ACCA F7
Financial Reporting
For exams in June 2014
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Key to Icons
Syllabus
Real world example
Technical content
Diagram
Question to consider
Key model
Answer
Tackling the exam
Past exam question
Summary
Answer to past exam
question
Case study
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Chapter 1
The conceptual
framework
• Conceptual framework and GAAP
• The IASB’s Conceptual Framework
• The objective of general purpose
financial reporting
• Underlying assumption
• Qualitative characteristics of financial
statements
• The elements of financial statements
• Recognition and measurement of the
elements of financial statements
• Fair presentation and compliance with
IFRS
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Syllabus Guide detailed outcomes 1
• Describe what is meant by a conceptual framework of
accounting
• Discuss whether a conceptual framework is necessary and
what an alternative system might be
• Discuss what is meant by relevance and faithful
representation and describe the qualities that enhance
these characteristics
• Discuss whether faithful representation constitutes more
than compliance with accounting standards
• Indicate the circumstances and required disclosures where
a ‘true and fair’ override may apply
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Syllabus Guide detailed outcomes 2
• Discuss what is meant by understandability and verifiability
in relation to the provision of financial information
• Discuss the importance of comparability and timeliness to
users of financial statements
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Syllabus Guide detailed outcomes 3
• Define what is meant by ‘recognition’ in financial
statements and discuss the recognition criteria
• Apply the recognition criteria to assets and liabilities and
income and expenses
• Discuss revenue recognition issues and indicate when
income and expense recognition should occur
• Demonstrate the role of the principle of substance over
form in relation to recognising sales revenue
• Explain the measurement bases of historical cost, fair
value / current cost, net realisable value and the present
value of future cash flows and compute amounts using
these bases
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Chapter summary diagram
Need for a
conceptual
framework
Advantages and
disadvantages
Generally accepted
accounting practice
(GAAP)
Conceptual framework and
GAAP
The conceptual
framework
The IASB’s conceptual
framework
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True and fair view
Conceptual Framework and GAAP 1
What is a conceptual framework?
• A statement of generally accepted theoretical principles
which form a frame of reference for financial reporting.
• These provide a basis for developing new accounting
standards and a platform to evaluate those already in
existence.
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Conceptual Framework and GAAP 2
Advantages of a conceptual framework
• Having a consistent conceptual base should avoid
contradictions and inconsistencies in basic concepts
and so produce standardised consistent accounting
practices.
• The development of standards is less subject to
political pressure.
• A consistent statement of financial position driven or
profit or loss driven approach is used.
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Conceptual Framework and GAAP 3
Disadvantages of a conceptual framework
• Financial statements have many users all with differing
needs.
– A single framework cannot satisfy the needs of all
users.
– There may be a need for a variety of accounting
standards, each produced for a different purpose
with different conceptual bases.
• Having a conceptual framework may not make it any
easier to prepare accounting standards.
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Conceptual Framework and GAAP 4
Generally accepted accounting practice (GAAP)
• Comprises the rules, from all sources, which govern
accounting.
• The major components include:
– National accounting standards, for example the Financial
Accounting Standards Board (FASB) in the USA
– National company law, for example the Companies Act in
the UK
– Local stock exchange requirements
– Regional bodies, such as the European Union. For
example, an Accounting Directive issued by the EU now
requires companies listed on an EU stock exchange to
prepare their consolidated financial statements using
IFRSs.
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The IASB’s Conceptual Framework 1
• Published in September 2010 to update the IASB
Framework for the Preparation and Presentation of
Financial Statements which was issued in 1989.
• Joint project by the IASB and FASB to be completed in
two phases.
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The IASB’s Conceptual Framework 2
• Currently comprises four chapters:
– Chapters 1 – 3 are from the new Conceptual
Framework for Financial Reporting.
– Chapter 4 consists of the parts of the former 1989
Framework which will be updated in phase 2 of the
project.
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The IASB’s Conceptual Framework 3
• Chapter 1
– The objective of general purpose financial reporting
• Chapter 2
– The reporting entity (still to be issued)
• Chapter 3
– Qualitative characteristics of useful financial
information
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The IASB’s Conceptual Framework 4
• Chapter 4
– Remaining text of the 1989 Framework
– Underlying assumption
– The elements of financial statements
– Recognition of the elements of financial statements
– Measurement of the elements of financial
statements
– Concepts of capital and capital maintenance.
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The objective of general purpose financial reporting 1
Chapter 1: The objective of general purpose financial
reporting
• To provide information about the reporting entity that is
useful to existing and potential investors, lenders and
other creditors in making decisions about providing
resources to the entity
• Such decisions are likely to include:
– Decisions to buy, hold or sell equity investments
– Assessment of management stewardship and
accountability
– Assessment of the entity’s ability to pay employees
– Assessment of the security of amounts lent to the entity
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The objective of general purpose financial reporting 2
Chapter 1: The objective of general purpose financial
reporting (cont.)
• The information required therefore relates to:
– The economic resources of the entity
– The claims against the entity and
– Changes in the entity’s economic resources and claims
• This information should be prepared on an accruals
basis.
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Underlying assumption
Chapter 4: The Framework (1989) remaining text
Underlying assumption
• Going concern:
– The financial statements are normally prepared on
the assumption that the entity is a going concern
and will continue to trade for the foreseeable future.
• It is assumed that the entity has neither the intention
not the need to liquidate the business or curtail major
operations.
• If it did the financial statements would be prepared on a
different basis and this basis would be disclosed.
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Qualitative characteristics of financial information 1
Chapter 3: Qualitative characteristics of useful financial
information
• These describe the attributes that information needs to
have in order for it to be most useful for existing and
potential investors, lenders and other creditors for making
decisions about the reporting entity.
• They are categorised into two categories:
– Fundamental qualitative characteristics
– Enhancing qualitative characteristics
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Qualitative characteristics of financial information 2
Fundamental qualitative characteristics
Relevance
Relevant financial information is
capable of making a difference in the
decisions made by users, ie if it has
• Predictive value, and/or
• Confirmatory value
Materiality
Information is material if omitting it
or misstating it could influence
decisions that users make on the
basis of financial information.
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Faithful representation
To be useful, financial information
must faithfully represent the
phenomena it purports to
represent.
A perfect faithful representation
would be:
• Complete
• Neutral
• Free from error
Qualitative characteristics of financial information 3
Enhancing qualitative characteristics
Comparability
Information is more
useful if it can be
compared with similar
information about
• Other entities, and
• Other periods
Consistency helps
achieve comparability
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Verifiability
Assures users that
information faithfully
represents the
economic phenomena
it purports to represent
Verification can be
direct or indirect
Timeliness
Understandability
Having information
available to
decision-makers in
time to be capable
of influencing their
decisions
Classifying,
characterising and
presenting
information clearly
and concisely
The elements of financial statements 1
Chapter 4: The Framework (1989) remaining text
The elements of financial statements
• An item can only be recognised in the financial
statements if it can be defined as one of the following
elements:
– Asset
– Liability
– Equity
– Income
– Expense
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The elements of financial statements 2
ASSET
A resource controlled by an entity as a result of past
events and from which future economic benefits are
expected to flow to the entity
LIABILITY A present obligation of the entity arising from past
events, the settlement of which is expected to result in
an outflow of resources embodying economic benefits
EQUITY
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The residual interest in the assets of an entity after
deducting its liabilities
The elements of financial statements 3
INCOME
Increases in economic benefits during the period other
than contributions from equity participants
EXPENSE Decreases in economic benefits during the period
other than distributions to equity participants
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Recognition and measurement of the elements of fs 1
Chapter 4: The Framework (1989) remaining text
Recognition of the elements of financial statements
• Recognition is the process of recording or showing an
item in the financial statements.
• An item can only be recognised in the financial statements
when it satisfies the recognition criteria.
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Recognition and measurement of the elements of fs 2
Chapter 4: The Framework (1989) remaining text
Recognition of the elements of financial statements
• Recognition criteria:
– An item meets the definition of an element of the
financial statements; and
– It is probable that any future economic benefit
associated with the item will flow to or from the entity;
and
– The item has a cost or value that can be measured with
reliability.
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Case study: Footballers 1
Are transfer fees paid for footballers an asset?
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Case study: Footballers 2
Are the recognition criteria satisfied?
• Firstly, is there an asset?
– Control
– Past event
– Expected generation of future economic benefit
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Case study: Footballers 3
• Asset?
– Control: the football club has purchased the right to
use the player for match fixtures/ training and
merchandising (player rights)
– Past event: the transaction to purchase the player
– Future economic benefits
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Case study: Footballers 4
What are the future economic benefits?
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Case study: Footballers 5
• Asset?
– Yes, an intangible asset
• Secondly, is there probable future economic benefit?
– Yes as discussed above
• Thirdly, can the amount be measured with reliability?
– Fee paid → yes
– Value of future ticket sales and merchandising → no
• Capitalise only the transfer fee paid as an intangible
non-current asset
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Recognition and measurement of the elements of fs 3
Chapter 4: The Framework (1989) remaining text
Measurement of the elements of financial statements
• The process of determining the monetary amounts at
which the elements of the financial statements are to be
recognised and carried in the statement of financial
position and the statement of profit or loss.
• There are four choices available:
– Historical cost
– Realisable value
– Current cost
– Present value
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Recognition and measurement of the elements of fs 4
Measurement
basis
Definition
Historical cost
Assets are recorded at the amount of cash or
cash equivalents paid or the fair value of the
consideration given to acquire them at the time of
their acquisition.
Liabilities are recorded at the amount of proceeds
received in exchange for the obligation.
Realisable value
The amount of cash or cash equivalents that
could currently be obtained by selling an asset in
an orderly disposal.
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Recognition and measurement of the elements of fs 5
Measurement
basis
Definition
Current cost
Assets are recorded at the amount of cash or
cash equivalents that would have to be paid if the
same or an equivalent asset was acquired at the
current time.
Liabilities are carried at the undiscounted amount
of cash or cash equivalents that would be
required to settle the obligation at the current
time.
Present value
A current estimate of the present discounted value
of the future net cash flows in the normal course
of business.
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Fair presentation and compliance with IFRS 1
• Financial statements should present fairly the financial
position, financial performance and cash flows of an
entity.
• It is presumed that this fair presentation will be achieved
where an entity complies with both the Conceptual
Framework and IFRSs.
• Fair presentation also requires an entity to:
– Select and apply appropriate accounting policies
– Present information in a manner that provides
relevance information and which is a faithful
representation
– Provide additional disclosures where further information
is required to enable users to understand the impact of
transactions
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Fair presentation and compliance with IFRS 2
• In extremely rare cases management may decide that
compliance with an IFRS would make the financial
statements misleading.
• Here departure from the IFRS is required in order for fair
presentation to be achieved.
• Such departures must be disclosed in full including the
reason for the departure and the financial impact of the
departure on the financial statements.
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Recent exam questions
Nature of question
Exam details
Discuss the meaning of understandability Q4 (a) Dec 2012
and comparability and the role of
consistency when preparing financial
statements
Use specific examples to show how IFRS Q4 (a) June 2011
disclosure can assist the predictive nature
of historic financial statements
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Chapter 2
The regulatory
framework
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• The need for a regulatory
framework
• The International Accounting
Standards Board (IASB)
• Setting of International Financial
Reporting Standards
Syllabus Guide detailed outcomes 1
• Explain why a regulatory framework is needed, also
including the advantages and disadvantages of IFRS over
a national regulatory framework
• Explain why accounting standards on their own are not a
complete regulatory framework
• Distinguish between a principles based and a rules based
framework and discuss whether they can be
complementary
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Syllabus Guide detailed outcomes 2
• Describe the structure and objectives of the IFRS
Foundation, the International Accounting Standards Board
(IASB), the IFRS Advisory Council (IFRS AC) and the
IFRS Interpretations Committee (IFRS IC)
• Describe the IASB’s Standard setting process including
revisions to and interpretations of Standards
• Explain the relationship of national standard setters to the
IASB in respect of the standard setting process
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Chapter summary diagram
The regulatory framework
The need for a
regulatory
framework
The IASB
The IASB’s
structure
Principlesbased versus
rules-based
approach
The standard
setting process
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The IASB's
relationship with
other standard
setters
The need for a regulatory framework 1
• A regulatory framework is required for two main
reasons:
– To act as a central source of reference of generally
accepted accounting practice (GAAP) in a given
market
– To designate a system of enforcement of that GAAP
to ensure consistency between companies
• Its aim is to narrow the areas of difference and choice
in financial reporting and to improve comparability.
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The need for a regulatory framework 2
Principles-based vs. rules-based systems
• A principles-based system works within a set of laid
down principles.
• International Financial Reporting Standards use a
principles-based system: they are written based on the
definitions of the elements of financial statements and
the recognition and measurement principles as detailed
in the Conceptual Framework for Financial Reporting.
• These principles are designed to cover a wide range of
scenarios without the need for a set of rules which
govern every eventuality.
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The need for a regulatory framework 3
Principles-based vs. rules-based systems
• A rules-based system regulates for issues as they
arise, this means that accounting standards contain
rules which apply to specific scenarios.
• US GAAP has historically used a rules-based system
however many of the recent corporate accounting
scandals have arisen as a direct result of companies
acting in a way that avoids rules.
• Consequently the US is moving towards a more
principles-based system.
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The need for a regulatory framework 4
There are both advantages and disadvantages of a
principles vs. rules-based system:
• Advantages:
– A principles-based approach on a single conceptual
framework ensures that standards are consistent with
each other.
– Rules can be broken and ‘loopholes’ found whereas
principles are more likely to offer a ‘catch all’ scenario.
– Principles reduce the need for excessive detail in
standards.
• Disadvantages:
– Principles can become out of date and can be overly
flexible and therefore subject to manipulation.
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The IASB 1
• The International Accounting Standards Board (IASB) is an
independent accounting standard setter established in 2001.
• It has three formal objectives:
– To develop, in the public interest, a single set of high
quality, understandable and enforceable global accounting
standards that require high quality, transparent and
comparable information in general purpose financial
statements
– To promote the use and vigorous application of those
standards
– To work actively with national accounting standard setters
to bring about convergence of national accounting
standards and IFRS to high quality solutions
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The IASB 2
IFRS Foundation
Trustees
International
Accounting
Standards Board
(IASB)
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IFRS
Interpretations
Committee
IFRS Advisory
Council
The IASB 3
The IFRS Foundation
• The IFRS Foundation is the parent entity of the IASB.
• Its trustees appoint:
– The IASB’s Chairman and members of its Board;
– The members of the IFRS Interpretations Committee
– The members of the IFRS Advisory Council
• It also seeks to raise funds for the organisations’
activities.
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The IASB 4
The IFRS Advisory Council
• The IFRS Advisory Council’s objective is to give advice
to the IASB on areas of work it should prioritise and on
major standard setting projects.
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The IASB 5
The IFRS Interpretations Committee
• The IFRS Interpretations Committee prepares
interpretations of IFRSAs for approval by the IASB.
• It also provides guidance on financial reporting issues
not specifically addressed by IFRSs.
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Setting of IFRS 1
Below are the key steps in the process used to issue an International Financial
Reporting Standard:
Issues Paper
IASB staff prepare an issues paper including studying the
approach of national standards setters.
The IFRS Advisory Council is consulted about the
advisability of adding the topic to the IASB’s agenda.
Discussion Paper
A Discussion Paper may be published for public
comment.
Exposure Draft
An Exposure Draft is published for public comment.
International
Financial Reporting After considering all comments received, and IFRS is
Standard
approved by a majority of the IASB. The final standard
includes both a basis for conclusions and any dissenting
opinions.
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Setting of IFRS 2
• For the IASB to achieve its objective in relation to the
harmonisation of accounting standards it is important
that it works closely with other national standard setters.
• The IASB is trying to co-ordinate its work plan with
national standard setters such that when it adds an item
to its agenda that national standard setters do the same
thing so that a standard can be agreed which has
international consensus.
• There are also plans to review all standards where there
are significant differences between IFRS and national
standards.
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Setting of IFRS 3
Current standards examinable in paper F7 are:
• IAS 1 (revised)
• IAS 2
• IAS 7
• IAS 8
• IAS 10
• IAS 11
• IAS 12
• IAS 16
• IAS 17
• IAS 18
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Setting of IFRS 4
Current standards examinable in paper F7 are:
• IAS 20
• IAS 21
• IAS 23
• IAS 24
• IAS 27 (revised)
• IAS 28
• IAS 32
• IAS 33
• IAS 34
• IAS 36
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Setting of IFRS 5
Current standards examinable in paper F7 are:
• IAS 37
• IAS 38
• IAS 39
• IAS 40
• IFRS 1
• IFRS 3 (revised)
• IFRS 5
• IFRS 7
• IFRS 9
• IFRS 10
• IFRS 13
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Recent exam questions
Nature of question
Exam details
Explain the difference between a
principles-based and a rules-based
system and state which system is used
by International Financial Reporting
Standards.
Q5 (a) June 2012
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Chapter 3
Presentation of
published financial
statements
• IAS 1 (revised) Presentation of
financial statements
• Statement of financial position
• The current/ non-current distinction
• Statement of profit or loss and
other comprehensive income
• Changes in equity
• Notes to the financial statements
• Revision of basic accounts
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Syllabus Guide detailed outcomes 1
• Describe the structure (format) and content of financial
statements presented under IFRS
• Prepare any entity’s financial statements in accordance
with the prescribed structure and content
• Prepare and explain the contents and purpose of the
statement of changes in equity
• Describe and prepare a statement of changes in equity
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Chapter summary diagram
Presentation of published
financial statements
IFRS financial
statements
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Formats
Financial statement
preparation questions
IAS 1 (revised) 1
IAS 1 applies to the preparation and presentation of general
purpose financial statements in accordance with IFRSs and states
that a complete set of financial statements comprises:
• A statement of financial position at the end of the period
• A statement of profit or loss and other comprehensive
income for the period
• A statement of changes in equity for the period
• A statement of cash flows for the period
• Notes to the financial statements including a summary of
significant accounting policies an other explanatory information
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IAS 1 (revised) 2
• Financial statements should also disclose:
– The name of the reporting entity
– Whether the accounts relate to the single entity only or a group
of entities
– The date of the end of the reporting period or the period
covered by the financial statements
– The presentation currency
– The level of rounding used in presenting amounts in the
financial statements
• Financial statements must be prepared on a timely basis in order to
provide useful information to users.
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Statement of financial position 1
XYZ GROUP – STATEMENT OF FINANCIAL POSITION FOR THE YEAR ENDED 31
DECEMBER 20X2
20X2
20X1
$’000
$’000
ASSETS
Non-current assets
Property, plant and equipment
X
X
Goodwill
X
X
Other intangible assets
X
X
Investments in associates
X
X
Investments in equity instruments
X
X
X
X
Current assets
Inventories
X
X
Trade receivables
X
X
Other current assets
X
X
Cash and cash equivalents
X
X
X
X
Total assets
X
X
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Statement of financial position 2
EQUITY AND LIABILITIES
Equity
Share capital
Retained earnings
Other components of equity
Total equity
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$’000
$’000
X
X
X
X
X
X
X
X
X
X
Statement of financial position 3
$’000
$’000
Non-current liabilities
Long-term borrowings
Deferred tax
Long-term provisions
Total non-current liabilities
X
X
X
X
X
X
X
X
Current liabilities
Trade and other payables
Short-term borrowings
Current portions of long-term borrowings
Current tax payable
Short-term provisions
Total current liabilities
X
X
X
X
X
X
X
X
X
X
X
X
Total liabilities
X
X
Total equity and liabilities
X
X
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Statement of financial position 4
•
The following items must be presented on the face of the
statement of financial position (minimum disclosure)
– Property, plant and equipment
– Investment property
– Intangible assets
– Financial assets
– Investments accounted for using the equity method
(associates)
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Statement of financial position 5
– Biological assets (not in syllabus)
– Inventories
– Trade and other receivables
– Cash and cash equivalents
– Assets classified as held for sale under IFRS 5
– Trade and other payables
– Provisions
– Financial liabilities
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Statement of financial position 6
– Current tax liabilities and assets as in IAS 12
– Deferred tax liabilities and assets
– Liabilities included in disposal groups under IFRS 5
– Non-controlling interests
– Issued capital and reserves
•
Other items can be presented in the notes to the financial
statements unless they need to be disclosed on the face of the
statement of financial position in order for users to properly
understand the entity’s financial position.
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Statement of financial position 7
•
Further sub-classification of the above items should be made either
on the face of the statement of financial position or in the notes.
•
The degree of further sub-classification depends on the requirements
of IFRSs and the nature of the business.
•
They include:
– Property, plant and equipment classified by class of asset
– Receivables analysed between amounts receivable from trade
customers, other group members, related parties, prepayments
and other amounts
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Statement of financial position 8
•
They include cont.:
– Inventories sub-classified into materials, work in progress and
finished goods
– Provisions
– Equity capital and reserves classified into classes of capital, share
premium and reserves
Additional specific disclosures must be made:
•
Share capital disclosures:
– Authorised share capital and issued share capital (issued and fully
paid and issued but not fully paid)
– Par value of each share
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Statement of financial position 9
•
Share capital disclosures cont.:
– Reconciliation of the number of shares outstanding at the
beginning and the end of the year
– Rights, preferences and restrictions attaching to the class of
shares (including restrictions on distributing dividends and the
repayment of capital)
– Shares in the entity held by itself or by related group companies
– Shares reserved for issuance under options and sales contracts
•
A description of the nature and purpose of each reserve within
owners’ equity.
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The current/ non-current distinction
•
Assets and liabilities should be classified as either current or noncurrent on the face of the statement of financial position.
•
Current assets and liabilities comprise assets and liabilities which
relate to the operating cycle of the entity.
•
The operating cycle of an entity is the time between the acquisition of
assets for processing and their realisation in cash and cash
equivalents.
•
Non-current assets and liabilities are used in the long term operations
of the entity and will typically be recovered or settled after more than
twelve months.
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The statement of profit or loss and OCI 1
IAS 1 (revised) allows income and expense items to be presented either:
•
In a single statement of profit or loss and other comprehensive
income
•
In two statements: a separate statement of profit or loss and a
statement of other comprehensive income
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The statement of profit or loss and OCI 2
XYZ GROUP – STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20X2
20X2
20X1
$’000
$’000
Revenue
X
X
Cost of sales
(X)
(X)
Gross profit
X
X
Other income
X
X
Distribution costs
(X)
(X)
Administrative expenses
(X)
(X)
Other expenses
(X)
(X)
Finance costs
(X)
(X)
Profit before tax
X
X
Income tax expense
(X)
(X)
PROFIT FOR THE YEAR
X
X
Other comprehensive income:
Gains on property revaluation
X
X
Investments in equity instruments
(X)
X
Income tax relating to components of other comprehensive
income
(X)
X
Other comprehensive income for the year, net of tax
X
(X)
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
X
X
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The statement of profit or loss and OCI 3
XYZ GROUP – STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED
31 DECEMBER 20X2
20X2
20X1
$’000
$’000
X
X
(X)
(X)
Gross profit
X
X
Other income
X
X
Distribution costs
(X)
(X)
Administrative expenses
(X)
(X)
Other expenses
(X)
(X)
Finance costs
(X)
(X)
Profit before tax
X
X
(X)
(X)
X
X
Revenue
Cost of sales
Income tax expense
PROFIT FOR THE YEAR
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The statement of profit or loss and OCI 4
XYZ GROUP – STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER
20X2
20X2 20X1
$’000 $’000
Profit for the year
X
X
Other comprehensive income:
Gains on property revaluation
X
X
Investments in equity instruments
(X)
X
Income tax relating to components of other comprehensive
income
(X)
X
Other comprehensive income for the year, net of tax
X
(X)
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
X
X
BPP LEARNING MEDIA
The statement of profit or loss and OCI 5
•
IAS 1 offers two formats for the statement of profit or
loss.
•
The most common format is to classify income and
expenses by function as above.
•
Income and expenses can also be classified by
nature as detailed on the next slide:
BPP LEARNING MEDIA
The statement of profit or loss and OCI 6
XYZ GROUP – STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31
DECEMBER 20X2
20X2
20X1
$’000
$’000
Revenue
X
X
Other operating income
X
X
(X)
X
X
X
Raw material and consumables used
(X)
(X)
Employee benefits expense
(X)
(X)
Depreciation and amortisation expense
(X)
(X)
Impairment of property, plant and equipment
(X)
(X)
Other expenses
(X)
(X)
Finance costs
(X)
(X)
X
X
(X)
(X)
X
X
Changes in inventories of FG and WIP
Work performed by the entity and capitalised
Profit before tax
Income tax expense
PROFIT FOR THE YEAR
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The statement of profit or loss and OCI 7
•
IAS 1 (revised) also requires the following items to be disclosed
on the face of the statement of profit or loss (minimum
disclosure)
– Revenue
– Finance costs
– Tax expense
– Profit or loss
•
Note that dividends do not meet the IASB Conceptual Framework
definition of an expense and so are not included in the statement
of profit or loss and other comprehensive income.
•
Rather they are shown as a deducted from retained earnings in
the statement of changes in equity.
BPP LEARNING MEDIA
Changes in equity
Balance at 1 January 20X1
Changes in accounting policy
Restated balance
Changes in equity for 20X1
Dividends
Total comprehensive income
Balance at 31 December 20X1
Changes in equity for 20X2
Issue of share capital
Dividends
Total comprehensive income
Transfer to retained earnings
Balance at 31 December 20X2
BPP LEARNING MEDIA
Share
capital
$’000
X
X
Ret’d
earnings
$’000
X
(X)
X
Revaluation
surplus
$’000
X
X
Total
equity
$’000
X
(X)
X
X
(X)
X
X
(X)
X
(X)
X
X
X
(X)
X
X
X
-
X
(X)
X
X
X
X
(X)
X
Notes to the financial statements
Notes to the accounts amplify the information given in the
financial statements.
Notes perform the following functions:
• Provide information about the basis on which the financial
statements were prepared and which specific accounting
policies were chosen.
• Disclose information required by IFRSs which has not
been disclosed elsewhere in the financial statements.
• Show any additional information relevant to understanding
the financial statements.
BPP LEARNING MEDIA
Revision of basic accounts 1
• In the exam you will be required to prepare a basic set of
company accounts from a trial balance incorporating
additional information provided in the question.
• To be successful in these questions you must
– Practice as many examples of these questions as you
can
– Adopt a methodical approach to completing them
BPP LEARNING MEDIA
Revision of basic accounts 2
1. Read the requirements and scan the information in the question.
2. Set up four pages as necessary:
•
Proforma statement of profit or loss and other comprehensive
income
•
Proforma statement of financial position
•
Proforma statement of changes in equity
•
A page for workings
3. Read the additional information given and make a mark by each
caption in the trial balance that is going to change.
BPP LEARNING MEDIA
Revision of basic accounts 3
4. Transfer the figures from the trial balance:
• Unaffected figures may be entered directly on your proforma
• Figures requiring adjustment can either be put into a working or
brackets opened up on the face of your proforma solution
5. Work through the adjustments in the additional information dealing
with both sides of the double entry. Once you have attempted all
adjustments, balance off your workings and transfer the final figures
to your proforma.
BPP LEARNING MEDIA
Question: AZ Co
AZ Co is a quoted manufacturing company. Its finished products are
stored in a nearby warehouse until ordered by customers. AZ Co has
performed very well in the past, but has been in financial difficulties in
recent months and has been reorganising the business to improve
performance.
The trial balance for AZ Co at 31 March 20X3 was as follows:
BPP LEARNING MEDIA
Question: AZ Co
TRIAL BALANCE AT 31 MARCH 20X3
Sales
Cost of goods manufactured in the year to
31 March 20X3 (excluding depreciation)
Distribution costs
Administrative expenses
Restructuring costs
Interest received
Debenture interest paid
Land and buildings (including land $20,000,000)
Plant and equipment
Accumulated depreciation at 31 March 20X2:
Buildings
Plant and equipment
Investment properties (at market value)
Inventories at 31 March 20X2
Trade receivables
Bank and cash
Ordinary shares of $1 each, fully paid
Share premium
Revaluation surplus
Retained earnings at 31 March 20X2
Ordinary dividends paid
7% debentures 20X7
Trade payables
Proceeds of share issue
$'000
94,000
9,060
16,020
121
SPLOCI
1,200
639
50,300
3,720
6,060
1,670
24,000
4,852
9,330
1,190
SOFP
20,000
430
3,125
28,077
1,000
214,232
BPP LEARNING MEDIA
$'000
124,900
18,250
8,120
2,400
214,232
Question: AZ Co
Additional information provided:
i. The property, plant and equipment are being depreciated as follows:
•
Buildings: 5% per annum straight line
•
Plant and equipment: 25% per annum reducing balance
•
Depreciation of buildings is considered an administrative cost
while depreciation of plant and equipment should be treated as a
cost of sale.
ii. On 31 March 20X3 the land was revalued to $24,000,000.
iii. Income tax for the year to 31 March 20X3 is estimated at $976,000.
Ignore deferred tax.
BPP LEARNING MEDIA
Question: AZ Co
iv.
The closing inventories at 31 March 20X3 were $5,180,000. An
inspection of finished goods found that a production machine had
been set up incorrectly and that several production batches, which
had cost $50,000 to manufacture, had the wrong packaging. The
goods cannot be sold in this condition but could be repacked at an
additional cost of $20,000. They could then be sold for $55,000.
the wrongly packaged goods were included in closing inventories at
their cost of $50,000.
v.
The 7% loan notes are ten year loans due for repayment by 31
March 20X7. Interest on these loan notes needs to be accrued for
the six months to 31 March 20X3.
vi.
The restructuring costs in the trial balance represent the cost of a
major restructuring of the company to improve competitiveness and
future profitability.
BPP LEARNING MEDIA
Question: AZ Co
vii. No fair value adjustments were necessary to the investment
properties during the period.
viii. During the year the company issued 2 million new ordinary shares
for cash at $1.20 per share. The proceeds have been recorded as
‘proceeds of share issue’.
BPP LEARNING MEDIA
Question: AZ Co
Required
Prepare the statement of profit or loss and other
comprehensive income and statement of changes in equity
for AZ for the year to 31 March 20X3 and a statement of
financial position at that date.
Notes to the financial statements are not required, but all
workings must be clearly shown.
BPP LEARNING MEDIA
Answer: AZ Co
AZ STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 20X3
$'000
124,900
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Other expenses
Finance income
Finance costs
Profit before tax
Income tax expense
PROFIT FOR THE YEAR
Other comprehensive income:
Gain on property revaluation
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
BPP LEARNING MEDIA
Answer: AZ Co
1
Expenses
$’000
Per question
BPP LEARNING MEDIA
Cost of sales Distribution
$’000
9,060
94,000
Admin
$’000
16,020
Other
$’000
121
Answer: AZ Co
AZ STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 20X3
$'000
Revenue
124,900
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Other expenses
1,200
Finance income
Finance costs
(639)
Profit before tax
Income tax expense
PROFIT FOR THE YEAR
Other comprehensive income:
Gain on land revaluation
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
BPP LEARNING MEDIA
Answer: AZ Co
2
Property, plant and equipment
Land
Cost
Accumulated depreciation b/d
Carrying amount b/d
Charge for year
$’000
20,000
-
Revaluation (balancing figure)
Carrying amount c/d
BPP LEARNING MEDIA
Buildings
Plant &
equipment
$’000
$’000
30,300
3,720
(6,060)
(1,670)
Total
$’000
Answer: AZ Co
Non-current assets
Property, plant and equipment
Investment properties
Current assets
Inventories
Trade receivables
Cash and cash equivalents
Equity
Share capital
Share premium
Retained earnings
Revaluation surplus
Non-current liabilities
7% loan notes 20X7
Current liabilities
Trade payables
Income tax payable
Interest payable
BPP LEARNING MEDIA
24,000
Answer: AZ Co
1
Expenses
Per question
Opening inventories
BPP LEARNING MEDIA
Cost of sales Distribution
$’000
$’000
9,060
94,000
4,852
Admin
$’000
16,020
Other
$’000
121
Answer: AZ Co
Non-current assets
Property, plant and equipment
Investment properties
Current assets
Inventories
Trade receivables
Cash and cash equivalents
24,000
9,330
1,190
Equity
Share capital (20,000
Share premium (430
Retained earnings (28,077 – 1,000
Revaluation surplus (3,125
Non-current liabilities
7% loan notes 20X7
Current liabilities
Trade payables
Income tax payable
Interest payable
BPP LEARNING MEDIA
18,250
8,120
Answer: AZ Co
2
Property, plant and equipment
Land
Cost
Accumulated depreciation b/d
Carrying amount b/d
Charge for year 30,300 x 5%
2,050 x 25%
Revaluation (balancing figure)
Carrying amount c/d
BPP LEARNING MEDIA
$’000
20,000
-
20,000
-
Buildings
Plant &
equipment
$’000
$’000
3,720
30,300
(6,060)
(1,670)
24,240
(1,515)
Total
$’000
2,050
(1,515)
(513)
(513)
Answer: AZ Co
1
Expenses
Cost of sales Distribution
$’000
$’000
9,060
94,000
Per question
Opening inventories
4,852
Depreciation - Buildings (W2)
- P&E (W2)
513
BPP LEARNING MEDIA
Admin
$’000
16,020
1,515
Other
$’000
121
Answer: AZ Co
2
Property, plant and equipment
Land
Cost
Accumulated depreciation b/d
Carrying amount b/d
Charge for year 30,300 x 5%
2,050 x 25%
Revaluation (balancing figure)
Carrying amount c/d
BPP LEARNING MEDIA
$’000
20,000
-
Plant &
Total
equipment
$’000
$’000
$’000
3,720 54,020
30,300
(6,060)
(1,670) (7,730)
20,000
24,240
20,000
4,000
24,000
Buildings
2,050
46,290
(1,515)
(1,515)
(513)
(513)
22,725
22,725
1,537 44,262
4,000
1,537 48,262
Answer: AZ Co
Non-current assets
Property, plant and equipment (W2)
Investment properties
48,262
24,000
Current assets
Inventories
Trade receivables
Cash and cash equivalents
9,330
1,190
Equity
Share capital (20,000
Share premium (430
Retained earnings (28,077 – 1,000
Revaluation surplus (3,125 + (W2) 4,000)
7,125
Non-current liabilities
7% loan notes 20X7
Current liabilities
Trade payables
Income tax payable
Interest payable
BPP LEARNING MEDIA
18,250
8,120
Answer: AZ Co
AZ STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 20X3
$'000
124,900
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Other expenses
1,200
Finance income
(639
Finance costs
Profit before tax
(976)
Income tax expense
PROFIT FOR THE YEAR
Other comprehensive income:
4,000
Gain on land revaluation (W2)
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
BPP LEARNING MEDIA
Answer: AZ Co
Non-current assets
Property, plant and equipment (W2)
Investment properties
48,262
24,000
Current assets
Inventories
Trade receivables
Cash and cash equivalents
9,330
1,190
Equity
Share capital (20,000
Share premium (430
Retained earnings (28,077 – 1,000
Revaluation surplus (3,125 + (W2) 4,000)
7,125
Non-current liabilities
7% loan notes 20X7
18,250
Current liabilities
Trade payables
Income tax payable
Interest payable
8,120
976
BPP LEARNING MEDIA
Answer: AZ Co
3
Inventories
Defective batch
Selling price
Costs to complete - repackaging
 NRV
Cost
 Write-off required
BPP LEARNING MEDIA
$’000
$’000
55
(20)
35
(50)
(15)
Answer: AZ Co
Non-current assets
Property, plant and equipment (W2)
Investment properties
48,262
24,000
Current assets
Inventories (5,180 – (W3) 15)
Trade receivables
Cash and cash equivalents
5,165
9,330
1,190
Equity
Share capital (20,000
Share premium (430
Retained earnings (28,077 – 1,000
Revaluation surplus (3,125 + (W2) 4,000)
7,125
Non-current liabilities
7% loan notes 20X7
Current liabilities
Trade payables
Income tax payable
Interest payable
BPP LEARNING MEDIA
18,250
8,120
976
Answer: AZ Co
1
Expenses
Cost of sales Distribution
$’000
$’000
9,060
94,000
Per question
Opening inventories
4,852
Depreciation - Buildings (W2)
- P&E (W2)
513
Closing inventories
(5,180 – (W3) 15)
(5,165)
BPP LEARNING MEDIA
Admin
$’000
16,020
1,515
Other
$’000
121
Answer: AZ Co
AZ STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 20X3
$'000
124,900
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Other expenses
1,200
Finance income
Finance costs (639 + ((18,250 x 7%) – 639)
(1,278)
Profit before tax
Income tax expense
(976)
PROFIT FOR THE YEAR
Other comprehensive income:
4,000
Gain on land revaluation (W2)
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
BPP LEARNING MEDIA
Answer: AZ Co
Non-current assets
Property, plant and equipment (W2)
Investment properties
Current assets
Inventories (5,180 – (W3) 15)
Trade receivables
Cash and cash equivalents
Equity
Share capital (20,000 + (2m x $1))
Share premium (430 + (2m x $0.20))
Retained earnings (28,077 – 1,000
Revaluation surplus (3,125 + (W2) 4,000)
48,262
24,000
5,165
9,330
1,190
22,000
830
7,125
Non-current liabilities
7% loan notes 20X7
18,250
Current liabilities
Trade payables
Income tax payable
Interest payable (1,278 – 639)
8,120
976
639
BPP LEARNING MEDIA
Answer: AZ Co
1
Expenses
Cost of sales Distribution
$’000
$’000
9,060
94,000
Per question
Opening inventories
4,852
Depreciation - Buildings (W2)
- P&E (W2)
513
Closing inventories
(5,180 – (W3) 15)
(5,165)
94,200
9,060
BPP LEARNING MEDIA
Admin
$’000
16,020
Other
$’000
121
1,515
17,535
121
Answer: AZ Co
AZ STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 20X3
$'000
124,900
Revenue
Cost of sales (W1)
(94,200)
30,700
Gross profit
Distribution costs (W1)
(9,060)
Administrative expenses (W1)
(17,535)
Other expenses (W1)
(121)
Finance income
1,200
(1,278)
Finance costs (639 + (18,250 x 7%) – 639)
3,906
Profit before tax
(976)
Income tax expense
2,930
PROFIT FOR THE YEAR
Other comprehensive income:
4,000
Gain on land revaluation (W2)
6,930
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
BPP LEARNING MEDIA
Answer: AZ Co
Non-current assets
Property, plant and equipment (W2)
Investment properties
Current assets
Inventories (5,180 – (W3) 15)
Trade receivables
Cash and cash equivalents
Equity
Share capital (20,000 + (2m x $1))
Share premium (430 + (2m x $0.20))
Retained earnings (28,077 – 1,000 + 2,930)
Revaluation surplus (3,125 + (W2) 4,000)
Non-current liabilities
7% loan notes 20X7
Current liabilities
Trade payables
Income tax payable
Interest payable (1,278 – 639)
BPP LEARNING MEDIA
48,262
24,000
72,262
5,165
9,330
1,190
15,685
87,947
22,000
830
30,007
7,125
59,962
18,250
18,250
8,120
976
639
9,735
87,947
Answer: AZ Co
AZ
STATEMENT OF CHANGES IN EQUITY
Share
Share
Ret’d
Rev’n
Total
capital premium earnings surplus
$’000
$’000
$’000
$’000 $’000
20,000
430
28,077
3,125 51,632
Balance at 1 April 20X2
2,000
400
2,400
Issue of share capital
(1,000)
(1,000)
Dividends
2,930
4,000 6,930
Total comprehensive income
22,000
830
30,007
7,125 59,962
Balance at 31 March 20X3
BPP LEARNING MEDIA
Recent exam questions
Nature of question
Exam details
The financial statement preparation
Q2 in all past
question is tested in Question 2 of
exams
the ACCA F7 exam.
You should expect to see the
following requirement:
i. Prepare the statement of profit or
loss and other comprehensive
income;
ii. Prepare the statement of changes
in equity
iii. Prepare the statement of financial
position.
BPP LEARNING MEDIA