Published Account
1
Introduction
Limited liability companies are governed by
Companies Ordinance (Cap.32 Tenth
Schedule) to prepare and publish accounts
annually which should have to comply with
Hong Kong Statements of Standard
Accounting Practice (HKSSAP) issued by
Hong Kong Society of Accountants
Published accounts set out in standardized
format
2
Components of Published Accounts
Components need special attention:
-
Extraordinary items
Exceptional items
Prior year adjustments
Post balance sheet events
Contingencies
3
Exceptional items
4
Exceptional Items
Definition
Items related to the ordinary activities of the business
but due to exceptional size, nature or incidence
Items must be material in size, unusual in nature and
expected not to recur frequently and regularly
Example
exceptional bad debts are written off profits or losses
related to discontinued operations
e.g. loss on the closure of a transport depot
exceptional bad debts are written off profits or losses
on the disposal of long-term investments
e.g. profit on the disposal of a subsidiary company
5
Exceptional Items
Example (cont’l)
exceptional bad debts are written off profits or losses on
the disposal of fixed assets
e.g. loss on the disposal of land, machinery or
equipment
exceptional bad debts are written off
e.g. a major debtor is declared bankrupt
exceptional stock is written off
e.g. a large amount of obsolete stock
amortization of intangible fixed assets which had been
capitalized previously
e.g. write off goodwill at 2% per annum
income or expenses arising from the restructuring of the
activities of a business
amounts transferred to employee share schemes
amounts of litigation settlements
6
Exceptional Items
Disclosure requirement:
Disclosed in the published profit and loss account as follows:
$
Profit before taxation is arrived at
after charging:
Depreciation
X
Director’s remuneration
X
Audit fee
X
Hire of plant
X
Interest
X
Exceptional loss
X
And after crediting:
Income from investment
Rental income
Exceptional gain
$
X
X
X
X
7
Extraordinary items
8
Extraordinary Items
Definition
those items which are derived from events or
transactions outside the ordinary activities of the
business
items which are material and expected not to recur
frequently and regularly.
Events which are completely outside the control of the
management
Examples:
- Losses arising from a natural catastrophe
- Losses arising from the expropriation of assets
9
Extraordinary Items
Disclosure requirement
- Profits or losses from extraordinary items
should be excluded from ordinary profit before tax
(internal profit and loss)
$
Profit before taxation
X
Less: Taxation
X
Net Profit after taxation
X
Extraordinary item (note)
X
Profit after taxation and extraordinary items X
10
Prior Year Adjustment
11
Prior Year Adjustments
Definition
Material adjustments made to the previous year’s
retained profits of there is a fundamental error in one of
the previous year’s accounts or a change in the accounting
policy
Example- fundamental error in previous year
- the omission of a significant amount of purchases in the
previous year.
12
Prior Year Adjustments
Example- change in accounting policy
- Completely written off intangible fixed assets (research
and development expenditures or goodwill) which had been
capitalized previously
- Change in stock valuation method
- Change in depreciation method
13
Prior Year Adjustments
Disclosure Requirement
Opening retained profits should be adjusted:
$
Profit before taxation
Less: Taxation
Add/less: Extraordinary item
Profit after tax and extraordinary item
Less: Appropriation
Retained profits for the year
Add: Retained profit bought forward
Retained profits brought forward
Add/Less: Prior year adjustment
X
X
•A note is required to show the nature of the prior year
adjustment
$
X
X
X
X
X
X
X
X
X
14
Contingencies
15
Contingencies
Definition
condition which exists at the balance sheet date, where
the outcome will be confirmed only on the occurrence or
non occurrence of one or more uncertain future events
16
Contingencies
Accounting treatment- depending on the degree of
contingency
Possibility of
Occurrence
For Contingent
Gain
For Contingent
Loss
With certainty
Accruals
Accruals
Probable
A contingency
(to be disclosed in
notes)
Accruals
Possible
Not to disclose
A Contingency
(to be disclosed in
notes)
With a slight chance
Not to disclose
Not to disclose
17
Contingencies
Examples of contingent losses:
- A discounted bill of exchange
- A guarantee given for a borrowing by another company
- A pending legal claim
Example of a contingent gain:
- A pending litigation settlement from another company
Disclosure requirement:
Contingencies should not be recognized in the accounts. A
note is required to describe the nature of a contingency.
18
Post Balance Sheet Events
19
Post Balance Sheet Events
Definition:
Those events, both favourable and unfavourable, which
occur between the balance sheet date and the date on
which the financial statements are approved by the board
of directors
20
Post Balance Sheet Events
Adjusting Events
Non-adjusting Events
21
Adjusting Events
Definition:
Those events, both favourable or unfavourable, which
occur between the balance sheet date and the date on
which the financial statements are approved by the
board of directors
22
Adjusting Events - Example
determination of the purchase or sale price of a fixed assets
purchased or sold during the year
permanent diminution in the value of a property
permanent diminution in the value of a long-term investment in
an unlisted company
determination of the net realizable value of stock
based on the available evidence, the determination that the
estimate of the accrued profit on a long-term contract was
incorrect
a major trade debtor goes into liquidation
dividends declared by subsidiaries and associated companies for
periods prior to the balance sheet date
a change in the taxation rate applicable to periods prior to the
balance sheet date
determination or receipt of insurance claims relating to the
current year
discovery of errors or fraud which affect the true and fair
view of the financial statements
23
Non-adjusting Events
Definition
Those events which concern conditions
that did not exist at the balance sheet
date.
24
Non-adjusting Events - Example
mergers and acquisitions
reconstructions and proposed reconstructions
issuance of shares and debentures
purchases and sales of fixed assets and investments
losses of fixed assets as a result of a disaster such as
fire or flood
extending trading activities or starting new activities
changes in foreign exchange rates
government actions such as the expropriation of assets
strikes and industrial actions
changes in pension benefits
25
Example
Refer to textbook P. 159
26
Harbour Ltd.
Profit and Loss Account for the year ended 31 December 1994
$
$
Turnover (note 1)
1,881,600
Profit before taxation is arrived at (working)
111,600
after charging:
Auditor’s remuneration (2)
1,000
Directors’ remuneration (25600+5000) (2) 30,600
Goodwill written off (2)
1,500
Debenture interest ($200,000 x 4%) (2,12) 8,000
Fire loss (2)
20,000
Loss on disposal (trial)
2,000
Exceptional bad debts (13)
70,000
Depreciation (note 1,3)
29,600
and after crediting:
Income from quoted investments
3,000
Income from unquoted investments
1,000
Profit tax for the year (1)
44,000
41,800
Less: overprovision in previous year (1)
2,200
69800
27
Working:
Adjustment for profit before tax:
Original
Less disposal loss (trial)
Bad debt (13)
Debenture interest
(8000-6000) (12,2)
185600
2000
70000
2000
11600
28
Cont’
$
Appropriations:
Debenture redemption reserve (trial)
Dividends (400000*0.0402) (1)
Retained profits for the year
Retained profits brought forward (trial)
Less: Prior year adjustment (note 2)
50,000
16,080
86,200
1,200
$
69,806
66,080
3,720
85,000
88,720
29
Harbour Ltd.
Balance Sheet as at 31 December 1994
$
Fixed Assets (note 3)
Intangible Fixed Assets
$
$
1,149,000
Goodwill (trial)
Investments
Quoted investments, at cost (market value: $57,000) (4, trial)
Current Assets
Stocks (5, trial)
Debtors (80000-70000-1200) (13, trial)
Bills Receivable (trial)
Prepayment (trial)
Short-term investment, at cost
(director’s valuation: $38,000) (14, trial)
Called up capital not paid (250*0.6) (14)
Cash at bank (trial)
4500
50,000
108,460
8,800
22000
7600
30,000
150
285,670
462,680
30
$
Less: Current Liabilities
Creditors (trial)
60000
Bills Payable (trial)
17000
Proposed dividends (40000*0.0402) (1)
16,080
Provision for tax (4000+44000-2200) (1, trail)45800
4% Debentures (next year:1995)
50,000
Net Current Assets/Working Capital
Financed by:
Share Capital (note 4) (14, trial)
Reserves (note 5)
$
270,220
1,473,720
475,000
848,720
Long-term Liabilities
4% Debentures (note 6) (after 2nd year: 96,97,98)
150,000
1,473,720
31
1.
Harbour Ltd.
Notes to the Accounts
Principal Accounting Policies
(a)Turnover
Turnover represents the invoiced amount of goods sold less
returns.
(b)Depreciation
Depreciation is calculated to write off the cost of fixed
assets over their estimated useful lives on a straight line basis
at the following annual rates:
Buildings
2%
Plant and machinery
10%
Office equipment
15%
No depreciation is provided on leasehold land.
( c )Stocks
Stocks are valued at the lower of cost and net realizable
value. Cost is determined on a first-in-first-out basis. Work in
progress and finished goods include an appropriate proportion
of production overhead expenses.
(d)Goodwill
Goodwill is amortized over a period of 5 years in equal
instalments.
32
2.
Prior Year Adjustment
The prior year adjustment relates to a change of
accounting policy in the treatment of development
expenditures.
33
240+60 (11, trial)
3. Fixed assets
Land
Cost
At 1 Jan 94
Disposals (11)
$000
$000
400.0
115.0
Plant and
Office
Machinery Equipment
$000
$000
Total
$000
22.0
837.0
(60.0)
600.0
240.0
22.0
1,377.0
108.0
(12.0)
4.7
210.4
(12.0)
24.0
3.3
29.6
100.0
120.0
115000*2%
24000*10%
8.0
228.0
300.0
(60.0)
Revaluation (3)
At 31 Dec 94
Aggregate Dep
At 1 Jan 94
Disposals
Charge for the year(3)
At 31 Dec 94 (trial)
Net book value
At 31 Dec 93
At 31 Dec 94
Buildings
600.0
1000.0
115.0
2.3
400.0
1,000.0
17.3
15.0
192.0
120.0
22000*15%
17.3
14.0
626.6
1,149.
34
During the year, the leasehold land was revalued to $1,000,000
and the surplus on revaluation of $600,000 was credited
directly to the revaluation reserve. The valuation was made
by a firm of independent valuers.
35
4.
Share Capital
Authorized:
1,000,000 ordinary shares of $1 each
Issued and called up:
475,000 ordinary shares of $1 each
475,000
$
1,000,000
In March 1994, 75,000 ordinary shares were offered to the
public at
1.8 per share payable as follows:
On application
$1.2 per share including premium
On allotment
$0.6 per share
These new shares rank pari passu in all respects with the
existing
shares except that they are not entitled to receive the final
dividend declared for the year.
36
5. Reserves
Debenture Redemption Reserve
DRR
$
At 1 Jan 94
(trial)
Transfer from 50,000
P&L (trial)
Revaluation (3)
Issue of share
Prior yr adj. (10)
Share
premium
$
50,000
Revaluation
reserve
$
1000000-40000
50,000
60,000
110,000
100,000
600,000
600,000
60,000
Retained profits
for the year
At 31 Dec 94
Retained
Profits Total
$
$
86,200
86,200
600,000
(1,200)
3,720
(1,200)
3,720
88,720
848,720
37
250000/5
6.
4% Debentures (12)
The company redeemed $50,000 4% debentures on 1 Jan.
94 at par.
7.
Capital Commitments (6)
Commitments outstanding at 31 Dec. 1994 not provided
for in the financial statement were as follows:
$
Contracted for
200,000
Authorized but not contracted for
300,000
500,000
38
8.
Contingent Liabilities (7)
At 31 Dec. 1994, there was an unsecured guarantee given
by the company for the bank overdraft facility of a
supplier in the amount of $95,000.
9.
Post Balance Sheet Event (8)
On 3 Jan. 1995, the company acquired the business of
Foreign Company for a cash consideration of $139,000.
39