FR-S23-Notes FY 2023-2024

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September 2023 to June 2024 exams Watch free ACCA FR lectures 1
ACCA Financial Reporting (FR)

CONCEPTUAL AND REGULATORY FRAMEWORK 3
1. IASB Conceptual Framework 3
2. Regulatory Framework 9
PUBLISHED COMPANY ACCOUNTS 13

3. Presentation of Financial Statements (IAS 1) 13
4. Statement of cash flows (IAS 7) 19
ACCOUNTING STANDARDS 25
5. Non-current assets 25
6. Intangible assets (IAS 38) 33
7. Impairments (IAS 36) 37
8. Non-current assets held for sale and discontinued operations (IFRS 5) 41
9. Accounting policies, changes in accounting estimate and errors (IAS 8) 45
10. Inventory (IAS 2) and Agriculture (IAS 41) 49
11. Financial instruments (IFRS 9) 53
12. Leases (IFRS 16) 59
13. Provisions, contingent assets and contingent liabilities (IAS 37) 65
14. Events after the reporting date (IAS 10) 71
15. Income taxes (IAS 12) 73
16. Revenue from contracts with customers (IFRS 15) 79
17. Foreign currency (IAS 21) 87
18. Fair Value (IFRS 13) 89
19. Earnings per share (IAS 33) 91
ANALYSIS AND INTERPRETATION 93

20. Financial performance (profitability) 93
21. Financial position 97
22. Investor analysis 101
GROUP ACCOUNTS 103

23. Consolidated statement of financial position 105
24. Group statement of profit and loss 119
25. Associates (IAS 28) 125
SOLUTIONS 131
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CONCEPTUAL AND REGULATORY FRAMEWORK
Chapter 1
IASB CONCEPTUAL FRAMEWORK
The IASB Framework provides the underlying rules, conventions and definitions that underpin the
preparation of all financial statements prepared under International Financial Reporting Standards (IFRS).
๏ Ensures standards developed within a conceptual framework
๏ Provide guidance on areas where no standard exists
๏ Aids process to improve existing standards
๏ Ensures financial statements contain information that is useful to users
๏ Helps prevent creative accounting
The revised IASB Conceptual Framework was issued in March 2018 and the new areas included are as
follows:
๏ Measurement basis
๏ Presentation and disclosure
๏ Derecognition
Whilst updates have been made to the following:
๏ Definitions of assets/liabilities
๏ Recognition of assets/liabilities
And clarification on:
๏ Measurement uncertainty
๏ Prudence
๏ Stewardship
๏ Substance over form
1. Objective of financial reporting

‘Provide information that is useful to existing and potential investors, lenders and other creditors in making
decisions about providing resources to the entity’
The decisions made by users will involve:
๏ Investment decisions
๏ Financing decisions
๏ Voting, or influencing management actions
The users will be assessing the management’s stewardship of the entity alongside its prospects for the
future, which will require the following information:
๏ Economic resources of the entity
๏ Claims against the entity
๏ Changes in the entity’s economic resources and claims.
๏ Efficiency and effectiveness of management
2. Qualitative characteristics – make information useful

Fundamental qualitative characteristics
๏ Relevance – information that makes a difference to decisions made by users (nature and materiality)
๏ Faithful information – must faithfully represent the substance of what it represents, and is therefore
complete (helps understand and includes descriptions and explanations), neutral (no bias, and
therefore supported by the exercise of prudence) and free from error. Measurement uncertainty will
impact the level of faithful representation.
Enhancing qualitative characteristics
๏ Comparability – identify similarities/differences between entities and year-on-year
๏ Verifiability – assures the information represents the economic phenomena it represents
๏ Timeliness – information is less useful the longer it takes to report it
๏ Understandability – user have a reasonable knowledge of business and activities
A cost constraint applies in ensuing that the information is useful, in that the benefit of obtaining the
information should outweigh the cost of obtaining it.
3. Financial statements and the reporting entity

Reporting entity
Is the entity that is required to prepare financial statements and does not necessarily have to be a legal
entity.
Financial statements
Report the entities assets, liabilities, income and expenses for:
๏ Consolidated financial statements
๏ Un-consolidated financial statements
๏ Combined financial statements
‣ Prepared for the entity as a whole
‣ Entity is a going concern and will continue to do so
4. Elements of financial statements

๏ Assets
‣ Present economic resource
‣ Controlled
‣ Past events
๏ Liabilities
‣ Present obligation
‣ Transfer an economic resource
‣ Past event
๏ Equity
‣ Residual interest in assets less liabilities
๏ Income
‣ Increase in asset
‣ Reduction in liability
๏ Expense
‣ Reduction in asset
‣ Increase in liability
5. Recognition and derecognition

Recognition – the process of including an item in the financial statements and is appropriate if it results in
relevant and faithful representation
Derecognition – the removal of all or part of an asset (loss of control)/liability (no obligation)
6. Measurement
Historical cost Current value

Price of the transaction that gave rise to the item Provides updated information to reflect conditions at
the measurement date
๏ Fair value
๏ Value in use (assets)/Fulfilment value (liabilities)
๏ Current cost
7. Presentation and disclosure

Statement of profit or loss is the primary source of information for a company’s performance, which includes
all income and expense. If the income and expense arises from changes in current value then it can be
recognised though other comprehensive income.
Reclassification of other comprehensive to profit or loss is allowable if it gives more relevant information.
Example 1 – Qualitative characteristics

The IASB’s Conceptual Framework for Financial Reporting identifies characteristics which make financial
information faithfully represent what it purports to represent.
Which of the following are examples of those characteristics?
1. Accruals
2. Completeness
3. Going concern
4. Neutrality
A (1) and (2)

B (2) and (4)
C (2) and (3)
D (1) and (4)
Example 2 - Framework
The following accounting standards were examined in Financial Accounting:
• IAS 2 Inventories
• IAS 16 Property, plant and equipment
Apply the principles outlined in the IASB Framework to the accounting standards above.
Example 3 - Measurement
In a country where the economy is growing and prices are subject to regular increases, which of the
following are false when using historical cost accounting compared to current value accounting?
1. Historical cost profits are understated in comparison to current value profits
2. Capital employed which is calculated using historical cost is understated compared to current value
capital employed
3. Historical cost profits are overstated in comparison to current value profits
4. Capital employed which is calculated using historical costs is overstated compared to current value
capital employed
A (1) and (2)

B (1) and (4)
C (2) and (3)
D (2) and (4)
Example 4 - Conceptual Framework

The Conceptual Framework for Financial Reporting of the International Accounting Standards Board is
based upon principles as opposed to rules.
Which of the following two statements are true?
TRUE/FALSE – The principles contained in the Conceptual Framework override any IFRS Standard that exists
TRUE/FALSE – If the Conceptual Framework is revised this automatically leads to changes to the IFRS
Standards
Chapter 2
REGULATORY FRAMEWORK
A regulatory framework exists to ensure that the accounting standards are prepared to meet the needs of
users.
IFRS Foundation
Promote and facilitate

adoption of IFRS
• Transparency
IFRS Interpretations • Accountability IFRS Advisory
Committee • Efficiency Council
Supports in the Reports to

• Technical agenda
application of IFRS
• Project priorities
IASB
• Issues in application/
implementation
• Benefits/cost of
proposals
Development and publication of:
IFRS
http://www.ifrs.org/about-us/who-we-are/
Example 1 - Regulatory Framework

Which one of the following is a duty of the IFRS Interpretations Committee?
A To provide guidance on financial reporting issues not specifically addressed in IFRSs

B To develop and approve IFRSs
C To gather views that supplement the normal consultative process
D To promote the use and rigorous application of IFRSs
Example 2 – Regulatory bodies

Which one of the following would NOT be regarded as a responsibility of the IASB?
A Responsible for all IFRS technical matters

B Publish IFRSs
C Overall supervisory body of the IFRS organisations
D Final approval of interpretations by the IFRS Interpretations Committee
1. IASB work plan

Technical projects (e.g. revenue/leases/financial instruments) are all set out in the work plan (http://
www.ifrs.org/projects/work-plan/), however it does not include just standard setting projects. It also
includes research (evidence gathering) and maintenance (narrow scope amendments and interpretations)
projects.
2. Standard setting process

Public Board meetings
Agenda papers
Agenda consultation
Discussion paper
Exposure draft
Revised exposure draft
New IFRS issued
New IFRS adopted
Post-implementation review
3. Purpose and the role of the International Sustainability

Standards Board (ISSB)
The International Sustainability Standards Board was formally announced at COP26, in Glasgow on 3
November 2021.
It has four key objectives:

๏ developing standards for a global baseline of sustainability disclosures.
๏ meeting the information needs of investors.
๏ enabling companies to provide comprehensive sustainability information to global capital markets.
๏ facilitating interoperability with disclosures that are jurisdiction-specific and/or aimed at broader
stakeholder groups.
ISSB develops standards that give high quality, comprehensive global baseline of sustainability disclosures
focused on the needs of investors and the financial markets – sustainability factors are more and more a part
of decisions made by investors.
Two Draft Standards were published in March 2022 with them being expected to be finally issued mid-2023.
IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information
The Standard sets out the general reporting requirements related to the disclosure of material information
about sustainability opportunities and sustainability-related risks. It emphasises that users of the Standards
need consistency between the financial statements and sustainability disclosures.
IFRS S2 Climate-related disclosures
The Standard sets out the disclosure requirements for material climate related opportunities and climate-
related risks. The disclosure relates to physical risks, transition risks, and climate-related opportunities
Both of these Draft Standards have been developed based upon the original work done on sustainability
disclosures by the Climate Disclosure Standards Board (CDSB), the Task Force for Climate-related Financial
Disclosures (TCFD), and industry-based Sustainability Accounting Standards (SASB).
PUBLISHED COMPANY ACCOUNTS
Chapter 3
PRESENTATION OF FINANCIAL
STATEMENTS (IAS 1)
The purpose of IAS 1 (revised) is to ensure greater clarity and understandability of financial statements.
Financial statements will present to the users of accounts:
๏ Statement of financial position
๏ Statement of profit or loss and other comprehensive income
๏ Statement of changes in equity
๏ Statement of cash flows
๏ Notes to the accounts (accounting policies and explanations)
๏ Comparatives
Financial statements should provide a fair presentation of the results, which is achieved by compliance with
IFRSs.
Additionally, the entity should also disclose the following to make the financial statements more
understandable:
๏ The name of the reporting entity
๏ Whether the financial statements are the individual or group financial statements
๏ The reporting date and the period covered by the financial statements
๏ The presentation currency
๏ The level of rounding used in presenting the amounts within the financial statements
Statement of financial position as at [date]
$’000s $’000s
ASSETS
Non-current assets
Property, plant and equipment X
Intangibles X
Financial assets X
X
Current assets
Inventories X
Trade and other receivables X
Financial assets X
Cash and cash equivalents X
X
Non-current assets held for sale X
X
Total assets X
EQUITY AND LIABILITIES

Equity
Equity shares ($1) X
Retained earnings X
Other components of equity X
Total equity X
Non-current liabilities
Long term borrowings X
Deferred tax X
X
Current liabilities
Trade and other payables X
Dividends payable X
Tax payable X
X
Total equity and liabilities X
Statement of profit and loss and other comprehensive income for the year ended [date]
Continuing operations $’000s

Revenue X
Cost of sales (X)
Gross profit X
Distribution expenses (X)
Administrative expenses (X)
Operating profit X
Finance costs (X)
Investment income X
Profit before tax X
Income tax expense (X)
Profit from continuing operations for the period X
Discontinued operations
Profit/(loss) for the period from discontinued operations X
Profit/(loss) for the period X
Other comprehensive income for the year (after tax):

Items that will not be reclassified to profit or loss:
Gain on non-current asset revaluations X
Gain/(loss) on fair value through other comprehensive income investment X/(X)
Income tax on items that will not be reclassified X/(X)
Other comprehensive income, net of tax X

Total comprehensive income for the period X
Example 1 – Statement of profit and loss, and statement of financial position

You are the accountant of Trott Ltd, a business that buys and sells cricket equipment.
The trial balance at 31 December 2017 was as follows:
$ $
Equity share capital ($1) 5,000
Retained earnings at 1 January 2017 5,835
Revenue 66,980
Staff costs 5,400
Inventory at 1 January 2017 3,930
Purchases 38,760
Distribution costs 3,130
Administrative expenses 3,790
Loan interest 200
Investment income 250
Tax 200
Receivables and payables 9,290 2,360
Bank 3,125
Motor vehicles – cost 5,000
Buildings – cost 12,000
Motor vehicles – accumulated depreciation 1 January
1,000
2017
Buildings - accumulated depreciation 1 January 2017 2,400
Debentures (2020) 1,000
84,825 84,825
Additional information:
1. Trott has not made any additions or disposals of tangible non-current assets in the year. Its
depreciation policy is as follows:
Motor vehicles – 20% reducing balance
Buildings – 25 years straight line
The depreciation expense for the year is charged to cost of sales.
2. Inventory at the end of the year was valued as follows:
Cost ($) NRV ($)

Bats 2,500 4,000
Gloves 650 500
Pads 1,000 2,000
Total 4,150 6,500
3. Staff costs are to be apportioned equally across cost of sales, distribution costs and administrative
expense.
4. The balance of tax on the tax account represents the over/under provision for the prior year. An
estimate of $1,500 has been made for the tax payable at the year-end.
Prepare in a statement of profit or loss for the year-ended 31 December 2017 and a statement of
financial position at that date.
Statement of changes in equity for the year ended [date]
Equity Retained Revaluation Total

shares earnings surplus
$’000s $’000s $’000s $’000s
B/f (as previously stated) X X X X
Change in policy/error – X/(X) – X/(X)
B/f (restated) X X X X
Issue of share capital X – – X
Dividends – (X) – (X)
Total comprehensive income for the year – X X X
Transfer to retained earnings – X (X) –
C/f X X X X
Example 2 – Statement of changes in equity (1)

Which of the following should appear in a company’s statement of changes in equity?
1. Total comprehensive income for the year

2. Amortisation of capitalised development costs
3. Surplus on revaluation of non-current assets
A 1, 2 and 3
B 2 and 3 only
C 1 and 3 only
D 1 and 2 only
Example 3 – Statement of changes in equity (2)

Extracts from Ball’s nominal ledger for the year ended 31 December 2017 are as follows:
$’000
Profit for the year 421
Dividend (98)
323
During the year the following important events took place:

(i) Properties were revalued by $105,000 increase.
(ii) 200,000 equity shares of $1 were issued during the year at a 25c premium
The opening equity balances were as follows:
$
Issued capital 400,000
Share premium 50,000
Revaluation surplus 165,000
Retained earnings 310,000
925,000
Prepare the statement of changes in equity for the year-ended 31 December 2017.
Chapter 4
STATEMENT OF CASH FLOWS (IAS 7)
Statements of cash flows are examinable in the ACCA FR exam but only to the extent that you will be
required to prepare extracts from the statement of cash flow, and only the indirect method will be
examinable.
Statement of cash flows for the year ended [date]

$'000s $'000s
Cash flows from operating activities
Profit before tax X
Finance cost X
Investment income (X)
Depreciation/amortisation X
(Profit)/loss on disposal of PPE (X)/X
Increase in inventory (X)
Increase in receivables (X)
Increase in payables X
Cash generated from operations X
Interest paid (X)
Income taxes paid (X)
Net cash generated from operating activities X
Cash flows from investing activities

Proceeds from sale of PPE X
Purchase of PPE (X)
Interest received X
Dividends received X
Net cash used in investing activities (X)
Cash flows from financing activities

Issue of equity shares X
Repayment of loan-term borrowings (X)
Proceeds from issue of long-term borrowings X
Dividend paid (X)
Net cash generated from financing activities (X)
Net increase/(decrease) in cash and cash equivalents X

Cash and cash equivalents at the beginning of the period X
Cash and cash equivalents at the end of the period X
Interest paid
Interest payable
B/f X
Bank (β) X Finance cost (SPL) X
C/f X
X X
Tax paid
Tax payable
B/f – current tax X
– deferred tax X
Bank (β) X Tax expense (SPL) X
C/f – current tax X

– deferred tax X
X X
Property, plant and equipment (PPE)
PPE (CV)
B/f X
Depreciation X
Revaluation X
Disposal X
Cash - additions (β) X
C/f X
X X
And,
π/λ on disposal = Proceeds less Carrying value
Equity shares
Issue of shares = movement in share capital and share premium
Borrowings
Issue of debt = increase in borrowings
Repayment of debt = decrease in borrowings
Dividend paid
Retained earnings
B/f X
Dividend paid (β) X PFY (SPL) X
C/f X
X X
Cash and cash equivalents
B/f C/f Movement

Cash X X
Cash equivalents X X
Overdraft (X) (X)
X X X/(X)
4. Approach
1. Read the requirement, noting the year-end date, and allocate the timings
2. Statement of cash flow headings
‣ Operating
‣ Investing
‣ Financing
‣ Cash and cash equivalents
‣ Workings
3. Cash and cash equivalents (b/f, c/f and movement)
4. Statement of profit or loss
‣ PBT
“Look up”
‣ Finance costs (interest paid)
‣ Investment income (dividends received)
“Look down”
‣ Tax (tax paid)
‣ Profit for the year (dividend paid)
5. Statement of financial position
‣ Working capital (inventory/receivables/payables)
‣ Borrowings
‣ Share capital and share premium
6. Additional information
‣ Cash inflow/outflow (sale of PPE)
‣ Non-cash items (depreciation)
7. Complete the workings and statement of cash flows in the time available
Example 1 – Statement of cash flows

The following information relates to Geofrost, a limited liability company, for the year ended 31 October
20X7.
Extracts from the statement of profit or loss for the year ended 31 October 20X7
$’000
Finance costs (400)
Profit before tax 15,000
Less tax 4,350
Profit for the year 10,650
Statement of financial position as at 31 October 20X7
20X7 20X6
$000s $000s
Assets
Non-current assets 43,282 26,574
Current assets
Inventory 3,560 9,635
Receivables 6,405 4,542
Cash 2,045 1,063
12,010 15,240
Total assets 55,292 41,814

Equity and liabilities
Capital and liabilities
Ordinary share capital 19,365 17,496
Retained earnings 16,115 6,465
35,480 23,961
Loan 8,000 10,300
Current liabilities
Bank overdraft 1,230 429
Trade payables 7,562 4,364
Taxation 3,020 2,760
11,812 7,553
Total equity and liabilities 55,292 41,814
1. Depreciation expense for the year was $4,658,000
2. Assets with a carrying value of $1,974,000 were disposed of at a profit of $720,000
Prepare the statement of cash flows for the year ended 31 October 20X7 for Geofrost.
ACCOUNTING STANDARDS
Chapter 5
NON-CURRENT ASSETS
Tangible non-current assets
IAS 16 IAS 23 IAS 20 IAS 40

Property, plant and Borrowing costs Government grants Investment property
equipment
1. Property, plant and equipment (IAS 16)

1.1. Measurement at recognition
๏ At cost
‣ Purchase price
‣ Directly attributable costs in bringing asset to its location and condition
‣ Costs to dismantle/restore (@ present value)
Revaluations
Cost Model Revaluation Model
Carried at cost less Carried at revalued amount

accumulated depreciation (fair value less accumulated
and impairment losses depreciation and impairment
losses)
If the asset is carried under the revaluation model, the following must be applied:
๏ Review periodically and keep revaluations up to date
๏ Consistent policy for each class of asset (avoids cherry-picking of assets)
๏ Depreciate the revalued asset less residual value over its remaining useful life
Example 1 – Revaluation increase

Panama bought an item of property, plant and equipment for $80 million on 1 January 2012. The asset had
zero residual value and was to be depreciated over its estimated useful life of 20 years.
On 1 January 2015 the asset was revalued to its fair value of $95 million.
Calculate the amounts to shown in the financial statements of Panama for the year-ended 31
December 2015.
The revaluation decrease will go to the revaluation reserve first, so that the value of the asset is no greater
than its depreciated historical cost as if there was no initial revaluation upwards, and any excess will go
through profit or loss.
Example 2 – Revaluation decrease

On 1 January 2013, Panama purchased an item of property, plant and equipment for $12 million. Panama
uses the revaluation model to value its non-current assets. The asset has zero residual value and is being
depreciated over its estimated useful life of 10 years. At 31 December 2014, the asset was revalued to $14
million but at 31 December 2015, the value of the asset had fallen to $8 million. Panama has not taken the
effect of the revaluation at 31 December 2015 in its financial statements.
Calculate the amounts to shown in the financial statements of Panama for the year-ended 31
December 2015.
1.2. Depreciation
IAS 16 allows two methods of depreciation:

๏ Straight line
๏ Reducing balance
Additional factors to consider are as follows:

๏ Depreciation starts when the asset is ready for its intended use and not from when it starts to be used.
๏ Any change in estimate is applied prospectively by applying the new estimates to the carrying value
of the PPE at the date of change.
๏ Separate the cost into its component parts and depreciate separately.
Example 3 – Change in estimate

Ecuador bought an item of property, plant and equipment for $25 million on 1 January 2012 and
depreciated over its useful life of 10 years.
On 31 December 2014, the assets remaining life was estimated as 5 years.
Calculate the amounts to shown in the financial statements of Ecuador for the year-ended 31
December 2015.
Example 4 – PPE and financial statements

The extracts from the trial balance of Kandy as at 30 September 2014 are:
$’000 $’000
Land ($5 million) and buildings – at cost 55,000
Plant and equipment – at cost 58,500
Accumulated depreciation at 1 October 2013
: buildings 20,000
: plant and equipment 34,500
The following notes are relevant:
Non-current assets:
The price of property has increased significantly in recent years and on 1 October 2013, the directors
decided to revalue the land and buildings. The directors accepted the report of an independent surveyor
who valued the land at $8 million and the buildings at $39 million on that date. The remaining life of the
buildings at 1 October 2013 was 15 years. Kandy does not make an annual transfer to retained profits to
reflect the realisation of the revaluation gain.
Plant and equipment is depreciated at 12½% per annum using the reducing balance method.
No depreciation has yet been charged on any non-current asset for the year ended 30 September 2014.
Depreciation is charged to cost of sales.
Prepare extracts from the statement of profit or loss and other comprehensive income for Kandy for
the year ended 30 September 2014 and from the statement of financial position as at the same date
with regards property, plant and equipment.
Illustration – Complex assets and depreciation

Paraguay bought an aircraft for a total cost of $200 million at the start of the financial year that consists of
different component parts, each one with a separate useful life. The cost and useful life of each component
is as follows:
Component Cost ($m) Useful life

Fuselage (airframe) £100m 20 years
Engines $75m 10 years
Cabin interior $25m 5 years
The annual depreciation charge on each component is calculated as follows:
Component Calculation Depreciation charge

Fuselage (airframe) £100m/20 years $5m per annum
Engines $75m/10 years $7.5m per annum
Cabin interior $25m/5 years $5m per annum
Paraguay would charge a total of $17.5m during the first year of operation of the aircraft ($5m + $7.5m +
$5m) and the carrying value of each component would be as follows at the end of the first year.
Component Calculation Carrying value

Fuselage (airframe) £100m - $5m $95m
Engines $75m - $7.5m $67.5m
Cabin interior $25m - $5m $20m
The total carrying value at the end of the first year to appear in PPE under non-current assets would be
$182.5m ($95m + $67.5m + $20m).
2. Borrowing costs (IAS 23)

Borrowing costs, net of income received from the investment of the money borrowed, on a qualifying asset
must be capitalised over the period of construction.
Capitalisation starts when:
๏ Expenditure on the asset commences

๏ Borrowing costs are being incurred
๏ Activities necessary to prepare the asset are in progress
Capitalisation must stop when the asset is ready for its use (whether or not it is being used) or when there is
no active construction.
Capitalisation for specific borrowings is capitalised using the effective rate of interest.
Example 5 – Specific borrowings

Columbia commenced the construction of an item of property, plant and equipment on 1 March 2015 and
funded it with a $10 million loan. The rate of interest on the borrowings was 5%.
Due to a strike no construction took place between 1 October and 1 November.
Calculate the amount of interest to be capitalised as par to of non-current assets if Columbia’s
reporting date is 31 December 2015.
Illustration – Net borrowing costs

Ecuador has a loan facility of $300 million upon which interest is charged at 6%. It is also allowed to invest
funds and earn a return of 4%.
On 1 March 2018, $100m was borrowed to construct a new indoor velodrome, of which $20 million was
invested immediately for use later on the project.
On 1 May 2018, work on the construction stopped due to strike action, but work restarted on 1 June 2018
and continued up to the 30 June 2018 reporting date.
The borrowing costs on the $100 million must be capitalised for three months, from 1 March 2018 to 30 April
2018, and for 1 June 2018 to 30 June 2018. The borrowing costs cannot be capitalised for the month of May
due to the strike action where no construction took place. Therefore, borrowing costs of $1.5 million ($100
million x 6% x 3/12) will be capitalised before any investment income is net-off.
The investment income received of $0.2 million ($20 million x 4% x 3/12) will be net-off the $1.5 million, to
give net borrowing costs capitalised of $1.3 million.
The interest expense for May of $0.5 million ($100 million x 6% x 1/12) and interest income of $0.07 million
will both be recognised through profit or loss.
Example 6 – General borrowings

Venezuela had the following bank loans in issue during 2015.
$m
4% bank loan 25
3% bank loan 40
Venezuela commenced the construction of an item of property, plant and equipment on 1 January 2015 for
which it used its existing borrowings. $10 million of expenditure was used on 1 January and $15 million was
used on 1 July.
Calculate the amount of interest to be capitalised as part of the non-current assets during 2015.
3. Government grants (IAS 20)

Recognise the grant when the:
๏ Entity will comply with the conditions attached to the grant
๏ Entity will actually receive the grant
Grants should be recognised according to the deferred income approach, using a systematic basis. This
spreads the income over the period in which the related expenditure is recognised.
If the grant is used to buy depreciating assets, the grant must be spread over the same life and using the
same method.
Example 7 – Grants and depreciable assets

Tweddle bought an item of property, plant and equipment for $10 million and received a government grant
of $2 million. The PPE has a useful life of 10 years and has no residual value.
Explain how the purchase of the property, plant and equipment and government grant would be
dealt with in the financial statements of Tweddle.
Note: If a government grant becomes repayable, it is treated as a change in accounting estimate.

The payment is first shown against any remaining deferred income balance.
If the payment exceeds the deferred income balance then the excess payment is treated as an expense.
Example 8 - Government Grants

XRT acquired plant costing $3m on 1 January 20X3, funded in part by a government grant of $1m. The plant
has a useful life of 10 years.
Calculate the non-current liability shown in the statement of financial position as at 31 December 20X3 if the
deferred income method is applied.
Calculate the value of the PPE as at 31 December 20X3 under the deferred income method and the
netting-off method.
4. Investment properties (IAS 40)

Investment property is property (land or a building – or part of a building – or both) held to earn rentals or
for capital appreciation or both, rather than for:
๏ Use in the production or supply of goods and services or for administrative purposes (IAS 16); or
๏ Sale in the ordinary course of business (IAS 2); or
4.1. Initial measurement
Investment properties should initially be measured at cost plus directly attributable costs.
4.2. Subsequent measurement
Fair value model Cost model

๏ The investment properties are revalued to ๏ The investment properties are held using
fair value at each reporting date the benchmark method in IAS 16 (cost)
๏ Gains or losses on revaluation are ๏ The properties are depreciated like any
recognised directly through profit or loss other asset
๏ The properties are not depreciated
Transfers into and out of investment property should only be made when supported by a change of use of
the property.
๏ IP to owner occupied (IAS 16) – Fair value at date of change
๏ IP to inventory (IAS 2) – Fair value at date of transfer
๏ Owner occupied (IAS 16) to IP – Revalue under IAS 16 and then treat as IP
๏ Inventory (IAS 2) to IP – Fair value on change and gain/loss to profit or loss
Example 9 – Investment property and change of use

Addlington owns a property that it is using as its head office. At 1 January 2015, its carrying value was $20
million and its remaining useful life was 20 years. On 1 July 2015 the business was reorganised cheaper
premises were found for use as a head office. It was therefore decided to lease the property under an
operating lease.
The property was valued by a qualified professional, who assessed the property’s value as $21 million on 1
July and $21.6 million on 31 December 2015.
Explain the accounting treatment of the property in the financial statements for the year-ended 31
December 2015.
Example 10 – Investment property

Deller owns a property which it does not occupy and is rented to third parties under an operating lease. The
property was acquired on 30 June 20X3 for $5m and had an estimated useful life of 40 years. Deller uses the
fair value model to measure investment property and the fair value of the property was estimated at $5.4m
at 31 December 20X3. If the property was sold then expected selling costs would be $0.1m.
Calculate the gain on the investment property and highlight where the gain should be recorded.
Exam preparation question – Revaluation and the SOCIE

The following extracts from the trial balance have been taken from the accounting records of Klopp Co as at
30 June 20X8:
Dr Cr
$ $
Equity shares ($1) 2,400,000
Share premium 800,000
Retained earnings at 30 June 20X7 3,450,000
(i) On 1 January 20X8, Klopp Co issued 600,000 shares at their full market price of $1·80. The proceeds
were credited to a suspense account.
(ii) The company’s land and buildings were revalued on 1 July 20X7. The land had cost $500,000 and the
buildings $5,000,000 on 1 July 20X2. The buildings were being depreciated over 50 years and the
building’s economic life remains unchanged. At 1 July 20X7, the land had a fair value of $600,000 and
the buildings had a fair value of $5,400,000. Klopp Co wishes to make the annual transfer between the
revaluation reserve and retained earnings.
(iii) Klopp Co declared the 20X7 final dividend of $0.05/share for all shares in issue on 30 June 20X7, on 9
July 20X7. An interim dividend for the year-ended 30 June 20X8 of $0.04/share was declared on 4
April 20X8 for all shares in issue on 31 March 20X8.
(iv) Klopp Co’s profit for the year is showing on the statement of profit or loss for the year-ended 30 June
20X8 as $448,000.
Prepare a statement of changes in equity for Klopp Co for the year ended 30 June 20X8.
Chapter 6
INTANGIBLE ASSETS (IAS 38)
No physical substance but has value to the business.
๏ patents
๏ brand names
๏ licences
3 factors to consider
Identifiability Control Future economic

benefits
1. Separate acquisition/purchase
Capitalise at cost plus any directly attributable costs (e.g. legal fees, testing costs). Amortisation is charged
over the useful life of the asset, starting when it is available for use.
2. Research and development

2.1. Research
Research expenditure is charged immediately to profit or loss in the year in which it is incurred.
2.2. Development
Development expenditure must be capitalised when it meets all the criteria.

๏ Sell/use
๏ Commercially viable
๏ Technically feasible
๏ Resources to complete
๏ Measure cost reliably (expense)
๏ Probable future economic benefits (overall)
3. Internally generated
Internally generate brands, mastheads cannot be capitalised as their cost cannot be separated from the
overall cost of developing the business.
Example 1 – Intangibles (1)

Which of the following statements are correct?
1. Capitalised development expenditure must be amortised over a period not exceeding five years.
2. Capitalised development costs are shown in the statement of financial position under the heading of
non-current assets
3. If certain criteria are met, research expenditure must be recognised as an intangible asset.
A 2 only
B 2 and 3 only
C 1 only
D 1 and 3 only

Booker is involved in developing new products and has spent $15 million on acquiring a patent to aid in this
development. The initial investigative phase of the project cost an additional $6 million, whereby it was
determined that the future feasibility of the product was guaranteed.
Subsequent expenditure incurred on the product was $8 million, of which $5 million was spent on the
functioning prototype and the remainder on getting the product into a safe and saleable condition.
A further $1 million was spent on marketing and $0.5 million on training sales staff on how to demonstrate
the use of the product.
At the reporting date the product had not yet been completed.
Explain how Booker should account for the expenditure in its financial statements.

GSK is a large pharmaceutical business involved in the research and development of viable new drugs. It
commenced initial investigation into the viability of a new drug on 1 February 20X5 at a cost of $40,000 per
month. On 1 August 20X5 GSK were able to demonstrate the commercial viability of the new drug and
intend to sell it on the open market once fully complete.
Costs subsequent to 1 August 20X5 remained at $40,000 per month. At 31 December 20X5, GSK’s reporting
date, the drug was not yet complete but it is believed that by mid-20X6 the drug will be available for sale.
The finance director is confident of the success of the drug’s sales that he wishes to revalue the intangible at
the reporting date, using a discounted future cash flow model to establish the fair value.
Explain the treatment of the above costs in GSK’s financial statements for the year-ended 31
December 20X5.
4. Revaluation of intangible assets

Intangible assets can only be revalued if there is an active market, which is rarely seen except for examples
such as production quotas or fishing licences. This is because an active market is one where identical items
are traded with such regularity that they generate a price that can be used to determine the fair value.
If there is an active market then the intangible will be revalued to fair value and amortised over its remaining
useful life.
Example 4 – Intangibles
Sudley bought a new brand name on 1 July 20X0 for $20m. The estimated useful life of the brand name was
ten years. a brand specialist valued the brand at a fair value of $22m on 1 July 20X2.
A training course was also run by Sudley on 1 July 20X2 for all staff to train them on how to use a new
accounting software. This training cost Sudley $500,000.
Sudley expects the employees to remain with them for on average a period of four years.
Calculate the total amount to be recognised as an expense in the statement of profit or loss for the
year ended 30 June 20X3?
Chapter 7
IMPAIRMENTS (IAS 36)
1. Identify possible impairment indicators (external vs. internal)
2. Perform impairment review (if identified possible impairments)
3. Record the impairment
1. Indicators of Impairment
External sources
๏ A significant decline in the asset’s market value more than expected by normal use or passage of time
๏ A significant adverse change in the technological, economic or legal environment
Internal sources
๏ Obsolescence or physical damage
๏ Significant changes, in the period or expected, in the way the asset is being used e.g. asset becoming
idle, plans for early disposal or discontinuing/ restructuring the operation where the asset is used
๏ Evidence that asset’s economic performance will be worse than expected
๏ Operating losses or net cash outflows for the asset
๏ Loss of key employee
2. Impairment review
If the carrying value of the asset is greater than its recoverable amount, it is impaired and should be written
down to its recoverable amount.
๏ Recoverable amount - the greater of fair value less cost to sell and value in use.
๏ Fair value less costs to sell - the amount receivable from the sale of the asset less the costs of
disposal.
๏ Value in use - the present value of the future cash flows from the asset.
Example 1 – Impairment
A machine was acquired on 1 January 20X5 at a cost of $50,000 and has a useful economic life of ten years.
At 31 December 20X9 an impairment review was performed. The fair value of the machine is $26,000 and
the selling costs are $2,000.
The expected future cash flows are $5,000 per annum for the next five years. The current cost of capital is
10%. An annuity factor for this rate over this period is 3.791
Prepare extract from the financial statement for the year-ended 31 December 20X9.
3. Record the impairment

Individual asset
The reduction in carrying value is taken through profit or loss unless related to a revalued asset, in which
case it is taken to any revaluation surplus first.
Example 2– Individual asset impairment

A building was bought on 1 January 20X1 at a cost of $1,000,000 and has a useful life of 20 years.
The company uses the revaluation model for its land and buildings, and on the 31 December 20X5 the fair
value of the building was $1,125,000. The company opts to transfer any excess depreciation on the revalued
amount to retained earnings.
On the 31 December 20X7 a fall in the market value of property led to an impairment review on the building,
which revealed the value of the building to be $600,000.
Explain how the impairment of the building should be dealt with in the financial statements for the
year ended 31 December 20X7.
Cash generating unit (CGU)

The impairment loss is allocated as follows:
1. Specific assets
2. Goodwill
3. Remaining assets (pro-rata)
Example 3 – CGU impairment

Peter owned 100% of the equity share capital of Sharon, a wholly-owned subsidiary.
The assets at the reporting date of Sharon were as follows:
$’000
Goodwill 2,400
Buildings 6,000
Plant and equipment 5,200
Other intangibles 2,000
Receivables and cash 1,400
17,000
On the reporting date a fire within one of Sharon’s buildings led to an impairment review being carried out.
The recoverable amount of the business was determined to be $9.8 million. The fire destroyed some plant
and equipment with a carrying value of $1.2 million and there was no option but to scrap it.
The other intangibles consist of a licence to operate Sharon’s plant and equipment. Following the scrapping
of some of the plant and equipment a competitor offered to purchase the patent for $1.5 million.
The receivable and cash are both stated at their realisable value and do not require impairment.
Show how the impairment loss in Sharon is allocated amongst the assets.
Note: Within a group of companies where there are several subsidiaries, the individual CGUs (subsidiaries)
are tested for impairment first, before the overall value of the business is tested.
Exam preparation question – Non-current assets

Extracts from the trial balance of Shea Co at 31 December 20X8 are as follows:
$000 $000
Retained earnings as at 31 December 20X7 (draft) 7,350
Office building at cost 25,000
Factories at cost 50,000
Office building accumulated depreciation 1 January 20X8 7,500
Factories accumulated depreciation 1 January 20X8 15,400
Suspense account 2,500
Shea Co acquired an office building for $25m on 1 January 20X2 with an estimated useful life of 20 years. On
1 July 20X8, the building was deemed impaired as its value in use was estimated to be $14m. At that date,
the estimated useful life was revised to 10 years.
Shea Co sold one of its twenty factories on 1 January 20X8 for $2.5m. The factory had originally cost $4m
and accumulated depreciation $2m. The proceeds were credited to the suspense account.
No depreciation has yet been charged on any non-current assets for the year ended 31 December 20X8.
Depreciation is charged on a pro-rata basis and the factories are depreciated at 10% per annum using the
reducing balance method.
Ignore any deferred tax consequences.
Required
(a) Prepare extracts from the statement of financial position as at 31 December 20X8.
(b) Prepare a schedule of adjustment that must be made to Shea’s draft retained earnings as a result
of any adjustments related to the non-current assets.
Chapter 8
NON-CURRENT ASSETS HELD FOR SALE
AND DISCONTINUED OPERATIONS
(IFRS 5)
1. Objective
๏ To require entities to disclose information about operations which have been discontinued during the
accounting period
๏ Improves the reader’s ability to interpret the results and to make meaningful projections
2. Non-current assets held for sale

๏ A non-current asset held for sale is one where the carrying amount will be recovered principally
through sale rather than through continuing use
๏ A disposal group is a group of (net) assets to be disposed of in a single sale transaction
To be classified as ‘held for sale’ it must be:

๏ Available for immediate sale in its present condition and,
๏ Its sale must be highly probable
For a sale to be highly probable

๏ Management must be committed to a plan to sell the asset
๏ An active programme to locate a buyer and complete the plan must have been started
๏ The asset must be being actively marketed at a price that is reasonable in relation to its current fair
value
๏ The sale should be expected to take place within twelve months from the date of classification as ‘held
for sale ‘
๏ It should be unlikely that significant changes to the plan will be made or that the plan will be
withdrawn
Non-current asset held for sale is valued at the lower of the carrying value and fair value less costs to sell.
Any reduction in value is recorded as an impairment through profit or loss.
IFRS 5
Cost Model Revaluation Model

Asset is revalued to fair value immediately
before classification as held for sale
๏ Once classified as a non-current asset held for sale it is no longer depreciated.

๏ The subsequent sale of the asset will give rise to a profit/loss on disposal.
Example 1 – NCA-HFS
York bought an asset at a cost of $120,000 on 1 January 20X1 and depreciated it straight line over 10 years.
The asset’s residual value is nil and depreciation is charged pro-rate on a monthly basis.
On 30 November 20X4, York classified the asset as a non-current asset held for sale in accordance with the
rules of IFRS 5 Discontinued operations and non-current assets held for sale. At that date the fair value of
the asset was $70,000 and the costs to sell were $2,000.
The asset had not been sold by the 31 December 20X4 reporting date.
Prepare extracts from the financial statements for the year-ended 31 December 20X4.
3. Discontinued operations
IFRS 5
Discontinued Operations
Definition When discontinued Disclosure
Definition
๏ Disposed of, or
๏ Held for sale, and:
Separate major Single co-ordinated plan Is a subsidiary

line of business or to dispose of a separate acquired exclusively
geographical area line of business/ with a view to re-sale
of operations geographical area
Discontinued
Disposed of in the year Held for sale
Disclose in year of Disclose in year

disposal held for sale
Disclosure
P or L SCF SFP
PFY → face Net cash flows → face or notes Fully disposed of → none
Revenue, expenses, Not fully disposed of →

pre-tax profit, tax ‘assets held for sale’
expense → face or
notes
Example 2 – Discontinued operations

Angola’s car manufacturing operation has been making substantial losses. Following a meeting of the
board of directors, it was decided to close down the car manufacturing operation on 31 March 20X6. The
company’s reporting date is 31 December and the car manufacturing operation is treated as a separate
operating segment.
Explain how the decision to close the car manufacturing operation should be treated in Angola’s
financial statements for the years ending 31 December 20X5 and 20X6.
Example 3 – Discontinued operations

Ruta Co Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 December 2017
$000 $000
2017 2016
Revenue 700 550
Cost of sales (300) (260)
Gross profit 400 290
Distribution costs (100) (70)
Administrative expenses (70) (60)
Profit from operations 230 160
During the year the entity ran down a material business operation with all activities ceasing on 30 March
2017
The results of the operation for 2017 and 2016 were as follows:
$000 $000
2017 2016
Revenue 60 70
Loss from operations (3) (1)
The entity made gains of $7,000 on the disposal of non-current assets of the discontinued operation. These
have been netted off against administrative expenses.
Prepare the Statement of Profit or Loss and Other Comprehensive Income for the year ended 31
December, 2017 for Ruta Co, complying with the provisions of IFRS 5, disclosing the information on
the face of the Statement of Profit or Loss and Other Comprehensive Income. Ignore taxation.
Chapter 9
ACCOUNTING POLICIES, CHANGES IN
ACCOUNTING ESTIMATE AND ERRORS
(IAS 8)
IAS 8
Accounting Estimates Accounting Policies Prior Period Errors
1. Accounting policies
Selection
Apply the standard that Apply a policy that gives relevant

specifically deals with the and reliable information
transaction
๏ Standard of a similar item
๏ IASB Framework definitions
Change in accounting policy
New IFRS Apply a new policy that gives more

relevant and reliable information
Follow treatment given in new IFRS Voluntary change
Retrospective application
๏ Adjust b/f figures
๏ Restate comparatives
Example 1 – Error
Adomas Co Statement of Profit or Loss and Other Comprehensive Income extract and summarised
Statement of Financial Position for the year ended 31 December, 2008
$’000
Revenue 2,500
Cost of sales and expenses (1,200)
Statement of Financial Position at 31 December, 2008

Non-current assets 2,000
Current assets 800
2,800
Share capital 600
Reserves 2,000
2,600
Current liabilities 200
2,800
During 2009 it was discovered that certain non-current assets had been included in the records at 31
December 2008 at $500,000 in excess of their recoverable amount and that this situation was unlikely to
change.
Prior to making any adjustment for the above the results and summarised Statement of Financial Position of
Adomas Co for 2009 was as follows:
Statement of Profit or Loss (extract) for the year ended 31 December 2009
$’000
Revenue 2,600
Costs and expenses (1,400)
Statement of Financial Position at 31 December 2009
$’000
Non-current assets 2,800
Current assets 1,700
4,500
Share capital 600
4,100
Current liabilities 400
4,500
During 2009 some other items of property had been revalued by $300,000 (included in the above retained
earnings figure).
Prepare extracts from Adomas Co’s financial statements for the year ended 31 December, 2009.
2. Accounting estimates
Changes in accounting estimate are recognised prospectively:
๏ Period of change
๏ Period of change and future periods
Example 2 – Accounting Estimates

Would the following be a change in accounting policy or revision of an estimate?
1. If a company decides to change its method of depreciation from straight line method to reducing
balance method.
2. If a company decides to change from capitalising finance costs to immediate write off.
3. Prior period error

Accounting errors (omissions and misstatements) include:
๏ Errors in applying accounting policies
๏ Oversights
๏ Fraud and the effects of fraud
Material errors are corrected retrospectively, the same as for a change in accounting policy.
Example 3 – Prior year error

Fraudulent financial reporting has been found within the accounts of Dodgy Co, which amounts to $3.4m of
trade receivables that need to be written off. Of the total $3.4m, $1.0m relates to the current reporting
period, and the remaining $2.4m relates to pervious period.
Explain the accounting treatment of the fraudulent financial reporting in the financial statements of
Dodgy Co.
Chapter 10
INVENTORY (IAS 2) AND AGRICULTURE
(IAS 41)
1. Inventory (IAS 2)
Measure @ lower of
Cost NRV
Costs incurred in bringing inventory
to its present condition and location Selling price X
Less:
๏ Materials
Costs to complete (X)
๏ Labour
Costs of selling (X)
๏ Manufacturing overheads
(based on normal output) NRV X
Example 1 – Inventory (cost)

According to IAS 2 Inventories, which TWO of the following costs should be included in valuing the
inventories of a manufacturing company?
1. Carriage inwards
2. Carriage outwards
3. Depreciation of factory plant
4. General administrative overheads
A 1 and 4
B 1 and 3
C 3 and 4
D 2 and 3
Example 2 – Inventory (valuation)

Neil paid $3 per unit for the raw materials of its products. To complete each unit incurred $2 per unit in
direct labour.
Production overheads for the year based on normal output of 12,000 units was $72,000.
Due to industrial action only 10,000 units were produced and 1,000 units were in inventory at the end of the
year.
As a result of the industrial action some units were badly stored and became damaged. It’s is estimated that
200 of the units will now only be sold for $12 each after minor repairs of $2 each
What figure for closing inventory would be shown in the Statement of Financial Position?
Example 3
A manufacturer is valuing its inventory at the reporting date and has identified the following items to be
valued:
Inventory A – work in progress consists of 10 items that have cost $2,500 to produce in total. It is expected
that each item will sell for $280, where direct selling costs are expected to be 5% of the selling price, and it is
estimated that costs to complete would be $10 per unit.
Inventory B – the company has 1,000 units costing $10 each, where the packaging has been damaged. It
will cost $2,000 to repackage all of the units allowing them to be sold at $11 each.
Inventory C – the company has produced inventory costing $7,000 that it is expecting to sell at $10,000 to
one of its customers. Changes in production methods mean that the goods are cheaper to produce and will
only cost $6,000 in the future.
At what amounts should the inventory be valued in the financial statements.
2. Agriculture (IAS 41)
Biological asset* Agricultural produce Inventory (IAS 2)
Produce from a
Living plant or animal
biological asset
e.g. tree or sheep
e.g. apples or lambs
Fair value less Fair value at the point

estimated point of sale of harvest less
costs estimated point off
(commissions, levies) sale costs
(commissions, levies)
• Initially and,
• At each reporting date
*Bearer plants are excluded from IAS 41 and are accounted for under IAS 16.
A bearer plant is defined as a living plant that:
๏ Is used in the production or supply of agricultural produce
๏ Is expected to bear produce for more than one period
๏ Has a remote likelihood of being sold as agricultural produce, except for
the incidental scrap sales.
Examples of bearer plants would be apple trees and grape vines.
Gain or loss to profit or

loss
Physical change Price change
Note:
๏ Agricultural land is accounted for under IAS 16 Property, plant and equipment
๏ Milk quotas are accounted for under IAS 38 Intangible assets
๏ Grant income for agricultural activity is credited to profit or loss as soon as they are unconditionally
receivable.
Chapter 11
FINANCIAL INSTRUMENTS (IFRS 9)
Company A Company B
Financial asset Financial liability, or equity
Purchase shares in co. B Issues shares
Purchase co. B debt Issues debt
Sells goods to B Buys good from A
1. Financial assets
๏ Initially recognise at fair value including transaction costs, unless classified as fair value through profit
or loss
1.2.1 Equity instruments
Fair value through profit or loss (default)

๏ Transaction costs are recognised immediately through profit or loss
๏ Re-measure to fair value at the reporting date, with gains or losses through profit or loss
Fair value through other comprehensive income
If there is a strategic intent to hold the asset the option to hold at fair value through other comprehensive
income is available. Re-measure to fair value at reporting date, with gains or losses through other
comprehensive income.
1.2.2 Debt instruments
Amortised cost
A financial asset is measured at amortised cost if it fulfils both of the following tests:
๏ Business model test – intent to hold the asset until its maturity date; and,
๏ Contractual cash flow test – contractual cash receipts on holding the asset.
Fair value through other comprehensive income
The investment in debt can be classified as FVTOCI if the objective of the business model is to instead collect
the cash receipts and sell the financial asset.
1.3. Derecognition
Financial assets are derecognised when sold, with gains or losses on disposal through profit or loss. Gains or
losses previously recognised through other comprehensive income are transferred to retained earnings
through the statement of changes in equity.
Example 1 – Financial assets

Norman has the following financial assets during the financial year.
1. Norman bought 100,000 shares in a listed entity on 1 November 2015. Each share cost $5 to purchase
and a fee of $0.25 per share was paid as commission to a broker. The fair value of each share at 31
December 2015 was $3.50.
2. Norman bought 200,000 shares in a listed entity on 1 March 2015 for $500,000, incurring transaction
costs of £40,000. Norman acquired the shares as part of a long term strategy to realise the gains in the
future. The fair value of the shares was £620,000 at 31 December. The shares were subsequently sold
for $650,000 on 31 January 2016.
3. Norman bought 10,000 debentures at a 2% discount on the par value of $100. The debentures are
redeemable in four years’ time at a premium of 5%. The coupon rate attached to the debentures is 4%.
The effective rate of interest on the debenture is 5.73%.
Explain how each of the above financial assets will be accounted for in the financial statements.
2. Financial liabilities
๏ Initially recognise at fair value less transaction costs (‘net proceeds’)

๏ Amortised cost
๏ Fair value though profit or loss
2.3. Derecognition
๏ Financial liabilities are derecognised when they have been paid in full or transferred to another party.
Example 2 – Financial liabilities

Norma issues 20,000 redeemable debentures at their $100 par value, incurring issue costs of $100,000. The
debentures are redeemable at a 5% premium in 4 years’ time and carry a coupon rate of 2%. The effective
rate on the debenture is 4.58%.
Calculate the amounts to be shown in the statement of financial position and statement of profit or
loss for each of the four years of the debenture.
3. Convertible debentures
If a convertible instrument is issued, the economic substance is a combination of equity and liability and is
accounted for using split equity accounting.
The liability element is calculated by discounting back the maximum possible amount of cash that will be
repaid assuming that the conversion doesn’t take place. The discount rate to be used is that of the interest
rate on similar debt without and conversion option.
The equity element is the difference between the proceeds on issue and the initial liability element.
The liability element is subsequently measured at amortised cost, using the interest rate on similar debt
without the conversion option as the effective rate. The equity element is not subsequently changed.
Example 3 – Convertible debentures

Alice issued one million 4% convertible debentures at the start of the accounting year at par value of $100
million.
The rate of interest on similar debt without the conversion option is 6%.
Explain how Alice should account for the convertible debenture in its financial statements for each of
the three years.
4. Disclosure (IFRS 7)
Financial instruments, particularly derivatives, often require little initial investment, though may result in
substantial losses or gains and as such stakeholders need to be informed of their existence. The objective of
IFRS7 is to allow users of the accounts to evaluate:
๏ The significance of the financial instruments for the entity’s financial position and performance
๏ The nature and extent of risks arising from financial instruments
๏ The management of the risks arising from financial instruments
Nature and extent of financial risks
Financial risk arising from the use of financial instruments can be defined as:
๏ Credit risk
๏ Liquidity risk
๏ Market risk
Disclosures with regards to these risks need to be both qualitative and quantitative.
Exam preparation question 1 – Financial liability

Extracts from the trial balance of Noreen Co at 31 December 20X8 are as follows:
$000 $000
Retained earnings as at 31 December 20X7 (draft) 1,250
Proceeds of the 4% loan notes 4,000
Interest paid 160
Noreen Co issued loan notes with a coupon rate of 4% on 1 January 20X8 at their face value of $4m.
$200,000 of direct costs related to the issue were incurred and charged to profit or loss. The loan will be
redeemable in five years’ time at a substantial premium which gives an effective rate of 7%. The annual
repayments of are paid on 31 December each year.
Required
(a) Prepare extracts from the statement of financial position as at 31 December 20X8.
(b) Prepare a schedule of adjustment that must be made to Noreen’s draft retained earnings as a
result of any adjustments related to the loan notes.
Exam preparation question 2 – Convertible debentures and the SOCIE

The following extracts from the trial balance have been taken from the accounting records of Henderson Co
as at 31 March 20X8:
Dr Cr
$ $
Equity shares ($1) 35,000,000
Share premium 7,500,000
Retained earnings at 31 March 20X7 5,600,000
Dividends paid 275,000
(i) During the year it was discovered that fraudulent financial reporting had been carried out by the
financial controller, which had previously been undetected. The auditors have discovered that trade
receivables of $0.9m have been found to be not existent and are required to be written off. Of the
$0.9m total balance, $0·2m relates to the year ended 31 March 20X8, with $0.7m relating to earlier
periods.
(ii) The equity shares and share premium balances in the trial balance extract include a fully subscribed 1
for 4 rights issue at $1.50 per share. The rights issue took place on 1 January 20X8 when the market
value of the shares was $2.10.
(iii) On 1 April 20X7, Henderson Co issued $10m 4% convertible loan notes. The conversion terms are that
on 31 March 20X9, one share can be converted for every $2 of loan notes held. Similar loan notes,
without the conversion option, incur interest at 6%. Interest is payable annually in arrears.
Relevant discount rates are as follows:

Present value of $1 in: 4% 6%
1 year 0.962 0.943
2 years 0.925 0.890
(iv) Henderson Co’s profit for the year is showing on the statement of profit or loss for the year-ended 31
March 20X8 as $448,000.
Required
Prepare a statement of changes in equity for Henderson Co for the year ended 30 June 20X8.
Exam preparation question 3 – Financial asset

On 1 January 2020 Norbert purchased a four-year loan note at a discount of 10% to its par vale of $10m. The
coupon rate attached to the loan note is 3% and the interest is received annually in arrears. Using the
amortised cost method of accounting for the loan note yields an effective rate of 6%.
Required
Calculate the interest income in the statement of profit or loss for the year ended 31 December 2021.
Chapter 12
LEASES (IFRS 16)
IFRS 16 Leases is to be adopted for accounting periods starting on or after 1 January 2019. It can be adopted
earlier but only if the entity has already adopted IFRS 15 Revenue from contracts with customers.
The new standard on leases is replacing the old standard (IAS 17) where the existence of operating leases
meant that significant amounts of finance were held off the balance sheet. In adopting the new standard all
leases will now be brought on to the statement of financial position, except in the following circumstances:
๏ leases with a lease term of 12 months or less and containing no purchase options – this election is
made by class of underlying asset; and
๏ leases where the underlying asset has a low value when new (such as personal computers or small
items of office furniture) – this election can be made on a lease-by-lease basis.
The accounting for low value or short-term leases is done through expensing the rental through profit or
loss on a straight-line basis.
Example 1 – Low-value assets

Banana leases out a machine to Mango under a four year lease and Mango elects to apply the low-value
exemption. The terms of the lease are that the annual lease rentals are $2,000 payable in arrears. As an
incentive, Banana grants Mango a rent-free period in the first year.
Explain how Mango would account for the lease in the financial statements.
1. Lessee accounting
1.1. Initial recognition
At the start of the lease the lessee initially recognises a right-of-use asset and a lease liability. [IFRS 16:22]
Right of use asset Lease liability

Measured at the amount of the lease liability plus Measured at the present value of the lease payments
any initial direct costs incurred by the lessee. payable over the lease term, discounted at the rate
implicit in the lease
๏ Lease liability ๏ Fixed payments less incentives
๏ Initial direct costs ๏ Variable payments (e.g. CPI/rate)
๏ Estimated costs for dismantling ๏ Expected residual value guarantee
๏ Payments less incentives before ๏ Penalty for terminating (if reasonably certain)
commencement date ๏ Exercise price of purchase option (if
reasonably certain)
Note: if the rate implicit in the lease cannot be
determined the lessee shall use their incremental
borrowing rate
Right of use asset Lease liability

Cost less accumulated depreciation Financial liability at amortised cost
Note: Depreciation is based on the earlier of the
useful life and lease term, unless ownership
transfers, in which case use the useful life.
Example 2 – Lessee accounting

On 1 January 2015, Plum entered into a five year lease of machinery. The machinery has a useful life of six
years. The annual lease payments are $5,000 per annum, with the first payment made on 1 January 2015. To
obtain the lease Plum incurs initial direct costs of $1,000 in relation to the arrangement of the lease but the
lessor agrees to reimburse Plum $500 towards the costs of the lease.
The rate implicit in the lease is 5%. The present value of the minimum lease payments is $22,730.
Demonstrate how the lease will be accounted in the financial statements over the five year period.
Exam questions on leases can prove to be tricky and the following illustration highlights where a subtle
change in terminology can lead to difficulties. The key point to identify in this illustration is that the present
value figure given is not for the total lease payments but of the future lease payments, i.e. those incurred
after the commencement of the lease.
Illustration – Future lease payments

Peach leased an item of equipment for a period of 5 years from start of its financial year, 1 January 2019. An
initial payment of $4,000 was made on 1 January 2019 and then a series of four future payments were made
each year on 1 January. The rate implicit in the lease is 3% and the present value of the future lease
payments is $14,868. The asset has a useful life of 5 years.
Extracts from the financial statements at the end of the financial year, 31 December 2019, would be as
follows:
Statement of profit or loss for the year ended 31 December 2019 (extract)
$
Depreciation
3,774
(18,868/5 years)
Finance cost (W) 446
Statement of financial position as at 31 December 2019 (extract)
$
Non-current assets
Property, plant and equipment 15,094
(=14,868 + 4,000 = 18,868 – 3,774)
Lease liability (W) 11,314
Current liabilities
Lease liability (=15,314 – 11,314) 4,000
Workings
b/f Payment O/S balance Interest @3% c/f

18,8681 (4,000) 14,868 446 15,314
15,314 (4,000) 11,314 339 11,653
1 The b/f figure in the lease liability table of $18,868 is the sum of the initial $4,000 payment at the
commencement of the lease plus the present value of the future lease payments of $14,868. The $18,868 is
ultimately the present value of total lease payments. i.e. those at the commencement of the lease and those
in the future.
2. Sale and leaseback

A sale and leaseback transaction occurs when one entity (seller) transfers an asset to another entity (buyer)
who then leases the asset back to the original seller (lessee).
The companies are required to account for the transfer contract and the lease applying IFRS 16, however
consideration is first given to whether the initial sale of the transferred asset is a performance obligation
under IFRS 15.
If the transfer of the asset is not a sale then the following rules apply:
Seller-Lessee Buyer-Lessor
๏ Continue to recognise the asset ๏ Do not recognise the asset
๏ Recognise a financial liability (= proceeds) ๏ Recognise a financial asset (= proceeds)
If the transfer of the asset is a sale then the following rules apply:
Seller-Lessee Buyer-Lessor
๏ Derecognise the asset ๏ Recognise purchase of the asset
๏ Recognise the sale at fair value
๏ Recognise lease liability (PV of lease rentals) ๏ Apply lessor accounting
๏ Recognise a right-of-use asset, as a proportion
of the previous carrying value of underlying
asset
๏ Gain/loss on rights transferred to the buyer
Example 3 – Sale and leaseback (1)

Apple required funds to finance a new ambitious rebranding exercise. It’s only possible way of raising
finance is through the sale and leaseback of its head office building for a period of 10 years. The lease
payments of $1 million are to be made at the end of the lease period
The current fair value of the building is $10 million and the carrying value is $8.4 million. The interest rate
implicit in the lease is 5%.
Advise Apple on how to account for the sale and leaseback in its financial statements if the office
building were to be sold at the fair value of $10 million and:
(a) Performance obligations are not satisfied; or,
(b) Performance obligations are satisfied.
Note: If the proceeds are less than the fair value of the asset or the lease payments are less than market
rental the following adjustments to sales proceeds apply:
๏ Any below-market terms should be accounted for as a prepayment of the lease payments; and,
๏ Any above-market terms should be accounted for as additional financing provided to the lessee.
Example 4 – Sale and leaseback (2)

Apple required funds to finance a new ambitious rebranding exercise. It’s only possible way of raising
finance is through the sale and leaseback of its head office building for a period of 10 years. The lease
payments of $1 million are to be made at the end of the lea se period
The current fair value of the building is $10 million and the carrying value is $8.4 million. The interest rate
implicit in the lease is 5%.
Advise Apple on how to account for the sale and leaseback in its financial statements if the
performance obligations are satisfied and the building is sold for the following:
(a) $9 million; or,
(a) $11 million.
Chapter 13
PROVISIONS, CONTINGENT ASSETS
AND CONTINGENT LIABILITIES (IAS 37)
Provision
Present obligation as a Probable transfer/outflow Measure the outcome

result of a past event of economic benefit reliably
1. Measurement
๏ Best estimate of expenditure
๏ Expected values (various different outcomes)
๏ Discount to present value if materially different
Illustration – Best estimate (single obligation)

Following the explosion of an oil rig in the North Sea that resulted in large amounts of environmental
damage the company was taken to court by the local authority who were looking to recover the costs of the
clean-up operation. The company has been informed by their lawyers that it was probable that they would
be liable for the costs of the clean-up operation. The lawyers estimated that following financial settlements
and their likelihood:
Settlement amount ($m) Likelihood of settlement

25 20%
40 45%
65 35%
For a single obligation that is being measured, i.e. the payment to clean-up the environmental damage, the
best estimate of the liability is the individual most likely outcome.
The most likely outcome is the settlement for $40 million and so this is the amount that would be provided
for within the financial statements.
Illustration – Best estimate (large population)

A company sells second hand cars with a six-month warranty that promises to repair the cars if any faults
occur following the sale. The company has estimated that 80% of the cars sold in the last six-months will
require no repairs, however 15% will require minor repairs and the remaining 5% will require major repairs.
The company has estimated that if all the cars were to have minor repairs then this would cost $100,000 and
if all the cars were to have major repairs then this would cost $500,000.
For a large population of items, the best estimate of the provision is based on an expected value of the
possible outcomes. The expected value of the repair costs is $40,000 [(80% x $nil) + (15% x $100,000) + (5%
x $500,000)] and so this is the amount that would be provided for within the financial statements.
Example 1 – Discounting and provisions

HR Co has a year end of 31 December 2018, and it was notified that on the 1 July 2018 a former employee
brought about a legal claim for unfair dismissal. HR Co’s legal team have said that it is probable that that HR
Co would lose the case, resulting in a payment of $495,000 on 30 June 2019.
HR Co has a cost of capital of 10% per annum. A one year discount factor at 10% is 0.9091.
Calculate the amounts to be recognised in the financial statements of HR Co for the year ended 31
December 2018
Illustration – PPE and provisions

An item of PPE was acquired at a cost of $100m on 1 January 20X1, with a useful life of ten years. As part of
local legislation, the PPE must be decommissioned the equipment at the end of the ten-year useful life. The
current estimate decommissioning the PPE in ten years' time is $10m.
A cost of capital of 10% per annum is to be used to discount the $10m to present value. The present value of
$1 receivable in ten years' time at a discount rate of 10% per annum is $0.386.
The accounting treatment of both the PPE and the provision at the end of the reporting period, 31
December 20X1, is as follows:
PPE
Initial cost = $110m ($100m + $10m)
Depreciation = $11m per annum ($110/10 years), to be recognised through profit or loss (SPL)
Carrying value = $99m ($110m - $11m), to be recognised on the statement of financial position (SFP)
Provision
Initial recognition (1 Jan 20X1) at present value = $3.86m (£10m x 0.386)
Finance cost = $0.386 ($3.86m x 10%), to be recognised through profit or loss (SPL)
Provision at the reporting date (31 December 20X1) = $4.246m ($3.86m + $0.386m), to be recognised on the
statement of financial position
2. Subsequent treatment
๏ Review the provision annually
๏ Only use the provision for expense originally created
Illustration – Settlement of provision

A provision of $10 million was correctly provided for in the financial statements in the prior year based upon
the information held at the reporting date. At the end of the current year the provision was settled for $12
million in cash.
The payment of the $12 million cash would reduce the provision down to zero and create an additional
expense of $2 million in profit or loss (administrative expenses), being the difference between the amount
provided for of $10 million and the amount settled of $12m.
Contingent liability
Possible obligation Present obligation
๏ Possible transfer, or
๏ Cannot measure reliably (rare)
Example 2 – Provisions and contingencies (1)

The following items have to be considered when finalising the financial statements of G-Star Co, a limited
liability company:
The company gives warranties on its products. The company’s statistics show that about 5% of sales give rise
to a warranty claim.
The company has guaranteed the overdraft of another company. The likelihood of a liability arising under
the guarantee is assessed as possible.
What is the correct action to be taken in the financial statement for these items?
Item 1 Item 2
A Create a provision Disclose by note only
B Disclose by note only No action
C Create a provision Create a provision
D Disclose by note only Disclose by note only
Example 3 – Provisions and contingencies (2)

Justina supplies fish to a local restaurant. In August 2009 she supplied the restaurant with some shell-fish,
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, 2009?
3. Specifics
Future operating losses
No provision can be made for anticipated losses as there is no obligation.
Onerous contracts
An onerous contract is whereby the cost of fulfilling the contract exceed the benefits received from the
contract (e.g. non-cancellable operating lease).
A provision is recognised at the lower of:

๏ Present value of continuing under the contract, and
๏ Present value of exiting the contract
Example 4 – Onerous contract

Daiva has a contract to buy 900 metres of cloth each month for $7 per metre. From each 3 metres of cloth
she can make a dress which she can sell for $30. She also incurs labour costs of $4 per dress. Alternatively she
can sell the cloth immediately for $6.25 per metre.
If she decides to cancel the cloth purchase contract without notice she must pay a cancellation penalty of
$700, for each of the next two months.
In December 2009 the market price of dresses fell to $22.
She is considering ceasing production since she believes that the market will not improve.
There is 2 months notice stated in the contract in case of breach of a contract.
(a) Is there a present obligation?
(b) What will appear in respect of the contract in Daiva’s financial statements for the year ending
31 December, 2009.
Restructuring
๏ Sale or closure of a line of business
๏ Ceasing activities in a geographical location
๏ Relocating activities
๏ Re-organisation (management or focus of operations)
A provision is recognised if there is a detailed formal plan and the plan has been announced.
The provision only includes costs which are necessarily to be incurred and not associated with continuing
activities.
Example 5 – Restructuring
On 18 August 2017 the directors of Paulius decided to close the Kaunas Factory.
(a) Assuming that no steps were taken to implement the decision and the decision was not
communicated to any of those affected by the Statement of Financial Position date of 31
August, 2017 what is the appropriate accounting treatment?
(b) What would be the appropriate accounting treatment for the closure if a detailed plan had been
agreed by the board on 26 August 2017, and letters sent to notify suppliers? The workforce in
Kaunas has been sent redundancy notices.
Contingent asset
Remote/Possible Probable Virtually certain
Ignore Disclose Recognise an asset
Illustration – Contingent asset

A business has a reporting date of 31 December and inventory worth $100,000 was stolen just prior to the
reporting date. The business has made a claim on its insurance and has heard from the insurers who have
said that it is probable that the full amount will be reimbursed, but no further confirmation of when any
payment will be made has been received.
The business will disclose a contingent asset within the notes to the accounts as it is probable that the
$100,000 will be received, however an asset cannot be recognised as it is not yet virtually certain as the final
confirmation has not been received of when the payment will be received.
Chapter 14
EVENTS AFTER THE REPORTING DATE
(IAS 10)
IAS 10
Adjusting Non-adjusting
Information relating to a condition that existed at Doesn’t reflect conditions that existed at the
the reporting date reporting date
๏ Fall in value of investments
๏ Settlement of outstanding court case
๏ Major purchase of assets
๏ Bankruptcy of a customer
๏ Announcing a discontinued operation
๏ Sale of inventory at below cost
๏ Announcing a restructuring
๏ Determination of purchase/sale price of PPE
Example 1 – Events after the reporting period

Which of the following material events after the reporting date and before the financial statements
are approved are adjusting events?
1. A valuation of property providing evidence of impairment in value at the reporting date.

2. Sale of inventory held at the reporting date for less than cost.
3. Discovery of fraud or error affecting the financial statements.
4. The insolvency of a customer with a debt owing at the reporting date which is still outstanding.
A 1, 2 and 4 only
B 1, 2, 3 and 4
C 1 and 4 only
D 2 and 3 only
Example 2– Events after the reporting period

The following events took place between the 31 December 2017 reporting date and the date the financial
statements were authorised for issue.
• The company makes an issue of 100,000 shares which raises $200,000 shortly after the Statement of
Financial Position date.
• A legal action had been brought against the company for breach of contract prior to the year end. The
outcome was decided shortly after the Statement of Financial Position date, and as a result the company
will have to pay costs and damages totalling $80,000. No provision has currently been made for this
event.
• Inventory included in the accounts at the year end at cost $25,000 was subsequently sold for $15,000.
• A building in use at the Statement of Financial Position date and valued at $500,000 was completely
destroyed by fire. Unfortunately, only half of the value was covered by insurance
Which of the above events are adjusting events in the financial statements.
Chapter 15
INCOME TAXES (IAS 12)
1. Current tax
Current tax is the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for
a period.
2. Recognition
Current tax should be recognised based on the year-end estimate of the tax payable. The income tax
expense though profit or loss is adjusted for any under/over provision from the prior year.
Example 1 – Current tax

The following trail balance (extract) relates to Clarion as at 31 March 2015:
$’000 $’000
Current tax 400
The following notes are also relevant:

A provision for current tax for the year ended 31 March 2015 of $3.5 million is required.
The balance on current tax in the trial balance represents the under/over provision of the tax liability for the
year ended 31 March 2014.
Prepare extracts from the statement of profit or loss for Clarion for the year ended 31 March 2015 and
from the statement of financial position as at the same date with regards tax.
3. Deferred tax
Deferred tax arises because;
Accounting profit (PFY) ≠ Taxable profit (PCTCT)
The reasons for this can be split into two categories:

๏ Permanent differences
Items that would have been used in calculating accounting profit but would NOT be used in
calculating taxable profit e.g. some entertaining expenses
๏ Temporary differences
Items that would have been used in calculating accounting profit and taxable profit but in
different accounting periods e.g. depreciation/tax allowances.
IAS 12 considers only temporary differences and it arises on temporary differences between the
carrying value of an asset or liability and its tax base.
Example 2 – Tracy (ignoring deferred tax)

Tracy purchased an item of property, plant and equipment on 1 January 20X5 for $5 million. It was
estimated that it had a useful economic life of 5 years but according to the tax authority had a 50% tax
allowance in its first year and 20% reducing balance there after.
Tracy made an accounting profit of $2m for the year, which is expected to continue unchanged for the next
two years.
Income tax rate 20%
Ignoring deferred tax calculate the profits after tax for Tracy for each of the three years ending 31
December 20X5 to 20X7.
4. Calculating deferred tax

1. Calculate the the temporary difference, as being the difference between the carrying vale of the
asset or liability and its tax base.
$’000s
Carrying value X
Tax base X
Temporary difference X
2. Calculate the deferred tax position by multiplying the temporary difference by the income tax
rate at which the asset or liability will be settled at.
X% x temporary difference = closing deferred tax provision
3. The closing deferred tax position is either a deferred tax asset or a liability.
A deferred tax liability arises if:
Carrying value > Tax base – taxable temporary difference
A deferred tax asset arises if:
Carrying value < Tax base – tax deductible temporary difference
4. The movement in the deferred tax position goes through profit or loss.
$’000s
Closing position X
Opening position X
Movement X/(X)
Increase in deferred tax Decrease in deferred tax

Dr Income tax expense (SPL) Dr Deferred tax
Cr Deferred tax provision Cr Income tax expense (SPL)
Example 3 – Tracy (incl. deferred tax)

Tracy purchased an item of property, plant and equipment on 1 January 20X5 for $5 million. It was
estimated that it had a useful economic life of 5 years but according to the tax authority had a 50% tax
allowance in its first year and 20% reducing balance there after.
Tracy made an accounting profit of $2m for the year, which is expected to continue unchanged for the next
two years.
Income tax rate 20%
Calculate the profits after tax for Tracy for each of the three years ending 31 December 20X5 to 20X7.
20X5 20X6 20X7

$’000s $’000s $’000s
Carrying value
Tax base
Temporary difference
Closing deferred tax

Opening deferred tax
Movement
Statement of profit or loss (extracts)
20X5 20X6 20X7

$’000s $’000s $’000s
Profit before tax
Income tax expense
Current tax
Deferred tax movement
Profit for the year
Statements of financial position (extracts)
20X5 20X6 20X7

$’000s $’000s $’000s
Deferred tax
Current liabilities
Tax payable
Example 4 – Accelerated capital allowances

Osborne buys an asset for $150,000 at the start of the financial year.
The asset has an estimated life of 6 years and an estimated residual value of $30,000.
Capital allowances are available at a rate of 25% reducing balance and the tax rate is 20%.
Calculate the deferred tax asset/liability to appear in the statement of financial position for the next
three years and the debit/credit charged to the tax expense in the statement of profit or loss for the
same period.
Example 5 – Revaluations
Clarke bought a property for $500,000 on 1 January 2013.
On 31 December 2015 the property had a carrying value of $470,000 and was revalued to $800,000.
The tax written down value at 31 December 2015 was $420,000 and the tax rate is 20%.
Explain how the revaluation, including any deferred tax impact, should be dealt with in Clarke’s
financial statements for the year-ended 31 December 2015.
Example 6 – Deferred tax and revaluations

Darling’s PPE consists of land purchased several years ago that originally cost of $250,000. The land has
been revalued during the year to $300,000. The tax rate is 20%.
Calculate the revaluation surplus to appear within the statement of financial position at the reporting
date.
Losses
If an entity has unused tax losses to carry forward, a deferred tax asset should be recognised to the extent
that it is possible that future taxable profits will be available against which the losses will be offset.
Chapter 16
REVENUE FROM CONTRACTS WITH
CUSTOMERS (IFRS 15)
IFRS 15 has replaced the previous IFRS on revenue recognition, IAS 18 Revenue and IAS 11 Construction
Contracts. It uses a principles-based 5-step approach to apply to contact with customers.
The five steps are as follows:
1. Identification of contracts
2. Identification of performance obligations (goods, services or a bundle of goods and services)
3. Determination of transaction price
4. Allocation of the price to performance obligations
5. Recognition of revenue when/as performance obligations are satisfied
1. Identification of contracts
The contract does not have to be a written one, it can be verbal or implied. In order for IFRS 15 to apply the
following must all be met:
๏ The contract is approved by all parties
๏ The rights and payment terms can be identified
๏ The contract has commercial substance
๏ It is probable that revenue will be collected
2. Identification of performance obligations

If the goods or services that have agreed to be exchanged under the contract are distinct (i.e. could be sold
alone) then they should be accounted for separately.
If a series of goods or services are substantially the same they are treated as a single performance obligation.
Illustration – Performance obligations

LiverTech is a computer business that primarily sells computer hardware. As well as selling computers, it
also supplies and installs the software to its customers and provides a technical support package over a
number of years. The business commonly sells the supply and installation, and technical support in a
combined goods and services contract.
The combined goods and services contract has two separate performance obligations, which would need to
be separated out and recognised separately.
The installation of software would be recognised once complete and the provision of technical services over
the period of the support service.
3. Determination of transaction price

The amount the selling party expects to receive is the transaction price. This should consider the following:
๏ Significant financing components
๏ Variable consideration
๏ Refunds and rebates (paid to the customer!)
Example 1 – Transaction price

Luckers Co. sells a car to a customer for $10,000, offering interest-free credit for a three-year period. The car
is delivered to the customer immediately. The annual market rate of interest on the provision of consumer
credit to similar customers is 5%.
What is the transaction price?
4. Allocation of the price

The price is allocated proportionately to the separate performance obligations based upon the stand-alone
selling price.
Example 2 – Allocation of price

Richer Co. sells home entertainment systems including a two-year repair and maintenance package for
$10,000. The price of a home entertainment system without the repair and maintenance contract is $9,000
and the price to renew a two-year maintenance package is $2,000.
How is the $10,000 contract price allocated to the separate performance obligations?
Note: Ignore any discounting and time value of money.
5. Recognition of revenue
Once control of goods or services transfers to the customer, the performance obligation is satisfied and
revenue is recognised. This may occur at a single point in time, or over a period of time.
If a performance obligation is satisfied at a single point in time, we should consider the following in
assessing the transfer of control:
๏ Present right to payment for the asset
๏ Transferred legal title to the asset
๏ Transferred physical possession of the asset
๏ Transferred the risks and rewards of ownership to the customer
๏ Customer has accepted the asset.
Example 3 – IFRS 15 (1)

Telephonica sells mobile phones, selling them for “free” when a customer signs up for a 12 month contract.
The contract costs the customer $45 per month.
Explain how the revenue should be recognised in Telephonica’s financial statements
Note: Vodaphone sells mobile phones without a monthly contract, selling the handset for $480. Call and
data charges are $20 per month. Ignore discounting and the time value of money
Example 4 – IFRS 15 (2)

LiverTech is a computer business that primarily sells computer hardware. As well as selling computers, it
also supplies and installs the software to its customers and provides a technical support package over two
years. The business commonly sells the supply and installation, and technical support in a combined goods
and services contract.
The combined goods and services contract sells for $1,600, but if sold separately the supply and installation
is sold for $1,500 and the technical support for $500.
If LiverTech sold a combined contract on 1 July 20X7, demonstrate how the transaction would be
presented in the financial statements for the year ended 31 December 20X7.
If a performance obligation is transferred over time, the completion of the performance obligation is
measured using either of the following methods:
๏ Output method – revenue is recognised based upon the value to the customer, i.e. work certified.
Work certified to date

Output method =
Total contract revenue
๏ Input method – revenue is recognised based upon the amounts the entity has used, i.e. costs incurred
or labour hours.
Costs to date
Input method (cost based) =
Total estimated costs
Any costs incurred to fulfil the contract with a customer should be expensed to the statement of profit or
loss as they are incurred.
Example 5 – Performance obligations over time and the statement of profit or loss (1)
Alex commenced a three-year building contract during the year-ended 31 December X4 at a contract price
of $50million. At the 31 December X4, the costs incurred to date are $15million and the contract is
estimated to be 40% complete.
Calculate the revenue and costs to be recognised in the statement of profit or loss for the year-ended
31 December 20X4.
Example 6 – Performance obligations over time and the statement of profit or loss (2)
of $50million. At the 31 December X4, the costs incurred to date are $15million and the contract is
estimated to be 40% complete. At 31 December the costs incurred to date are $28million and the contract is
estimated to be 70% complete.
Calculate the revenue and costs to be recognised in the statement of profit or loss for the year-ended
31 December 20X5.
As contracts that span more than one accounting period progress, the company is creating an asset for the
customer that needs to be recognised in the statement of financial position. The amount to be recognised is
as follows:
$
Revenue recognised to date X
Less: amounts invoiced to date (X)
Contract asset/(liability) X
Illustration – Contract asset

Ellie enters into a four-year building contract on1 March 20X1, with a contract price of $10m
At 31 December 20X3, the contract is 60% complete, and the following amounts have been recorded:
• Amounts invoiced to the customers at $2.1m
• Amounts received from the customer at $1.1m
The contract asset to be recognised in the statement of financial position as at 31 December 20X3 is $3.9 m
Contract asset = $3.9 m = 60% x $10m (total revenue) less $2.1m (amounts invoiced to the customer
The profit recognised is not relevant to the contract asset, nor is the amounts received.
Example 7 – Performance obligations over time and the statement of financial

position
of $50million. At the 31 December X4, the costs incurred to date are $15million and the contract is estimated
to be 40% complete. At 31 December the costs incurred to date are $28million and the contract is estimated
to be 70% complete.
Rory has invoiced the customer for work completed to date as follows:
31 December 20X5 $26m
31 December 20X4 $16m
Calculate the contract asset/liability to be recognised in the statement of financial position at 31

December 20X4 and 20X5.
6. Specifics
Principal vs agent - When a third party is involved in providing goods or services to a customer, the seller is
required to determine whether the nature of its promise is a performance obligation to:
๏ Provide the specified goods or services itself (principal) or
๏ Arrange for a third party to provide those goods or services (agent)
Example 8 – Agent vs. principal

Evie is a business manufacturing aircraft component parts, selling two types of components to Ben. Ben acts
as a selling agent and sells component X to the public receiving 10% of commission on the selling price. Ben
also sells component Y directly to its customers making a 25% gross margin on these sales.
The following relates to sales made in the month of December:
Component X Component Y
Revenue ($) 300,000 80,000
How much revenue should Ben recognise for the month of December?
Repurchase agreements - When a vendor sells an asset to a customer and is either required, or has an
option, to repurchase the asset. The legal form here is always a sale followed by a purchase at a later date.
The economic substance is more likely to be a loan secured against an asset that is never actually being sold.
Illustration – Repurchase agreements

Rory runs a wood business where it holds the cut wood for several years whilst it matures, before it can then
be used in the manufacture of high-quality furniture. It has recently sold a large batch of newly cut wood to
a London bank for $100,000, with an option to repurchase the wood in 10-years’ time for $250,000. The
wood’s current fair value is $125,000 and it is expected that it will have a fair value of $400,00 in 10-years’
time.
Although Rory has sold the wood to the London bank, the wood will remain on Rory’s premises for the 10-
year duration and will still have the risks of ownership as Rory will need to cover the cost of insurance and
maintain the wood in top condition.
The accounting treatment is not that of a sale as the following highlight that it is a repurchase agreement:
The initial sale at $100,000 is below the current fair value of $125,000 and the repurchase of the wood in 10-
years’ time for $250,000 is below the expected fair value of $400,000, giving Rory the reward of the wood
increasing in value.
The London bank bears very little risk of the inventory falling in value.
The risks remain with Rory as it bears the costs of insuring and maintaining the wood.
The wood will therefore remain in Rory’s inventory and no sale is recognised. The proceeds received of
$100,000 will be recognised as a loan, within non-current liabilities. Interest will be charged on the loan
using the amortised cost method of accounting, spreading the total interest of $150,000 ($250,000 -
$100,000) over the ten-year period.
Bill and hold arrangements - an entity bills a customer for a product but the entity retains physical
possession of the product until it is transferred to the customer at a point in time in the future
Consignments – arises where a vendor delivers a product to another party, such as a dealer or retailer, for
sale to end customers. The inventory is recognised in the books of the entity that bears the significant risk
and reward of ownership (e.g. risk of damage, obsolescence, lack of demand for vehicles, no opportunity to
return them, the showroom-owner must buy within a specified time if not sold to public).
Exam preparation question – Sale of goods

Extracts from the trial balance of Alex Co at 30 June 20X8 are as follows:
$000 $000
Revenue 65,270
Alex Co made a large sale of goods on 31 December 20X7, which was also the date of delivery. Under the
terms of the agreement, Alex Co will receive payment of $4m on 31 December 20X8. Currently, Alex Co has
recorded $2m in revenue and trade receivables. The directors intend to record the remaining $2m revenue
in the year ended 30 June 20X9. The costs of this sale have been accounted for correctly in the financial
statements for the year ended 30 June 20X8. Alex Co has a cost of capital of 5% at which an appropriate
discount factor would be 0·9524.
Required
Prepare extracts from the statement of profit or loss for Alex Co for the year ended 30 June 20X8
Exam preparation question – Identification of contracts

IFRS 15 Revenue from Contracts with Customers highlights the criteria before an entity should account for a
contract.
Which TWO of the following are NOT required criteria?
A. All parties to the contract have approved the contract

B. The contract must be in writing
C. The contract must have commercial substance
D. It is possible that the consideration will be collected from the customer
Chapter 17
FOREIGN CURRENCY (IAS 21)
1. Functional currency
If an entity has transactions that are denominated in a currency other than its functional currency then the
amount will need to be translated into the functional currency before it is recorded within the general
ledger.
The functional currency is the currency of the primary economic environment in which the entity operates.
This is deemed to be where the entity generates and expends cash.
Management should consider the following factors in determining the functional currency:
๏ The currency that dominates the determination of the sales prices
๏ The currency that most influences operating costs
๏ The currency in which an entity’s finances are denominated is also considered.
2. Recognition and measurement

Record the transaction at the exchange rate in place on the date the transaction occurs (historic rate – HR).
Monetary assets and liabilities are retranslated using the closing rate (CR) at the reporting date, with any
gains or losses going through profit or loss.
Non-monetary assets and liabilities are not retranslated at the reporting date, unless carried at fair value,
whereby translate at the rate when fair value was established.
Note: No specific guidance is given as to where any exchange differences are recorded within profit or loss.
The general accepted practice is:
๏ Trading transaction – operating costs
๏ Financing transaction – financing costs
Example 1 – Functional currency (1)

Jones Inc. has its functional currency as the $USD.
It trades with several suppliers overseas and bought goods costing 400,000 Dinar on 1 December 2017.
Jones paid for the goods on 10 January 2018. Flower’s year-end is 31 December.
The exchange rates were as follows:
1 December 2017 4.1 Dinar : $1USD

31 December 2017 4.3 Dinar : $1USD
10 January 2018 4.4 Dinar : $1USD
Show how the transaction would be recorded in Jones’s financial statements.
Exam preparation question – Foreign currency transaction

Hulme Co sold goods to an overseas customer on 1 November 20X8 for 10m Gromits (Gr). They agreed a 90-
day payment term. No entries have yet been made to record this sale, although the goods were correctly
removed from inventory and expensed in cost of sales. The amount remains unpaid at 31 December 20X8.
Relevant exchange rates are:
1 December 20X8: 2·5 Gr/$
31 December 20X8: 2·4 Gr/$
Required
Prepare a schedule of adjustment that must be made to Hulme’s draft retained earnings of
$3,500,000 as a result of any adjustments related to the foreign currency transaction.
Chapter 18
FAIR VALUE (IFRS 13)
IASB has adopted a fair value method to measure assets and liabilities in its IFRS accounting standards
because the historic cost convention was not consistent with the underlying qualitative characteristic of
relevance.
The issue was the there was no definition of what fair value actually was, until IFRS 13 was created.
Fair value – The price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
IFRS 13 adopts a hierarchical approach to measuring fair value, whilst giving consideration to the principal
market, being the largest market in which an asset/liability is traded. It also considers the highest and best
use of an asset.
Level 1 inputs
Level 1 inputs are quoted prices in active markets (frequency and volume) for identical assets or liabilities
that the entity can access at the measurement date.
A quoted market price in an active market provides the most reliable evidence of fair value and is used
without adjustment to measure fair value whenever available, with limited exceptions.
Level 2 inputs
Level 2 inputs are inputs other than quoted market prices included within Level 1 that are observable for the
asset or liability, either directly or indirectly.
Level 2 inputs include:
quoted prices for similar assets or liabilities in active markets
quoted prices for identical or similar assets or liabilities in markets that are not active
inputs other than quoted prices that are observable for the asset or liability, for example interest rates and
yield curves observable at commonly quoted intervals
Level 3 inputs
Level 3 inputs are unobservable inputs for the asset or liability and covers the scenarios whereby there is
little, if any, market activity.
An entity develops unobservable inputs using the best information available in the circumstances, which
might include the entity's own data, taking into account all information about market participant
assumptions that is reasonably available.
Chapter 19
EARNINGS PER SHARE (IAS 33)
1. Basic Earnings per Share
Profit attributable to ordinary shareholders of the parent
Basic EPS =
Weighted average number of shares
If the number of shares has changed during the period the following assumptions are made regarding the
weighted average number of shares:
Full price issue Normal weighted average calculation

Bonus issues Assume that the bonus shares have always been in issue (and therefore alter the
comparative EPS amount)
Rights issue Assume that the shares issued are a mix of bonus and full price shares. For the
bonus element assume that they have always been in issue and therefore adjust
the comparative
If bonus issues or rights issues occur after the reporting date, but before the date of approval of the accounts
the EPS should be calculated based on the number of shares following the issue.
Example 1 – Basic EPS

Ruth makes up its accounts to 30 June each year. On 1 July 20X5 Ruth has 500 million ordinary shares in
issue.
Profits for the year to 30 June 20X6 were $250m. There were no preference shares in issue.
Calculate the basic earnings per share assuming:
(a) Share capital has not changed during the year
(b) An issue of 50 million new shares at full market price on 1 August 20X5.
(c) A 1 for 4 bonus issue occurring on 1 November 20X5.
(d) A 1 for 5 rights issue on 1 February 20X6 held at $1.25. The price of a share immediately before
the rights issue was $1.40.
Example 2 – Multiple share issues and prior year comparatives

Ernie had earnings of $750,000 for the year-ended 31 March 2019. There were 2,000,000 $1 equity shares in
issue on 1 April 2018, and a new issue of 3,000,000 shares at full market price was carried out on 30
September 2018. A bonus issue of one new share for every two shares held was issued on 1 December 2018.
The EPS figure reported for the year-ended 31 March 2018 was 15.5c.
Calculate the basic EPS for Ernie for the year-ended 31 March 2019, and restate the comparative
figure for 31 March 2018.
2. Diluted earnings per share

This is calculated where potential ordinary shares have been outstanding during the period which would
cause EPS to fall if exercised (dilutive instruments).
The earnings should be adjusted by adding back any costs that will not be incurred once the dilutive
instruments have been exercised. This will include for post-tax interest saved on convertible debt.
The number of shares will be adjusted to take account of the exercise of the dilutive instrument. This means
that adjustment is made:
For convertible instruments By adding the maximum number of shares to be issued in the future
For options By adding the number of effectively “free” shares to be issued when
the options are exercised
Example 3 – Diluted EPS

Flanagan makes up his accounts to 31 December each year and has calculated the basic EPS based on actual
shares of 1,000 million and earnings of $500m, for the year ended 31 Dec 20X5.
Convertible debentures
On 31 December 20X5 Flanagan had in issue $10m of 5% convertible loan stock.
The loan stock is convertible at the following dates with the following terms:
31 Dec 20X6 125 shares for every $100 of loan stock
31 Dec 20X7 120 shares for every $100 of loan stock
The tax rate is 20%
Share options
Flanagan also granted 100m options at the same date. The option price is $2.50 but the average fair value of
a share is $4.00.
Calculate the fully diluted EPS for the year to 31 December 20X5.
ANALYSIS AND INTERPRETATION
Chapter 20
FINANCIAL PERFORMANCE
(PROFITABILITY)
Gross profit margin
Gross profit
Gross margin (%) x 100%
Revenue
An increase in gross profit margin indicates that variable costs, raw materials, labour, power etc are not
rising as quickly as selling prices, whilst a decrease will indicate the opposite.
Changes in the gross profit margin over time should be analysed further to identify the cause: has the
company introduced new products? Is it cutting prices to increase market share? Was it unable to pass on
inflationary price increases?
Operating profit margin
PBIT
Operating profit margin (%) x 100%
Revenue
This will differ from the gross profit margin in that selling, general and administrative expenses and
depreciation are deducted. An analysis of the causes of changes in this percentage might reveal that the
company's other costs are increasing/decreasing at a greater rate than sales.
Return on capital employed
PBIT
Return on capital employed (%) x 100%
Net debt + equity
This measures the level of returns a business has made using the capital it has within it. It allows for
comparison of overall performance year on year as well as allowing comparison to an entity in a similar
industry of different size.
Net asset turnover
Revenue
Asset turnover (# times)
Capital employed*
* Capital employed = shareholders’ funds + interest bearing debt.
Non-current asset turnover
Revenue
Non-current assets
This is the overall measure of the efficiency of a company in generating sales from its investment in non-
current assets. The minimum investment in assets to generate the maximum revenue is an indication of
efficiency. However, it may in fact deteriorate in the short term if a company is replacing heavily depreciated
assets with new equipment.
Some factors to consider:
๏ Timing of Sales
๏ Asset efficiency vs profitability
๏ Asset valuation policies
Example 1 – ROCE
The following extracts are from Hassan’s financial statements:
$
Profit before interest and tax 10,200
Interest (1,600)
Tax (3,300)
Profit after tax 5,300
Share capital 20,000

Reserves 15,600
35,600
Loan liability 6,900
42,500
What is Hassan’s return on capital employed?

A 15%
B 29%
C 24%
D 12%
Example 2 – Financial performance (1)

Archer Co is a retailer and trades through its stores on the high street, selling high quality goods. The
company has recently been suffering from rising costs, that it has been unable to pass on to its customers.
In response to the number of people shopping via the Internet, Archer Co has implemented a cost cutting
strategy in the prior year, and in the current year asked shareholders for funds to help reduce it debt burden.
The following financial information for the current year is available:
Statement of profit and loss for the year ended 31 March 2019
2019 2018
$’000s $’000s
Revenue 42,000 45,000
Cost of sales (19,000) (17,000)
Gross profit 23,000 28,000
Operating expenses (10,000) (17,000)
Operating profit 13,000 11,000
Finance costs (700) (1,000)
Profit before tax 12,600 10,000
Income tax expense (3,150) (2,500)
Profit for the year 9,450 7,500
(a) Calculate the following ratios for the years ending 31 May 2019 and 31 May 2018:
Gross margin
Operating margin
(b) Using the information provided and the ratios calculated above, comment on the comparative
performance for the two years ended 31 May 2019 and 2018.
Example 3 – Financial performance (2)

A Co and B Co both operate in the retail sector selling children’s clothes.
Extracts from the draft financial statements for the companies for the year ended 31 December 20X0 are as
follows:
A Co B Co
$000 $000
Revenue 180,000 150,000
Cost of sales (136,000) (105,000)
Profit from operations 24,000 27,000
Finance costs (4,000) (2,000)
The following information is also relevant:

1. A Co manufactures and retails premium branded children’s clothes, which it sells online and in its own
international chain of branded stores.
2. B Co sells mid-market children’s clothes in department stores. It sources its goods directly from the
manufacturer and does not make international sales. B Co is looking to expand its operations to
include the international market in the future.
3. Following an impairment review A Co suffered an impairment in the year of $10 million. The
impairment expense is included within operating expenses.
(a) Using the financial statement extracts provided, calculate the following ratios for both A Co and
B Co:
(i) Gross profit margin
(ii) Operating profit margin
(iii) Interest cover
(b) Comment on the performance of both companies for the year ended 31 December 20X0.
Chapter 21
FINANCIAL POSITION
1. Liquidity
The ability of a company to pay its obligations as and when they fall due (its liquidity) is a major concern of
any credit analysis. Short term liquidity can be assessed by comparing current assets with current liabilities
in a variety of forms:
Working Capital = Current Assets - Current Liabilities.
A working capital surplus represents a cushion of protection for current creditors; it indicates the amount by
which the value of current assets could decrease still leaving enough to repay current liabilities from the sale
of current assets.
The optimum amount of working capital varies considerably from company to company and from industry
to industry, thus the nature of the company's business and the quality of its assets must be considered.
Companies functioning within industry sectors with short production/sales cycles (e.g. supermarkets) can
generally function satisfactorily with a much smaller amount of working capital than those with a long
production cycle (e.g. heavy engineering).
2. Current ratio
Current assets
Current liabilities
A current ratio of over one indicates that a company has a higher level of current assets than current
liabilities and should, therefore, be in a position to meet its short term obligations as and when they fall due.
However, some companies function adequately on current ratios of less than one whilst others need a much
higher ratio. Generally the more liquid the current assets are the higher this ratio will be.
Trends are difficult to analyse but generally higher ratios indicate greater liquidity. However, an increase
may reflect a high level of unsaleable stock or overdue receivables whereas a decrease may result from
greater efficiency.
Some factors to consider:
๏ Asset quality
๏ Seasonality
3. Quick ratio (acid test)

Current assets - inventory
Current liabilities
This quick ratio shows how easily a company can meet its current obligations using funds raised from quick
assets (those assets which can be converted quickly into cash).
A comparison of the quick ratio and current ratios which shows increases in both, but with the current ratio
increasing more, would indicate that the company has been building up stock.
4. Working capital
Inventory days
Inventory
x 365
Cost of sales
Shows how long a business is holding its inventory. A higher number of days inventory might indicate
holdings of obsolete or unsaleable inventory, but it might also signify a purchase of raw materials now in
anticipation of an increase in price later.
Trade receivables collection period
Trade receivables
x 365
Revenue
Providing revenue is evenly spread throughout the year the ratio will indicate how effectively debts are
being collected.
An increase in the ratio of receivables to revenue could, providing the proportion of cash sales has not
increased, indicate one of the following:-
Receivables are being given or are taking longer to pay. What are the terms of trade?
The total receivables figure includes long outstanding debts. Should provisions be made?
Trade payables payment period
Trade payables
x 365
Cost of sales
If purchases are spread evenly throughout the year, this ratio will show the length of credit the company is
taking. An increase in the ratio may indicate that more reliance is being placed upon the payables to finance
the business. A drop in days may indicate that a company is taking cash discounts or may indicate suppliers
are cutting credit terms because of the company's decreased creditworthiness.
5. Solvency/gearing/risk
Gearing ratio
Net debt
Equity
An increase in the gearing ratio indicates that either borrowings are increasing faster than equity, or equity
is falling more quickly than borrowings. In extreme cases, borrowings may be increasing while equity falls.
In the first case, this may be simply because the profit potential of any increased borrowing has not yet been
realised, or that the increase in profitability arising from the use or the increase in borrowings is not being
retained within the business.
Interest cover
PBIT
Interest payable
Indicates the number of times profits exceed interest expense. This may indicate severe financial difficulties
or that borrowings are too high for the company to support. Is the current year's profitability exceptional?
It is important to note that this is a ratio based on profitability not cashflow which would be a better
indicator of company’s ability to pay interest.
Example 1 – Working capital

Xena has the following working capital ratios:
20X9 20X8
Current ratio 1.2:1 1.5:1
Receivables days 75 days 50 days
Payables days 30 days 45 days
Inventory turnover 42 days 35 days
Which of the following statements is correct?
A Xena’s liquidity and working capital has improved in 20X9

B Xena is receiving cash from customers more quickly in 20X9 than in 20X8
C Xena is suffering from a worsening liquidity position in 20X9
D Xena is taking longer to pay suppliers in 20X9 than in 20X8
Example 2 – Financial performance and working capital

SAF has experienced a period of rapid expansion in the last 6 months following the launch of a new product
on 1 July 20X2. The following information is available from the management accounts of SAF:
6 months to 6 months to
31 December 30 June 20X2
20X2
$000 $000
Inventories at period end 1,220 460
Receivables at period end 1,715 790
Cash and cash equivalents at period end - 150
Trade payables at period end 1,190 580
Short-term borrowing at period end 250 -
Revenue for the period 3,100 2,000
Cost of sales for the period 2,420 1,450
Analyse the financial performance and working capital position of SAF, including the calculation of
five relevant ratios.
Chapter 22
INVESTOR ANALYSIS
Dividend Cover
Profit for the year
(# times)
Dividends
Dividend Yield
Dividends x 100%
(%)
Share price
Price/earnings ratio
Price per share
Earnings per share
Note: EPS can also be calculated but that is dealt with in a previous chapter because it is a ratio with its own
accounting standard.
Example 1 – Investor ratios

Morgan Co is a listed company and has 50c equity share capital of $20m in issue.
The company paid a dividend per share of 10.5c in its most recent financial year and the share price at the
reporting date was $1.20. The additional financial information is also available to investors:
Statement of profit and loss

2019
$’000s
Income tax expense (4,600)
Calculate each of the following investor ratios for Morgan Co:

Dividend cover
Dividend yield
P/E ratio
EPS
GROUP ACCOUNTS
Basic principles
Single entity concept Control and ownership

๏ P Ltd and S Ltd – separate legal entities ๏ Control (power to direct activities) –
100%P + 100%S
๏ P Group Ltd – one single entity, prepare
accounts using substance ๏ NCI - Ownership
A parent is an entity that has one or more subsidiaries.

A subsidiary is an entity which is controlled by another entity (known as the parent).
The key concept in determining whether or not an investment constitutes a subsidiary is that of control.
Control is the power to govern the financial and operating policies of an entity so as to obtain benefit from
its activities.
Control is usually achieved by the purchase of more than 50% of a company’s equity share capital.
IFRS 10 Consolidated Financial Statements defines control and tells us how to consolidate.
A parent/subsidiary relationship can exist even where the parent owns less than 50% of the voting power of
the subsidiary since the key to the relationship is control and the power to direct the activities. Other
situations where control exists are when the investor:
๏ Can exercise the majority of the voting rights in the investee
๏ Is in a contractual arrangement with others giving control
๏ Holds < 50% of the voting rights, but the remainder are widely distributed
๏ Holds potential voting rights which will give control
Chapter 23
CONSOLIDATED STATEMENT OF
FINANCIAL POSITION
1. Subsidiary
A subsidiary is an entity that is controlled by another entity (parent).
An entity has control over an entity when it has the power to direct the activities, which is assumed to be
when the entity has > 50% of the voting rights.
The parent company must prepare consolidated financial statement if it has control over one or more
subsidiaries.
The underlying principles of consolidation are:
๏ Substance over legal form
๏ Control and ownership
2. Basic consolidation
2.1. Basic steps
100% P + 100% S assets and liabilities, ignoring the investments in subsidiary
100% P share capital and share premium only (reporting to parent’s shareholders)
Retained earnings (balancing figure)
Example 1 – Basic consolidation

Peter acquired 100% of the equity share capital of Steven on 31 December 20X4 for $1,000,000.
The financial statements of the two companies at that date were as follows:
Peter Steven
$000 $000
Investment in Steven Co 1,000 -
Other assets 1,500 1,200
Equity share capital 1,000 250

Retained earnings 1,100 750
2,100 1,000
Liabilities 400 200
Prepare the consolidated statement of financial position for the Peter Group at 31 December 20X4.
Example 2 – Basic consolidation (continued)

Following Peter’s acquisition of the 100% of Steven’s equity share capital of Steven on 31 December 20X4,
both companies continued to trade. The financial statements of the two companies at the end of the
following year 31 December 20X5 were as follows:
Peter Steven
$000 $000
Investment in Steven Co 1,000 -

2,400 1,150
Liabilities 500 300
Prepare the consolidated statement of financial position for the Peter Group at 31 December 20X5.
3. Non-controlling interest
Control is exerted through a shareholding of greater than 50%, so therefore it is not always necessary to fully
own a subsidiary.
Shareholdings of 75% will still give the parent the power to direct the activities of the subsidiary and
therefore it must prepare consolidated financial statements.
As the parent’s 75% holding still maintains control, the assets and liabilities of the subsidiary are
consolidated 100% on a line-by-line basis.
It is necessary to account for 25% ownership interest in the subsidiary which is referred to as the non-
controlling interest. It is shown in the equity section of the consolidated statement of financial position.
The non-controlling interest is measured using either of the following methods:
๏ Proportionate share of net assets
๏ Fair value
Example 3 – Non-controlling interest

Pierre acquired 80% of Stefan’s equity share capital on 31 December 20X4 when Stefan’s retained earnings
were $750,000.
The financial statements of the two companies at the end 31 December 20X5 were as follows:
Pierre Stefan
$000 $000
Investment in Stefan Co 800 -

2,200 1,150
Liabilities 500 300
Prepare the consolidated statement of financial position for the Pierre Group at 31 December 20X5
assuming the non-controlling interest is measured using the proportionate share of net assets
method
4. Goodwill
On acquisition of a subsidiary, the parent will usually pay more for the subsidiary than the value of the net
assets (assets less liabilities). Why?
๏ Customer loyalty
๏ Good reputation
The difference between what the parent pays and what the net assets are truly worth is referred to as
goodwill.
Example 4 – Goodwill
A parent company buys 75% of the equity shares in a subsidiary company for $156,000.
The remaining shares were valued at $52,000 and the net assets at acquisition were $170,000.
Calculate the goodwill arising on acquisition assuming that:
• Non-controlling interest is measured using the proportionate share of net assets method
• Non-controlling interest is measured using the fair value method.
Example 5 – Basic consolidation (revision)

On 1 January 20X3 Gasta Co acquired 75% of the share capital of Erica Co for $1,380,000. The retained
earnings of Erica Co at that date were $480,000. Erica Co's share capital has remained unchanged since the
acquisition.
The following draft statements of financial position for the two companies have been prepared at 31
December 20X9.
Gasta Co Erica Co
$000 $000
Investment in Erica Co 1,380 0
Equity share capital 2,000 1,000

4,040 1,660
Liabilities 1,840 740
The non-controlling interest (NCI) was valued at $450,000 as at 1 January 20X3.

Required:
(a) Calculate the goodwill arising on acquisition of Erica
(b) Calculate the non-controlling interest at 31 December 20X9
(c) Calculate the following figures which will be reported in Gasta’s consolidated statement of
financial position as at 31 December 20X9.
(i) Investment
(ii) Other assets
(iii) Share capital
(iv) Retained earnings
(v) Liabilities
5. Other components of equity

Each other component of equity (e.g. created by the upwards revaluation of PPE) has a separate calculation
still based on ownership, so the calculation follows the same principles for that as the group retained
earnings.
Group other components of equity
100% P X
Add: P’s % of S’s post acqn movement X
X
6. Workings
W1) Group Structure
20-50%
>50%
W2) Net assets of subsidiary
At reporting At Post
date acquisition acquisition
Equity shares X X
SP X X
Ret. earnings X X
X X X
W3) Goodwill
FV of consideration (shares/cash) X
NCI at acquisition X
X
FV of net assets at acquisition (W2) (X)
Goodwill at acquisition X
W4) Non-controlling interests
NCI @ acquisition (W3) X

Add: NCI% x S’s post-acqn profits (W2) X
X
W5) Group retained earnings
100% P X
Add: P’s % of S’s post acqn retained earnings (P’s% x (W2)) X
X
Example 6 – Workings
Matthews purchased 80% of Jones for $600,000 two years ago when Jones’s retained earnings
showed a balance of $100,000.
Matthews Jones
$000 $000
Non-current assets 1,000 500
Investment in Jones 600 -
Current assets 800 600
Equity share capital ($1) 500 200

Retained earnings 800 400
1,300 600
Liabilities 1,100 500
Matthews measures the non-controlling interest using the fair value method.
The fair value of Jones’s equity shares acquired was $200,000 at acquisition
Prepare the consolidated statement of financial position for the Matthews group for the
year-ended 31 December 20X5.
7. Adjustments – group and subsidiary

7.1. Intra-company balances
๏ Remove the payable
๏ Remove the receivable
7.2. Cash in transit

Step 1 Deal with cash in transit first (adjust receiver’s books to assume they have recorded the cash)
Step 2 Remove the intra-company trade receivable and payable
Illustration – Cash in transit

P has an intra-company trade receivable of $1,500 at the year-end due form S. This does not agree with the
corresponding $1,000 trade payable in S due to a cheque of $500 sent by S immediately prior to the year-
end, which P did not receive until after the start of the new accounting year.
To account for the cash in transit and intra-company balances we need to:
1) Record the cash in transit in the group accounts
DR Bank $500
CR Receivables $500
2) Eliminate the equal intra-company balances
DR Payables $1,000
CR Receivables $1,000
7.3. Inventory in transit

Dr Inventory (SFP) X
Cr Payables (SFP) X
7.4. Unrealised profits

Inventory PUP - Need to remove the intra-group profit included in inventory held @ year-end (cost
structures)
Cr Inventory (SFP) X
Dr Retained earnings (of seller) X
If S is seller → Adjust (W2)

If P is seller → Adjust (W5)
Illustration – Unrealised profits

P sells $100 goods to S at $125 and S has not sold the goods on by the end of the year.
Example 7 – Unrealised profits

Statements of financial position as at 31 December 20X5
James Molly
$’000 $’000
Non-current assets
PPE 900 500
Investment in Molly 800 -
Current Assets 700 600
2,400 1,100
Share Capital 500 200

Retained earnings 800 400
Current liabilities 1,100 500
2,400 1,100
James bought 80% of the equity shares in Molly for $800,000 when the retained earnings were $150,000.
Non-controlling interest is measured using the fair value method.
The fair value of the non-controlling interest was $200,000 at the acquisition date.
During the year Molly sold goods to James at $120,000 based on a mark-up of 20%. Half of the goods
remain in inventory at the year-end.
Prepare the James Group consolidated statement of financial position as at 31 December 20X5.
Non-current asset PUP - Need to remove the intra group profit on intra -company transfers of non-current assets
Cr PPE (CSFP) X
Dr Retained earnings (of seller) X
If S is seller → Adjust (W2)

If P is seller → Adjust (W5)
Illustration – Non-current assets PUPs

A parent company sold an item of PPE for $250,000 to its subsidiary on the last day of the reporting period,
when its carrying value was $200,000.
The intra-group profit of $50,000 needs to be removed so that the PPE is held at the carrying value to the
group of £200,000. An adjustment would be required as follows:
DR Retained earnings (parent – (W5)) $50,000
CR PPE (CSFP) $50,000
Fair value adjustments (IFRS 3)

Bring in FV of identifiable assets and liabilities on a line by line basis into the group SFP (PPE, inventory,
contingent liabilities)
Adjust S’s net assets (W2) @ SFP date and @ acquisition column.
Adjust S’s net assets (W2) @ acqn column (extra depn, sale of inventory)
Illustration – Fair value adjustment (PPE)

A parent company acquires a subsidiary at the start of the reporting period, where the fair value of the PPE is
$50,000 higher than its book value and the remaining life of the PPE is 10 years.
The fair value adjustment is recorded within the workings at the end of the first year as follows:
(W2) Net assets of the subsidiary
Equity shares X X
Ret. earnings X X
FV (PPE) 50 50
Extra depn. (5)
X X X
And the fair value is also reflected on the face of the statement of financial position as follows:
Non-current assets
$000s
Property, plant and equipment (100% P + 100% S + 50 – 5) X
Illustration – Fair value adjustment (contingent liability)

A parent company acquires a subsidiary at the start of the reporting period, and there is a contingent
liability of $100,000 disclosed in the notes to the subsidiary’s accounts.
The contingent liability is recorded at fair value within the workings at the end of the first year as follows:
(W2) Net assets of the subsidiary
Equity shares X X
Ret. earnings X X
Contingent liability (100) (100)
X X X
And the fair value is also reflected on the face of the statement of financial position as follows:
Current liabilities
$000s
Contingent liability 100
8. Other issues
8.1. Consideration
A parent may acquire a controlling interest in a subsidiary in other fashions as opposed to just a cash
payment. Other considerations are as follows:
๏ Share for share exchange
๏ Deferred cash consideration
๏ Contingent consideration
8.2. Share for share exchange

๏ Calculate the number of subsidiary shares acquired
๏ Calculate the number of P shares issued
๏ Value the P shares issued
๏ Record the journal entry
Example 8 – Share exchange

Harry acquired 80% of the 10 million ordinary $1 shares of Sally by offering a share exchange of one for
every four shares acquired. The fair value of Harry’s shares is $3 per share.
Calculate the cost of investment for the acquisition and prepare the journal entry to record the share
issue.
8.3. Deferred consideration

A parent may agree to pay cash in the future following the acquisition of the subsidiary. This deferred
consideration is recorded on acquisition at present value.
Example 9 – Deferred consideration

Pony acquired 80% of the 30 million $1 equity shares of Star on 1 January 20X5. The consideration was
through the offer of a share exchange of two shares issued for every three shares acquired and a cash
payment of $1 per share payable on 31 December 20X5. The fair value of the Pany’s equity shares was $2 at
1 January 20X5.
The present value of $1 received in one year’s time is $0.91 at a rate of 10%.
Calculate the cost of the investment in Star at 1 January 20X5
The deferred consideration needs to be unwound to its final value and is done so using the interest rate
originally applied to discount back the original entry and is recorded as follows:
Dr Finance cost
Cr Deferred consideration liability
NOTE: The adjustment does not impact the fair value of consideration.
8.4. Contingent consideration
Contingent consideration is cash to be paid by the acquirer at a point in the future that is dependent on
conditions being met, i.e. subsidiary profits have increased by 10% since acquisition.
The contingent consideration is measured at fair value and this fair value would be given in the exam.
8.5. Mid-year acquisitions

Calculate the subsidiary’s retained earnings at acquisition, assuming subsidiary profits in the year accrue
evenly.
Illustration – Mid-year acquisition

Richard acquired 80% of Andy’s equity share capital on 1 August 20X5. Both have a year end of 31 December
20X5.
Andy’s retained earnings at the end of the year were $600,000 and its profit for the year was $120,000.
Assuming the profit accrued evenly during the year then the Andy’s retained earnings figure at 1 August
20X5 is calculated as follows:
$600,000 − (5/12 x $120,000) = $540,000
8.6. Uniform accounting policies

Subsidiary must adopt the parents accounting policies in the group accounts. Accounted for by adjusting
the value of assets/liabilities and (W2).
8.7. Coterminous year-ends

Financial statements within three months of the parents year-end can be used and adjusted for any
significant events.
8.8. Non-consolidation
There is no grounds for a parent that has control of a subsidiary to not consolidate the subsidiary’s results. If
the parent gains control of a subsidiary that it is then looking to dispose of and meets the criteria as a ‘held
for sale’ it will treat the subsidiary under IFRS 5 within the consolidated accounts. If this subsidiary is then
still part of the group after 12-months then it will be consolidated as normal from the acquisition date.
Chapter 24
GROUP STATEMENT OF PROFIT AND
LOSS
1. Basic consolidation
Example 1 – Basic consolidation (revision)

Keswick Co acquired 80% of the share capital of Derwent Co on 1 June 20X5.
The summarised draft statements of profit or loss for Keswick Co and Derwent Co for the year ended 31 May
20X6 are shown below:
Keswick Derwent
$000 $000
Revenue 8,400 3,200
Cost of sales (4,600) (1,700)
Operating expenses (2,200) (960)
Profit before tax 1,600 540
Tax (600) (140)
Profit for the year 1,000 400
Prepare the Keswick group consolidated statement of profit or loss for the year ended 31 May 20X6.
Consolidated statement of profit and loss and other comprehensive income
X/12
P S Adj. Group
Revenue X X (X) X
COS (X) (X) X
-PUP (Inventory ) (X) (X) (X)
-FV adj (extra depn) (X)
Gross profit X
Dist costs (X) (X) (X)
Admin exp. (X) (X)
-Impairment (X) (X)
Finance cost (X) (X) X (X)
Investment income X X (X) X
-Dividend from S/A (X)
Associate (P’s % x A’s PFY) - impairment X
Profit before tax X
Taxation (X) (X) (X)
PFY X X
Revaluation gain X X X
Associate X
TCI X X
Parent (β) X
NCI = NCI% x S’s TCI X
2. Basic consolidation (mid-year acquisition)
Example 2 – Basic consolidation (mid-year acquisition)

Statements of profit or loss for the year-ended 31 December 20X5
Vader Maul
$’000 $’000
Revenue 1,645 1,280
Cost of sales (1,205) (990)
Profit before interest and tax 250 170
Finance costs (55) (30)
Profit before tax 205 140
Taxation (35) (28)
Profit for the year 170 112
1. On 1 July 20X5, Vader acquired 80% of the equity shares of Maul. It is the group policy to measure the
non-controlling interest at acquisition at fair value.
2. Maul declared a dividend during the year of $10,000.
3. An impairment review at the reporting date revealed the goodwill in Maul to be impaired by $20,000
4. Assume that the profits accrue evenly.
Prepare a consolidated statement of profit or loss for the Vader group for the year-ended 31
December 20X5
3. Adjustments
Intra-group trading transactions
E.g. sales, loans/debenture interest and management charges
๏ Remove the expense – adjustment column
๏ Remove the income – adjustment column
Unrealised profits
PUP adjustment on goods unsold at year-end (cost structures) by increasing C’o’S in seller’s column.
Fair value adjustment

Any additional, annual deprecation on the fair value increase of S’s net assets is adjusted through C’o’S in S’s
column.
Example 3 – Unrealised profits

Statement of profit or loss for the year ended 31 December 20X5
Gary Nick
$000 $000
Revenue 120,000 90,000
Cost of sales (70,000) (40,000)
Profit from operations 30,000 15,000
Finance cost (2,000) (500)
Income tax expense (6,000) (3,000)
• Gary acquired 80% of Nick on 1 January 20X5. Goodwill on acquisition has been impaired by $1m during
the year and should be charged to operating expenses. Full goodwill method
• During the year Nick sold $10m goods to Gary at a mark-up of 25% on cost. One quarter of those goods
are in inventory at the year end.
Prepare the Gary Group consolidated statement of profit or loss for the year to 31 December 20X5.
4. Group disposals
A group structure can change if the parent company sells the shares in an entity (subsidiary). At this level
only the full disposal of a subsidiary is examinable, whereby the parent has control and then following the
disposal of shares no longer owns any further shares.
Control -> no control
1. Calculate a group profit or loss on disposal of the subsidiary.
2. The revenues and costs of the subsidiary must be consolidated up to the date of the disposal
(W) Group profit/loss on disposal
$m
Proceeds X
Add: non-controlling interest X
Less: net assets at disposal (X)
Less: goodwill (X)
Group profit or loss on disposal X
Example 4
Socks owned 90% of Mogs before it decided to sell all of its investment on 31 December 2017 for $200
million. The non-controlling interest at that date was $15 million.
The goodwill on acquisition was $38 million and the net assets at the date of disposal were $150 million.
Calculate the group profit on disposal that will appear in the group financial statements of Socks
group for the year-ended 31 December 2017.
Exam standard question – Profit attributable to the equity holders of

the parent
Romeo acquired 90% of the equity share capital of Juliet on 1 July 2020. Juliet sold $5m of goods on 31
October 2020 making a profit of $2m. One quarter of these goods remain in inventory at the reporting date.
For the year-ended 31 December 2020, Romeo made profits of $85,600,000 and Juliet made profit so
£25,400,000.
Calculate the profit attributable to the equity shareholders of Romeo to appear in the consolidated
statement of profit or loss for the year ended 31 December 2020.
Chapter 25
ASSOCIATES (IAS 28)
An associate is where an entity has significant influence over the associated company.
Significant influence is the power to participate in the financial and operating policy decisions. It is
presumed that an investment of between 20% and 50% indicates the ability to significantly influence the
investee.
Where an entity has significant influence, the investment is accounted for using equity method of
accounting in the financial statements.
1. Group Statement of financial position – ‘Investment in associate’

The investment in associate is calculated as follows:
$
Cost of investment in A X
Add: % of A’s post acquisition reserves X
Less: impairment of goodwill (X)
X
Example 1 – Associate (SFP)

Penny bought 30% of the equity share capital of Alex on 1 January 20X5 for $250,000. Alex’s profits for the
year were $170,000.
An impairment review was carried out at the end of the year and the investment in Alex was found to be
impaired by $20,000.
Calculate the investment in associate to appear in Penny’s financial statements at 31 December 20X5.
Exam preparation question – Investment in associate

On 1 June 20X3, S acquired 25,000 equity shares in A for $300,000. At the date of acquisition, A had in issue
100,000 $1 equity shares. A generated profits for the year of $235,000 and paid a dividend of $40,000.
Calculate the carrying amount of the investment in associate to appear in the group statement of
financial position as at 31 December 20X3, assuming the profits accrue evenly during the year.
Example 2 – Group SFP incl. associate

Hartsop, a public limited company, operates in the retail sector. The draft statements of financial position at
31 December 2020 are as follows:
Hartsop Skiddaw
$m $m
Assets:
Non-current assets
Property, plant and equipment 1,560 1,250
Investments 1,540
3,100 1,250
Current assets 1,020 1,200
Equity and liabilities:

Share capital 1,700 1,000
Retained earning 1,450 800
Total equity 3,150 1,800
Non-current liabilities 520 350
Current liabilities 450 300
Total liabilities 970 650

The following information is relevant to the preparation of the group financial statements:
On 1 January 2019, Hartsop acquired 70% of the equity interest of Skiddaw for a cash consideration of
$1,340 million. At 1 January 2019, the identifiable net assets of Skiddaw had a fair value of $1,850 million,
and retained earnings were $450 million. The excess in fair value is due to an item of property, plant and
equipment that has a remaining useful life of 10 years.
It is the group policy to measure the non-controlling interest at acquisition at is proportionate share of the
fair value of the subsidiary’s net assets.
On 1 July 2020, Hartsop acquired 25% of the equity interest of Angletarn for a cash consideration of $200
million. Angletarn’s profits for the year were $80 million, out of which a dividend of $20 million was declared
on 31 December 2020. The 25% holding gives Hartsop the power to participate in the operating and
financing decisions of Angletarn.
Prepare the group consolidated statement of financial position of Hartsop as at 31 December 2020.
2. Group Statement of profit or loss – ‘Share of profit of associate’

A share of profit of associate is calculated as shown below and shown immediately before profit before tax.
% of A’s profit for the year X

Less: goodwill impaired during the year (X)
X
NOTE: Any dividend received from the associate included in the parent’s investment income is removed
when equity accounting.
3. Adjustments - group and associate

If there has been trading between the group and the associate, then any profit on inventory sold between
the parties that is still held at the reporting date will need to be removed, however we adjust for the group
share only.
If the parent sells to the associate:
Dr Group retained earnings/Cost of sales
Cr Investment in associate (reduce goods to cost to the group)
If the associate sells to the parent:

Dr Group retained earnings/Share of profit of associate
Cr Group inventory (reduce goods to cost to the group)
NOTE: The associate is considered to be outside of the group and so no adjustment is made for outstanding
receivable/payable balances or sales/cost of sales as is seen when trading occurs between the parent and
subsidiary.
Example 3 – PUP
TR owns 20% of the equity share capital of BF. During the year to 31 December 20X0 TR purchased goods
with a sales value of $200,000 from BF. One half of these goods remained in inventories at the year end 31
December 20X0. BF includes a mark-up of 25% on all sales.
Which of the following accounting adjustments would TR process in the preparation of its
consolidated financial statements in relation to these goods?
A DR Group retained earnings (W5) $20,000 CR Inventories $20,000

B DR Share of profit of associate $20,000 CR Investment in associate $20,000
C DR Group retained earnings (W5) $4,000 CR Inventories $4,000
D DR Share of profit of associate $4,000 CR Investment in associate $4,000
Example 4 – Group SPL incl. associate

Helvellyn Scafell
$m $m
Revenue 1,645 1,280
Cost of sales (1,205) (990)
Operating costs (190) (120)
Profit before interest and tax 250 170
Profit before tax 195 140
Taxation (35) (30)
The following information is relevant in the preparation of the group financial statements:
On 1 January 2020, Helvellyn acquired 80% of the equity shares of Scafell, a public limited company, for a
cash consideration of $90 million. The fair value of the identifiable net assets acquired was $85 million and
the fair value of the non-controlling interest was $25 million. The fair value of the net assets at acquisition
was not materially different to their book value.
On 1 June 2020 Helvellyn acquired 25% of the equity shares of Armboth and exerted significant influence
through its representation on the board of directors. Armboth’s profits for the year were $200 million.
It is the group policy to measure the non-controlling interest at acquisition at fair value.
During the year, Helvellyn sold goods to Armboth for $40 million at a margin of 20%. At the reporting date
Armboth still held half of the goods in inventory.
Goodwill has been impairment tested at year-end and found there to be no impairment in Scafell but the
investment in Armboth has fallen by $ 1 million.
Assume that profits accrue evenly during the year.
(a) Calculate the goodwill on acquisition of Scafell
(b) Prepare a consolidated statement of profit or loss for the Helvelyn group for the year-ended 31
December 2020
4. IAS 28 Associates
Other situations where significant influence exists are when the investor:
๏ Representation on the board
๏ Participation in policy making process
๏ Material transaction between the two entities
๏ Interchange of managerial personnel
๏ Provision of essential technical information
Example 5 – Significant influence

Haycock has recently purchased financial interests in several companies.
How would each of the following purchases be accounted for?
Subsidiary Associate Investment
Purchase of 15% of the equity shares of Mosedal where

all decisions are made at board level, but Haycock does
not have any representation on the board.
Purchase of 19.9% of the equity shares of Glaramara

where all decisions are made at board level and
Haycock has appointed two of the five directors on the
board.
Purchase of 45% of the equity shares of Birks where

due to an agreement with the other shareholders,
Haycock has the majority of the voting rights.
Purchase of 25% of the equity shares of Whinlatter

with the remaining 75% owned by one shareholder
that Haycock has no links with.
Purchase of 15% of the equity shares of Catbells, who

Haycock provides essential technical information to on
a regular basis during the year.
SOLUTIONS
Chapter 1
Answer to example 1 – Qualitative characteristics
Answer B – For information to faithfully represent the transaction it needs to be complete, free from bias
and neutral.
Answer to example 2 – Framework

IAS 2 Inventories
Definition (asset) - A present economic resource controlled by the entity as a result of past events An
economic resource is a right that has the potential to produce economic benefits.
Measurement - Valued at lower of cost and net realisable value
IAS 16 Property, plant and equipment

Definition (asset) - A present economic resource controlled by the entity as a result of past events An
economic resource is a right that has the potential to produce economic benefits.
Definition (depreciation) - Decreases in assets, or increases in liabilities, that result in decreases in equity,
other than those relating to distributions to holders of equity claims
Measurement – Historic cost or fair value (revaluation model)
Disclosure – Gains on revaluation recognised though profit or loss (prudence)
Answer to example 3 - Measurement

Answer B
Example 4 - Conceptual Framework

Neither of the statements are true.
The Conceptual Framework is not an accounting standard and although it assists the IASB develop IFRSs it
does not override and IFRS Standards as these give the specific rules on how to treat an item within the
financial statements.
The Conceptual Framework can also be updated (as it was when there were changes to the assumptions
etc.) but this does not automatically lead to changes to the IFRS Standards because any change in standards
has to go through the due process. This would involve updating their agenda for the new project with the
aim of amending the IFRS Standard.
Chapter 2
Answer to example 1 - Regulatory Framework
Answer A
Answer to example 2 – Regulatory bodies

Answer C
Chapter 3
Answer to example 1 – Statement of profit and loss, and statement of financial position
Statement of financial position as at 31st December 2017
$ $
ASSETS
Non-current assets
Property, plant and equipment (W) 12,320
Current assets
Inventories (W) 4,000
Trade and other receivables 9,290
Cash and cash equivalents 3,125
16,415
Total assets 28,735
EQUITY AND LIABILITIES

Equity
Equity shares ($1) 5,000
Retained earnings (5,835 + 13,040) 18,875
Total equity 23,875
Debentures 1,000
Current liabilities
Trade and other payables 2,360
Tax payable 1,500
3,860
Total equity and liabilities 28,735
Statement of profit and loss for the year ended 31st December 2017
$
Revenue 66,980
Cost of sales (1,800 + 3,930 + 38,760 + 800 (W) + 480 (W) – 4,000 (W)) (41,770)
Gross profit 25,210
Distribution expenses (1,800 + 3,130) (4,930)
Administrative expenses (1,800 + 3,790) (5,590)
Operating profit 14,690
Income tax expense (200 + 1,500) (1,700)
WORKINGS
Motor vehicles
Cost 5,000
Acc. Dep. (1,000)
4,000
Dep. @ 20% red. bal.
(800)
(0.2 x 4,000)
3,200
Buildings
Cost 12,000
Acc. Dep. (2,400)
9,600
Dep. (12,000 / 25) (480)
9,120
PPE = 3,200 (MV) + 9,120 (L+B) = 12,320

Inventory = 2,500 + 500 + 1,000 = 4,000
Answer to example 2 – Statement of changes in equity (1)

Answer C – Amortisation is an expense that is charged through the statement of profit and loss, it is not
shown in the statement of comprehensive income.
Answer to example 3 – Statement of changes in equity (2)

Other
Equity Share Retained
components Total
shares premium earnings
of equity
$’000s $’000s $’000s $’000s $’000s
B/f 400 50 310 165 925
Issue of share capital 200 50 - - 250
Dividends - - (98) - (98)
Total comprehensive income for the year - - 421 105 526
C/f 600 100 633 270 1,603
Chapter 4
Answer to example 1 – Statement of cash flows
Statement of cash flows for the year ended [date]
$’000s $’000s
Cash flows from operating activities
Finance cost 400
Investment income (180)
Depreciation 4,658
Profit on disposal of PPE (720)
Decrease in inventory (3,560 - 9,635) 6,075
Increase in receivables (6,405 - 4,542) (1,863)
Increase in payables (7,562 - 4,364) 3,198
Cash generated from operations 26,568
Interest paid (400)
Income taxes paid (W) (4,090)
Net cash from operating activities 22,078
Cash flows from investing activities

Purchase of property, plant and equipment (W) (23,340)
Proceeds from sale of property, plant and equipment (1,974 + 720) 2,694
Dividends received 180
Net cash used in investing activities (20,466)
Cash flows from financing activities

Issue of equity shares 1,869
Repayment of long-term borrowings (2,300)
Dividends paid (6,465 + 10,650 - 16,115) (1,000)
Net cash used in financing activities (1,431)

Net increase/(decrease) in cash and cash equivalents 181
Cash and cash equivalents at beginning of period (1,063 - 429) 634
Cash and cash equivalents at end of period (2,045 - 1,230) 815
WORKINGS
Tax paid
Tax payable
B/f – current tax 2,760
Bank (β) 4,090 Tax expense (SPL) 4,350
C/f – current tax 3,020
7,110 7,110
Property, plant and equipment (PPE)
PPE (CV)
B/f 26,574
Depreciation 4,658
Cash - additions (β) 23,340 Disposal 1,974
C/f 43,282
49,914 49,914
Chapter 5
Answer to example 1 – Revaluation increase
SFP SPLOCI
$’000 $’000
Property, plant and equipment 89,412 Depreciation 5,588
Revaluation reserve 25,412 Gain 27,000
Historic cost Revaluation

Revaluation reserve
model
($’000) ($’000) ($’000)
Cost (1.1.12) 80,000

Acc. Depn. (12,000)
(80,000/20) x 3 years
Carrying value (31.12.14) 68,000 95,000 27,000
Depreciation (4,000) (5,588) (1,588)
(95,000/17)
89,412 25,412
Answer to example 2 – Revaluation decrease

SFP SPLOCI
$’000 $’000
Property, plant and
8,000 Depreciation 1,750
equipment
Impairment (PL) 400
Impairment (OCI) 3,850
Historic cost Revaluation model Revaluation reserve

($’000) ($’000) ($’000)
Cost (1.1.13) 12,000
Acc. Depn.
(2,400)
(12,000/10) x 2 years
Carrying value (31.12.14) 9,600 14,000 4,400
Depreciation
(1,200) (1,750) (550)
(14,000/8)
Carrying value (before) 8,400 12,250 3,850
Impairment (400) (4,250) (3,850)
Carrying value
8,000 Nil
(after)
Answer to example 3 – Change in estimate

SFP SPLOCI
$’000 $’000
Property, plant and equipment 14,000 Depreciation 3,500
$’000
Cost (1.1.12) 25,000
Acc. Dep.
(7,500)
(25,000/10) x 3 years
Carrying value (31.12.14) 17,500
Depreciation
(3,500)
17,500/5
14,000
Answer to example 4 – PPE and financial statements
SFP SPLOCI
$’000 $’000
Depreciation
Land and buildings 44,400 5,600
(3,000 + 2,600)
Plant and equipment 21,000
Workings
Plant and equipment
$’000
Cost 58,500
Acc. depn. b/f (34,500)
24,000
Depreciation
(3,000)
24,000 x 12.5%
21,000
Land and buildings

Historic cost Revaluation model Revaluation reserve
($’000) ($’000) ($’000)
Cost 55,000
Acc. depn. (20,000)
Carrying value (1.10.13) 35,000 47,000 12,000
Depreciation
(2,600)
(39,000/15)
Carrying value (30.09.14) 44,400
Answer to example 5 – Specific borrowings

Borrowing costs = $10 million x 5% x 9/12
= $375,000
Answer to example 6 – General borrowings

% $m Ave.
4% bank loan 4% 25 1
3% bank loan 3% 40 1.2
65 2.2
2.2
Weighted average = x 100%
65
= 3.38%
Capitalised = ($10m x 3.38%) + ($15m x 3.38% x 6/12)
= $0.59m
Answer to example 7 – Grants and depreciable assets

The property, plant and equipment will be capitalised on the statement of financial position as a non-
current asset at its cost of $10 million.
It will be depreciated over its 10 year useful life and therefore $1 million of depreciation will be charged
through profit or loss each year. The carrying value of the PPE will be reduced by the same amount each
year.
The government grant is for a depreciable asset and so the $2 million will be spread over the same life as the
PPE.
As Tweddle has met the conditions for the grant the $2 million will be recognised as deferred income on the
statement of financial position.
It will be spread/amortised over 10 years and therefore $0.2 million income will be shown in profit or loss
each year, with the deferred income being reduced by the same amount each year.
Tweddle will also split the deferred income at the reporting date between current and non-current liabilities.
The statement of cash flows will show a payment to acquire PPE of $10 million and grant income of $2
million in investing activities.
The depreciation and amortisation of government grants are both non-cash items in profit or loss and will
need adjusting in operating activities if using the indirect method.
Answer Example 8 - Government Grants

$1m/10 years = $100k per annum
$1m - $100k = $0.9m (total deferred income)
Current liability = $0.1m
Non-current liability = $0.8 m = ($0.9m - $0.1m)
PPE = 9/10 x $3m = $2.7m (deferred income)
PPE = 9/10 x ($3m - $1m) = $1.8m
Answer to example 9 – Investment property and change of use

Addlington will treat the property using IAS 16 for the first six-months of the year before applying IAS 40
once the change in use of the property took place.
The property will be depreciated for the first six-months of the year resulting in a depreciation expense
through profit or loss of $0.5 million ($20 million/20 years x 6/12), thus reducing the carrying value to $19.5
million ($20 million - $0.5 million).
The property is revalued to its fair value of $21 million on 1 July 2015 under IAS 16, giving a gain through
other comprehensive income of $1.5 million ($21 million - $19.5 million).
The property is now classified as investment property and no longer depreciated.
It is revalued to a fair value of $21.6 million at the reporting date with the gain of $0.6 million going through
profit or loss.
Answer to example 10 – Investment property

The IP is revalued from $5m to $5.4m and therefore of gain of $0.4m is recognised through the statement of
profit or loss.
The IP is not depreciated as it is held under the fair value model, hence the useful life of 40 years is not
relevant to the scenario. The IP is revalued to fair value, which does not incorporate the selling costs. FV less
costs to sell is a figure that is used when valuing a non-current asset that is held for sale under IFRS5.
Exam preparation solution – Revaluation and the SOCIE

Share Retained Revaluation
Share capital premium earnings reserve Total
$ $ $ $ $
30 June 20X7 2,400,000 800,000 3,450,000 6,650,000
Share issue (W1) 600,000 480,000 1,080,000
Dividend (W2) (240,000) (240,000)
Revaluation (W3) 1,000,000 1,000,000
Reserve transfer (W3) 20,000 (20,000) -
30 June 20X8 3,000,000 1,280,000 3,678,000 980,000 8,938,000
Workings
1. Share issue
Share capital = 600,000 x $1 = 600,000

Share premium = 600,000 x $0.80 = $480,000
2. Dividend
Final (PY) = 2,400,000 x 0.05 = 120,000

Interim (CY) = 3,000,000 x 0.04 = 120,000
Total = 240,000
3. Revaluation
Historic cost Revaluation model Revaluation

$ $ $
Cost 5,500,000
Acc. Depn. (W4) (500,000)
Carrying value 5,000,000 6,000,000 1,000,000
Depn. (100,000) (120,000) (20,000)
(5,400,000/45 years)
Remaining useful life Excess depreciation

Building valuation
4. Buildings accumulated depreciation"

Acc. Depn. (buildings ONLY) = 5,000,000/50 x 5 years (1 July X2 to 1 July X7)
Chapter 6
Answer to example 1 – Intangibles (1)
A
A Incorrect – Development expenditure is amortised over its useful economic life, if it is has a finite life,
otherwise annual impairments are required.
B Correct – Development costs are recognised on the statement of financial position as an intangible
non-current asset.
C Incorrect – Research expenditure cannot be capitalised, and is expensed through profit or loss.

The purchase of the patent should be capitalised at $15 million and amortised over its useful life.
The $6 million spent on the investigative phase is essentially research and should be expensed through
profit or loss as incurred.
The $8 million subsequently spent after completion of the research phase is development expenditure and
is capitalised as an intangible non-current asset on the statement of financial position.
It is not yet amortised as the project is not yet complete but an impairment review should be carried out to
see if the asset has lost value.
The $1.5 million spent on marketing and training should both be expensed through profit or loss
immediately.

The initial investigation into the viability of the new drug is research and is expensed through profit or loss
at $40,000 per month. A total of $240,000 ($40,000 x 6 months) will be expensed from 1 February 20X5 to 1
August 20X5 (6 months).
The commercial viability of the new drug and subsequent costs constitute as development costs as
probable future economic benefits can be identified and there is a market for the drug. The costs are
capitalised as an intangible non-current asset on the statement of financial position. A total of $200,000
($40,000 x 5 months) is capitalised from 1 August 20X5 to 31 December 20X5 (5 months).
The intangible is not amortised as it would have an indefinite life, so annual impairment reviews are
performed instead, to see if the asset has fallen in value.
The finance director cannot revalue the intangible as there is no active market, however the discounted
future cash flows would indicate that the intangible is not impaired.
Answer to example 4 - Intangibles (4)

Brand = $2,000,000 ($20m/10 years) = amortisation
NOTE: The brand is not revalued to fair value as there is not an active market.
Training course = $500,000
Total expense = $2,500,000
Chapter 7
Answer to example 1 – Impairment
SFP (extract) SPLOCI(extract)
$ $
Non-current assets
PPE (W) 24,000 Depreciation (W) 5,000
Impairment (W) 1,000
WORKINGS
$50,000
Annual depreciation = = $5,000 per annum
10 years
Carrying value @ 31 December 20X9 = $50,000 − ($5,000 x 5 years)

= $25,000
Fair value less costs to sell = $24,000

($26,000 - $2,000)
Value in use = $5,000 x 3,791

= $18,995
Recoverable amount (higher) = $24,000
Impairment = $25,000 − $24,000

= $1,000
Answer to example 2– Individual asset impairment

The carrying value of $975,000 at 31 December 20X7 is impaired by $375,000 and $600,000 is recorded in
the statement of financial position.
Of the $375,000 impairment, $325,000 is charged against the revaluation surplus as the asset was previously
revalued, and the remaining $50,000 is charged through profit or loss.
Revaluation Revaluation
Historic cost
model surplus
$
$ $
Cost (1.1.X1) 1,000,000
Acc. Depn
=1,000,000/20 years x 5 years (250,000)
(X1 to X5)
CV (31.12.X5) 750,000 1,125,000 375,000
Acc. Depn (100,000) (150,000) (50,000)
CV (31.12.X7) 650,000 975,000 325,000
(50,000) (375,000) (325,000)
CV (31.12.X7) 600,000 Nil
Answer to example 3 – CGU impairment

The plant and equipment is reduced in value to $4 million ($5.2 million - $1.2 million) as it has been
specifically impaired following the destruction by fire of some of the equipment.
The goodwill is then fully impaired and written down to a nil carrying value.
The patent it reduced in value to $1.5 million
The remaining impairment is then $3.1 million ($17 million - $9.8 million (recoverable amount of CGU) - $1.2
million (plant & equipment) - $2.4 million (goodwill) - $0.5 million (patent)), which is spread pro-rate over the
remaining assets. As the receivables and cash are held at their realisable values they will not be impaired
and so the remaining impairment is fully allocated to the buildings.
Exam preparation solution – Non-current assets

(a) Statement of financial position as at 31 December 20X8
$’000
Non-current assets
Property, plant and equipment
42,640
13,300 + 29,340 (W)
Equity
Retained earnings (b) 390
(b) Adjustments to retained earnings
$’000
Draft retained earnings 7,350
Profit on disposal
500
(=$2,500,000 – ($4,000,000 - $2,000,000))
Depreciation – factories (3,260)
Depreciation – office building (625)
Impairment (2,875)
Depreciation – office building (700)
13,500
Workings
Office building
$’000
Cost 25,000
Accumulated depreciation (7,500)
Depreciation 25,000/20 x 6/12 (625)
Carrying value 16,875
Impairment (2,875)
Value in use/fair value 14,000
Depreciation (14,000/10 x 6/12) (700)
Carrying value 13,300
Factories
$’000
Cost 50,000
Accumulated depreciation at 1 January 20X8 (15,400)
Disposal (2,000)
Carrying value at 1 January 20X8 32,600
Depreciation (32,600 x 10%) (3,260)
Carrying value at 31 December 20X8 29,340
Chapter 8
Answer to example 1 – Non-current assets held for sale and discontinued operations
SFP (extract) SPL(extract)
$ $
Current assets
NCA-HFS (W) 68,000 Depreciation (W) 11,000
Impairment (W) 5,000

Workings
Annual depreciation = $120,000 / 10 years = $12,000 p.a.
Carrying value (30 November 20X4) = 120,000 – (12,000 x 3 years) – (12,000 x 11/12) = $73,000
Fair value less costs to sell = 70,000 – 2,000 = $68,000
NCA-HFS (lower) = $68,000
Impairment = 73,000 – 68,000 = $5,000
Answer to example 2 – Discontinued operations

31 December 2015
The operation is not being sold so cannot be classified as held for sale and neither is it a discontinued
operation as it is still operating until 31 March 2016. Angola is firmly committed to the closure but it hasn’t
taken place and so is included in continuing operations. A disclosure in the notes can be made of the
intention to close the operation in the following year.
31 December 2016
The operation is now classified as a discontinued operation as it has now ceased operating.
Answer to example 3 – Discontinued operations

Ruta Co Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 December 2017
$000 $000
2017 2016
Revenue 640 480
Gross Profit 380 265

Profit from continuing operations 233 161

Discontinued operations (3) (1)
Chapter 9
Answer to example 1 – Error
Profit or loss and other comprehensive income for the year ended 31 December 2009
2009 2008
$’000 $’000
as restated
Revenue 2,600 2,500
Costs and expenses (1,400) (1,700)
Profit for the year 1,200 800
Gain on revaluation of properties 300 –
Total comprehensive income 1,500 800
Statement of Financial Position as at 31 December, 2009
2009 2008
$’000 $’000
as restated
TNCA 2,300 1,500
Current assets 1,700 800
4,000 2,300
$1 Equity shares 600 600
Retained earnings 2,700 1,500
Revaluation reserve 300 –
3,600 2,100
Current liabilities 400 200
4,000 2,300
Statement of Changes in Equity for the year ended 31 December 2009
Share Revaluation Retained Total

capital reserve earnings
$’000 $’000 $’000 $’000
Balance at 31 December, 2008 600 – 2,000 2,600
Material error – – (500) (500)
Restated balance 600 – 1,500 2,100
Surplus on revaluation of properties 300 300
Net Profit for the year 1,200 1,200
Balance at 31 December, 2009 600 300 2,700 3,600
Answer to example 2 – Accounting estimates

The change in method is a change in accounting estimate.
The changing of the capitalisation of finance costs is a change in accounting policy.
Answer to example 3 – Prior year error

The total receivables of $3.4m should be removed from the statement of financial position in the current
year.
$1.0m should be recognised as an expense in the statement of profit or loss in the current year, through
operating expenses.
The $2.4m that relates to previous periods is a prior year error and should be recognised through the
statement of changes in equity as an adjustment to the opening retained earnings.
Chapter 10
Answer to example 1 – Inventory (cost)
Answer B
Answer to example 2 – Inventory (valuation)

$/unit
Material cost 3
Labour cost 2
Overheads
6
(=72,000/12,000)
Total cost 11
NRV = $12 - $2 = $10
Total inventory valuation = (800 undamaged units x $11) + (200 damaged units x $10) = $10,800.
Answer to example 3 – Inventory

Inventory A @ $2,500
Cost (lower) = $2,500
NRV = ($280 - $10 – $14 (5% x $280)) x 10 units = $2,560
Inventory B @ $9,000
Cost = 1,000 x $10 = $10,000
NRV (lower) = (1,000 x $11) - $2,000 = $9,000
Inventory C @ $7,000
Cost (lower) = $7,000, ignoring the future costs of production
NRV = $10,000
Chapter 11
Answer to example 1 – Financial assets
1. The investment in shares is initially recognised at $500,000 on the statement of financial position as an
asset.
The transaction costs are recognised immediately through profit or loss as the shares are classified as
fair value through profit or loss.
At the reporting date the shares are re-measured to their fair value of $350,000 on the statement of
financial position.
A loss on the investment is recognised through profit or loss of $150,000.
2. The investment in shares is initially recognised at $540,000 on the statement of financial position as an
asset.
The transaction costs are included in the value of the asset as it is held strategically for the long-term
and therefore classified as fair value through other comprehensive income.
At the reporting date the shares are re-measured to fair value of $620,000 on the statement of
financial position.
The gain on the investment of $80,000 is shown through other comprehensive income.
On disposal of the shares a gain of $30,000 is recognised through profit or loss and the $80,000 held in
other comprehensive income is transferred to retained earnings through the statement of changes in
equity as a reserve transfer.
3. The investment in debt is classified as amortised cost as there are contractual coupon interest receipts
each year and the intent is to hold the asset until all the cash has been collected.
The investment in debt is initially measured at $980,000 on the statement of financial position.
The effective rate of interest is used to calculate the interest income each year. In the first year the
interest income is $56,154 ($980,000 x 5.73%) and is recognised through profit or loss.
The cash receipts of $40,000 are used to reduce the value of the investment on the statement of
financial position.
The investment in debt is held at $996,451 at the reporting date on the statement of financial position.
Answer to example 2 – Financial liabilities

SPL
Year 1 Year 2 Year 3 Year 4
Finance cost 87 89 91 93
SFP
Year 1 Year 2 Year 3 Year 4
2% debentures (W) 1,947 1,996 2,047 -
Working
Interest
Year B/f Cash C/f
(4.58%)
1 1,900 87 (40) 1,947
2 1,947 89 (40) 1,996
3 1,996 91 (40) 2,047
4 2,047 93 (2,140) -
Answer to example 3 – Convertible Debentures

Alice is required to account for the convertible debentures on initial recognition based on substance and
using split equity accounting.
The liability is calculated on the assumption that there is no conversion option on the debt, so essentially
treated as a 100% loan redeem for cash. The initial liability is recognised at the present value of the future
cash flows, discounted at the rate of interest on similar debt without the conversion option.
This gives a figure of $94.7 million (see working below).
The difference between the liability and the net proceeds is recognised within equity at $5.3 million.
The subsequent accounting treatment of the debt is at amortised cost, whilst the equity balance is not
adjusted until conversion takes place in the future.
Working
Year Cash flow DF PV

($m) (@ 6%) ($m)
1 4 0.943 3.772
(4% coupon x $100 million (par))
2 4 0.890 3.56
3 104 0.840 87.36
($4m plus $100 million (par at redemption)
94.692
=$94.7 million
Exam preparation solution 1 – Financial liability

Statement of financial position as at 31 December 20X8
$’000s
Equity
Retained earnings (b) 1,184
4% loan notes (W) 3,906
Adjustments to retained earnings
$
Draft retained earnings 1,250,000
Issue costs 200,000
Interest (266,000)
1,184,000
Workings
b/f Interest (@7%) Coupon c/f

3,800,000 266,000 (160,000) 3,906,000
(=4,000,000 – 200,000)
Exam preparation solution – Financial asset

Statement of financial position as at 31 December 20X8
$’000s
Non-current assets
5% redeemable bonds (W) 10,835,000
Equity
Retained earnings (b)
$
Issue costs 500,000
Cash received (5%) (400,000)
Interest (7%) 735,000
2,935,000
Workings
b/f Interest (@7%) Coupon (@4%) c/f

10,500,000 735,000 (400,000) 10,835,000
(=10,000,000 + 500,000)
Exam preparation solution 2 – Convertible debentures and the SOCIE

Share Share Retained Convertible
capital premium earnings option Total
$ $ $ $ $
31 March 20X7 28,000,000 4,000,000 5,600,000 37,600,000
Prior year error (700,000) (700,000)
Restated balance 4,900,000 36,900,000
Share issue (W1) 7,000,000 3,500,000 10,500,000
Dividend (275,000) (275,000)
Convertible option (W2) 366,800 366,800
31 March 20X8 35,000,000 7,500,000 5,073,000 366,800 47,939,800
Workings
1. Share issue
Closing no. shares (total) 35,000,000 No. shares after 5

No. shares issues
Total number of shares issued (1/5 x 35,000,000) 7,000,000 1
(1 for 4)
Opening no. shares (total) 28,000,000 No. shares before 4
Share capital = 7,000,000 x $1 = $7,000,000
Share premium = 7,000,000 x $0.50 = $3,500,000
2. Convertible debt
- PV of debt
CF PV
Discount rate
$ $
X8 (coupon interest at 4%) 400,000 0.943 377,200
X9 (coupon interest at 4% plus principal of $10m) 10,400,000 0.890 9,256,000
9,633,200
- Equity option
$
Proceeds 10,000,000
PV of debt 9,633,200
Equity option (β) 366,800
Exam preparation solution – Financial asset

Interest income = $554,000 (nearest $’000)
Interest income Interest received

b/f c/f
(6%) (3%)
31 Dec 2020 9,000 540 (300) 9,240
31 Dec 2021 9,240 554 (300) 9,494
Chapter 12
Answer to example 1 – Low-value assets
An expense of $1,500 would be recognised through profit or loss for each of the four year lease. At the end
of year one an accrual of $1,500 would be recognised on the statement of financial position of which $500
would be released over the remaining three years of the lease.
$2,000 x 3
Expense (p.a.) = = $1,500
4
Answer to example 2 – Lessee accounting

Initial recognition
Record the right of use asset and lease liability
DR Right-of-use asset $22,730
CR Lease liability $22,730
Record the initial direct costs

DR Right-of-use asset $1,000
CR Cash $1,000
Record the incentive payments received

DR Cash $500
CR Right-of-use asset $500
Right-of-use asset = 22,730 + 1,000 – 500 = 23,230
Subsequent measurement
Depreciate the asset over the earlier lease term of five years.
$23,230
Expense (p.a.) = = $4,646
5
Record finance lease payments and interest using the rate implicit in the lease
Year B/f Payment Capital Finance cost C/f
balance (5%)
1 22,730 (5,000) 17,730 887 18,617
2 18,617 (5,000) 13,617 681 14,298
3 14,298 (5,000) 9,298 465 9,763
4 9,763 (5,000) 4,763 237 5,000
5 5,000 (5,000) - - -
Answer to example 3 – Sale and leaseback (1)

(i) Transfer of asset is not a sale
Seller Lessor
• Continue to recognise the asset @ $8.4 million and • Do not recognise the asset as it has not been sold
depreciate. to the buyer.
• Recognise a financial liability @ transfer proceeds • Recognise a financial asset @ transfer proceeds of
of $10 million. $10 million.
(ii) Transfer of asset is sale
Seller Lessor
• Recognise purchase of the asset @ $10 million (fair
• Derecognise the asset @ $8.4 million1 value = proceeds)
• Recognise lease liability @ PV of lease rentals2 • Apply lessor accounting
• Recognise a right-of-use asset, as a proportion of
the previous carrying value of underlying asset 3
• Gain/loss on rights transferred 4
DR Bank $10,000,000
DR Right of use asset3 (W2) $6,486,257
CR Lease liability2 (W1) $7,721,735
CR PPE – Building1 $8,400,000
CR Gain on transfer4 $364,522
(W1) Lease liability = PV of lease rentals at rate implicit in the lease = $1 million x AF1-10@5%
Lease a = $1 million x 7.722 = $7,721,735
(W2) $ $
Right-of-use retained 7,721,735 77.22% 6,486,257
Rights transferred 2,278,265 22.78% 1,913,743
Total 10,000,000 100.0% 8,400,000
Answer to example 4 – Sale and leaseback (2)

i) The proceeds of $9 million are below the $10 million fair value of the asset and so the below-market
proceeds of $1 million are treated as a prepayment.
DR Bank $9,000,000
DR Prepayment $1,000,000
ii) The proceeds of $11 million are greater than the $10 million fair value of the asset, so the above
market proceeds are treated as additional financing provided by the buyer-lessor to the seller-lessee.
DR Bank $11,000,000
Chapter 13
Answer to example 1 – Discounting and provisions
The provision is initially recognised at its present value on 1 July 2018 of $450,000 (= $495,000 x 0.9091
(rounded to nearest $000)).
The provision is then unwound at 10% for six months to calculate the finance cost of $22,500 ($450,000 x
10% x 6/12)
SFP SPL
$ $
Provision 472,500 Finance cost 22,500
Answer to example 2 – Provisions and contingencies (1)

Answer A
Answer to example 3 – Provisions and contingencies (2)

If she has a 42% chance of losing, then she must have a 58% chance of winning. It is, therefore, not probable
that she has an obligation. No provision would be appropriate.
However, there is a possible obligation, arising from some past event, which may involve the outflow of
economic resource.
The appropriate treatment in Justina’s financial statements for the year ended 31 August, 2009 would
therefore seem to be to treat the matter as a contingent liability.
This involves:
• a disclosure note of the past event,
• the legal action outstanding,
• an explanation of the uncertainties upon which the outcome depends, and
• an estimate of the costs, were she to lose the case
Answer to example 4 – Onerous contract

(a) Yes, a legal obligation under the purchase contract
(b) Give notice, and buy the cloth Give notice, buy the cloth, Cancel the
for 2 more months and and sell immediately contract
produce without notice
Cost 2 × 900 × $7 12,600 2 × 900 × $7 12,600 2 × $700 1,400
Labour cost 2 ×900/3 × $4 2,400
15,000
Sell 2 × 300 dresses × $22 13,200 Sell 2 × 900 × $6.25 11,250
Loss (1,800) Loss (1,350) Loss (1,400)
There is therefore an unavoidable loss of $1,350. This should be provided for in the Statement of Financial
Position and expensed through the Statement of Profit or Loss and Other Comprehensive Income. In the
Notes to the Financial Statements, there should be an explanation of the circumstances and the
uncertainties concerning timings, amounts and assumptions
Answer to example 5 – Restructuring

(a) There is neither a legal nor constructive obligation, because no obligating event has yet occurred. The
directors could change their minds, and decide to keep the Kaunas factory open. Therefore, no
provision is appropriate.
(b) There is a detailed plan, the impact of which has been communicated to suppliers and the workforce.
Paulius has therefore raised the valid expectation in the minds of those affected. Although not a legal
obligation, there is a constructive obligation arising from some past event, involving the probable
outflow of economic resource. A provision is therefore appropriate in the amount which represents
the best estimate of the costs of closing the Kaunas factory.
Chapter 14
Answer to example 1 – Events after the reporting period
B
• The impairment indicator existed at the reporting date and the valuation gives additional evidence
towards the impairment review, therefore and adjusting event
• The sale of inventory below cost provides additional evidence on the value of the inventory at the
reporting date, therefore an adjusting event
• The fraud/error is an adjusting event as it will have been in evidence at the reporting date but not yet
discovered, therefore an adjusting event.
• The insolvency of the customer gives evidence that they were in financial difficulty at the reporting date,
therefore an adjusting event.
Answer 2– Events after the reporting period

Non-adjusting events as the issue of shares does not give evidence of a condition that existed at the year-
end. The company would use the issue of shares in its calculation of basic EPS.
An adjusting event as the legal action and its outcome give evidence of a condition the existed at the
reporting date. A provision of $80,000 would be made.
An adjusting event that reduces the value of year-end inventory by $10,000 as it gives evidence of the fall in
value of the inventory held at the reporting date. Inventory included in the accounts at the year-end would
now be included at $15,000.
A non-adjusting event as the condition did not exist at the reporting date. As the item is material a
disclosure of its nature and financial impact would be made in the notes.
Chapter 15
Answer to example 1 – Current tax
Statement of profit or loss for the year ended 31 March 2015 (extract)
$’000
Profit before tax X
Income tax expense (3,500 – 400) (3,100)
Profit for the year X
Statement of financial position as at 31 March 2015 (extract)
$’000
Current liabilities
Tax payable 3,500
Answer to example 2 – Tracy (ignoring deferred tax)

20X5 20X6 20X7
($000s) ($000s) ($000s)
Profit before tax 2,000 2,000 2,000
Income tax expense (100) (500) (520)
Profit after tax 1,900 1,500 1,480
WORKINGS
20X5 20X6 20X7
($000s) ($000s) ($000s)
Add: depreciation 1,000 1,000 1,000
Less: tax depreciation (2,500) (500) (400)
PCTCT 500 2,500 2,600
Tax @ 20% 100 500 520
$000s
Cost 5,000
Tax allowance X5 (50%) (2,500)
2,500
Tax allowance X6 (20%) (500)
2,000
Tax allowance X7 (20%) (400)
1,600
Answer to example 3 – Tracy (incl. deferred tax)

20X5 20X6 20X7
($000s) ($000s) ($000s)
Income tax expense
- current tax (100) (500) (520)
- deferred tax movement (300) 100 120
Profit after tax 1,500 1,600 1,600
20X5 20X6 20X7

($000s) ($000s) ($000s)
Carrying value 4,000 3,000 2,000
Tax base 2,500 2,000 1,600
Temporary difference 1,500 1,000 400
@ 20% 300 200 80

DT liab DT liab DT liab
Closing DT 300 200 80

Opening DT 0 300 200
Movement 300 100 120
increase decrease decrease
Answer to example 4 – Accelerated capital allowances

1. Calculate the temporary difference
Year 1 Year 2 Year 3
$ $ $
Carrying value 130,000 110,000 90,000
Tax base 112,500 84,375 63,281
Temporary difference 17,500 25,625 26,719
2. Calculate the deferred tax position

$ $ $
Temporary difference 17,500 25,625 26,719
Deferred tax position @20% 3,500 5,125 5,344
3. Deferred tax asset/liability?

$ $ $
CV > TB CV > TB CV > TB
DT Liability DT Liability DT Liability
3,500 5,125 5,344
4. Movement in opening and closing position

$ $ $
Closing position 3,500 5,125 5,344
Opening position Nil 3,500 5,125
Movement 3,500 1,625 219
↑ Liability ↑ Liability ↑ Liability
Answer to example 5 – Revaluations

There is a gain on revaluation at the year-end of $330,000 ($800,000 - $470,000) that is shown through other
comprehensive income.
The deferred tax is calculated in the standard fashion but the carrying value is based upon the revalued
amount.
Year 1
$
Carrying value (revalued amount) 800,000
Tax base 420,000
Temporary difference 380,000
Deferred tax position @20% 76,000
Liability
(CV > TB)
The deferred tax liability must be recorded at $76,000 at the end of the first year but careful consideration
must be given to the movement in the deferred tax liability as t is higher than what it is expected to be given
the asset was revalued.
DR Profit or loss (β) 12,000

Other comprehensive income
DR 66.000
($330,000 gain on revaluation x 20%)
CR Deferred tax liability 76,000
Answer to example 6 – Deferred tax and revaluations

The gain on revaluation and the associated deferred tax on the gain will go through other comprehensive
income. The net figure is shown within the equity section of the statement of financial position
Revaluation surplus:
$
Revaluation gain (300 – 250) 50,000
Deferred tax @ 20% (20% x 50) (10,000)
Total revaluation surplus 40,000
Chapter 16
Answer to example 1 – Transaction price
The three-year interest-free credit period suggests that the $10,000 selling price includes a significant
financing component.
The selling price is therefore discounted to present value based on a discount rate that reflects the credit
characteristics of the party (customer) receiving the financing i.e. 5%.
Therefore the transaction price is $10,000/(1.05)3 = $10,000 x 0.8638 = $8,638.
Answer to example 2 – Allocation of price

The performance obligations and allocation of total price are as follows:
Provision of home cinema system (9,000/11,000 × $10,000) = $8,182
Provision of maintenance contract (2,000/11,000 × $10,000) = $1,818
Answer to example 3 – IFRS 15 (1)

1. Identify the contract
• Signed agreement
2. Identify the separate performance obligations
• Sale of handset
• Provision of calls and data service
3. Determine the transaction price
• $540 = $45 x 12 months
4. Allocate transaction price to performance obligations
• Standalone prices (using Vodaphone)
• $720 (= $480 + (12 months x $20)
• Handset = 480/720 x 540 = $360
• Calls and data = 240/720 x 540 = $180
5. Recognise revenue as each performance obligation is satisfied
• Handset (goods) = at
• Calls and data (services) = over 12 months
Answer to example 4 – IFRS 15 (2)

1. Identify the contract
• Signed agreement
2. Identify the separate performance obligations
• Supply and installation service
• Technical support
3. Determine the transaction price
• Combined contract price = $1,600
4. Allocate transaction price to performance obligations
• Standalone price(supply and installation) = $1,500
• Standalone price (technical support) = $500
• Supply and installation = 1,500/2,000 x 1,600 = $1,200
• Technical support = 500/2,000 x 540 = $400
5. Recognise revenue as each performance obligation is satisfied
• Supply and installation = on installation (1 July 20X7)
• Technical support = over two years (1 July 20X7 to 30 June 20X9)
SFP (extract) SPL (extract)
$ $
Non-current liabilities Revenue 1,300
Deferred income 100 = 1,200 + (6/24 x 400)
Current liabilities
Deferred income 200
= 12/24 x 400
Answer 5 – Performance obligations over time and the statement of profit or loss (1)
$m
Revenue (40% x $50million) 20
Costs (costs to date) (15)
Profit 5
Answer 6 – Performance obligations over time and the statement of profit or loss (2)
Cumulative Recognised Profit or loss
to December to December y/e 31
20X5 20X4 December
$m $m 20X5
$m
Revenue (70% x $50million) 35 20 15
Costs (costs to date) (28) (15) (13)
Profit 7 5 2
Answer 7 – Performance obligations over time and the statement of financial position
Cumulative Recognised Profit or loss
to December to December y/e 31
20X5 20X4 December
$m $m 20X5
$m
Revenue (70% x $50million) 35 20 15
Costs (costs to date) (28) (15) (13)
Profit 7 5 2
20X5 20X4
$m $m
Revenue recognised to date 35 20
Less: amounts invoiced to date (26) (16)
Contract asset/(liability) 11 4
Answer 8 – Agent vs. principal

$
Component X revenue as agent (10% x 300,000) 30,000
Component Y revenue as principal 80,000
Total revenue 110,000
Exam preparation solution – Sale of goods
Statement of profit or loss for the year ended 30 June 20X8

$’000
Revenue (65,270 + 1,810 (w)) 67,080
Investment income (350 + 95 (w)) 445
Workings
Revenue = $4,000,000 / 1.05 = $3,809,524
= $3,809,524 – $2,000,000 = $1,809,524
Investment income = $3,809,524 x 5% x 6/12 = $95,238
Exam preparation solution – Identification of contracts

B and D
Chapter 17
Answer to example 1 – Functional currency (1)
1 December 2015
DR Purchases $97,561
CR Payables $97,561
400,000 Dinar
= = $97,561
4.1
31 December 2015
Retranslate the monetary balance (payable) at the closing rate (4.3 Dinar:$1)
400,000 Dinar
= = $93,023
4.3
Reduction in payables = $97,561 - $93,023 = $4,538
DR Payables $4,538
CR Profit or loss $4,538
Do not retranslate the non-monetary balance (inventory), and leave it at $97,561 at the reporting date.
10 January 2016
Translate the payment at the exchange rate on the day of the transaction
400,000 Dinar
= = $90,909
4.4
DR Payables $93,023
CR Bank $90,909
CR Profit or loss $2,114
Exam preparation solution – Foreign currency transaction

$
Sale (revenue) 4,000,000
Gain 166,667
1,184,000
Workings
1 December 20X8 – Revenue (Gr10,000,000/2.5) $4,000,000 and receivable of $4,000,000
31 December 20X8 – Receivable of $4,166,667 (Gr10,000,000/2.4) and gain of $166,667 ($4,166,667 -
$4,000,000)
Chapter 18
No examples
Chapter 19
Answer to example 1 – Basic EPS
250m
a) Basic EPS = = 50c per share
500m
250m
b) Basic EPS = = 45.8c per share
546m (W)
Date No. shares in issue Weighting Weighted average

(# months) no. shares
1 July X5 500m 1/12 42m
1 August X5 550m 11/12 504m
WANS = 546m
New number of shares
Original number 500

New issue 50
New number 550
250m
c) Basic EPS = = 40c per share
625m
Original number 500
New issue 125
New number 625
250m
d) Basic EPS = = 45.8c per share
546m
Date No. shares in issue Weighting Fraction Weighted average
(# months) no. shares
1 July X5 500m 7/12 1.40/1.38 296m
1 Feb X6 600m 5/12 250m
WANS = 546m
500m × 1 ÷ 8 = 63m extra shares
New number of shares = 500m + 63m = 563m
Theoretical ex-rights price
$ $
5 shares at 1.40 7.00
1 share at 1.25 1.25
6 shares 8.25
TERP = 8.25/6 = $1.375

Therefore rights issue fraction = 1.40 / 1.38
Answer to example 2 – Multiple share issues and prior year comparatives

$750,000
EPS (31 March 2019) = = 14.29c
5,250,000(W)
EPS (31 March 2018 - restated) = 15.5 x 2/3 = 10.33c
(W)
No. shares in Weighting (# Weighted average

Date Fraction
issue months) no. shares
1.4.18 – 30.9.18 2,000,000 6/12 3/2 1,500,000
New issue 3,000,000
1.10.18 – 30.11.18 5,000,000 2/12 3/2 1,250,000
Bonus issue 2,500,000
1.12.18 – 31.3.19 7,500,000 4/12 2,500,000
WANS = 5,250,000
Bonus fraction No. shares in issue after 3

= =
(1-for-2) No. shares in issue after 2
Answer to example 3 – Diluted EPS

i) Convertible loan stock
500m + 400k
Diluted EPS = = 49.4c per share
1,000m + 12.5m
(W1) Extra earnings = $500,000 x (1 – 0.2) = $400,000

(W2) Extra Shares = $10m x 125 shares / $100 = 12.5m
ii) Share options

500m
Diluted EPS = = 48.2c per share
1,000m + 37.5m
No. shares under the option 100m

No. shares at full market value
62.5m
100 x $2.50/$4.00
37.5m
Fully diluted EPS
Earnings Shares
($m) (m)
Basic 500 1,000
Options - 37.5
Convertibles 0.4 12.5
500.4 1,050 47.6c
Both the basic EPS of 50c and the fully diluted EPS of 47.6c are to be disclosed.
Chapter 20
Answer to example 1 – ROCE
ROCE = PBIT / Net debt + equity x 100%
ROCE = 10,200 / 35,600 + 6,900 x 100% = 24%
Answer B
Answer to example 2 – Financial performance (1)

(a)
2019 2018
Gross margin 54.8% (=23,000/42,000) 62.2% (=28,000/45,000)
Operating margin 31.0% (=13,000/42,000) 24.4% (=11,000/45,000)
(b) The revenue has fallen by 6.7% due to more customers shopping using the Internet. If the company
does not do more to address the decline then it will run the risk of continued falling sales in future
periods.It might be a future strategy to sell its goods via the Internet as well as from its high street
stores.
Gross margin has fallen due to rising costs of production that have been unable to be passed on
directly to its customers. This will have been done in order to maintain competitiveness with the
online market, but if margins are to improve then Archer Co will need to either increase the selling
prices or look to source the same products at more competitive prices.
Operating margin has increased because Archer Co has implemented a cost cutting exercise that will
have reduced staff numbers, and/or closed down stores that were under-performing. This will have
resulted in large costs of redundancy in the prior year that are not present in the current year costs,
and lower wages/rent in the current year.
Finance costs have reduced as the funds received from the shareholders has been used to reduce the
borrowing and lower the interest costs.
Answer to example 3 – Financial performance (2)

(a)
Co A Co B
Gross profit margin = 24.4% (44,000/180,000) = 30% (45,000/150,000)
Operating profit margin =13.3% (24,000/180,000) =18% (27,000/150,000)
Operating profit margin = 18.9%

(excl. impairment) (24,000 + 10,000)/180,000
Interest cover = 6 times = 13.5 times
(24,000/4,000) (27,000/2,000)
Interest cover = 8.5 times
(excl. impairment) (24,000 + 10,000)/4,000
(b) A Co has a higher revenue than B Co and is the larger of the two companies, highlighting the appeal
of the premium branded clothes.
It is common for companies selling premium branded products to have higher margins than those
selling cheaper products, but Co B’s gross profit margin is higher than that of A Co on a lower revenue.
This is because it sources its clothes directly from the manufacturer therefore saving on
manufacturing costs.
Another reason for Co B’s higher margin could be that Co A has had to discount the selling prices of its
premium brands due to competition.
The operating profit margin of each company is in line with expectations as Co B’s continues to be
higher than that of Co A’s. However, when we remove the non-recurring impairment charge, Co A’s
margin is higher than that of Co Bs. This is because Co A operates online, and its overheads will not be
as large as those of Co B who sells via department stores.
The interest cover of Co B is higher than that of Co A, however Co A’s is high enough to cover any
future interest payments provided that profits remain consistent. Co B’s interest cover gives
confidence in its ability to issue further debt as it pursues it international expansion.
Overall, Co B looks the more profitable operation but when we remove Co A’s impairment charge, Co
A becomes more profitable. Co B has the capacity to expand internationally and can use this to boost
its profitability in future years.
Chapter 21
Answer to example 1 – Working capital
Answer C – The liquidity position is worsening as the current ratio has fallen.
Answer to example 2 – Financial performance and working capital

The expansion of operations has resulted in more than a 50% increase in revenue, however this has been at
the expense of gross profit margin which has reduced from 27.5% to 21.9%. This is a significant decrease in
the period, however it is likely that this is as a result of a strategic decision to sell a lower margin product as
costs would not be expected to increase that dramatically in a 6 month period. Alternatively, it could be the
result of a strategic decision to sell the new product at a discount in order to boost the volume of sales.
There has been a significant increase in inventories held, increasing from 58 days to 92 days. This is not
surprising in a period of expansion and it is most likely needed in order to meet the increased demand.
More concerning is the position on receivables and payables, as it appears that SAF is overtrading with an
increase in receivable days from 72 to 101 days in the last six months. It could be as a result of more
favourable credit terms being offered to new customers, however since receivables days have increased
beyond payable days the result will be increased pressure on the entity’s liquidity.
It could be the case that the credit control department has struggled to cope with the increased level of
activity and could be addressed simply by dedicating additional resources to credit control.
The current ratio has fallen. However the quick ratio is more of a concern as it has decreased from 1.6 to 1.2
and this together with the entity having moved from a positive cash position to having short term
borrowings, makes it clear that the expansion has caused problems with the management of working
capital. The entity should ensure that an overdraft facility is in place until procedures can be imposed to
improve the management of working capital.
Appendix
All workings in $000’s 6 months to 31 December 20X2 6 months to 30 June 20X2

Inventory days 1,220/2,420 x 182.5 460/1,450 x 182.5
= 92 days = 58 days
Payable days 1,190/2,420 x 182.5 580/1,450 x 182.5
= 90 days = 73 days
Receivable days 1,715/3,100 x 182.5 790/2,000 x 182.5
= 101 days = 72 days

Current ratio 2,935/1,440 = 2.0 1,400/580 = 2.4
Quick ratio 1,715/1,440 = 1.2 940/580 = 1.6
Gross profit margin 680/3,100 x 100 = 21.9% 550/2,000 x 100 = 27.5%
Chapter 22
Answer to example 1 – Investor ratios
EPS 56.7c = Earnings/No. shares in issue = 22,680/40,000
Dividend cover 5.4 times = EPS/DPS = 56.6c/10.5c
Dividend yield 8.75% = DPS/Price per share = 10.5c/$1.20 x 100%
P/E ratio 2.12 = Share price/EPS = $1.20/56.6c
NOTE: No. shares in issue = $20m/50c = 40m shares
Chapter 23
Answer to example 1 – Basic consolidation
Peter Group
$000
Other assets
2,700
(1,500 + 1,200)
Total assets 2,700
Equity share capital 1,000

2,100
Liabilities
600
(400 + 200)
Answer to example 2 – Basic consolidation (continued)

Peter Group
$000
Other assets
3,350
(1,900 + 1,450)
Total assets 3,350

Retained earnings
1,550
(=1,400 + (100% x (900 – 750))
2,550
Liabilities
800
(500 + 300)
Answer to example 3 – Non-controlling interest

Pierre Group
$000
Other assets
3,350
(1,900 + 1,450)
Total assets 3,350

Retained earnings
1,320
(1,200 + (80% x (900 – 750))
2,320
Non-controlling interest
(25% x (250 + 750)) + (25% x (900 230
– 750))
2,550
Liabilities
800
(500 + 300)
Answer to example 4 – Goodwill

(i) Proportionate share of net assets method
$
FV of consideration 156,000
NCI at acquisition
42,500
(25% x 170,000)
FV of net assets at acquisition (170,000)
Goodwill at acquisition 28,500
(ii) Fair value method
$
FV of consideration 156,000
NCI at acquisition 52,000
FV of net assets at acquisition (W2) (170,000)
Goodwill at acquisition 38,000
Answer to example 5 – Basic consolidation (revision)

(a) Goodwill
$ $
Cost of investment 1,380,000
Net assets
Share capital 1,000,000
(1,480,000)
Goodwill 350,000
(b) Non-controlling interests
$
NCI% of post-acquisition profits
45,000
25% x (660,000 – 480,000)
NCI at reporting date 495,000
(c) Other figures
(i) Investment = $nil
(ii) Other assets = 4,500 + 2,400 = $6,900,000
(iii) Share capital = $2,000,000 (100% P only)
(iv) Retained earnings = 2,040 + [75% x (660 – 480)] = $2,175,000
(v) Liabilities = 1,840 + 740 = $2,580,000
Answer to example 6 – Workings

Matthews
Group
$000
Non-current assets
1,500
(1,000 + 500)
Goodwill (W3) 500
Current assets
1,400
(800 + 600)
Total assets 3,400
Equity share capital ($1) 500

Retained earnings (W5) 1,040
1,540
Non-controlling interest (W4) 260
1,800
Liabilities
1,600
(1,100 + 500)
Workings
W1) Group Structure
Matthews
80%
Jones

Equity shares 200 200
Ret. earnings 400 100
600 300 300
W3) Goodwill
FV of consideration (shares/cash) 600
NCI at acquisition (FV) 200
800
FV of net assets at acquisition (W2) (300)
Goodwill at acquisition 500
NCI @ acqn (W3) 200

Add: 20% x 300 (W2) 60
260

100% P 800
Add: 80% x 300 (W2) 240
1,040
Answer to example 7 – Unrealised profits

James
Group
$’000
Non-current assets
PPE
1,400
(900 + 500)
Goodwill (W3) 650
Current Assets
1,290
(700 + 600 – 10 (PUP))
3,340
Share Capital 500

Retained earnings (W5) 992
Current liabilities
1,600
(1,100 + 500)
3,340
WORKINGS
W1) Group Structure
James
80%
Molly

Equity shares 200 200

PUP
(10)
(20/120 x 120 x ½)
590 350 240
W3) Goodwill
FV of consideration (shares/cash) 800

NCI at acquisition (FV) 200
1,000
FV of net assets at acquisition (W2) (350)
NCI @ acqn (W3) 200

Add: 20% x 240 (W2) 48
248

100% P 800
Add: 80% x 240 (W2) 192
992
Answer to example 8 – Share exchange

1. No. S shares acquired = 80% x 10,000,000 = 8,000,000
2. No. P shares issued = 8,000,000 x 1 / 4 = 2,000,000
3. Value of P shares issued = 2,000,000 x $3 = $6,000,000 (cost of investment)
4. Journal entry
Dr Investment $6,000,000
Cr Share capital $2,000,000
Cr Share premium (β) $4,000,000
Answer to example 9 – Deferred consideration

Share exchange
1. No. S shares acquired = 80% x 30,000,000 = 24,000,000
2. No. P shares issued = 24,000,000 x 2 / 3 = 16,000,000
3. Value of P shares issued = 16,000,000 x $2 = $32,000,000 (cost of investment)
Deferred consideration
PV of consideration = 24,000,000 x $1 x 0.91 = 21,840,000
Total consideration
= 32,000,000 + 21,840,000 = $53,840,000
Chapter 24
Answer to example 1 – Basic consolidation (revision)
Group
$’000
Revenue 11,600
(8,400 + 3,200)
Cost of sales (6,300)
(4,600 + 1,700)
Gross profit 5,300
Operating expenses (2,160)
(2,200 + 960)
Taxation (740)
(600 + 140)
Profit attributable to:

Equity shareholders (β) 2,320
Non-controlling interest 80
(20% x 400)
Answer to example 2 – Basic consolidation (mid-year acquisition)

Vader
P S
$’000
Revenue
2,285
(1,645 + (6/12 x 1,280))
Cost of sales
(1,700)
(1,205 + (6/12 x 990))
Gross profit 585
Distribution costs
(135)
(100 + (6/12 x 70))
Administrative expenses
(135)
(90 + (6/12 x 50) + 20(imp))
Profit before interest and tax 315
Finance costs
(70)
(55 x (6/12 x 30))
Investment income
2
(10 – (80% x 10))
Profit before tax 247
Taxation
(49)
(35 + (6/12 x 28))
Profit for the year 198
Profit attributable to:

Equity shareholders (β) 190.8
Non-controlling interest
7.2
= 20% x [(6/12 x 112) – 20]
Answer to example 3 – Unrealised profits

P S Adj. Group
Revenue 120,000 90,000 (10,000) 200,000
COS (70,000) (40,000) 10,000 (100,500)
PUP
(500)
(25/125 x 10,000 x ¼)
Gross profit 99,500
Op exp. (20,000) (35,000)
(56,000)
-Impairment (1,000)
Finance cost (2,000) (500) (2,500)
Taxation (6,000) (3,000) (9,000)
PFY 10,000 32,000
Parent (β) 30,000
NCI = 20% x 10,000 2,000
Answer to example 4 – Group disposals

$m
Proceeds 200
Add: non-controlling interest 15
Less: net assets at disposal (150)
Less: goodwill (38)
Group profit on disposal 27
Exam preparation solution – Profit attributable to the equity holders

of the parent
Romeo Juliet (6/12) Total
$ $ $
Profit 85,600,000 12,700,00
PUP (1/4 x 2,000,000) (500,000)
Total 12,200,000
Attributable to the parent 100% 90%
85,600,00 10,980,000 96,580,000
Chapter 25
Answer to example 1 – Associate
$
Cost of investment in A 250,000
Add: 30% x 170,000 51,000
Less: impairment of goodwill (20,000)
281,000
Answer to example 2 – Group SFP incl. associate

Hartsop
$m
Assets:
Non-current assets
Property, plant and equipment
3,130
(1,560 + 1,250 + (400 – 80) (W2))
Goodwill (W3) 45
Investment in associate (W6) 205
3,380
Current assets
2,220
(1,020 + 1,200)
Total assets 5,600
Equity and liabilities:

Share capital 1,700
Retained earnings (W5) 1,644
3,344
Total equity 3,980
870
(520 + 350)
Current liabilities
750
(450 + 300)
Total liabilities 1,620
Workings
W1) Group Structure
20-50%
>50%

Equity shares 1,000 1,000
SP
FV – PPE 400 400
Depreciation (80) -
2,120 1,850 270
W3) Goodwill
FV of consideration (shares/cash/loan stock) 1,340

NCI at acquisition
555
(30% x 1,850)
1,895
FV of net assets at acquisition (W2) (1,850)
NCI @ acqn (W3) 555

Add: NCI% x S’s post-acqn profits (W2)
81
(30% x 270)
636
100% P 1,450
Add: P’s % of S’s post acqn retained earnings (70% x 1,270(W2)) 189
Add: P’s % of A’s post acqn retained earnings (W6) 10
Less: Dividend (W6) (5)
1,644
W6) Investment in associate
Cost 200
Add: P% x A’s post-acqn profits
10
(25% x 80 x 6/12)
Less: Dividend
(5)
(25% x 20)
205
Answer to example 3 – PUP

D
The adjustment is for TR’s 20% share of the profit on the goods still held in inventory at the reporting date.
PUP = 25/125 x 200,000 x ½ x 20%= $4,000
DR Share of profit of associate $4,000
CR Investment in associate $4,000
Answer to example 4 – Group SPL incl. associate

(a) Goodwill
$’000
FV consideration 90
FV NCI 25
FV net assets @ acquisition (85)
Goodwill @ acquisition 30
CONSOLIDATED STATEMENT OF PROFIT AND LOSS AND OTHER COMPREHENSIVE INCOME
P S Adj. Group
Revenue 1,645 1,280 2,925
COS (1,205) (990) (2,196)
PUP (P to A) (1)
Gross profit 729
Op. costs (190) (120) (310)
Finance cost (55) (30) (85)
Associate (25% x (200 x 6/12)) – 1 24
(impairment)
Profit before tax 358
Taxation (35) (30) (65)
PFY 110 293
Parent (β) 271
NCI = 20% x 110 22
Answer to example 5 – Significant influence

Mosedal – investment as there is no significant influence as Haycock does not have any board
representation.
Glaramara – associate as there is significant influence via the two directors of the five in total on the board.
Birks – subsidiary as there is control due to holding the majority of the voting rights.
Whinlatter – investment as there is no significant influence given that there is only one other shareholder
with whom we have no links with at all.
Catbells – associate as there is significant influence due to the provision of essential technical information.
Exam preparation solution – Investment in associate

$300,000 + (25% x 235,000 x 6/12) – (25% x $40,000) = $319,375

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ACCA Financial Reporting (FR)

PUBLISHED COMPANY ACCOUNTS 13

ANALYSIS AND INTERPRETATION 93

GROUP ACCOUNTS 103

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CONCEPTUAL AND REGULATORY FRAMEWORK

1. Objective of financial reporting

2. Qualitative characteristics – make information useful

3. Financial statements and the reporting entity

4. Elements of financial statements

5. Recognition and derecognition

Historical cost Current value

7. Presentation and disclosure

Example 1 – Qualitative characteristics

A (1) and (2)

A (1) and (2)

Example 4 - Conceptual Framework

Promote and facilitate

Supports in the Reports to

Example 1 - Regulatory Framework

A To provide guidance on financial reporting issues not specifically addressed in IFRSs

Example 2 – Regulatory bodies

A Responsible for all IFRS technical matters

1. IASB work plan

2. Standard setting process

Revised exposure draft

New IFRS issued

New IFRS adopted

3. Purpose and the role of the International Sustainability

It has four key objectives:

IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information

IFRS S2 Climate-related disclosures

PUBLISHED COMPANY ACCOUNTS

Statement of financial position as at [date]

EQUITY AND LIABILITIES

Continuing operations $’000s

Other comprehensive income for the year (after tax):

Other comprehensive income, net of tax X

Example 1 – Statement of profit and loss, and statement of financial position

Cost ($) NRV ($)

Statement of changes in equity for the year ended [date]

Equity Retained Revaluation Total

Example 2 – Statement of changes in equity (1)

1. Total comprehensive income for the year

Example 3 – Statement of changes in equity (2)

During the year the following important events took place:

Statement of cash flows for the year ended [date]

Cash flows from investing activities

Cash flows from financing activities

Net increase/(decrease) in cash and cash equivalents X