AAT
Financial Statements
Revision Tutorial
2012
BPP PROFESSIONAL
EDUCATION
BPP PROFESSIONAL
EDUCATION
Kiran Sagoo
0121 237 3818
harkiransagoo@bpp.com
How will the paper be assessed?
It is assessed by a 2 1/2 hour exam.
The exam is in two sections:
—Drafting of financial statements (60% of the assessment)
—Analysis and interpretation* (40% of the assessment)
*
Also the IASB’s Framework for the Preparation and
Presentation of Financial Statements and legal and
regulatory framework
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How will the paper be assessed?
— Section 1 (Drafting)
— Part A – Construction of the financial statements of single
companies
— Part B – International Financial Reporting Standards
(IFRSs)
— Part C – Construction of consolidated financial statements
— Section 2
— Part A – Analysis and interpretation of financial statements
— Part B – Framework for the Preparation and Presentation
of
Financial Statements
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Assessment Criteria (Extract)
K&U (2)
Understand the key features of a published set of accounts
1. Describe the key components and the purpose of a statement of
financial position
2. Describe the key components and the purpose of a statement of
comprehensive income.
3. Describe the key components and the purpose of a statement of
cash flows.
4. Explain the content and purpose of disclosure notes to the
accounts.
5. Identify accounting standards and the effect of these on the
preparation of the financial statements.
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Overview of Session
—Revision through the main accounting standards
—Examples of how to answer written questions
—Good answers vs. poor answer
—Basic exam techniques
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Types of Written Questions
—Could be:
—Knowledge based questions
—Scenario based questions
See examples later
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The Accounting Equation
ASSETS = LIABILITIES + EQUITY
Assets – CONTROLLED by entity as a result of PAST
events, resulting in an INFLOW of ECONOMIC
BENEFITS
Liabilities – PRESENT OBLIGATION arising from PAST
EVENTS, resulting in an OUTFLOW of
ECONOMIC BENEFITS
Equity – Owners RESIDUAL INTEREST in the assets of
the entity after deducting all liabilities
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Fundamental Characteristics
—Relevance - if information is capable of making
a difference in the decision made by users
—Faithful Representation –
information
represents the commercial substance of
economic transactions and events. Information is
complete, neutral and free from error.
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IAS 16 – Property Plant and Equipment
Measurement
AT recognition
• Cost + directly attributable costs
Measurement
AFTER
recognition
• Cost less accumulated depreciation OR
• Fair value less accumulated
depreciation
Subsequent
Costs
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• Improvements = capital expenditure
• Maintenance = expense
IAS 40 – Investment Properties
Definition
• Property held for rent or capital
appreciation
Measurement
AT recognition
• Hold at cost less accumulated
depreciation
Measurement
AFTER
recognition
• Cost less accumulated depreciation
OR
• Fair value – no deprecation
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IAS 17 Leases
Operating
Leases
Finance
Leases
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• Lease where risks and rewards of
ownership are not transferred to the
lessee
• Payments are charged to the income
statement on a straight line basis
• Lease where substantially all of the risks
and rewards incidental to ownership are
transferred to the lessee
• Recognise as an asset, and a
corresponding liability on the SFP
IAS 36 - Impairments
Test each
period.
Lower:
Recoverable
Amount.
Higher:
Value in use
(PV of future
CF)
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Carrying
Value (Cost
less Acc Dep)
Fair value
less costs to
sell
If the carrying value
exceeds the recoverable
amount then write down to
the recoverable amount.
Loss recognised in the
Income Stmt
IAS 37 – Provisions, Contingent Liabilities &
Contingent Assets
Contingent
Asset
• Virtually certain – recognise as asset on
SFP
• Probable – disclose a note in the FS
Contingent
Liability
• Possible obligation arising from past
events, but cannot measure reliably
• Disclose a note in the FS
Provision
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• Present obligation arising from past events
• Probable and measure reliably
• Recognise as a liability in the SFP
Example of a “knowledge based” question
a) Define the terms ‘finance lease’ and ‘operating lease’ in accordance
with IAS 17 Leases.
b) Explain how operating leases are accounted for in the financial
statements of the lessee
c) Explain how finance leases are accounted for in the financial
statements of the lessee
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Model Answer – “knowledge based” question
a) Operating lease – A lease other than a finance lease. Lease where
risks and rewards of ownership are not transferred to the lessee.
Finance lease – A lease where substantially all of the risks and
rewards incidental to ownership of an asset are transferred to the
lessee.
b) Treatment of an operating lease
Payments in relation to the lease of the asset are charged to the
income statement on a straight line basis. The leased asset is NOT
recognised in the statement of financial position.
c) Treatment of a finance lease
The lease will be recognised as an ASSET on the statement of
financial position. A LIABILITY will also be recognised for the
outstanding lease payment, which is measure at the fair value of the
asset or the present value of the minimum lease payments (if lower).
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Example of a “scenario based” question
During the year the board of Morel Ltd decided to close down a division of
the company and developed a detailed plan for implementing the decision.
Morel Ltd wrote to customers warning them to seek an alternative source of
supply. Redundancy notices were sent to the staff of the division. The board
has a reliable estimate that the cost of closing the division would be
£1,854,000.
During the year three people were seriously injured as a result of food
poisoning. It was claimed that the food poisoning came from products sold
by Morel Ltd. Legal proceedings have started seeking damages from the
company of £2,000,000. Lawyers working for Morel Ltd have advised that it
is probable that the company will not be found liable.
Prepare notes for a meeting with the directors to answer the following
questions.
(a) What is meant by a ‘provision’, according to IAS 37 Provisions,
contingent liabilities and contingent assets?
(b) When should a provision be recognised?
(c) How should Morel Ltd treat the two matters set out in the data above in
its financial statements?
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Model Answer – “scenario based” question
(a)IAS 37 Provisions, contingent liabilities and contingent assets
defines a provision as a liability of uncertain timing or
amount. A liability is a present obligation of the entity arising
from past events, the settlement of which is expected to
result in an outflow of economic benefits.
(b) A provision should be recognised when:
• An entity has a present obligation as a result of a past
event. The obligation can be either legal or constructive; and
• It is probable that an outflow of resources embodying
economic benefits will be required to settle the obligation; and
• A reliable estimate can be made of the amount of the
obligation.
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Model Answer – “scenario based” question
(c) Accounting treatment of matters arising during the financial year
(i) Closure of a division
Morel Ltd has a constructive obligation to carry out the closure
because it has communicated the decision to the people who will be
affected: its customers and its employees. This communication appears
to have taken place before the year end. It is probable that there will
be an outflow of resources embodying economic benefits: the company
will incur costs as a result of closing the division. A reliable estimate
has been made of the costs. Therefore the company should recognise
a provision of £1,854,000 at its year end.
(ii) Legal proceedings
As the company will probably not be liable it is unlikely that there is a
present obligation or that there will be an outflow of resources
embodying economic benefits. Therefore no provision should be
made. However, the company does have a contingent liability (unless
the chances of its being found liable for damages are remote). Details
of the claim should be disclosed in the notes to the financial
statements.
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Good vs. Poor Answer
Prepare brief notes to answer the following points
for the directors:
(a) State how, according to IAS 36 Impairment of
assets, an impairment loss is
calculated and which two figures are needed.
(b) Explain what is meant by each of these
figures.
(c) State how an impairment loss is to be treated
in the financial statements.
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Good Answer
a) IAS 36 states that if an assets carrying value exceeds the
recoverable amount then the asset is impaired. The difference
between the two is the impairment amount
b) The carrying amount is the value recognised in the SFP after
deducting accumulated depreciation and impairment losses. The
recoverable amount is the higher of the fair value less costs to sell
and the value in use, which is the present value of future cashflows
c) Impairments are recognised in the income statement unless the
asset was previously re-valued upwards in other comprehensive
income. In this case the revaluation will be reversed and any
excess losses remaining will be recognised in the income
statement
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Poor Answer
a) The calculation of impairment is the difference between
the asset in the statement of financial position and the
sale value
— NO mention of appropriate terminology, didn’t answer
question fully.
b) The asset is the cost less depreciation, the sale price is
what the asset could be sold for
— NOT well explained. No use of appropriate terminology
c) Impairments are written off to the income statement
— NOT enough detail
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Basic Exam Technique
—Need to be able to apply knowledge to
scenario’s in order to achieve full marks.
—Must write in sufficient detail.
—No bullet pointing
—Cover all “buzz words” in the standard, it will
help you write about it
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