Expense:
Case 6:
Pargatha Co recognizes a liability of $10,000 for accrued product warranty costs on 31
December 20X7. These product warranty costs will not be deductible for tax purposes until the
enterprise pays claims. The tax rate is 25%.
State the deferred tax implications of this situation:
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9
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Recognition of Deferred Tax Liabilities:
The general principle in IAS 12 is that deferred tax liabilities should be recognised for all taxable
temporary differences. There are 3 exceptions to the requirement to recognise a deferred tax
liability, as follows:



liabilities arising from goodwill for which amortisation is not deductible for tax purposes;
liabilities arising from the initial recognition of an asset/liability other than in a business
combination which, at the time of the transaction, does not affect either the accounting
or the taxable profit; and
liabilities arising from undistributed profits from investments where the enterprise is
able to control the timing of the reversal of the difference and it is probable that the
reversal will not occur in the foreseeable future.
Recognition of Deferred Tax Assets:
A deferred tax asset should be recognised for deductible temporary differences, unused tax
losses and unused tax credits to the extent that it is probable that taxable profit will be
available against which the deductible temporary differences can be utilised, unless the
deferred tax asset arises from:


negative goodwill which was treated as deferred income under IAS 22 Business
Combinations; or
the initial recognition of an asset/liability other than in a business combination which, at
the time of the transaction, does not affect the accounting or the taxable profit.
Deferred tax assets for deductible temporary differences arising from investments in
subsidiaries, associates, branches and joint ventures should be recognised to the extent that it
is probable that the temporary difference will reverse in the foreseeable future and that
taxable profit will be available against which the temporary difference will be utilised.
The carrying amount of deferred tax assets should be reviewed at each balance sheet date and
reduced to the extent that it is no longer probable that sufficient taxable profit will be available
to allow the benefit of part or that entire deferred tax asset to be utilised. Any such reduction
should be subsequently reversed to the extent that it becomes probable that sufficient taxable
profit will be available.
A deferred tax asset should be recognised for an unused tax loss carry forward or unused tax
credit if, and only if, it is considered probable that there will be sufficient future taxable profit
against which the loss or credit carry forwards can be utilised.
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10
ACCA FR (F7): Financial Reporting
By:
Zya Rana
TOTAL TAX EXPENSE FOR THE YEAR
-
is calculated considering the impact of both types of taxes (Current & Deferred)
$
Current Tax:
Tax estimation for the year
xxx
Less: Over provision of last year
(xx)
Add: Under provision of last year
xx
Deferred Tax:
Tax Exp , due to DTL 
xxx
Tax Exp , due to DTL 
(xx)
Tax Exp , due to DTA 
(xx)
Tax Exp , due to DTA 
xxx
Tex Expense  or  due to Revaluation:
(see later)
Total Tax Expense for the Year
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x/(x)
XXX
11
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Case 7:
Richard of York is a Shakespearean costumier company. Income tax at 20% is estimated at
$30,000.
A taxable temporary difference of $125,000 has accumulated at the year end. The following is
an extract from the trial balance of the above at 31 December 20X5:
Dr
Sales
Operating costs
Dividends received
Deferred tax
Corporation tax (over provision from prior year)
Cr
100,000
55,000
8,000
19,000
4,000
Solution:
$
Current Tax:
Tax estimation for the year
Less: Over provision of last year
Add: Under provision of last year
Deferred Tax:
Tax Exp , due to DTL 
Tax Exp , due to DTL 
Tax Exp , due to DTA 
Tax Exp , due to DTA 
Tex Expense  or  due to Revaluation:
(see later)
Total Tax Expense for the Year
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12
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Practice Question 1 – BPP Kit:
A company's trial balance shows a debit balance of $2.1 million brought forward on current tax
and a credit balance of $5.4 million on deferred tax. The tax charge for the current year is
estimated at $16.2 million and the carrying amounts of net assets are $13 million in excess of
their tax base. The income tax rate is 30%
What amount will be shown as income tax in the statement of profit or loss for the year?
A
B
C
D
$15.6 million
$12.6 million
$16.8 million
$18.3 million
Solution:
$
Current Tax:
Tax estimation for the year
Less: Over provision of last year
Add: Under provision of last year
Deferred Tax:
Tax Exp , due to DTL 
Tax Exp , due to DTL 
Tax Exp , due to DTA 
Tax Exp , due to DTA 
Tex Expense  or  due to Revaluation:
(see later)
Total Tax Expense for the Year
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13
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Tax Account
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14
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Practice Question 2 – BPP Kit:
The statements of financial position of Nedburg include the following extracts:
Statements of financial positions as at 30 September
20X2($m)
20X1 ($m)
Non-Current Liabilities:
Deferred tax
310
140
Current Liabilities:
Taxation
130
160
The tax charge in the statement of profit and loss for the year ended 30 September 20X2 is
$270 million.
What amount of tax was paid during the year to 30 September 20X2?
A
B
C
D
$300 million
$140 million
$200 million
$130 million
Solution:
Tax Account
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15
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Practice Question 3 – BPP Kit:
The statements of financial position of Pinto included the following:
Statements of financial positions as at 30 September
31 Mar 20X8
31 Mar 20X7
Current Assets:
Income Tax Asset
-
50
Non-Current Liabilities:
Deferred Tax
50
30
Current Liabilities:
Income Tax Payable
150
-
The profit and loss income tax charge for the year ended 31 Mar 20X8 is estimated at $160.
What amount of income tax has been received or paid during the year 31 Mar 20X8?
A
B
C
D
$60 paid
$40 paid
$60 received
$40 received
Solution:
Tax Account
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Losses and Taxation
-
Due to losses 
-
Means, tax savings in future years
Deferred Tax Asset Arises
Example:
Assuming that the loss can be adjusted for maximum 2 years.
Year End
2020
2021
2022
Profit / (Loss)
(2000)
700
400
Loss adjustment
Maximum Relief Claimed?
How to calculate Deferred Tax Asset on relief claimed, assuming the tax @20%?
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ACCA FR (F7): Financial Reporting
By:
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Revaluation of NCA and Deferred Tax Liability
Example: (Tax Rate = 30%)
Accounting Base of Asset
Tax Base of Asset
Land and building purchased
$1,000
$1,000
Company revalued L&B @
$1,200
??????
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18
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Practice Question 4 – BPP Kit:
A company's trial balance at 31 December 20X3 shows a debit balance of $700,000 on current
tax and a credit balance of $8,400,000 on deferred tax. The directors have estimated the
provision for income tax for the year at $4.5 million and the required deferred tax provision is
$5.6 million, $1.2 million of which relates to a property revaluation.
What is the profit or loss income tax charge for the year ended 31 December 20X3?
A
B
C
D
$1 million
$2.4 million
$1.2 million
$3.6 million
Solution:
$
Current Tax:
Tax estimation for the year
Less: Over provision of last year
Add: Under provision of last year
Deferred Tax:
Tax Exp , due to DTL 
Tax Exp , due to DTL 
Tax Exp , due to DTA 
Tax Exp , due to DTA 
Tex Expense  or  due to Revaluation:
(see later)
Total Tax Expense for the Year
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Practice Question 5 – BPP Kit:
The trial balance of Highwood at 31 March 20X6 showed credit balances of $800,000 on current
tax and $2.6 million on deferred tax. A property was revalued during the year giving rise to
deferred tax of $3.75 million. This has been included in the deferred tax provision of $6.75
million at 31 March 20X6.
The income tax charge for the year ended 31 March 20X6 is estimated at $19.4 million.
What will be shown as the income tax charge in the statement of profit or loss of Highwood
at 31 March 20X6?
A
B
C
D
$19 million
$22 million
$19.8 million
$20.6 million
Solution:
$
Current Tax:
Tax estimation for the year
Less: Over provision of last year
Add: Under provision of last year
Deferred Tax:
Tax Exp , due to DTL 
Tax Exp , due to DTL 
Tax Exp , due to DTA 
Tax Exp , due to DTA 
Tex Expense  or  due to Revaluation:
(see later)
Total Tax Expense for the Year
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Section B
Julian MCQ case
19 mins
Information relevant to questions 214–218.
The carrying amount of Julian's property, plant and equipment at 31 December 20X3 was $310,000 and the tax written
down value was $230,000.
The following data relates to the year ended 31 December 20X4:
(i)
At the end of the year the carrying amount of property, plant and equipment was $460,000 and the tax written
down value was $270,000. During the year some items were revalued by $90,000. No items had previously
required revaluation. In the tax jurisdiction in which Julian operates revaluations of assets do not affect the tax
base of an asset or taxable profit. Gains due to revaluations are taxable on sale.
(ii)
Julian began development of a new product during the year and capitalised $60,000 in accordance with IAS 38.
The expenditure was deducted for tax purposes as it was incurred. None of the expenditure had been amortised
by the year end.
The corporate income tax rate is 30%. The current tax charge was calculated for the year as $45,000.
214
Julian's accountant is confused by the term 'tax base'. What is meant by 'tax base'?
A
B
C
D
215
The amount of tax payable in a future period
The tax regime under which an entity is assessed for tax
The amount attributed to an asset or liability for tax purposes
The amount of tax deductible in a future period
What is the taxable temporary difference to be accounted for at 31 December 20X4 in relation to property, plant
and equipment and development expenditure?
A
B
C
D
216
$60,000
$90,000
$18,000
$27,000
What amount will be shown as tax payable in the statement of financial position of Julian at 31 December
20X4?
A
B
C
D
218
Development
expenditure
$60,000
Nil
$60,000
Nil
What amount should be charged to the revaluation surplus at 31 December 20X4 in respect of deferred tax?
A
B
C
D
217
Property, plant and
equipment
$270,000
$270,000
$190,000
$190,000
$45,000
$72,000
$63,000
$75,000
Deferred tax assets and liabilities arise from taxable and deductible temporary differences. Which one of the
following is NOT a circumstance giving rise to a temporary difference?
A
B
C
D
Depreciation accelerated for tax purposes
Development costs amortised in profit or loss but tax was deductible in full when incurred
Accrued expenses which have already been deducted for tax purposes
Revenue included in accounting profit when invoiced but only liable for tax when the cash is received.
(10 marks)
68
Questions
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
IAS 1: PRESENTATION OF FINANCIAL STATEMENTS
Objective:
a)
b)
Prescribes basis for presentation of general purpose financial statements;
Sets out overall requirements for the presentation of financial statements, guidelines
for their structure and minimum requirements for their content.
General Purpose Financial Statements:
(Referred to as ‘financial statements’) are those intended to meet the needs of users who are
not in a position to require an entity to prepare reports tailored to their particular information
need.
International Financial Reporting Standards (IFRSs):
Standards and Interpretations issued by the International Accounting Standards Board (IASB).
They comprise:
(a)
(b)
(c)
(d)
International Financial Reporting Standards;
International Accounting Standards;
IFRIC Interpretations (International Financial Reporting Interpretations Committee) ;
and
SIC Interpretations (Standard Interpretations Committee)
Other Comprehensive Income:
Comprises items of income and expense (including reclassification adjustments) that are not
recognised in profit or loss as required or permitted by other IFRSs.
The components of other comprehensive income include:
(a)
Changes in revaluation surplus (see IAS 16 Property, Plant and Equipment and IAS 38
Intangible Assets);
(d)
Gains and losses from investments in equity instruments measured at fair value
through other comprehensive income in accordance with IFRS 9 Financial Instruments;
1
ACCA FR (F7): Financial Reporting
2
By:
Zya Rana
ACCA FR (F7): Financial Reporting
3
By:
Zya Rana
ACCA FR (F7): Financial Reporting
4
By:
Zya Rana
ACCA FR (F7): Financial Reporting
5
By:
Zya Rana
ACCA FR (F7): Financial Reporting
Format of Financial Statements
General Format of Statement of Comprehensive Income
6
By:
Zya Rana
ACCA FR (F7): Financial Reporting
General Format of Statement of Financial Position
7
By:
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ACCA FR (F7): Financial Reporting
General Format of Statement of Changes In Equity
8
By:
Zya Rana
Financial Reporting – Underlying Assumptions:





Accruals
Going Concern
Consistency
Materiality
off-setting
Standardization of accounting practices:
Advantages






provide a focal point for debate
require disclosure of policies adopted
encourage global discussion
flexible
enable meaningful comparison
reduce penumbral areas of divergent
possibilities
Disadvantages




pressure groups may succeed in asking
for amendments
Allowed alternative treatments –
standardization?
inappropriate treatment could result
from following a standard
rules take away use of skill and
judgment
A conceptual framework:
Framework has been developed defined as “a constitution, a coherent system of interrelated
objectives and fundamentals which can lead to consistent standards and which prescribe the
nature, function and limits of financial accounting and financial statements”
Framework – Qualitative Characteristics:










Understandable
Comparable
Relevant
Faithful representation
Complete
Material
Substance over form
Reliable
Neutral
Prudent
THE REGULATORY FRAMEWORK
COMPOSITION OF BOARD
IFAC
 international federation of accountants
 mission: The mission of IFAC is “the development and enhancement of the profession to
enable it to provide services of consistently high quality in the public interest”
 it is a non-profit, non-governmental and non-political international organization of
accountancy bodies.
 over 3 million members world-wide
 one representative from each member body on the assembly
 the assembly elects a council for two terms of 6 months
 council supervises the IFAC work programme
 work programme includes technical sub-committees on
 international audit practices
 financial accounting
 ethics
 management accounting
 education and training
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Group Accounts
Groups and Consolidation:
Consolidation means presenting the results, assets and liabilities of a group of companies as if they were
one company.
Parent and Subsidiary:
The central company, called a parent, generally owns most or all of the shares in the other companies,
which are called subsidiaries.
The Relevant IFRSs for Consolidation:




IAS 27 Separate financial statements
IAS 28 Investments in associates and joint ventures
IFRS 3 Business combinations
IFRS 10 Consolidated financial statements
Key Definitions:
Control:
An investor controls an investee when the investor is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect those returns through its power over the
investee.
Power:
Existing rights that give the current ability to direct the relevant activities
Subsidiary:
An entity that is controlled by another entity (known as the parent)
Parent:
An entity that controls one or more entities
Group:
A parent and all its subsidiaries
Consolidated Financial Statements:
The financial statements of a group in which the assets, liabilities, equity, income, expenses and cash
flows of the parent and its subsidiaries are presented as those of a single economic entity.
1
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Non-Controlling Interest:
NCI is the equity in a subsidiary not attributable, directly or indirectly, to a parent.
A Trade:
(Or ‘simple’) investment is an investment in the shares of another entity that is held for the accretion of
wealth, and is not an associate or a subsidiary.
Consolidation Means:

Adding together

Cancellation of like items internal to the group

Consolidate as if you owned everything then show the extent to which you do not own everything
Content of Consolidated Financial Statements:
Consolidated financial statements present the results of the group; they do not replace the separate
financial statements of the individual group companies.




Parent company financial statements, which will include 'investments in subsidiary undertakings'
as an asset in the statement of financial position, and income from subsidiaries (dividends) in the
statement of profit or loss and other comprehensive income
Consolidated statement of financial position
Consolidated statement of profit or loss and other comprehensive income
Consolidated statement of cash flows (this is beyond the scope of the FR syllabus)
2
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
How to calculate Goodwill at time of acquisition?
IFRS 03 allows 2 methods for the calculation of goodwill at time of acquisition:
1.
Fair Value Method / Full Goodwill Method
2.
Portion of Net Assets / Partial Goodwill Method
Goodwill
Fair Value Method
Portion of Net Assets
Cost of investment (COI) by ‘Parent’
xxx
Cost of investment (COI) by ‘Parent’
xxx
Add: ‘FV of NCI at acquisition date’
(xx)
Add: ‘% of Net Assets held by NCI’
(xx)
Total COI in subsidiary company
xxx
Total COI in subsidiary company
xxx
Less: FV of Net Assets (Equity) of
Subsidiary company:
Less: FV of Net Assets (Equity) of
Subsidiary company:
Share capital of subsidiary
xx
Share capital of subsidiary
xx
Share premium of subsidiary
xx
Share premium of subsidiary
xx
Revaluation reserve of subsidiary
xx
Revaluation reserve of subsidiary
xx
Other reserves
xx
Other reserves
xx
FV  or FV  - Non-Dep asset
xx
FV  or FV  - Non-Dep asset
xx
FV  or FV  - Depreciable asset
xx
FV  or FV  - Depreciable asset
xx
Retained earnings of subsidiary
At acquisition time
xx
Retained earnings of subsidiary
At acquisition time
xx
Goodwill
3
(xx)
X/(X)
Goodwill
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(xx)
X/(X)
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Example:
At 31st Dec 2017
Pak
South
Non-current assets
800
500
Investment is ‘South’
300
-
Current assets
150
100
1250
600
Equity
Share capital
400
100
Share Premium
200
50
Retained Earnings
300
150
900
300
Non-current liabilities
300
100
Current liabilities
50
200
1250
600
Notes:
-
At 1 January 2017, Pak co’ acquired 75% shares in South co’ when retained earnings of South
were $80,000.
-
FV of land was $100,000 increased over book value at 1 January 2017
-
NCI fair value at acquisition date is $90,000
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Requirement:
Calculate goodwill at the time of acquisition under both methods:
Goodwill
Fair Value Method
Portion of Net Assets
Cost of investment (COI) by ‘Parent’
Cost of investment (COI) by ‘Parent’
Add: ‘FV of NCI at acquisition date’
Add: ‘% of Net Assets held by NCI’
Total COI in subsidiary company
Total COI in subsidiary company
Less: FV of Net Assets (Equity) of
Subsidiary company:
Less: FV of Net Assets (Equity) of
Subsidiary company:
Share capital of subsidiary
Share capital of subsidiary
Share premium of subsidiary
Share premium of subsidiary
Revaluation reserve of subsidiary
Revaluation reserve of subsidiary
Other reserves
Other reserves
FV  or FV  - Non-Dep asset
FV  or FV  - Non-Dep asset
FV  or FV  - Depreciable asset
FV  or FV  - Depreciable asset
Retained earnings of subsidiary
At acquisition time
Retained earnings of subsidiary
At acquisition time
Goodwill
Goodwill
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Rules for Consolidated SOFP:
-
While adding up assets of parent and subsidiary, do not record ‘Investment in subsidiary’ in
consolidated SOFP
-
Don’t record Equity of Subsidiary while preparing consolidated SOFP
-
Add up 100% Assets and Liabilities of both parent and subsidiary in consolidated SOFP
-
Do not record Intra Group Balances in consolidated SOFP
-
Record Goodwill (subject to impairment) as an intangible asset while preparing consolidated
SOFP
-
Record the value of NCI in consolidated SOFP at each reporting date
Example:
At 31st Dec 2017
Pak
South
Non-current assets
800
500
Investment is ‘South’
300
-
Current assets
150
100
1250
600
Equity
Share capital
400
100
Share Premium
200
50
Retained Earnings
300
150
900
300
Non-current liabilities
300
100
Current liabilities
50
200
1250
600
Notes:
At 1 January 2017, Pak co’ acquired 75% shares in South co’ when retained earnings of South
were $80,000.
FV of land was $100,000 increased over book value at 1 January 2017
NCI fair value at acquisition date is $90,000
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ACCA FR (F7): Financial Reporting
Requirement:
Prepare consolidated SOFP as at 31 December 2017:
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ACCA FR (F7): Financial Reporting
5 TYPES OF CONSIDERATION
OR
By:
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COST OF INVESTMENT (COI)
Cash Consideration
Example:
Mummy co’ acquired majority shareholding in Yummy co’ by investing cash $500,000.
Required:
A/c Entry?
Share for Share Exchange (SFSE) Consideration
Example:
Clifton co’ acquired 3000 shares of Beach co’ by way of share for share exchange of 2 shares issued for
every 5 shares acquired. At the time of acquisition, market value/share of Clifton co’ was $4 where as its
par value/share is $1.
Required:
8
A/c Entry?
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Example:
ACCA acquired 480 shares of CIMA by way of share for share exchange of 2 shares issued for every 4
shares acquired. Shares issued at a market value of $5/share and par value of ACCA’s each share is $4.5.
Required:
A/c Entry?
Deferred Consideration
In deferred consideration, always record COI at PV (Present Value)
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Example:
Aqua co’ acquired Fina co’ and promised to a sum of money after 1 year which has present value of
$100 at date of acquisition. Today’s cost of capital is 10%.
Required:
A/c Entry at time of acquisition and after payment?
Example:
Aik co’ acquired Naik co’ and will pay consideration of $110 (Future Value) after 1 year. Cost of capital is
10%.
Required:
10
A/c Entry at time of acquisition and after payment?
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Example:
Candy land co’ acquired Land Rover co’ at a cost of $760.5 payable after 3 years and the cost of capital is
15%.
Required:
11
A/c Entry at time of acquisition and after payment?
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Contingent Consideration
In cont. consideration, firstly we record COI at PV and for further time period if when the payment to
subsidiary is PROBABLE.
Probability of outcome
Virtually certain(95% above)
Probable (50% to 95%)
Possible(10% above)
Remote(10% below)
12
Liabilities
Assets
Record as a provision
Record
Record as a provision
Disclose as a contingent asset
Disclose as a
contingent liability
Ignore
Ignore
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Loan Notes Consideration
Example:
On 1 Jan’00 (at start of the year), Kin Co’ acquired 75% shares from a total of 20000 shares of Lin Co’. In
consideration, Kin Co’ issued a $100 8% loan note for every 100 shares acquired in Lin Co’.
Required:
13
A/c Entry at time of acquisition and also calculate Interest expense for the year-end?
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ACCA FR (F7): Financial Reporting
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Question 1 (Cash and SFSE consideration)
Pole acquired six million of Whole’s ordinary $1 shares on 1 April 2017 for an agreed consideration of
$25 million. The consideration was settled by a share for share exchange of five new shares in Pole for
every three shares acquired in Whole, and a cash payment of $5 million. The cash transaction has been
recorded in Pole’s statement of Financial Position, but the SFSE has not yet recorded.
Required:
14
Treatment of above?
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ACCA FR (F7): Financial Reporting
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Question 2 (Deferred and Cash consideration)
Google acquired 75% of Bing’s 80 million ordinary shares on 1 November 2017 and paid an immediate
$3.50 per share in cash and agreed to pay a further amount of $108 million on 1 November 2018.
Google’s cost of capital is 8% per annum. Google has only recorded the cash consideration of $3.50 per
share. Assume the year end date is 31 October each year.
Required:
15
Treatment of above?
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ACCA FR (F7): Financial Reporting
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INTER – COMPANY BALANCES
Example:
Parent sold some inventory to its subsidiary in post-acquisition time during the year and recorded
receivables and payables are $100,000 by both companies.
Required:
16
What is the treatment of above transaction for group accounts purposes?
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INTER–COMPANY TRANSACTIONS
Question 3 (Sales from Parent to Subsidiary)
In the post-acquisition period, a parent company sold goods to its subsidiary at a price of $6million.
These goods had cost Parent $4 million. Half of these goods were still in the inventory of Subsidiary at
its year-end of 31 March 2017.
Required:
17
Treatment of above?
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ACCA FR (F7): Financial Reporting
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Question 4 (Sales from Subsidiary to Parent)
During the year Sammy, an 80% subsidiary, sold goods to Neeni, its parent, for $1.8 million. Sammy adds
a 20% mark-up on cost to all its sales. Goods with a transfer price of $450,000 were included in Neeni’s
inventory at its year-end of 31 March 2015.
Required:
18
Treatment of above?
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ACCA FR (F7): Financial Reporting
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Question 5 (Mixed Transactions)
Honey owns 80% share of Sugar. In separate years transactions are:
Calculate the provision for unrealized profit in each of the following transaction.
A.
From H to S, $20,000, markup 25%, half in inventory
B.
From S to H, $150,000 markup 50%, 20% in inventory
C.
H sold goods to S at a price of $12 million, these goods bought by H for $9 million. During the
year S sold $10 million (at the cost to S) of these goods for $15 million.
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D.
S sold a machine with a book value of $100,000 to H at a transfer price if $120,000 at the year
starts. Group policy dictates that the machine is depreciated over its remaining life of five years.
E.
H sold an item of plant to S for $240,000. The transfer had a mark-up of 20%. S charged $24,000
in depreciation.
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Exam Question (June 2013)
On 1 October 2012, Paradigm acquired 75% of Strata’s equity shares by means of a share exchange of
two new shares in Paradigm for every five acquired shares in Strata. In addition, Paradigm issued to the
shareholders of Strata a $100 10% loan note for every 1,000 shares it acquired in Strata. Paradigm has
not recorded any of the purchase consideration, although it does have other 10% loan notes already in
issue.
The market value of Paradigm’s shares at 1 October 2012 was $2 each.
The summarized statements of financial position of the two companies as at 31 March 2013 are:
Assets
Non-current assets
Property, plant and equipment
Financial asset: equity investments (notes (i) and (iv))
Current assets
Inventory (note (ii))
Trade receivables (note (iii))
Bank
Total assets
Equity and liabilities
Equity
Equity shares of $1 each
Retained earnings/(losses) – at 1 April 2012
– for year ended 31 March 2013
Non-current liabilities
10% loan notes
Current liabilities
Trade payables (note (iii))
Bank overdraft
Total equity and liabilities
Paradigm
$’000
Strata
$’000
47,400
7,500
–––––––
54,900
25,500
3,200
–––––––
28,700
20,400
14,800
2,100
–––––––
92,200
8,400
9,000
nil
–––––––
46,100
40,000
19,200
7,400
–––––––
66,600
20,000
(4,000)
8,000
–––––––
24,000
8,000
nil
17,600
nil
–––––––
92,200
–––––––
13,000
9,100
–––––––
46,100
–––––––
The following information is relevant:
(i)
At the date of acquisition, Strata produced a draft statement of profit or loss which showed it
had made a net loss after tax of $2 million at that date. Paradigm accepted this figure as the
basis for calculating the pre- and post-acquisition split of Strata’s profit for the year ended 31
March 2013.
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Also at the date of acquisition, Paradigm conducted a fair value exercise on Strata’s net assets
which were equal to their carrying amounts (including Strata’s financial asset equity
investments) with the exception of an item of plant which had a fair value of $3 million below its
carrying amount. The plant had a remaining economic life of three years at 1 October 2012.
Paradigm’s policy is to value the non-controlling interest at fair value at the date of acquisition.
For this purpose, a share price for Strata of $1·20 each is representative of the fair value of the
shares held by the non-controlling interest.
(ii)
Each month since acquisition, Paradigm’s sales to Strata were consistently $4·6 million.
Paradigm had marked these up by 15% on cost. Strata had one month’s supply ($4·6 million) of
these goods in inventory at 31 March 2013. Paradigm’s normal mark-up (to third party
customers) is 40%.
(iii)
Strata’s current account balance with Paradigm at 31 March 2013 was $2·8 million, which did
not agree with Paradigm’s equivalent receivable due to a payment of $900,000 made by Strata
on 28 March 2013, which was not received by Paradigm until 3 April 2013.
(iv)
The financial asset equity investments of Paradigm and Strata are carried at their fair values as
at 1 April 2012. As at 31 March 2013, these had fair values of $7·1 million and $3·9 million
respectively.
(v)
There was no impairment losses within the group during the year ended 31 March 2013.
Required:
Prepare the consolidated statement of financial position for Paradigm as at 31 March 2013. (20 marks)
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IAS – 28 INVESTMENTS IN ASSOCIATES & JOINT VENTURES
IAS – 28 deals with the accounting treatment of Investments in Associate companies / Joint Ventures,
using EQUITY METHOD OF ACCOUNTING.
What are Associate companies / Joint Ventures?
Investment in shares  20% - 50%
EQUITY METHOD OF ACCOUNTING:
Initial COI
A: Share of profit for the year
Carrying value of associate
x
x
x
Exam Question (June 2010)
On 1 April 2009 Picant acquired 75% of Sander’s equity shares in a share exchange of three shares in
Picant for every two shares in Sander. The market prices of Picant’s and Sander’s shares at the date of
acquisition were $3·20 and $4·50 respectively.
In addition to this Picant agreed to pay a further amount on 1 April 2010 that was contingent upon the
post-acquisition performance of Sander. At the date of acquisition Picant assessed the fair value of this
contingent consideration at $4·2 million, but by 31 March 2010 it was clear that the actual amount to be
paid would be only $2·7 million (ignore discounting). Picant has recorded the share exchange and
provided for the initial estimate of $4·2 million for the contingent consideration.
On 1 October 2009 Picant also acquired 40% of the equity shares of Adler paying $4 in cash per acquired
share and issuing at par one $100 7% loan note for every 50 shares acquired in Adler. This consideration
has also been recorded by Picant.
Picant has no other investments.
The summarised statements of financial position of the three companies at 31 March 2010 are:
Assets
Non-current assets
Property, plant and equipment
Investments
Current assets
Inventory
Trade receivables
Total assets
23
Picant
$’000
Sander
$’000
Adler
$’000
37,500
45,000
–––––––
82,500
24,500
nil
––––––
24,500
21,000
nil
––––––
21,000
10,000
6,500
–––––––
99,000
–––––––
9,000
1,500
–––––––
35,000
–––––––
5,000
3,000
––––––
29,000
––––––
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Equity and liabilities
Equity
Equity shares of $1 each
Share premium
Retained earnings – at 1 April 2009
– For the year ended 31 March 2010
Non-current liabilities
7% loan notes
Current liabilities
Contingent consideration
Other current liabilities
Total equity and liabilities
By:
Zya Rana
25,000
19,800
16,200
11,000
–––––––
72,000
8,000
nil
16,500
1,000
–––––––
25,500
5,000
nil
15,000
6,000
––––––
26,000
14,500
2,000
nil
4,200
8,300
–––––––
99,000
–––––––
nil
7,500
–––––––
35,000
–––––––
nil
3,000
–––––
29,000
–––––
The following information is relevant:
(i)
(ii)
(iii)
(iv)
(v)
At the date of acquisition the fair values of Sander’s property, plant and equipment was equal to
its carrying amount with the exception of Sander’s factory which had a fair value of $2 million
above its carrying amount. Sander has not adjusted the carrying amount of the factory as a
result of the fair value exercise. This requires additional annual depreciation of $100,000 in the
consolidated financial statements in the post-acquisition period. Also at the date of acquisition,
Sander had an intangible asset of $500,000 for software in its statement of financial position.
Picant’s directors believed the software to have no recoverable value at the date of acquisition
and Sander wrote it off shortly after its acquisition.
At 31 March 2010 Picant’s current account with Sander was $3·4 million (debit). This did not
agree with the equivalent balance in Sander’s books due to some goods-in-transit invoiced at
$1·8 million that were sent by Picant on 28 March 2010, but had not been received by Sander
until after the year end. Picant sold all these goods at cost plus 50%.
Picant’s policy is to value the non-controlling interest at fair value at the date of acquisition. For
this purpose Sander’s share price at that date can be deemed to be representative of the fair
value of the shares held by the non-controlling interest.
Impairment tests were carried out on 31 March 2010 which concluded that the value of the
investment in Adler was not impaired but, due to poor trading performance, consolidated
goodwill was impaired by $3·8 million.
Assume all profits accrue evenly through the year.
Required:
Prepare the consolidated statement of financial position for Picant as at 31 March 2010. (20 marks)
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CONSOLIDATED PROFIT AND LOSS
Rules for consolidated P/L:
P/L of Parent and Subsidiary  add up  According to the # of months of acquisition
Don’t record intra company transactions
Don’t record intra company interest income or dividend income
Record impairment loss (if any) for the year
Record depreciation expense for the year
Example 1:
On 1 January 2009, Zoi acquired 60% of the ordinary shares of Xavier.
The following income statements have been produced by Zoi and Xavier for the year ended 31-Dec2009.
Zoi
Xavier
$000
$000
Revenue
1,260
520
Cost of sales
(420)
(210)
Gross profit
Distribution cost
Admin expenses
840
(180)
(120)
310
(60)
(90)
Profit from operation
Investment income from Xavier
540
36
160
----
PBT
Taxation
576
(130)
160
(26)
Profit for the year
446
134
Additional Information:
During the year ended 31 Dec 2009, Zoi had sold $84,000 worth of goods to Xavier. These goods had
cost Zoi $56,000. On 31 Dec 2009, Xavier still had $36,000 worth of theses goods in inventories (held at
cost to Xavier).
Required
Prepare the consolidated income statement to incorporate Zoi and Xavier for the year ended 31
December 2009.
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Example 1 Solution:
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Example 2:
Set out below are the draft income statements of Daisy and its subsidiary company Flower for the year
ended 31 December 2007.
On 1 January 2006, Daisy purchased $75,000 ordinary shares in Flower from an issued share capital of
100,000 $1 ordinary shares.
Income statements for the year ended 31 December 2007
Revenue
Cost of sales
Daisy
$000
600
(360)
Flower
$000
300
(140)
Gross profit
Operating expenses
240
(93)
160
(45)
Profit from operations
Finance costs
147
----
115
(3)
Profit before tax
Tax
147
(50)
112
(32)
Profit for the year
97
80
The following additional information is relevant:
1.
During the year Flower sold goods to Daisy for $20,000, making a mark-up of one third. Only
20% of these goods were sold before the year-end, the rest were still in inventory.
2.
Goodwill has been subject to an impairment review at the end of each year since acquisition and
the review at the end of this year revealed another impairment of $5,000. The current
impairment is to be recognized as an operating expense.
3.
At the date of acquisition, a fair value adjustment was made and this has resulted in an
additional depreciation charge for the current year of $15,000. It is group policy that all
depreciation is charged to cost of sales.
4.
Daisy values the NCI using the fair value method.
Required
Prepare the consolidated income statement for the year-ended 31 December 2007.
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Example 2 Solution:
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Example 3:
Given below are the income statements for Paris and its subsidiary London for the year ended 31
December 2017.
Revenue
Cost of sales
Paris
$000
3,200
(2,200)
London
$000
2,560
(1,480)
Gross profit
Distribution cost
Admin expenses
1,000
(160)
(400)
1,080
(120)
(80)
Profit from operations
Investment income
440
160
880
----
Profit before tax
Taxation
600
(400)
880
(480)
Profit for the year
200
400
Additional Information:






Paris paid $1.5 million on 31 December 2001 for 80% of London’s 800,000 ordinary shares.
Goodwill impairments at 1 January 2017 amounted to $152,000. A further impairment of
$40,000 was found to be necessary at the year end. Impairments are to be included in admin
expenses.
Paris made sales to London, at a selling price of $600,000 during the year. Not all of the goods
had been sold externally by the year end. The profit included in London’s closing inventory was
$30,000.
Fair value depreciation for the current year amounted to $10,000. All depreciation should be
charged to cost of sales.
London paid an interim dividend during the year $200,000.
Paris values the NCI using the fair value method.
Required
Prepare a consolidated income statement for the year ended 31 December 2017 for the Paris group.
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Example 3 Solution:
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Example 4:
The following income statements were prepared for the year ended 31 March 2018.
Revenue
Cost of sales
Ethos
$000
303,600
(143,800)
Pathos
$000
217,700
(102,200)
Gross Profit
Operating expenses
159,800
(71,200)
115,500
(51,300)
Profit from operations
Investment income
88,600
2,800
64,200
1,200
PBT
Taxation
Profit for the year
91,400
(46,200)
45,200
65,400
(32,600)
32,800
Additional Information:
On 30 November 2017, Ethos acquired 75% of the issued ordinary capital of Pathos. No dividends were
paid by either company during the year. The investment income is from quoted investments and has
been correctly accounted for.
The profits of both companies are deemed to accrue evenly over the year.
Required
Prepare the consolidated income statement for the year ended 31 March 2018.
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Example 4 Solution:
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Example 5:
P bought 70% of S on 1 July 2016. The following are the income statements of P and S for the year
ended 31 March 2017.
Revenue
Cost of sales
P
$000
31,200
(17,800)
S
$000
10,400
(5,600)
Gross profit
Operating expenses
13,400
(8,500)
4,800
(3,200)
Profit from operations
Investment income
4,900
2,000
1,600
-------
PBT
Taxation
Profit for the year
6,900
(2,100)
4,800
1,600
(500)
1,100
The following information is available:
1.
2.
3.
4.
On 1 July 2016, an item of plant in the books of S had a fair value of $5,000 in excess of its
carrying value. At this time, the plant had a remaining life 10 years. Depreciation is charged to
cost of sales.
During the post-acquisition period, S sold goods to P for $4,400. Of this amount, $500 was
included in the inventory of P at the year-end. S earns a 35% margin on its sales.
Goodwill amounted to $800 arose on the acquisition of S, which had been measured using the
fair value method. Goodwill is to be impaired by 10% at the year-end, impairment losses should
be charged to operating expenses.
S paid a dividend of $500 on 1 January 2017.
Required
Prepare the consolidated income statement for the year ended 31 March 2017.
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Example 5 Solution:
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ACCA FR (F7): Financial Reporting
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Example 6:
Below are the income statements of Barbie group and its associated companies as at 31 December
2018.
Revenue
Cost of sales
Barbie
$000
385
(185)
Doll
$000
100
(60)
Shelly
$000
60
(20)
Gross profit
Operating expenses
200
(50)
40
(15)
40
(10)
PBT
Tax
150
(50)
25
(12)
30
(10)
Profit for the year
100
13
20
You are also given the following information:





Barbie acquired 60,000 ordinary shares in Shelly a number of years ago. Shelly has 200,000 $1
ordinary shares.
Barbie acquired 45,000 shares in Doll a number of years ago. Ken has 50,000 $1 ordinary shares.
During the year Shelly sold goods to Barbie for $28,000, Barbie still holds some of these goods in
inventory at the year end. The profit element included in these goods is $2,000.
NCI are valued using the fair value method.
Goodwill and the investment in the associate were impaired for the first time during the year as
follows:
Shelly $2,000
Doll
$3,000
Impairment of the subsidiary’s goodwill should be charged to operating expenses.
Required
Prepare the consolidated income statement for Barbie including the results of its associated company.
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Example 6 Solution:
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ACCA FR (F7): Financial Reporting
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Zya Rana
Exam Question (December 2013)
On 1 April 2013, Polestar acquired 75% of the equity share capital of Southstar. Southstar had been
experiencing difficult trading conditions and making significant losses. In allowing for Southstar’s difficulties,
Polestar made an immediate cash payment of only $1·50 per share. In addition, Polestar will pay a further
amount in cash on 30 September 2014 if Southstar returns to profitability by that date.
The value of this contingent consideration at the date of acquisition was estimated to be $1·8 million, but at
30 September 2013 in the light of continuing losses, its value was estimated at only $1·5 million. The
contingent consideration has not been recorded by Polestar. Overall, the directors of Polestar expect the
acquisition to be a bargain purchase leading to negative goodwill.
At the date of acquisition shares in Southstar had a listed market price of $1·20 each. Below are the
summarised draft financial statements of both companies.
Statements of profit or loss for the year ended 30 September 2013
Polestar
Southstar
$’000
$’000
Revenue
110,000
66,000
Cost of sales
(88,000)
(67,200)
––––––––
–––––––
Gross profit (loss)
22,000
(1,200)
Distribution costs
(3,000)
(2,000)
Administrative expenses
(5,250)
(2,400)
Finance costs
(250)
nil
––––––––
–––––––
Profit (loss) before tax
13,500
(5,600)
Income tax (expense)/relief
(3,500)
1,000
––––––––
–––––––
Profit (loss) for the year
10,000
(4,600)
––––––––
–––––––
Statements of financial position as at 30 September 2013
Assets -Non-current assets
Property, plant and equipment
41,000
21,000
Financial asset: equity investments (note (iii))
16,000
nil
––––––––
–––––––
57,000
21,000
Current assets
16,500
4,800
––––––––
–––––––
Total assets
73,500
25,800
––––––––
–––––––
Equity and liabilities - Equity
Equity shares of 50 cents each
30,000
6,000
Retained earnings
28,500
12,000
––––––––
–––––––
58,500
18,000
Current liabilities
15,000
7,800
––––––––
–––––––
Total equity and liabilities
73,500
25,800
––––––––
–––––––
37
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
The following information is relevant:
(i)
At the date of acquisition, the fair values of Southstar’s assets were equal to their carrying amounts
with the exception of a leased property. This had a fair value of $2 million above its carrying amount
and a remaining lease term of 10 years at that date. All depreciation is included in cost of sales.
(ii)
Polestar transferred raw materials at their cost of $4 million to Southstar in June 2013. Southstar
processed all of these materials incurring additional direct costs of $1·4 million and sold them back
to Polestar in August 2013 for $9 million. At 30 September 2013 Polestar had $1·5 million of these
goods still in inventory. There were no other intra-group sales.
(iii)
Polestar has recorded its investment in Southstar at the cost of the immediate cash payment; other
equity investments are carried at fair value through profit or loss as at 1 October 2012. The other
equity investments have fallen in value by $200,000 during the year ended 30 September 2013.
(iv)
Polestar’s policy is to value the non-controlling interest at fair value at the date of acquisition. For
this purpose, Southstar’s share price at that date can be deemed to be representative of the fair
value of the shares held by the non-controlling interest.
(v)
All items in the above statements of profit or loss are deemed to accrue evenly over the year unless
otherwise indicated.
Required:
(a)
Prepare the consolidated statement of profit or loss for Polestar for the year ended 30 September
2013.
(b)
Prepare the consolidated statement of financial position for Polestar as at 30 September 2013.
The following mark allocation is provided as guidance for this question:
(a) 14 marks
(b) 11 marks
38
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Exam Question (December 2010)
On 1 June 2010, Premier acquired 80% of the equity share capital of Sanford. The consideration consisted of towel
elements:
- a share exchange of three shares in Premier for every five acquired shares in Sanford &
- the issue of a$100 6% loan note for every 500 shares acquired in Sanford.
The share issue has not yet been recorded by Premier, but the issue of the loan notes has been recorded.
At the date of acquisition shares in Premier had a market value of$5 each and the shares of Sanford had a stock
market price of $3·50 each. Below are the summarised draft financial statements of both companies.
Statements of comprehensive income for the year ended 30 September 2010
Premier
Sanford
$’000
$’000
Revenue
92,500
45,000
Cost of sales
(70,500)
(36,000)
–––––––
–––––––
Gross profit
22,000
9,000
Distribution costs
(2,500)
(1,200)
Administrative expenses
(5,500)
(2,400)
Finance costs (100) nil
–––––––
–––––––
Profit before tax
13,900
5,400
Income tax expense
(3,900)
(1,500)
–––––––
–––––––
Profit for the year
10,000
3,900
Other comprehensive income:
Gain on revaluation of land (note (i))
500
nil
–––––––
–––––––
Total comprehensive income
10,500
3,900
–––––––
–––––––
Statements of financial position as at 30 September 2010
Assets - Non-current assets
Property, plant and equipment
25,500
13,900
Investments
1,800
nil
–––––––
–––––––
27,300
13,900
Current assets
12,500
2,400
–––––––
–––––––
Total assets
39,800
16,300
––––––– –––––––
Equity and liabilities - Equity
Equity shares of $1 each
12,000
5,000
Land revaluation reserve – 30 September 2010 (note (i))
2,000
nil
Other equity reserve – 30 September 2009 (note (iv))
500
nil
Retained earnings
12,300
4,500
–––––––
–––––––
26,800
9,500
Non-current liabilities
6% loan notes
3,000
nil
Current liabilities
10,000
6,800
–––––––
–––––––
Total equity and liabilities
39,800
16,300
–––––––
–––––––
39
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
The following information is relevant:
(i)
At the date of acquisition, the fair values of Sanford’s assets were equal to their carrying amounts with
the exception of its property. This had a fair value of $1·2 million below its carrying amount. This would
lead to a reduction of the depreciation charge (in cost of sales) of $50,000 in the post-acquisition period.
Sanford has not incorporated this value change into its entity financial statements.
Premier’s group policy is to revalue all properties to current value at each year end. On 30 September
2010, the value of Sanford’s property was unchanged from its value at acquisition, but the land element
of Premier’s property had increased in value by $500,000 as shown in other comprehensive income.
(ii)
Sales from Sanford to Premier throughout the year ended 30 September 2010 had consistently been $1
million per month. Sanford made a mark-up on cost of 25% on these sales. Premier had $2 million (at cost
to Premier) of inventory that had been supplied in the post-acquisition period by Sanford as at 30
September 2010.
(iii)
Premier had a trade payable balance owing to Sanford of $350,000 as at 30 September 2010. This agreed
with the corresponding receivable in Sanford’s books.
(iv)
Premier’s investments include some available-for-sale investments that have increased in value by
$300,000 during the year. The other equity reserve relates to these investments and is based on
their value as at 30 September 2009. There were no acquisitions or disposals of any of these
investments during the year ended 30 September 2010.
(v)
Premier’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this
purpose Sanford’s share price at that date can be deemed to be representative of the fair value of the
shares held by the non-controlling interest.
(vi)
There has been no impairment of consolidated goodwill.
Required:
(a)
Prepare the consolidated statement of comprehensive income for Premier for the year ended 30
September2010.
(b)
Prepare the consolidated statement of financial position for Premier as at 30 September 2010.
The following mark allocation is provided as guidance for this question:
(a) 9 marks
(b) 16 marks
40
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
IAS 7: Statement of Cash Flows
Objective:
The objective of IAS 7 is to require the presentation of information about the historical changes
in cash and cash equivalents of an entity by means of a statement of cash flows, which classifies
cash flows during the period according to operating, investing, and financing activities.
Fundamental Principle:

All entities that prepare financial statements in conformity with IFRSs are required to
present a statement of cash flows.

The statement of cash flows analyses changes in cash and cash equivalents during a
period.

Cash and cash equivalents comprise cash on hand and demand deposits, together with
short-term, highly liquid investments that are readily convertible to a known amount of
cash, and that are subject to an insignificant risk of changes in value.

Guidance notes indicate that an investment normally meets the definition of a cash
equivalent when it has a maturity of three months or less from the date of acquisition.

Equity investments are normally excluded, unless they are in substance a cash
equivalent (e.g. preferred shares acquired within three months of their specified
redemption date).

Bank overdrafts which are repayable on demand and which form an integral part of an
entity's cash management are also included as a component of cash and cash
equivalents.
Cash and Cash Equivalents:
-
Cash
Bank
Bank Overdraft (OD)
Bonds
Short-term deposits
Presentation of the Statement of Cash Flows:
Cash flows must be analyzed between operating, investing and financing activities.
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
-
Operating Activities are the main revenue-producing activities of the entity that are not
investing or financing activities, so operating cash flows include cash received from
customers and cash paid to suppliers and employees
-
Investing Activities are the acquisition and disposal of long-term assets and other
investments that are not considered to be cash equivalents
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ACCA FR (F7): Financial Reporting
-
By:
Zya Rana
Financing Activities are activities that alter the equity capital and borrowing structure of
the entity

interest and dividends received and paid may be classified as operating,
investing, or financing cash flows, provided that they are classified consistently
from period to period

cash flows arising from taxes on income are normally classified as operating,
unless they can be specifically identified with financing or investing activities

for operating cash flows, the direct method of presentation is encouraged, but
the indirect method is acceptable
Methods for the Preparation of Cash Flow Statements:
-
Direct Method
-
Indirect Method
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Direct Method:
The direct method shows each major class of gross cash receipts and gross cash payments.
Operating Activities under Direct Method:
Cash receipts from customers
Cash paid to suppliers
X
X
Cash paid to employees
(X)
Cash paid for other operating expenses
(X)
Interest paid
(X)
Income taxes paid
(X)
Net cash from operating activities
X/(X)
Investing Activities under Direct Method:
Financing Activities under Direct Method:
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Indirect Method:
The indirect method adjusts accrual basis net profit or loss for the effects of non-cash
transactions.
Operating Activities under Indirect Method:
Profit before tax
X
A: Interest expense
X
A: Depreciation (non-cash item)
X
L: Gain on disposal of NCA
(X)
A: Increase in provisions
X
L: Decrease in provisions
(X)
L: Government grants
X
L: Investment income
(X)
Operating profit before working capital changes
XXX
L: Increase in inventory
(X)
A: Decrease in inventory
X
L: Increase in receivables
(X)
A: Decrease in receivables
X
A: Increase in payables
X
L: Decrease in payables
(X)
Cash generated from operations
XXX
Interest paid
(X)
Tax Paid
(X)
Net cash from operating activities
X/(X)
Investing Activities under indirect Method:
L: Purchase of PPE / Intangibles
(X)
A: Disposal of PPE / Intangibles
X
Net cash from investing activities
X/(X)
Financing Activities under indirect Method:
A: Proceeds from issue of share
L: Dividend paid
A: Proceeds from issue of loan notes
L: Repayment of long-term borrowings
X
(X)
X
(X)
Net cash from financing activities
X/(X)
Cash & cash equivalents at the start of the year
X/(X)
Cash & cash equivalents at the end of the year
X/(X)
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Example:
Income Statement for the year ended 31 Dec’ 20X6.
“$000”
Sales
600
Cost of sales
(300)
GP
300
Operating Expenses:
Salaries
Rent
Depreciation
bad debts
PBIT
Gain on disposal
Interest
PBT
Tax
PAT
30
20
10
5
(65)
235
5
(15)
225
(18)
207
During the year, an asset carrying value of $25,000 have been sold during the year.
Balance Sheet as at 31 December
2005
“$000”
450
50
150
---650
2006
“$000”
470
45
250
142
907
Share capital
Share premium
Retained Earnings
200
50
180
300
75
380
NCL
Salary payable
Taxes payable
Interest payable
Overdraft
Accounts payable
100
10
20
30
60
650
40
5
12
25
70
907
PPE
Debtors
Inventory
Cash and cash equivalents
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Solving above example using direct method:
Operating activities under direct method:
Cash receipts from customers
Cash paid to suppliers
Cash paid to employees
Cash paid for other operating expenses
Interest paid
Income taxes paid
Net cash from operating activities
Investing activities under direct method:
Financing activities under direct method:
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Solving above example using indirect method:
Operating Activities under Indirect Method:
Profit before tax
A: Interest expense
A: Depreciation (non-cash item)
L: Gain on disposal of NCA
A: Increase in provisions
L: Decrease in provisions
L: Government grants
L: Investment income
Operating profit before working capital changes
L: Increase in inventory
A: Decrease in inventory
L: Increase in receivables
A: Decrease in receivables
A: Increase in payables
L: Decrease in payables
Cash generated from operations
Interest paid
Tax Paid
Net cash from operating activities
Investing Activities under indirect Method:
L: Purchase of PPE / Intangibles
A: Disposal of PPE / Intangibles
Net cash from investing activities
Financing Activities under indirect Method:
A: Proceeds from issue of share
L: Dividend paid
A: Proceeds from issue of loan notes
L: Repayment of long-term borrowings
Net cash from financing activities
Cash & cash equivalents at the start of the year
Cash & cash equivalents at the end of the year
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ACCA FR (F7): Financial Reporting
By:
Zya Rana
Exam Question (June 2012)
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ACCA FR (F7): Financial Reporting
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By:
Zya Rana
10
ACCA FR (F7): Financial Reporting
By:
Zya Rana
Solving above question using indirect method:
Operating Activities under Indirect Method:
Profit before tax
A: Interest expense
A: Depreciation (non-cash item)
L: Gain on disposal of NCA
A: Increase in provisions
L: Decrease in provisions
L: Government grants
L: Investment income
Operating profit before working capital changes
L: Increase in inventory
A: Decrease in inventory
L: Increase in receivables
A: Decrease in receivables
A: Increase in payables
L: Decrease in payables
Cash generated from operations
Interest paid
Tax Paid
Net cash from operating activities
Investing Activities under indirect Method:
L: Purchase of PPE / Intangibles
A: Disposal of PPE / Intangibles
Net cash from investing activities
Financing Activities under indirect Method:
A: Proceeds from issue of share
L: Dividend paid
A: Proceeds from issue of loan notes
L: Repayment of long-term borrowings
Net cash from financing activities
Cash & cash equivalents at the start of the year
Cash & cash equivalents at the end of the year
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Financial Reporting – FR (F7) By: Zya Rana
Interpretation of Financial Statements:
Stakeholders
Interests
Shareholders / Investors
Return on their investments
Suppliers / Vendors
Security of their debts
Management
Trends and levels of profit
Bank Managers / Financial Institutions
Debts security
Employees
Job security / Bonus / Increments
Professional advisors
Investment Advisory to potential investors
Usefulness of Ratio Analysis:
Current year ratios 
compared with previous year results
Current year ratios 
compared with budgeted performance to find any variances
Current year ratios 
compared to competitors results
Current year ratios 
may be used to set future performance
Limitations of Ratio Analysis:
When interpreting accounting ratios, should always bear in mind the following:
-
Comparative information is essential for any meaningful ratio analysis. A lack of
information about either industry averages or previous years’ performance will limit
analysis.
-
Accounting ratios are based on SOCI and SOFP, both of which are subject to the
limitations of historical cost accounting. Inflation, different bases for valuing assets
or specific price changes can distort intercompany comparisons, and comparisons
made over time.
Financial Reporting – FR (F7) By: Zya Rana
-
Past company performance is not necessarily the best indicator of future
performance. Indeed, by the time accounts are published and available for analysis
they may already be out of date.
-
Ratios analysis helps to build a picture of a company. The richness of the picture
depends upon the quality of the financial information on which the ratios are based.
If the accounts are poorly constructed (e.g. poor estimates of depreciation, bad
debts etc) then conclusion drawn from the accounting ratios will be flawed.
-
Operational changes: A company may change its underlying operational structure
to such an extent that a ratio calculated several years ago and compared to the
same ratio today would yield a misleading conclusion.
-
Point in time: Some ratios extract information from the balance sheet. Be aware
that the information on the balance sheet is only as of the last day of the reporting
period. If there was an unusual spike or decline in the account balance on the last
day of the reporting period, this can impact the outcome of the ratio analysis.
-
Accounting policies: if two companies have different accounting policies, it can
invalidate any comparison between their ratios. For example, return on capital
employed is materially affected by revaluation of fixed assets. Comparing this ratio
for two companies where one has revalued its fixed assets and the other carries
fixed assets at depreciated historical cost would not be very meaningful. Similar
examples may involve depreciation methods, stock valuation policies etc.
-
The definition of an accounting ratio: if a ratio is calculated by two companies using
different definitions, then there is an obvious problem. Common examples of this
are gearing ratios (some use debt/equity; other may use debt/debt + equity). Also,
where a ratio is partly based on a profit figure, there can be differences as to what
is included and what is excluded from the profit figure.
-
The use of norms can be misleading: A desirable range for the current ratio may
be between 1.5 and 2:1, but all businesses are different. This would be a very high
ratio for a supermarket (with few debtors), but a low figure for a construction
company (with high levels of work in process).
1. Profitability ratios
Types
of
Ratios
2. Liquidity / working capital ratios
3. Investors’ ratios
4. Gearing ratios
Financial Reporting – FR (F7) By: Zya Rana
Profitability Ratios:
Gross profit margin
=
Gross profit
Sales revenue
%
Operating profit margin
=
PBIT
Sales revenue
%
Return on assets (or ROCE)
=
PBIT
Capital employed
%
* Operating Profit or PBIT = Profit before interest and tax. It is often referred to
internationally as IBIT (Income before interest and tax)
** Capital employed = Total assets less current liabilities OR Equity plus non-current
liabilities.
Net Asset Turnover
=
Sales revenue
= Times pa
Capital employed
Operating Profit margin
=
PBIT
Net Asset Turnover
=
Sales revenue
Relationship between Ratios:
/
Sales revenue
/
Capital employed
Financial Reporting – FR (F7) By: Zya Rana
Liquidity / Working Capital Ratios:
Working capital cycle:
The working capital cycle includes cash, receivables, inventories and payables. It
effectively represents the time to purchase inventories, then sell them and collect the
cash. The length of the cycle is determined using the following ratios:
Buy
Inventories
Inventory days
Sell
Receivables days
Inventories
Payables days
Receive cash
from receivables
W. C cycle
Pay
Payables
Current ratio
=
Current assets
Current liabilities
Quick ratio / Acid test ratio
=
Current assets – inventories
Current liabilities
Receivables days
=
Trade receivables
Credit sales
X 365/12/52
 It tells about days for recovery from customers
 Receivables would be the CLOSING or AVERAGE
 If credit sales balance is not given, assume all sales as “Credit Sales”
Payables payment period
=
Trade payables
Credit purchases
X 365/12/52
 It tells the time period to pay off your liabilities
 If credit purchases balance is not given, assume all purchases as “Credit Purchases”
 In case, even the purchases balance is not given, assume COGS as credit
purchases.
Inventory days
=
Inventories
COGS
X 365/12/52
 It indicates the time period from purchase to sale of inventory
Inventory turnover
=
COGS /
Inventories
= Times
Financial Reporting – FR (F7) By: Zya Rana
Investors’ Ratios:
EPS
-
=
It tells how much profit is generated per share
Relationship b/w EPS and PE ratio is directly proportional
P/E ratio
-
=
Current share price
EPS
Earning capacity of share
(P/E ratio X EPS
= Share price)
Dividend yield
-
PAT – Preference dividend (Irredeemable preference shares)
Weighted average # of ordinary shares
=
Dividend per share %
Current share price
It shows the return on the basis of Market price of share
Example:
Co A (10/50) * 100 = 20%
Co B ( 8/50) * 100 = 16%
Being an investor, assume, you have $50 and you will invest in Co A as you will
be getting 4% points higher return.
Dividend Cover
=
PAT
Dividends Paid
Financial Reporting – FR (F7) By: Zya Rana
Gearing Ratios:
Debt / Equity
=
Interest bearing debt
Shareholders’ funds
%
Debt / (debt + equity)
=
Interest bearing debt
Shareholder’ funds + interest bearing debt
%
Interest bearing debt = long-term debt on which the company is requires to pay interest.
In some instances a persistent bank overdraft is classified as long term debt.
Interest cover
=
PBIT
Interest payable
Financial Reporting – FR (F7) By: Zya Rana
Example: Given below is the information of a limited company.
Income Statement
Sales
Cost of sales
Gross profit
Administrative expenses
Selling expenses
Profit before tax
Taxation
PAT
Accumulated profit brought forward
Accumulated profit carried forward
$
1,675,000
(1,000,000)
675,000
(250,000)
(225,000)
200,000
(50,000)
150,000
100,000
250,000
Market value of each share is $15.
Balance Sheet
$
FIXED ASSETS
PPE
1,150,000
Investments
300,000
CURRENT ASSETS
Stock
Debtors
Advances
Cash and Bank
310,000
350,000
100,000
40,000
TOTAL ASSETS
EQUITY
Equity shares of $10 each
Retained earnings
TOTAL EQUITY AND LIABILITIES
Calculate the ratios on next page:
1,450,000
800,000
2,250,000
700,000
250,000
NON-CURRENT LIABILITIES
CURRENT LIABILITIES
Payables
Other payables
Sundry creditors
$
950,000
725,000
125,000
250,000
200,000
575,000
2,250,000
Financial Reporting – FR (F7) By: Zya Rana
Required
1. G.P margin
2. Operation profit
margin
3. ROCE
4. Asset turnover
5. Current ratio
6. Quick ratio
7. Receivables days
8. Payables days
9. Inventory days
10. Inventory turnover
11. EPS
12. P/E Ratio
13. Debt/Equity
14. Debt/(Debt+Equity)
Working
Result
3
Quartile sells jewellery through stores in retail shopping centres throughout the country. Over the last two years it has
experienced declining profitability and is wondering if this is related to the sector as whole. It has recently subscribed
to an agency that produces average ratios across many businesses. Below are the ratios that have been provided by
the agency for Quartile’s business sector based on a year end of 30 June 2012.
Return on year-end capital employed (ROCE)
Net asset (total assets less current liabilities) turnover
Gross profit margin
Operating profit margin
Current ratio
Average inventory turnover
Trade payables’ payment period
Debt to equity
16·8%
1·4 times
35%
12%
1·25:1
3 times
64 days
38%
The financial statements of Quartile for the year ended 30 September 2012 are:
Income statement
$’000
Revenue
Opening inventory
Purchases
Closing inventory
8,300
43,900
–––––––
52,200
(10,200)
–––––––
Gross profit
Operating costs
Finance costs
Profit before tax
Income tax expense
Profit for the year
6
$’000
56,000
(42,000)
–––––––
14,000
(9,800)
(800)
–––––––
3,400
(1,000)
–––––––
2,400
–––––––
Statement of financial position
$’000
Assets
Non-current assets
Property and shop fittings
Deferred development expenditure
Current assets
Inventory
Bank
25,600
5,000
–––––––
30,600
10,200
1,000
–––––––
Total assets
Equity and liabilities
Equity
Equity shares of $1 each
Property revaluation reserve
Retained earnings
11,200
–––––––
41,800
–––––––
15,000
3,000
8,600
–––––––
26,600
Non-current liabilities
10% loan notes
Current liabilities
Trade payables
Current tax payable
$’000
8,000
5,400
1,800
–––––––
Total equity and liabilities
7,200
–––––––
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.
Required:
(a) Prepare for Quartile the equivalent ratios that have been provided by the agency.
(9 marks)
(b) Assess the financial and operating performance of Quartile in comparison to its sector averages.
(12 marks)
(c) Explain four possible limitations of the usefulness of the above comparison.
(4 marks)
(25 marks)
7
[P.T.O.
Financial Reporting – FR (F7) By: Zya Rana
December 2012 – Question 3 – Quartile Co
Required
1. ROCE
2. Net asset
turnover
3. G.P
margin
4. Operating
profit margin
5. Current
ratio
6. Average
inventory
turnover
7. Payables
days
8. Debt to
equity
9.
Working
Quartile
Sector
Average
ACCA FR (F7):
Financial Reporting
By: Zya
Rana
IAS 33: Earning Per Share (EPS)
EPS
=
Profit attributable to ordinary shareholders
Weighted average # of ordinary shares
or
EPS
=
PAT – Preference dividend (Irredeemable preference shares)
Weighted average # of ordinary shares
Types of EPS:
1.
Basic EPS:
Is calculated in the basis of shares already issued in past and the # of
shares issued in current year.
2.
Diluted EPS:
Is calculated on the basis of shares already issued (past + current year),
and the shares which the company will issue in future time period.
Theoretical – Ex Right Price (TERP):
-
TERP is calculated when an entity makes Right Issue
It is the estimated future share price which is calculated in the basis of Prudence
concept
Reason for calculating TERP or Estimated Future Share Price:
It is calculated considering the concept of demand & supply in accordance with the prudence.
Similarity / Difference Between
Issued to existing shareholders
Consideration involved
Issued at
Right Shares
Yes
Yes
Discounted price
Bonus Shares
Yes
No
Free of cost
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ACCA FR (F7):
Financial Reporting
By: Zya
Rana
IAS 33 and Right Shares:
-
In IAS 33, there is no concept of discounted price when issuing right shares
-
So, when issuing right shares, we need to break it into two elements:
-

Full M.V shares (shares which involved cash element) &

The shares issued free of cost (discounted element)
Multiply fraction according to the # of months (Right shares issued date to the year-end
date)
IAS 33 and Bonus Shares:
-
In bonus shares, there is no cash consideration involvement, so multiply the fraction for
whole year i.e. 12/12
Practice Questions – Basic EPS – Next Slide
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ACCA FR (F7):
Financial Reporting
By: Zya
Rana
Question 1:
Brains Co had 100,000 shares in issue, and then makes a 1 for 5 rights issue on 1 October 20X2
at a price of $1. The market value on the last day of quotation with rights was $1.60.
Calculate the basic EPS for 20X2, given total earnings of $50,000 in 20X2.
Solution:
Step 1:
Find the number of new right shares issued:
Step 2:
Calculate TERP:
Step 3:
Now, find the Weighted Average # of ordinary
shares:
Step 4:
EPS for 2002:
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ACCA FR (F7):
Financial Reporting
By: Zya
Rana
Question 2:
On 01 January 2019, the issued share capital consisted of 4,000,000 ordinary shares of 25c
each, and the shares were quoted at $1.
On 1 July 2019 the company made a rights issue in the proportion of 1 for 4 at 50c per share.
Year ended 31 December
Profit after tax
2019
$ 425,000
Show the calculation of basic EPS to be presented in the financial statements for the year
ended 31 December 2019.
Step 1:
Find the number of new right shares issued:
Step 2:
Calculate TERP:
Step 3:
Now, find the Weighted Average # of ordinary
shares:
Step 4:
EPS for 2019:
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ACCA FR (F7):
Financial Reporting
By: Zya
Rana
Question 3:
Marcoli Co has net profit figure of $1.5m for the year ended 31 December 20X7.
On 1 January 20X7 the number of shares was 500,000. During 20X7 the company announced a
rights issue with the following details:
Rights:
1 new share for each 5 outstanding
Exercise price:
$5.00
Last date to exercise rights: 1 March 20X7
The market (fair) value of one share in Marcoli immediately prior to exercise on 1 March 20X7 =
$11.00.
Calculate the basic EPS for 20X7.
Step 1:
Find the number of new right shares issued:
Step 2:
Calculate TERP:
Step 3:
Now, find the Weighted Average # of ordinary
shares:
Step 4:
EPS for 20X7:
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ACCA FR (F7):
Financial Reporting
By: Zya
Rana
September 2016 Question 32 Gregory Co:
Year start
Subsidiary acquired
Year end
Req (a): 8 marks4 Observations4 Comments in reply 2 points/comment
Group
(2006)
Observation 1:
Single
(2005)
% Increase
PAT
Comments on observation 1:
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6
ACCA FR (F7):
Financial Reporting
Observation 2:
Group
(2006)
Single
(2005)
13 cents
12.5 cents
By: Zya
Rana
% Increase
EPS =
# of right shares issued:
2006
2005
=
Right shares
Actual # of shares should have been used the “Weighted Average shares”, but wrongly used the
6000 shares in above observation.
Now, find the Weighted Average # of ordinary shares:
Profits:
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ACCA FR (F7):
Financial Reporting
By: Zya
Rana
Comments on observation 2:
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8
ACCA FR (F7):
Financial Reporting
By: Zya
Rana
Comments on observation 3:
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9
ACCA FR (F7):
Financial Reporting
By: Zya
Rana
Observation 4:
Comments on observation 4:
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10
ACCA FR (F7):
Financial Reporting
By: Zya
Rana
Req (b): 12 marks4 Ratios calculations4 marks and remaining 8 marks for
commenting on comparative performance:
Required
2006
2005
1. ROCE
2. Net asset
turnover
3. G.P margin
4. Operating
profit margin
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ACCA FR (F7):
Financial Reporting
By: Zya
Rana
Comments on the comparative performance:
1.
On the basis of ratios result of two years, it can be noted that the overall financial
performance of the Gregory Co has declined.
The ROCE has decreased by 10.6% [(11.3% - 10.1%) / 11.3%]. This may because of
reduction in G.P as it also has fallen by 22% [(25.7 – 20) / 25.7] over a period of one
year. It appears that overall decline in ROCE has happened due to the weaker profits
margins.
2.
Although, NATO increased from 0.53 times to 0.63 times but despite to this
improvement, it is still very low with only 63 cents of sales generated from every $1
invested in the business.
3.
The decline in operating profit margin is mainly due to the decline in G.P margin and it
seems the operating costs might not be better controlled.
4.
The outcome of the acquisition of Tamsin Co looks like significant effect on overall
performance of the group, but this may not necessarily be the case as there could be
some other factors that might distorting the analysis.
As mentioned above that 2006 results only include six months results of subsidiary
acquired during the year. On the other hand, the SOFP include the full amount of
consideration paid for acquiring Tamsin Co.
In summary, although on the first impression, the acquisition of Tamsin Co appears to be
worsening investment by Gregory, but it is pertinent to mention that consolidated results of 1
year cannot produce clear picture of comparison with previous year wherein company was
operating as a single co.
It is difficult to determine the actual performance and also difficult to form a definite view in
case of non-availability of further information regarding Tamsin’s company, such as separate
financial statements of subsidiary.
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ACCA FR (F7):
Financial Reporting
By: Zya
Rana
Diluted EPS (DEPS):
Is calculated on the basis of shares already issued (past + current year), and the
shares which the company will issue in future time period.
It is used to gauge the quality of a company's EPS if all convertible securities
were exercised.
Convertible securities are all:
Outstanding convertible preferred shares
Outstanding Convertible loan notes
Outstanding Share options / warrants
The diluted EPS will always be lower than the simple or basic EPS due to the
issue of future commitments as per afore-mentioned convertible securities.
DEPS is calculated as:
(PAT – Preference dividend) + *Cost of debt
(Weighted average # of shares outstanding + **all dilutive potential common stock)
*Cost of debt = After-tax interest on convertible securities
*Interest expense: Eliminate any interest expense associated with dilutive potential common
stock, since it is assumed that these shares are converted to common stock. The conversion
would eliminate the company’s liability for the interest expense.
*Cost of debt = kd X (1 – t)
**The number of shares which may issue due to the conversion of convertible securities.
Practice Questions – Diluted EPS – Next Slide
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13
ACCA FR (F7):
Financial Reporting
By: Zya
Rana
Question 1:
In 20X7 Farrah Co had a basic EPS of 105c based on earnings of $105,000 and 100,000 ordinary
$1 shares.
It also had in issue $40,000 15% convertible loan stock which is convertible in two years' time at
the rate of 4 ordinary shares for every $5 of stock. The rate of tax is 30%.
In 20X7 gross profit of $200,000 and expenses of $50,000 were recorded, including interest
payable of $6,000.
Calculate the DEPS.
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14
ACCA FR (F7):
Financial Reporting
By: Zya
Rana
Question 2:
A company had 8.28 million shares in issue at the start of the year and made no new issue of
shares during the year ended 31 December 20X4, but on that date it had in issue $2,300,000
10% convertible loan stock 20X6 – 20X9.
Assume a corporation tax rate of 30%.The earnings for the year were $2,208,000.
This loan stock will be convertible into ordinary $1 shares as follows.
20X6 90 $1 shares for $100 nominal value loan stock
20X7 85 $1 shares for $100 nominal value loan stock
20X8 80 $1 shares for $100 nominal value loan stock
20X9 75 $1 shares for $100 nominal value loan stock
Calculate the fully diluted EPS for the year ended 31 December 20X4.
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ACCA FR (F7):
Financial Reporting
By: Zya
Rana
Question 3: September 2016 – Question 31 – Triage Co
Requirement (C)
The issue of convertible loan notes can potentially dilute the basic earnings per share (EPS).
Calculate the diluted earnings per share for Triage Co for the year ended 31 March 20X6 (there
is no need to calculate the basic EPS).
(3 Marks)
The following note is relevant:
(Note (i) of the question)
Triage Co issued 400,000 $100 6% convertible loan notes on 1 April 20X5. Interest is payable
annually in arrears on 31 March each year. The loans can be converted to equity shares on the
basis of 20 shares for each $100 loan note on 31 March 20X8 or redeemed at par for cash on
the same date. An equivalent loan without the conversion rights would have required an
interest rate of 8%.
The present value of $1 receivable at the end of each year, based on discount rates of 6% and
8%, are:
6%
8%
End of year 1
0·94
0·93
End of year 2
0·89
0·86
End of year 3
0·84
0·79
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ACCA FR (F7):
Financial Reporting
By: Zya
Rana
Question 4:
Barwell had 10 million ordinary shares in issue throughout the year ended 30 June 20X3. On 1
July 20X2 it had issued $2 million of 6% convertible loan stock, each $5 of loan stock convertible
into 4 ordinary shares on 1 July 20X6 at the option of the holder.
Barwell had profit after tax for the year ended 30 June 20X3 of $1,850,000. It pays tax on profits
at 30%.
What was diluted EPS for the year?
A
B
C
D
$0.167
$0.185
$0.161
$0.17
Question 5:
Aqua has correctly calculated its basic earnings per share (EPS) for the current year.
Which of the following items need to be additionally considered when calculating the diluted
EPS of Aqua for the year?
(i)
(ii)
(iii)
(iv)
A
B
C
D
A 1 for 5 rights issue of equity shares during the year at $1.20 when the market price
of the equity shares was $2.00
The issue during the year of a convertible (to equity shares) loan note
The granting during the year of directors' share options exercisable in three years' time
Equity shares issued during the year as the purchase consideration for the acquisition of
a new subsidiary company
All four
(i) and (ii) only
(ii) and (iii) only
(iii) and (iv) only
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ACCA FR (F7):
Financial Reporting
By: Zya
Rana
Share Options / Warrants:
Options granted (lower than M.V) to employees or directors with certain conditions attached.
Question 6
A company had 8.28 million shares in issue at the start of the year and made no issue of shares
during the year ended 31 December 20X4, but on that date there were outstanding options to
purchase 920,000 ordinary $1 shares at $1.70 per share. The average fair value of ordinary
shares was $1.80. Earnings for the year ended 31 December 20X4 were $2,208,000.
Calculate the fully DEPS for the year ended 31 December 20X4.
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