DIP IFR FOUNDATION COURSE

External Reports (financial statements)

1. Statement of Profit or Loss and Other Comprehensive Income (SOPOL &OCI)
2. Statement of financial position (SOFP)
3. Statement of cash flow (SOCF)
4. Statement of change in Equity (SOCIE)
5. Notes – Disclosures

Users of financial statements and accounting information

(1) Managers of the company appointed by the company’s owners to supervise the day-to-day activities of the
company. They need information about the company’s financial situation as it is currently and as it is
expected to be in the future. This is to enable them to manage the business efficiently and to make effective
decisions.
(2) Shareholders of the company, They company’s owner, want to assess how well the management is
performing. They want to know how profitable the company’s operations are and how much profit they can
afford to withdraw from the business for their own use.
(3) Trade contacts. Suppliers want to know about the company’s ability to pay its debts: customers need to
know that the company is secure source of supply and is in no danger of having taken close down.
(4) Providers of finance of the company. The bank wants to ensure that the company is able to keep up
interest payments, and eventually to repay the amounts advanced.
(5) The taxation authorities to assess the tax payable by the company, including sales taxes.
(6) Employees of the company their future careers and size of their wages and salaries depend on it.
(7) Financial analysts and advisers need information for their clients or audience.
(8) Government and their agencies, they also require information in order to provide a basis for national
statistics.
(9) The public, in a variety of way.

1
 DIP IFR FOUNDATION COURSE

Sources, records and books of prime entry

Role of source documents
Business transactions are recorded on source documents. Examples include sales and purchase orders,
invoices and credit notes.
Types of source documents
Whenever a business transaction takes place, involving sales or purchases, receiving or paying money, or owing
or being owed money, it is usual for the transaction to be recorded on a document. These documents are the
source of all the information recorded by a business.
Documents used to record the business transactions in the 'books of account' of the business include the
following.
(a) Quotation. A document sent to a customer by a company stating the fixed price that would be charged to
produce or deliver goods or services. Quotations tend to be used when businesses do not have a standard
listing of prices for products, for example when the time, materials and skills required for each job vary
according to the customer's needs. Quotations can't be changed once they have been accepted by the
customer.
(b) Purchase order. A document of the company that details goods or services which the company wishes to
purchase from another company. Two copies of a purchase order are often made, one is sent to the
company from which the goods or services will be purchased, and the other is kept internally so the
company can keep track of its orders. Purchase orders are often sequentially numbered.
(c) Sales order. A document of the company that details an order placed by a customer for goods or services.
The customer may have sent a purchase order to the company from which the company will then generate a
sales order. Sales orders are usually sequentially numbered so that the company can keep track of orders
placed by customers.
(d) Goods received note. A document of the company that lists the goods that a business has received from a
supplier. A goods received note is usually prepared by the business's own warehouse or goods receiving
area. This is discussed further below.
(e) Goods despatched note. A document of the company that lists the goods that the company has sent out to
a customer. The company will keep a record of goods despatched notes in case of any queries by
customers about the goods sent. The customer will compare the goods despatched note to what they
receive to make sure all the items listed have been delivered and are the right specification.
(f) Invoice. This is discussed further below.
(g) Statement. A document sent out by a supplier to a customer listing the transactions on the customer's
account, including all invoices and credit notes issued and all payments received from the customer. The
statement is useful, as it allows the customer to reconcile the amount that they believe they owe the supplier
to the amount the supplier believes they are owed. Any differences can then be queried.
(h) Credit note. A document sent by a supplier to a customer in respect of goods returned or overpayments
made by the customer. It is a 'negative' invoice. This is discussed further below.
(i) Debit note. A document sent by a customer to a supplier in respect of goods returned or an overpayment
made. It is a formal request for the supplier to issue a credit note.
(j) Remittance advice. A document sent to a supplier with a payment, detailing which invoices are being paid
and which credit notes offset. A remittance advice allows the supplier to update the customer's records to
show which invoices have been paid and which are still outstanding. It also confirms the amount being paid,
so that any discrepancies can be easily identified and investigated.
(k) Receipt. A document confirming confirmation that a payment has been received. This is usually in respect of
cash sales, eg a till receipt from a cash register. This is discussed further below.

2
 DIP IFR FOUNDATION COURSE

Question
Which one of the following can the accounting equation can be rewritten as?
A. Assets + profit – drawings – liabilities = closing capital
B. Assets – liabilities – drawings = opening capital + profit
C. Assets – liabilities – opening capital + drawings = profit
D. Assets – profit – drawings = closing capital – liabilities

The need for books of prime entry

The main books of prime entry are as follows.
(a) Sales day book
(b) Purchase day book
(c) Sales returns day book
(d) Purchase returns day book
(e) Journal (described in the next chapter)
(f) Cash book
(g) Petty cash book

Sales and purchase day books

Invoices and credit notes are recorded in day books.
Sales day book
The sales day book is the book of prime entry for credit sales.
Purchase day book
A business also keeps a record in the purchase day book of all the invoices it receives.
The purchase day book is the book of prime entry for credit purchases.

Sales returns day book

When customers return goods for some reason, a credit note is raised. All credit notes are recorded in the sales
returns day book.
The sales returns day book is the book of prime entry for credit notes raised.

Purchase returns day book

Not surprisingly, the purchase returns day book records credit notes received in respect of goods which the
business sends back to its suppliers.
The purchase returns day book is the book of prime entry for credit notes received from suppliers.

Cash book
The cash book may be a manual record or a computer file. It records all transactions that go through the bank
account.

3
 DIP IFR FOUNDATION COURSE

Question
1. Which of the following are books of prime entry?
1. Sales day book
2. Cash book
3. Journal
4. Purchase ledger

A. 1 and 2 only
B. 1, 2 and 3 only
C. 1 only
D. All of them

2. In which book of prime entry will a business record debit notes in respect of goods which have been sent
back to suppliers?
A. The sales returns day book
B. The cash book
C. The purchase returns day book
D. The purchase day book

3. Which of the following statements is/are TRUE or FALSE?

1. Cash purchases are recorded in the purchases day book.
2. The sales day books is used to keep a list of invoices received from suppliers.

A. Both statements are TRUE

B. Both statements are FALSE
C. Statement 1 is TRUE and statement 2 is FALSE
D. Statement 1 is FALSE and statement 2 is TRUE

4. Complete the table to show the source document and book of original entry used for each of the
following transactions.
The first transaction has been completed as an example.
Transaction Source document Book of original entry
Goods sold on credit Sales invoice Sales day book

Goods returned to a credit supplier

Payment sent in the post to a credit

supplier
Rent paid by direct debit

Payment from a trade receivable

Purchase of a motor vehicle on

credit

4
 DIP IFR FOUNDATION COURSE

Bank statements
Weekly or monthly, a business will receive a bank statement. Bank statements should be used to check that the
amount shown as a balance in the cash book agrees with the amount on the bank statement, and that no cash
has 'gone missing'. This agreement or 'reconciliation' of the cash book with a bank statement is the subject of a
later chapter.

Petty cash
Most businesses keep petty cash on the premises, which is topped up from the main bank account. Under the
imprest system, the petty cash is kept at an agreed sum, so that each topping up is equal to the amount paid
out in the period.

What is petty cash?

Most businesses keep a small amount of cash on the premises to make occasional small payments in cash, eg
staff refreshments, postage stamps, to pay the office cleaner, taxi fares, etc. This is often called the cash float or
petty cash account. The cash float can also be the resting place for occasional small receipts, eg cash paid by a
visitor to make a phone call.

Petty cash book

A petty cash book is a cash book for small payments.

Imprest system
Under what is called the imprest system, the amount of money in petty cash is kept at an agreed sum or 'float'
(say, $250). This is called the imprest amount. Expense items are recorded on vouchers as they occur, so that
at any time:
$

Cash still held in petty cash 195

Plus voucher payments (25+5+10+15) 55

Must equal the imprest amount 250

The total float is replenished regularly (to $250, or whatever the imprest amount is) by means of a cash payment
from the bank account into petty cash. The amount of the 'top-up' into petty cash will be the total of the voucher
payments since the previous top-up.

5
 DIP IFR FOUNDATION COURSE

Example: petty cash and the imprest system

DEF operates an imprest system for petty cash. During February 20X9, the following petty cash transactions took
place.
$
2.2.X9 Stamps 12.00
3.2.X9 Milk 25.00
8.2.X9 Taxi fare 15.00
17.2.X9 Stamps 5.00
18.2.X9 Received from staff for photocopying 8.00
28.2.X9 Stationery 7.50

The amount remaining in petty cash at the end of the month was $93.50. What is the imprest amount?
A. $166.00
B. $150.00
C. $72.50
D. $56.50

Question
State which books of prime entry the following transactions would be entered into.
(a) Your business pays A Brown (a supplier) $450.00
(b) You send D Smith (a customer) an invoice for $650
(c) Your accounts manager asks you for $12 urgently in order to buy some envelopes
(d) You receive an invoice from A Brown for $300
(e) You pay D Smith $500
(f) F Jones (a customer) returns goods to the value of $250
(g) You return goods to J Green to the value of $504
(h) F Jones pays you $500

Answer
(a) Cash book
(b) Sales day book
(c) Petty cash book
(d) Purchases day book
(e) Cash book
(f) Sales returns day book
(g) Purchase returns day book
(h) Cash book

6
 DIP IFR FOUNDATION COURSE

Ledger accounts and double entry

Why do we need ledger accounts?

Ledger accounts summarise all the individual transactions listed in the books of prime entry.
The nominal ledger
The principal accounts are contained in a ledger called the general or nominal ledger.
The nominal ledger is an accounting record which summarises the financial affairs of a business.
The nominal ledger is sometimes called the 'general ledger'. The information contained in the books of prime
entry (eg the sales and purchases day books) is summarised and posted to accounts in the nominal ledger.
Examples of accounts in the nominal ledger include the following.
1. Plant and machinery at cost (non-current asset)
2. Motor vehicles at cost (non-current asset)
3. Plant and machinery, provision for depreciation (liability)
4. Motor vehicles, provision for depreciation (liability)
5. Proprietor's capital (liability)
6. Inventories – raw materials (current asset)
7. Inventories – finished goods (current asset)

Accounting equation
The accounting equation is ASSETS = CAPITAL + LIABILITIES.

Drawings
Drawings are amounts of money taken out of a business by its owner.

Question
1. Which of the following is correct?
A. Capital = assets + liabilities
B. Capital = liabilities – assets
C. Capital = assets – liabilities
D. Capital + assets = liabilities

2. The profit earned by a business in 20X7 was $72,500. The proprietor injected new capital of $8,000 during
the year and withdrew goods for his private use which had cost $2,200.
If net assets at the beginning of 20X7 were $101,700, what were the closing net assets?
A. $35,000
B. $39,400
C. $168,400
D. $180,000

3. The profit made by a business in 20X7 was $35,400. The proprietor injected new capital of $10,200 during
the year and withdrew a monthly salary of $500.
If net assets at the end of 20X7 were $95,100, what was the proprietor's capital at the beginning of the year?
A. $50,000
B. $55,500
C. $63,900
D. $134,700

7
 DIP IFR FOUNDATION COURSE

Payables and receivables

Trade accounts payable are liabilities. Trade accounts receivable are assets.

Trade accounts payable and trade accounts receivable

A payable is a person or organisation to whom a business owes money.
A trade payable is a person or organisation to whom a business owes money for debts incurred in the course of
trading operations.
A trade account payable is a liability of a business.
Just as a business might buy goods on credit, so too might it sell goods to customers on credit. A customer who
buys goods without paying cash for them straightaway is a receivable.
A trade account receivable is an asset of a business.

Matching
The matching convention requires that revenue earned is matched with the expenses incurred in earning it.

Double entry bookkeeping

Double entry bookkeeping is based on the idea that each transaction has an equal but opposite effect.
Every accounting event must be entered in ledger accounts both as a debit and as an equal but opposite credit.

Dual effect (duality concept)

Double entry bookkeeping is the method used to transfer the weekly/monthly totals from the books of prime
entry into the nominal ledger.

Rules of double entry bookkeeping

A debit entry will:
 Increase an asset
 Decrease a liability
 Increase an expense

A credit entry will:

 Decrease an asset
 Increase a liability
 Increase income

Journal
The journal is the record of prime entry for transactions which are not recorded in any of the other books of
prime entry.
You should remember that one of the books of prime entry is the journal.
The journal keeps a record of unusual movement between accounts. It is used to record any double entries
made which do not arise from the other books of prime entry, ie non-routine transactions. For example, journal
entries are made when errors are discovered and need to be corrected.

8
 DIP IFR FOUNDATION COURSE

Correction of errors
The journal is most commonly used to record corrections to errors that have been made in writing up the nominal
ledger accounts. Errors corrected by the journal must be capable of correction by means of a double entry in
the ledger accounts. In other words, the error must not have caused total debits and total credits to be unequal.

Receivables and payables ledgers

The receivables and payables ledgers contain the personal accounts of individual customers and suppliers.
They do not normally form part of the double entry system.
Impersonal accounts and personal accounts
The accounts in the nominal ledger (ledger accounts) relate to types of income, expense, asset, liability – rent,
sales, trade receivables, payables etc – rather than to the person to whom the money is paid or from whom it is
received. They are therefore called impersonal accounts. However, there is also a need for personal accounts,
most commonly for receivables and payables, and these are contained in the receivables ledger and payables
ledger.
Receivables ledger
The sales day book provides a chronological record of invoices sent out by a business to credit customers. For
many businesses, this might involve very large numbers of invoices per day or per week. The same customer
might appear in several different places in the sales day book, for sales made on credit at different times. So a
customer may owe money on several unpaid invoices.
In addition to keeping a chronological record of invoices, a business should also keep a record of how much
money each individual credit customer owes, and the makeup of this total debt. The need for a personal
account for each customer is a practical one.
(a) A customer might telephone, and ask how much they currently owe. Staff must be able to tell them.
(b) It is a common practice to send out statements to credit customers at the end of each month, showing how
much they still owe, and itemising new invoices sent out and payments received during the month.
(c) The managers of the business will want to keep a check on the credit position of an individual customer, and
to ensure that no customer is exceeding their credit limit by purchasing more goods.
(d) Most important is the need to match payments received against debts owed. If a customer makes a
payment, the business must be able to set off the payment against the customer's debt and establish how
much they still owe on balance.
The receivables ledger is a ledger for customers' personal accounts.

Payables ledger
The payables ledger, like the receivables ledger, consists of a number of personal accounts. These are separate
accounts for each individual supplier, and they enable a business to keep a continuous record of how much it
owes each supplier at any time.
The payables ledger is a ledger for suppliers' personal accounts.

9
 DIP IFR FOUNDATION COURSE

Practice Question
1. A trader's net profit for the year may be computed by using which of the following formulae?
A. Opening capital + drawings – capital introduced – closing capital
B. Closing capital + drawings – capital introduced – opening capital
C. Opening capital – drawings + capital introduced – closing capital
D. Opening capital – drawings – capital introduced – closing capital

2. A business can make a profit and yet have a reduction in its bank balance. Which ONE of the following
might cause this to happen?
A. The sale of non-current assets at a loss
B. The charging of depreciation in the statement of profit or loss
C. The lengthening of the period of credit given to customers
D. The lengthening of the period of credit taken from suppliers

3. The net assets of Altese, a trader, at 1 January 20X2 amounted to $128,000. During the year to 31
December 20X2 Altese introduced a further $50,000 of capital and made drawings of $48,000. At 31
December 20X2 Altese's net assets totalled $184,000.
What is Altese's total profit or loss for the year ended 31 December 20X2?
A. $54,000 profit
B. $54,000 loss
C. $42,000 loss
D. $58,000 profit

4. Jones Co has the following transactions:

1. Payment of $400 to J Bloggs for a cash purchase
2. Payment of $250 to J Doe in respect of an invoice for goods purchased last month
What are the correct ledger entries to record these transactions?
A Dr Cash $650
Cr Purchases $650
B Dr Purchases $650
Cr Cash $650
C Dr Purchases $400
Dr Trade Payables $250
Cr Cash $650
D Dr Cash $650
Cr Trade Payables $250
Cr Purchases $400

5. Which of the following documents should accompany a return of goods to a supplier?

A. Debit note
B. Remittance advice
C. Purchase invoice
D. Credit note

10
 DIP IFR FOUNDATION COURSE

6. A company’s motor vehicles at cost account at 30 June 20X6 is as follows:

MOTOR VEHICLES – COST

$ $

Balance b/d 150,500 Disposal 85,000

Additions 120,950 Balance c/d 186,450

271,450 271,450

What opening balance should be included in the following period’s trial balance for motor vehicles – cost at 1
July 20X6?
A. $271,450 DR
B. $271,450 DR
C. $186,450 CR
D. $186,450 DR

7. A company’s trade payables account at 30 September 20X1 is as follows:

TRADE PAYABLES ACCOUNT

$ $

Cash at bank 21,600 Balance b/d 14,000

Balance c/d 11,900 Purchases 19,500

33,500 33,500

What was the balance for trade payables in the trial balance at 1 October 20X0?
A. $14,000 DR
B. $14,000 CR
C. $11,900 DR
D. $11,900 CR

8. Which of the following would be recorded in the sales day book?

A. Discounts allowed
B. Sales invoices
C. Credit notes received
D. Trade discounts
9. Which of the following statements is true?
A. A debit records an increase in liabilities.
B. A debit records a decrease in assets.
C. A credit records an increase in liabilities.
D. A credit records an decrease in capital.

10. How is the total of the purchases day book posted to the nominal ledger?
A. Debit purchases, Credit cash
B. Debit payables control, Credit purchases
C. Debit cash, Credit purchases
D. Debit purchases, Credit payables control

11
 DIP IFR FOUNDATION COURSE

11. Which one of the following statements about an imprest system of petty cash is correct?
A. An imprest system for petty cash controls small cash expenditures because a fixed amount is paid into
petty cash at the beginning of each period.
B. The imprest system provides a control over petty cash spending because the amount of cash held in
petty cash at any time must be equal to the value of the petty cash vouchers for the period.
C. An imprest system for petty cash can operate without the need for petty cash vouchers or receipts for
spending.
D. An imprest system for petty cash helps with management of small cash expenditures and reduces the
risk of fraud.

12. Which one of the following provides evidence that an item of expenditure on petty cash has been approved
or authorised?
A. Petty cash voucher
B. Record of the transaction in the petty cash book
C. Receipt for the expense
D. Transfer of cash from the bank account into petty cash

The following information is relevant for questions 13 and 14.

On 1 May 20X9 Marshall's cash book showed a cash balance of $224 and an overdraft of $336. During the week
ended 6 May the following transactions took place.
May 1 Sold $160 of goods to P Dixon on credit.
May 1 Withdrew $50 of cash from the bank for business use.
May 2 Purchased goods from A Clarke on credit for $380 less 15% trade discount.
May 2 Repaid a debt of $120 owing to R Hill, taking advantage of a 10% cash discount. The payment
was by cheque.
May 3 Sold $45 of goods for cash.
May 4 Sold $80 of goods to M Maguire on credit, offering a 121/2% discount if payment made within 7
days.
May 4 Paid a telephone bill of $210 by cheque.
May 4 Purchased $400 of goods on credit from D Daley.
May 5 Received a cheque from H Larkin for $180. Larkin has taken advantage of a $20 cash discount
offered to him.
May 5 Sold $304 of goods to M Donald on credit.
May 5 Purchased $135 of goods from Honour Co by cheque.
May 6 Received a cheque from D Randle for $482.
May 6 Purchased $100 of goods on credit from G Perkins.

13. What is the total of the sales day book?

A. $544
B. $589
C. $534
D. $579

14. What is the total of the purchases day book?

A. $880
B. $823
C. $1,033
D. $958

12
 DIP IFR FOUNDATION COURSE

15. Smith Co has the following transactions:

1. Purchase of goods on credit from T Rader: $450
2. Return of goods purchased on credit last month to T Rouble: $700
What are the correct ledger entries to record these transactions?
A Dr Purchases $450

Dr Purchase Returns $700

Cr Cash $450

Cr Trade Payables $700

B Dr Purchases $450

Dr Trade Payables $700

Cr Purchase Returns $1,150

C Dr Purchases $450

Dr Trade Payables $250

Cr Purchase Returns $700

D Dr Purchase Returns $700

Dr Purchases $450

Cr Trade Payables $1,150

16. Mew Ling has the following transactions:

1. Receipt of cash from R Singh in respect of an invoice for goods sold three weeks ago
2. Receipt of cash from S Kalu for cash sales
What are the ledger entries required to record the above transactions?
A Dr Cash

Cr Sales

B Dr Cash

Cr Sales

Cr Trade Receivables

C Dr Sales

Cr Cash

D Dr Trade Receivables

Dr Sales

Cr Cash

13
 DIP IFR FOUNDATION COURSE

17. How is the total of the sales day book recorded in the nominal ledger?

Debit Credit
A Receivables Receivables
Ledger Control Account
B Receivables Receivables
Control Account Ledger
C Sales Receivables
Control Account
D Receivables Sales
Control Account

18. Are the following statements about debit entries true or false?
1. A debit entry in the cash book will increase an overdraft in the accounts.
2. A debit entry in the cash book will increase a bank balance in the accounts.
A. Both true
B. Both false
C. 1 true and 2 false
D. 1 false and 2 true

19. An accountant has inserted all the relevant figures into the trade payables account, but has not yet balanced
off the account.
TRADE PAYABLES ACCOUNT

$ $

Cash at bank 100,750 Balance b/d 250,225

Purchases 325,010

Assuming there are no other entries to be made, other than to balance off the account, what is the closing
balance on the trade payables account?
A. $474,485 DR
B. $575,235 DR
C. $474,485 CR
D. $575,235 CR

20. You are given the following information:

Receivables at 1 January 20X3 $10,000
Receivables at 31 December 20X3 $9,000
Total receipts during 20X3 (including cash sales of $5,000) $85,000
What are sales on credit during 20X3?
A. $81,000
B. $86,000
C. $79,000
D. $84,000

14
 DIP IFR FOUNDATION COURSE

21. A business sells $100 worth of goods to a customer, the customer pays $50 in cash immediately and will
pay the remaining $50 in 30 days' time.
What is the double entry to record the purchase in the customer’s accounting records?
A. Debit cash $50, credit payables $50, credit purchases $50
B. Debit payables $50, debit cash $50, credit purchases $100
C. Debit purchases $100, credit payables $50, credit cash $50
D. Debit purchases $100, credit cash $100

22. Tin Co purchases $250 worth of metal from Steel Co. Tin Co agrees to pay Steel Co in 60 days time.
What is the double entry to record the purchase in Steel Co’s books?
A. Debit sales $250, credit receivables $250
B. Debit purchases $250, credit payables $250
C. Debit receivables $250, credit sales $250
D. Debit payables $250, credit purchases $250

23. The following totals appear in the day books for March 20X8.
$
Sales day book 40,000
Purchases day book 20,000
Returns inwards day book 2,000
Returns outward day book 4,000
Opening and closing inventories are both $3,000. What is the gross profit for March 20X8?
A. $22,000
B. $24,000
C. $20,000
D. $18,000

24. T Tallon had the following transactions:

1. Sale of goods on credit for $150 to F Rogit
2. Return of goods from B Blendigg originally sold for $300 in cash to B Blendigg
What are the correct ledger entries to record these transactions?
A Dr Receivables $150
Dr Sales Returns $300
Cr Sales $150
Cr Cash $300
B Dr Sales $150
Dr Cash $300
Cr Receivables $150
Cr Sales Returns $300
C Dr Receivables $450
Cr Sales $150
Cr Sales Returns $300
D Dr Sales Returns $300
Dr Sales $150
Cr Cash $450

15
 DIP IFR FOUNDATION COURSE

From trial balance to financial statements

Trial balance
At suitable intervals, the entries in each ledger account are totalled and a balance is struck. Balances are usually
collected in a trial balance which is then used as a basis for preparing a statement of profit or loss and a
statement of financial position.
A trial balance is a list of ledger balances shown in debit and credit columns.

What if the trial balance shows unequal debit and credit balances?
A trial balance can be used to test the accuracy of the double entry accounting records. It works by listing
the balances on ledger accounts, some of which are debits and some credits. Total debits should equal total
credits.
If the two columns of the list are not equal, there must be an error in recording the transactions in the accounts. A
list of account balances, however, will not disclose the following types of errors.
(a) The complete omission of a transaction, because neither a debit nor a credit is made
(b) The posting of a debit or credit to the correct side of the ledger, but to a wrong account
(c) Compensating errors (eg an error of $100 is exactly cancelled by another $100 error elsewhere)
(d) Errors of principle (eg cash from receivables being debited to trade accounts receivable and credited to
cash at bank instead of the other way round)

Statement of profit or loss

A profit or loss ledger account is opened up to gather all items relating to income and expenses. When
rearranged, these items make up the statement of profit or loss.

Statement of financial position

The balances on all remaining ledger accounts (including the profit or loss account) can be listed and
rearranged to form the statement of financial position.

Question
1. At 30 November 20X5 Jenny had a bank loan of $8,500 and a balance of $678 in hand in her bank account.
How should these amounts be recorded on Jenny's opening trial balance at 1 December 20X5?
A. Debit $7,822
B. Credit $7,822
C. Credit $8,500 and Debit $678
D. Debit $8,500 and Credit $678

2. Bert has extracted the following list of balances from his general ledger at 31 October 20X5:
$
Sales 258,542
Opening inventory 9,649
Purchases 142,958
Expenses 34,835
Non-current assets (carrying amount) 63,960
Receivables 31,746
Payables 13,864
Cash at bank 1,783
Capital 12,525
What is the total of the debit balances in Bert's trial balance at 31 October 20X5?
A. $267,049
B. $275,282
C. $283,148
D. $284,931
16
 DIP IFR FOUNDATION COURSE

Practice Question
1. William's trial balance at 30 September 20X5 includes the following balances:
Trade receivables $75,943

Receivables allowance $4,751

How should these balances be reported in William's statement of financial position as at 30 September
20X5?
A. An asset of $71,192
B. An asset of $75,943 and a liability of $4,751
C. A liability of $71,192
D. A liability of $75,943 and an asset of $4,751

2. A trial balance is made up of a list of debit balances and credit balances.

Which of the following statements is correct?
A. Every debit balance represents an expense.
B. Assets are represented by debit balances.
C. Liabilities are represented by debit balances.
D. Income is included in the list of debit balances.

3. At 31 October 20X6 Roger's trial balance included the following balances:

$
Machinery at cost 12,890
Accumulated depreciation 8,950
Inventory 5,754
Trade receivables 11,745
Trade payables 7,830
Bank overdraft 1,675
Cash at bank 150
What is the value of Roger's current assets at 31 October 20X6?
A. $17,649
B. $17,499
C. $15,974
D. $13,734

4. Which ONE of the following statements does NOT describe a way in which an effective accounting system
facilitates the provision of useful accounting information?
A. By requiring authorisation in line with organisational policies
B. By processing and recording transactions in accordance with accounting rules
C. By preventing transactions from being processed inaccurately
D. By enabling transactions to be recorded as necessary to permit preparation of financial statements

17
 DIP IFR FOUNDATION COURSE

Year - end Adjustment

Debit Credit

Closing inventory Inventory cost of sale

Depreciation Depreciation expense Accumulated depreciation
Bad debt (irrecoverable debt) Bad debt expense Allowance for receivable
Accrued expense Expense Current liabilities
Accrued income Current asset Income
Prepaid expense Current asset Expense
Prepaid income Income Current

Preparation of financial statements of sole traders

Prepare a set of final accounts for a sole trader from a trial balance after incorporating period-end adjustments
for depreciation, inventory, prepayments, accruals, irrecoverable debts and allowances for receivables.

18
 DIP IFR FOUNDATION COURSE

Question – 1
The following trial balance was extracted from the ledger of Stephen Chee, a sole trader, as at 31 May 20X1 –
the end of his financial year.
TRIAL BALANCE AS AT 31 MAY 20X1
Dr Cr
$ $
Property, at cost 120,000
Equipment, at cost 80,000
Provisions for depreciation (as at 1 June 20X0)
– on property 20,000
– on equipment 38,000
Purchases 250,000
Sales 402,200
Inventory, as at 1 June 20X0 50,000
Discounts allowed 18,000
Discounts received 4,800
Returns out 15,000
Wages and salaries 58,800
Irrecoverable debts 4,600
Loan interest 5,100
Other operating expenses 17,700
Trade payables 36,000
Trade receivables 38,000
Cash in hand 300
Bank 1,300
Drawings 24,000
Allowance for receivables 500
17% long-term loan 30,000
Capital, as at 1 June 20X0 121,300
667,800 667,800

The following additional information as at 31 May 20X1 is available.

(a) Inventory as at the close of business has been valued at cost at $42,000.
(b) Wages and salaries need to be accrued by $800.
(c) Other operating expenses are prepaid by $300.
(d) The allowance for receivables is to be adjusted so that it is 2% of trade receivables.
(e) Depreciation for the year ended 31 May 20X1 has still to be provided for as follows.
(i) Property: 1.5% per annum using the straight -line method
(ii) Equipment: 25% per annum using the reducing balance method
Required
Prepare Stephen Chee's statement of profit or loss for the year ended 31 May 20X1 and his statement of
financial position as at that date.

19
 DIP IFR FOUNDATION COURSE

Question – 2
Donald Brown, a sole trader, extracted the following trial balance on 31 December 20X0.
TRIAL BALANCE AS AT 31 DECEMBER 20X0
Debit Credit
$ $
Capital as at 1 January 20X0 26,094
Receivables 42,737
Cash in hand 1,411
Payables 35,404
Fixtures and fittings at cost 42,200
Discounts allowed 1,304
Discounts received 1,175
Inventory as at 1 January 20X0 18,460
Sales 491,620
Purchases 387,936
Motor vehicles at cost 45,730
Lighting and heating 6,184
Motor expenses 2,862
Rent 8,841
General expenses 7,413
Bank overdraft 19,861
Provision for depreciation
Fixtures and fittings 2,200
Motor vehicles 15,292
Drawings 26,568
591,646 591,646

The following information as at 31 December is also available.

(a) $218 is owing for motor expenses.
(b) $680 has been prepaid for rent.
(c) Depreciation is to be provided for the year as follows.
(1) Motor vehicles: 20% on cost
(2) Fixtures and fittings: 10% reducing balance method
(d) Inventory at the close of business was valued at $19,926.
Required
Prepare Donald Brown's statement of profit or loss for the year ended 31 December 20X0 and his statement of
financial position at that date.

20
 DIP IFR FOUNDATION COURSE

Introduction to company accounting

Limited liability and accounting records
There are some important differences between the accounts of a limited liability company and those of sole
traders or partnerships
Unlimited and limited liability
Unlimited liability means that if the business runs up debts that it is unable to pay, the proprietors will become
personally liable for the unpaid debts and would be required, if necessary, to sell their private possessions to
repay them.
Limited liability means that the maximum amount that an owner stands to lose, in the event that the company
becomes insolvent and cannot pay off its debts, is their share of the capital in the business.

Advantages
Limited liability is a major advantage of turning a business into a limited liability company.
However, in practice, banks will normally seek personal guarantees from shareholders before making loans or
granting an overdraft facility and so the advantage of limited liability is lost to a small owner managed business.

Disadvantages
(a) Compliance with national legislation
(b) Compliance with national accounting standards and/or International Financial Reporting Standards
(c) Formation and annual registration costs

Authorised, issued, called-up and paid-up share capital

A distinction must be made between authorised, issued, called-up and paid-up share capital.
(a) Authorised (or legal) capital is the maximum amount of share capital that a company is empowered to
issue. The amount of authorised share capital varies from company to company, and can change by
agreement.
For example, a company's authorised share capital might be 5,000,000 ordinary shares of $1 each. This
would then be the maximum number of shares it could issue, unless the maximum were to be changed by
agreement.
(b) Issued capital is the par amount of share capital that has been issued to shareholders. The amount of
issued capital cannot exceed the amount of authorised capital.
Continuing the example above, the company with authorised share capital of 5,000,000 ordinary shares of
$1 might have issued 4,000,000 shares. This would leave it the option to issue 1,000,000 more shares at
some time in the future.
When share capital is issued, shares are allotted to shareholders. The term 'allotted' share capital means the
same thing as issued share capital.
(c) Called-up capital. When shares are issued or allotted, a company does not always expect to be paid the full
amount for the shares at once. It might instead call up only a part of the issue price, and wait until a later
time before it calls up the remainder.
For example, if a company allots 400,000 ordinary shares of $1, it might call up only, say, 75 cents per
share. The issued share capital would be $400,000, but the called-up share capital would only be $300,000.
(d) Paid-up capital. Like everyone else, investors are not always prompt or reliable payers. When capital is
called up, some shareholders might delay their payment (or even default on payment). Paid-up capital is the
amount of called-up capital that has been paid.

21
 DIP IFR FOUNDATION COURSE

For example, if a company issues 400,000 ordinary shares of $1 each, calls up 75 cents per share, and
receives payments of $290,000, we would have:
$
Allotted or issued capital 400,000
Called-up capital 300,000
Paid-up capital 290,000
Capital not yet paid-up 10,000
The statement of financial position of the company would appear as
follows.
$
Assets
Called-up capital not paid 10,000
Cash (called-up capital paid) 290,000
300,000
Equity
Called-up share capital
(400,000 ordinary shares of $1, with 75c per share called up) 300,000

Notice that in a limited liability company's statement of financial position the owners' capital is called equity.
In business and in your wider reading, shares may be called equities.

Preference shares
Preference shares are shares which confer certain preferential rights on their holder.
The rights attaching to preference shares are set out in the company's constitution. They may vary from
company to company and country to country, but typically:
(a) Preference shareholders have a priority right to a return of their capital over ordinary shareholders if the
company goes into liquidation.
(b) Preference shares do not carry a right to vote.
(c) If the preference shares are cumulative, it means that before a company can pay an ordinary dividend it
must not only pay the current year's preference dividend but must also make good any arrears of preference
dividends unpaid in previous years.

Classification of preference shares

Preference shares may be classified in one of two ways.
 Redeemable
 Irredeemable
Redeemable preference shares mean that the company will redeem (repay) the nominal value of those shares
at a later date. For example, 'redeemable 5% $1 preference shares 20X9' means that the company will pay these
shareholders $1 for every share they hold on a certain date in 20X9. The shares will then be cancelled and no
further dividends paid. Redeemable preference shares are treated like loans and are included as non-current
liabilities in the statement of financial position. Remember to reclassify them as current liabilities if the redemption
is due within 12 months. Dividends paid on redeemable preference shares are treated like interest paid on loans
and are included in financial costs in the statement of profit or loss.

22
 DIP IFR FOUNDATION COURSE

Irredeemable preference shares are treated just like other shares. They form part of equity and their dividends
are treated as appropriations of profit.

Ordinary shares
Ordinary shares are shares which are not preferred with regard to dividend payments. Thus a holder only
receives a dividend after fixed dividends have been paid to preference shareholders.
Ordinary shareholders are thus the effective owners of a company. They own the 'equity' of the business, and
any reserves of the business (described later) belong to them. Ordinary shareholders are sometimes referred to
as equity shareholders.
Example:
Garden Gloves Co has issued 50,000 ordinary shares of 50 cents each and 20,000 7% preference shares of $1
each. Its profits after taxation for the year to 30 September 20X5 were $8,400. The management board has
decided to pay an ordinary dividend (ie a dividend on ordinary shares) which is 50% of profits after tax and
preference dividend.
Required
Show the amount in total of dividends and of retained profits, and calculate the dividend per share on ordinary
shares.

Reserves
Share capital and reserves are 'owned' by the shareholders. They are known collectively as 'shareholders'
equity'.
Shareholders' equity consists of the following.
(a) The par value of issued capital (minus any amounts not yet called up on issued shares)
(b) Other equity (share premium, revaluation reserve, retain earning)
The share capital itself might consist of both ordinary shares and preference shares. All reserves, however, are
owned by the ordinary shareholders, who own the 'equity' in the company.
Statutory and Non-Statutory Reserves
In most countries, a distinction must be made between the following.
(a) Statutory reserves, which are reserves which a company is required to set up by law, and which are not
available for the distribution of dividends.
(b) Non-statutory reserves, which are reserves consisting of profits which are distributable as dividends, if the
company so wishes.
Dividends
Dividends are appropriations of profit after tax.
Shareholders who are also managers of their company will receive a salary as a manager. They are also entitled
to a share of the profits made by the company.
Many companies pay dividends in two stages during the course of their accounting year.
(a) In mid-year, after the half-year financial results are known, the company might pay an interim dividend.
(b) At the end of the year, the company might propose a further final dividend.
The total dividend to be included in the financial statements for the year is the sum of the dividends actually paid
in the year. (Not all companies by any means pay an interim dividend. Interim dividends are, however, commonly
paid out by larger limited liability companies.)
At the end of an accounting year, a company's managers may have proposed a final dividend payment, but this
will not yet have been paid. The proposed dividend does not appear in the accounts but will be disclosed in the
notes in accordance with IAS 10 Events after the reporting period.

23
 DIP IFR FOUNDATION COURSE

Question-1
A company has authorized share capital of 1,000,000 50c ordinary shares and an issued share capital of
800,000 50c ordinary shares. If an ordinary dividend of 5% is declared, what is the amount payable to
shareholders?
A. $50,000
B. $20,000
C. $40,000
D. $25,000

Question – 2
The following trial balance of Malright, a limited liability company, at 31 October 20X7.
Dr Cr
$'000 $'000
Buildings at cost 740
Buildings, accumulated depreciation, 1 November 20X6 60
Plant at cost 220
Plant, accumulated depreciation, 1 November 20X6 110
Land at cost 235
Bank balance 50
Revenue 1,800
Purchases 1,105
Discounts received 90
Returns inwards 35
Wages 180
Energy expenses 105
Inventory at 1 November 20X6 160
Trade payables 250
Trade receivables 320
Administrative expenses 80
Allowance for receivables, at 1 November 20X6 10
Directors' remuneration 70
Retained earnings at 1 November 20X6 130
10% loan notes 50
Dividend paid 30
$1 ordinary shares 650
Share premium account 80
3,280 3,280

24
 DIP IFR FOUNDATION COURSE

Additional information as at 31 October 20X7:

(a) Closing inventory has been counted and is valued at $75,000.
(b) The items listed below should be apportioned as indicated.
Cost of sales Distribution Administrative
costs expenses
% % %
Discounts received – – 100
Energy expenses 40 20 40
Wages 40 25 35
Directors' remuneration – – 100

(c) An invoice of $15,000 for energy expenses for October 20X7 has not been received.
(d) Loan note interest has not been paid for the year.
(e) The allowance for receivables is to be increased to the equivalent of 5% of trade receivables. Any expenses
connected with receivables should be charged to administrative expenses.
(f) Plant is depreciated at 20% per annum using the reducing balance method. The entire charge is to be
allocated to cost of sales.
(g) Buildings are depreciated at 5% per annum on their original cost, allocated 30% to cost of sales, 30% to
distribution costs and 40% to administrative expenses.
(h) Income tax has been calculated as $45,000 for the year.

Required
Prepare the following financial statements for Malright in accordance with IAS 1 Presentation of financial
statements:
(a) The statement of profit or loss for the year ended 31 October 20X7
(b) The statement of changes in equity for the year ended 31 October 20X7
(c) The statement of financial position as at 31 October 20X7

Question – 3
The following information has been extracted from the books of Tonson, a limited liability company, as at 31
October 20X6.

Dr Cr
$'000 $'000
Cash 15
Insurance 75
Inventory at 1 November 20X5 350
General expenses 60
Energy expenses 66
Marketing expenses 50
Wages and salaries 675
Discounts received 50
Share premium account 200
Retained earnings at 1 November 20X5 315
Allowance for receivables at 1 November 20X5 40

25
 DIP IFR FOUNDATION COURSE

Sales revenue 5,780

Telephone expenses 80
Property expenses 100
Bank 94
Returns inward 95
Trade payables 290
Loan note interest 33
Trade receivables 900
Purchases 3,570
7% loan notes 470
Irrecoverable debts 150
$1 ordinary shares 1,800
Accumulated depreciation at 1 November 20X5
Buildings 360
Motor Vehicles 80
Furniture and equipment 420
Land at cost 740
Buildings at cost 1,500
Motor vehicles at cost 240
Furniture and equipment at cost 1,200
9,899 9,899
F3/FFA FINANCIAL ACCOUNTING
You have also been provided with the following information:
(a) Inventory at 31 October 20X6 was valued at $275,000 based on its original cost. However, $45,000 of this
inventory has been in the warehouse for over two years and the directors have agreed to sell it in November
20X6 for a cash price of $20,000.
(b) The marketing expenses include $5,000 which relates to November 20X6.
(c) The allowance for receivables is to be increased to the equivalent of 5% of trade receivables.
(d) There are wages and salaries outstanding of $40,000 for the year ended 31 October 20X6.
(e) Buildings are depreciated at 5% of cost. At 31 October 20X6 the buildings were professionally valued at
$1,800,000 and the directors wish this valuation to be incorporated into the financial statements.
(f) Depreciation is to be charged as follows:
(i) Motor vehicles at 20% of carrying amount
(ii) Furniture and equipment at 20% of cost
(g) No dividends have been paid or declared.
(h) Tax of $150,000 is to be provided for the year.
(i) During October 20X6 a bonus issue of one for ten shares was made to ordinary shareholders. This has not
been entered into the books. The share premium account was used for this purpose.
Required
Prepare the following statements, for internal use:
(a) The statement of profit or loss for the year ended 31 October 20X6
(b) The statement of financial position as at 31 October 20X6

26
 DIP IFR FOUNDATION COURSE

Bonus (capitalization) issues

A company may wish to increase its share capital without wishing to raise additional finance by issuing new
shares.

Question
CLARKE FRINGLAND CO
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X3 (EXTRACT)
$
Share capital(50c) 10,000
Share premium 7,000
Retained earning 8,000
25,000

Clarke Fringland Co has decided on a bonus issue of shares of 1 for 4 and will use the share premium account
for this purpose.

Required
What is the double entry to record the bonus issue of shares and what is the adjusted financial position extract
after the bonus issue?
Rights issues
A rights issue (unlike a bonus issue) is an issue of shares for cash. The 'rights' are offered to existing
shareholders, who can sell them if they wish. This is beneficial for existing shareholders in that the shares are
usually issued at a discount to the current market price.

Question
CLARKE FRINGLAND CO
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X3 (EXTRACT)
$
Share capital (50c) 8,000
Share premium 7,000
Retained earnings 10,000
25,000

Clarke Fringland Co decides on a rights issue of 1 for 4 at $1.20

Required
What is the double entry to record the issue of shares and what is the adjusted financial position extract after the
issue?

27
 DIP IFR FOUNDATION COURSE

IAS-16 Property, Plant and equipment

Scope:
 are held for use in the production or supply of goods and services, for rental to I. others, or for administration
purposes, and
 are expected to be used during more than one period.

Recognition
 it is probable that future economic benefits associated with the item will flow to the entity and
 the cost of the item can be measured reliably

Initial measurement
Initial measurement Once an item of property, plant and equipment qualifies for recognition as an asset, it will
initially be measured at cost.
From your studies of double entry, you should remember that the entries to record an acquisition of a non-current
asset are:
DEBIT Non-current asset – cost $X
CREDIT Cash (or payable, if a credit transaction) $X

Components of cost
IAS 16 lists the components that make up the cost of an item of property, plant and equipment as follows. x
 Purchase price, including any import duties paid, but excluding any trade discount and sales tax paid
 Initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located
 Directly attributable costs of bringing the asset to working condition for its intended use. (IAS 16, para. 16)
Examples of directly attributable costs are:
- the cost of site preparation, eg levelling the floor of the factory so the machine can be installed;
- initial delivery and handling costs;
- installation and assembly costs;
- professional fees (lawyers, architects, engineers);
- costs of testing whether the asset is working properly, after deducting the net proceeds from selling
samples produced when testing equipment; and
- staff costs arising directly from the construction or acquisition of the asset
The following costs will not be part of the cost of property, plant or equipment unless they can be attributed
directly to the asset's acquisition, or bringing it into its working condition.
 Expenses of operations that are incidental to the construction or development of the item
 Administration and other general overhead costs
 Start-up and similar pre-production costs
 Initial operating losses before the asset reaches planned performances
 Staff training costs
 Maintenance contracts purchased with the asset
All of these will be recognised as an expense rather than as part of the cost of the asset

28
 DIP IFR FOUNDATION COURSE

Example
On 1 January 2010, Allen Ltd purchased a new machine, the Defoe. Details of the transaction are as follows.
(1) List price – $300,000
(2) Trade discount given – 10% of list price
(3) Settlement discount received – 5% of list price, net of trade discount
(4) Electrical installation – $38,000
(5) Staff training in use of the Defoe machine – $15,000
(6) Pre-production testing – $10,000
(7) Maintenance contract for three years – $36,000
Allen Ltd had wrongly specified the requirements for the electrical installation. The $8,000 cost of correcting this
mistake is included in the $38,000 above.
Required
Calculate the initial amount to be included under fixed assets, in respect of the Defoe machine, at 1 January
2010. Assume it was ready to produce units of output on that day.

Subsequent Expenditure
Subsequent expenditure is added to the carrying amount of the asset, but only when it is probable that future
economic benefits, in excess of the originally assessed standard of performance of the existing asset, will flow to
the enterprise. All other subsequent expenditure is simply recognised as an expense in the period in which it is
incurred.
The important point here is whether any subsequent expenditure on an asset improves the condition of the
asset beyond the previous performance. The following are examples of such improvements.
(a) Modification of an item of plant to extend its useful life, including increased capacity
(b) Upgrade of machine parts to improve the quality of output
(c) Adoption of a new production process leading to large reductions in operating costs
Normal repairs and maintenance on property, plant and equipment items merely maintain or restore value; they
do not improve or increase it, so such costs are recognised as an expense when incurred.

Requirements of IAS 16 for depreciation

The need to depreciate non-current assets arises from the accruals assumption.
Depreciation accounting is governed by IAS 16. Below are some of the important definitions you need to be
aware of.
 Depreciation is the allocation of the depreciable amount of an asset over its estimated useful life.
Depreciation for the accounting period is charged to net profit or loss for the period either directly or
indirectly.
 Depreciable assets are assets which:
- Are expected to be used during more than one accounting period
- Have a limited useful life

Depreciation methods
Consistency is important. The depreciation method selected should be applied consistently from period to period
unless altered circumstances justify a change. When the method is changed, the effect should be quantified and
disclosed and the reason for the change should be stated.
Various methods of allocating depreciation to accounting periods are available, but whichever is chosen must be
applied consistently to ensure comparability from period to period. Change of policy is not allowed simply
because of the profitability situation of the entity.

29
 DIP IFR FOUNDATION COURSE

Example-1
A lorry bought for a business cost $17,000. It is expected to last for five year and then be sold for scrap for
$2,000. Usage over the five year is expected to be;
Year 1 200 Hr
Year 2 100 Hr
Year 3 1000 Hr
Year 4 150 Hr
Year 5 40 Hr
Required;
Work out the depreciation to be charged each year under;
(a) The straight- line method
(b) The reducing balance method (using a rate of 35 %)
(c) The machine hour method
(d) The sum of the digits method

Example -2
A business which has an accounting year that runs from 1 January to 31 December purchases a new non-
current asset on 1 April 20X1, at a cost of $24,000. The expected life of the asset is four years, and its residual
value is nil.
What should the depreciation charge for 20X1 be?

Measurement subsequent to initial recognition

The standard offers two possible treatments here, essentially a choice between keeping an asset recorded at
cost or revaluing it to fair value.
(a) Cost model. Carry the asset at its cost less depreciation and any accumulated impairment loss.
(b) Revaluation model. Carry the asset at a revalued amount, being its fair value at the date of the revaluation
less any subsequent accumulated depreciation and subsequent accumulated impairment losses. The
revised IAS 16 makes clear that the revaluation model is available only if the fair value of the item can be
measured reliably.
Accounting for revaluations
How should any increase in value be treated when a revaluation takes place? The debit will be the increase in
value in the statement of financial position, but what about the credit? IAS 16 requires the increase to be credited
to other comprehensive income and accumulated in a revaluation surplus (ie part of owners' equity), unless there
was previously a decrease on the revaluation of the same asset.
DEBIT Carrying amount (statement of financial position)
CREDIT Other comprehensive income (revaluation surplus)

Reversing a previous decrease in value

If the asset has previously suffered a decrease in value that was charged to profit or loss, any increase in value
on a subsequent revaluation should be recognised in profit or loss to the extent that it reverses the previous
decrease. (IAS 16: para 39)
Any excess is then recognised in other comprehensive income and accumulated in a revaluation surplus.

30
 DIP IFR FOUNDATION COURSE

Impairment of carrying amounts of non-current assets

An impairment loss should be treated in the same way as a revaluation decrease ie the decrease should be
recognised as an expense. However, a revaluation decrease (or impairment loss) should be charged directly
against any related revaluation surplus to the extent that the decrease does not exceed the amount held in the
revaluation surplus in respect of that same asset.

Example: 1 revaluation surplus

Binkie Co has an item of land carried in its books at $13,000. Two years ago a slump in land values led the
company to reduce the carrying amount from $15,000. This was taken as an expense in profit or loss. There has
been a surge in land prices in the current year, however, and the land is now worth $20,000.
Account for the revaluation in the current year.

Example -2 revaluation decrease

Let us simply swap round the example given above. The original cost was $15,000, revalued upwards to $20,000
two years ago. The value has now fallen to $13,000.
Account for the decrease in value.

Revaluation of depreciated assets

There is a further complication when a revalued asset is being depreciated. As we have seen, an upward
revaluation means that the depreciation charge will increase. Normally, a revaluation surplus is only realised
when the asset is sold.
However, when it is being depreciated, part of that surplus is being realised as the asset is used. The amount of
the surplus realised is the difference between depreciation charged on the revalued amount and the (lower)
depreciation which would have been charged on the asset's original cost.
This amount can be transferred to retained (ie realised) earnings but NOT through profit or loss.
Example: revaluation and depreciation
Crinckle Co bought an asset for $10,000 at the beginning of 20X6. It had a useful life of five years. On 1 January
20X8 the asset was revalued to $12,000. The expected useful life has remained unchanged (ie three years
remain).
Account for the revaluation and state the treatment for depreciation from 20X8 onwards.

31
 DIP IFR FOUNDATION COURSE

Non-current asset disposals

When a non-current asset is sold, there is likely to be a profit or loss on disposal. This is the difference
between the net sale price of the asset and its carrying amount at the time of disposal.

Example: disposal of a non-current asset

A business purchased a non-current asset on 1 January 20X1 for $25,000. It had an estimated life of 6 years and
an estimated residual value of $7,000. The asset was eventually sold after 3 years on
1 January 20X4 to another trader who paid $17,500 for it.
What was the profit or loss on disposal, assuming that the business uses the straight line method for
depreciation?

Example 2: disposal of a non-current asset

A business purchased a machine on 1 July 20X1 at a cost of $35,000. The machine had an estimated residual
value of $3,000 and a life of 8 years. The machine was sold for $18,600 on 31 December 20X4, the last day of
the accounting year of the business. To make the sale, the business had to incur dismantling costs and costs of
transporting the machine to the buyer's premises. These amounted to $1,200.
The business uses the straight- line method of depreciation. What was the profit or loss on disposal of the
machine?

32
 DIP IFR FOUNDATION COURSE

IAS – 40 Investment Properties

Definition and Accounting treatment
IAS 40 Investment Property relates to 'property (land or buildings) held (by the owner or by the lessee as a
right-of-use asset) to earn rentals or for capital appreciation or both'.
Examples of investment property are:

(a) Land held for long-term capital appreciation rather than for short-term sale in the ordinary course of business
(b) A building owned by the reporting entity (or held by the entity as a right-of-use asset) and leased out under
an operating lease
(c) A building held by a parent and leased to a subsidiary. Note, however, that while this is regarded as an
investment property in the individual parent company financial statements, in the consolidated financial
statements this property will be regarded as owner-occupied (because it is occupied by the group) and will
therefore be treated in accordance with IAS 16.
(d) Property that is being constructed or developed for future use as an investment property

The following are not investment property:

 Property held for use in the production or supply of goods or services or for administrative purposes (IAS 16
Property, Plant and Equipment applies)
 Property held for sale in the ordinary course of business or in the process of construction of development for
such sale (IAS 2 Inventories applies)
 Property being constructed or developed on behalf of third parties (IFRS 15 Revenue from Contracts with
Customers applies)
 owner-occupied property (IAS 16 applies)
 Property that is being constructed or developed for use as an investment property (IAS 16 currently applies
until the property is ready for use, at which time IAS 40 starts to apply)
 Property leased to another entity under a finance lease (IFRS 16 Leases applies).

Question – 1
Lavender owns a property, which it rents out to some of its employees. The property was purchased for $30
million on 1 January 20X2 and had a useful life of 30 years at that date. On 1 January 20X7 it had a market value
of $50 million and its remaining useful life remained unchanged. Management wish to measure properties at fair
value where this is allowed by accounting standards.
Required: How should the property be treated in the financial statements of Lavender for the year ended 31
December 20X7.

Question – 2
Rich Co owns a piece of land. The directors have not yet decided whether to build a factory on it for use in its
business or to keep it and sell it when its value has risen.
Would this be classified as an investment property under IAS 40?
Answer
Yes. If an entity has not determined that it will use the land either as an owner-occupied property or for short-
term sale in the ordinary course of business, the land is considered to be held for capital appreciation.

33
 DIP IFR FOUNDATION COURSE

Recognition
Investment property should be recognised as an asset when two conditions are met:
(a) It is probable that the future economic benefits that are associated with the investment property will flow to the
entity.
(b) The cost of the investment property can be measured reliably.

Initial measurement
An investment property should be measured initially at its cost, including transaction costs.
A right-of-use asset classified as an investment property should be measured in accordance with IFRS 16.

Measurement subsequent to initial recognition

IAS 40 requires an entity to choose between two models:

- The fair value model

- The cost model
Whatever policy it chooses should be applied to all of its investment property.

If the cost model is chosen, investment properties are held at cost less accumulated depreciation. No
revaluations are permitted.

Under the fair value model, the entity re-measures its investment properties to fair value each year. No
depreciation is charged. All gains and losses on revaluation are reported in the statement of profit or loss. If, in
exceptional circumstances, it is impossible to measure the fair value of an individual investment property reliably
then the cost model should be adopted.

Change from one model to the other is permitted only if this results in a more appropriate presentation. IAS 40
notes that this is highly unlikely for a change from the fair value model to the cost model.

Transfer
Transfers to or from investment property can only be made if there is a change of use. There are several
possible situations in which this might occur and the accounting treatment for each is set out below:
(1) Transfer from investment property to owner-occupied property
Use the fair value at the date of the change for subsequent accounting under IAS 16.

(2) Transfer from investment property to inventory

Use the fair value at the date of the change for subsequent accounting under IAS 2 Inventories.

(3) Transfer from owner-occupied property to investment property to be carried at fair value
Normal accounting under IAS 16 (cost less depreciation) will have been applied up to the date of the
change. On adopting fair value, there is normally an increase in value. This is recognised as other
comprehensive income and credited to the revaluation surplus in equity in accordance with IAS 16. If the fair
valuation causes a decrease in value, then it should be charged to profits.

(4) Transfer from inventories to investment property to be carried at fair value

Any change in the carrying amount caused by the transfer should be recognised in profit or loss.

34
 DIP IFR FOUNDATION COURSE

Question – 1
Kapital Co owns a building which it has been using as a head office. In order to reduce costs, on 30 June 20X9 it
moved its head office functions to one of its production centres and is now letting out its head office. Company
policy is to use the fair value model for investment property.
The building had an original cost on 1 January 20X0 of $250,000 and was being depreciated over 50 years. At
31 December 20X9 its fair value was judged to be $350,000.

How will this appear in the financial statements of Kapital Co at 31 December 20X9?

Question – 2
Speculate owns the following properties at 1 April 2012:
Property A: An office building used by Speculate for administrative purposes with a depreciated historical cost of
$2 million. At 1 April 2012 it had a remaining life of 20 years. After a reorganisation on 1 October 2012, the
property was let to a third party and reclassified as an investment property applying Speculate’s policy of the fair
value model. An independent valuer assessed the property to have a fair value of $2·3 million at 1 October 2012,
which had risen to $2·34 million at 31 March 2013. Property B: Another office building sub-let to a subsidiary of
Speculate. At 1 April 2012, it had a fair value of $1·5 million which had risen to $1·65 million at 31 March 2013.

Required:
Prepare extracts from Speculate’s entity statement of profit or loss and other comprehensive income and
statement of financial position for the year ended 31 March 2013 in respect of the above properties. In the case
of property B only, state how it would be classified in Speculate’s consolidated statement of financial position.

35
 DIP IFR FOUNDATION COURSE

IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations

Classification of assets held for sale
A non-current asset (or disposal group) should be classified as held for sale if its carrying amount will be
recovered principally through a sale transaction rather than through continuing use.

A number of detailed criteria must be met:

(a) The asset must be available for immediate sale in its present condition.
(b) Its sale must be highly probable (ie significantly more likely than not).
For the sale to be highly probable, the following must apply:

 Management must be committed to a plan to sell the asset.

 There must be an active programme to locate a buyer.
 The asset must be marketed for sale at a price that is reasonable in relation to its current fair value.
 The sale should be expected to take place within one year from the date of classification.
 It is unlikely that significant change to the plan will be made or that the plan will be withdrawn.

Example

On 1 December 20X3, ManiCo became committed to a plan to sell a manufacturing facility and has already
found a potential buyer. ManiCo does not intend to discontinue the operations currently carried out in the facility.
At 31 December 20X3 there is a backlog of uncompleted customer orders. The company will not be able to
transfer the facility to the buyer until after it ceases to operate the facility and has eliminated the backlog of
uncompleted customer orders. This is not expected to occur until spring 20X4.

Required
Can the manufacturing facility be classified as 'held for sale' at 31 December 20X3?
Answer
The facility will not be transferred until the backlog of orders is completed; this demonstrates that the facility is
not available for immediate sale in its present condition. The facility cannot be classified as 'held for sale' at 31
December 20X3. It must be treated in the same way as other items of property, plant and equipment: it should
continue to be depreciated and should not be separately disclosed.

Measurement of assets held for sale

A non-current asset (or disposal group) that is held for sale should be measured at the lower of its carrying
amount and fair value less costs of disposal.

If the fair value of an asset less costs of disposal is lower than carrying amount, an impairment is loss should
be recognised. An impairment loss on an asset held under IFRS 5 is charged to profit or loss.

Non-current assets held for sale should not be depreciated, even if they are still being used by the entity.

36
 DIP IFR FOUNDATION COURSE

Question
On 1 January 20X1, AB acquires a building for $200,000 with an expected life of 50 years. On 31 December
20X4 AB puts the building up for immediate sale. Costs to sell the building are estimated at $10,000.
Required Outline the accounting treatment of the above if the building had a fair value at 31 December 20X4 of:
(a) $220,000
(b) $110,000.

Presentation of a non-current asset or disposal group classified as held for sale

Non-current assets and disposal groups classified as held for sale should be presented separately from other
assets in the statement of financial position. The liabilities of a disposal group should be presented separately
from other liabilities in the statement of financial position.
(a) Assets and liabilities held for sale should not be offset.
(b) The major classes of assets and liabilities held for sale should be separately disclosed either on the face
of the statement of financial position or in the notes.
(c) IFRS 5 requires non-current assets or disposal groups held for sale to be shown as a separate component
of current assets/current liabilities.

37
 DIP IFR FOUNDATION COURSE

Discontinue operation
A discontinued operation is a component of an entity that has been sold, or which is classified as held for sale,
and which is:
 a separate line of business (either in terms of operations or location)
 part of a plan to dispose of a separate line of business, or
 a subsidiary acquired solely for the purpose of resale.

Presentation
IFRS 5 requires information about discontinued operations to be presented in the financial statements.
 A single amount should be presented on the face of the statement of profit or loss and other comprehensive
income that is comprised of:
- The total of the post-tax profit or loss of discontinued operations
- The post-tax gain or loss on the measurement to fair value less costs to sell or on the disposal of the
discontinued operation.
 In the comparative figures the operations are also shown as discontinued (even though they were not
classified as such at the end of the previous year).

38
 DIP IFR FOUNDATION COURSE

Illustration

The following illustration is taken from the implementation guidance to IFRS 5. Profit for the period from
discontinued operations would be analysed in the notes.

LARGE GROUP

STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 20X2

20X2 20X1

Continuing operations $'000 $'000

Revenue XX XX

Cost of sales (XX) (XX)

Gross profit XX XX

Other income (XX) (XX)

Distribution costs (XX) (XX)

Administrative expenses (XX) (XX)

Other expenses (XX) (XX)

Finance costs (XX) (XX)

Share of profit of associates XX XX

Profit before tax XX XX

Income tax expense (XX) (XX)

Profit for the year from continuing operations XX XX

Discontinued operations

Profit for the year from discontinued operations XX XX

Profit for the year XX XX

Profit attributable to:

Owners of the parent XX XX

Non-controlling interest XX XX

XX XX

39
 DIP IFR FOUNDATION COURSE

Question

On 20 October 20X3 the directors of Largo Co made a public announcement of plans to close a steel works. The
closure means that the group will no longer carry out this type of operation, which until recently has represented
about 10% of its total revenue. The works will be gradually shut down over a period of several months, with
complete closure expected in July 20X4. At 31 December output had been significantly reduced and some
redundancies had already taken place. The cash flows, revenues and expenses relating to the steel works can
be clearly distinguished from those of the subsidiary's other operations.

Required

How should the closure be treated in the financial statements for the year ended 31 December 20X3?

Answer
Because the steel works is being closed, rather than sold, it cannot be classified as 'held for sale'. In addition, the
steel works is not a discontinued operation. Although at 31 December 20X3 Largo Co was firmly committed to
the closure, this has not yet taken place nor can its assets be classified as held for sale, therefore the steel works
must be included in continuing operations. Information about the planned closure could be disclosed in the notes
to the financial statements.

40
 DIP IFR FOUNDATION COURSE

IAS – 38 intangible assets

Definition and recognition criteria
An intangible asset is defined as 'an identifiable non-monetary asset without physical substance' (IAS 38,
para 8).
An entity should recognise an intangible asset should be recognised if all the following criteria are met.
 The asset is identifiable
 The asset is controlled by the entity
 The asset will generate future economic benefits for the entity
 The cost of the asset can be measured reliably.
An intangible asset is identifiable if it:
 'is separable (capable of being separated and sold, transferred, licensed, rented, or exchanged, either
individually or as part of a package), or
 it arises from contractual or other legal rights, regardless of whether those rights are transferable or
separable from the entity or from other rights and obligations' (IAS 38, para 12).
If an intangible asset does not meet the recognition criteria, expenditure should be charged to the statement of
profit or loss as it is incurred. Once the expenditure has been so charged, it cannot be capitalised at a later date.

Measurement
Initial recognition

When an intangible asset is initially recognised, it is measured at cost.

Subsequent recognition

After recognition, an entity must choose either the cost model or the revaluation model for each class of
intangible asset.

 The cost model measures the asset at cost less accumulated amortisation and impairment.
 The revaluation model measures the asset at fair value less accumulated amortisation and impairment.

The revaluation model

The revaluation model can only be adopted if fair value can be determined by reference to an active market. An
active market is one where the products are homogenous, there are willing buyers and sellers to be found at all
times, and prices are available to the public. Active markets for intangible assets are rare.
Active markets are unlikely to exist for brands, newspaper mastheads, music and film publishing rights, patents
or trademarks. Revaluations should be made with sufficient regularity such that the carrying amount does not
differ materially from actual fair value at the reporting date. Revaluation gains and losses are accounted for in the
same way as revaluation gains and losses of tangible assets held in accordance with IAS 16 Property, Plant and
Equipment.

41
 DIP IFR FOUNDATION COURSE

Amortisation
An entity must assess whether the useful life of an intangible asset is finite or indefinite.
 An asset with a finite useful life must be amortised on a systematic basis over that life. Normally the straight-
line method with a zero residual value should be used. Amortisation starts when the asset is available for
use.
 An asset has an indefinite useful life when there is no foreseeable limit to the period over which the asset is
expected to generate net cash inflows. It should not be amortised, but be subject to an annual impairment
review.

Research and development expenditure

Research expenditure cannot be recognised as an intangible asset. (although tangible assets used in research
should be recognised as plant and equipment).
IAS 38 says that development expenditure should only be recognised as an intangible asset if the entity can
demonstrate that:

 the project is technically feasible

 the entity intends to complete the intangible asset, and then use it or sell it
 the intangible asset will generate future economic benefits
 it has adequate resources to complete the project
 it can reliably measure the expenditure on the project.

Other internally generated intangible assets

The standard prohibits the recognition of internally generated brands, mastheads, publishing titles and customer
lists and similar items as intangible assets. These all fail to meet one or more (in some cases all) the definition
and recognition criteria and in some cases are probably indistinguishable from internally generated goodwill.

Recognition of an expense
All expenditure related to an intangible which does not meet the criteria for recognition either as an identifiable
intangible asset or as goodwill arising on an acquisition should be expensed as incurred. The IAS gives
examples of such expenditure:

- Start up costs
- Training costs
- Advertising costs
- Business relocation costs
Prepaid costs for services, for example advertising or marketing costs for campaigns that have been prepared
but not launched, can still be recognised as a prepayment.

42
 DIP IFR FOUNDATION COURSE

Question – 1

The following trial balance relates to Candal at 30 September 2008:

Capitalised development expenditure – at 1 October 2007 20,000

Development expenditure–accumulated amortisation at 1 October 2007 6,000

Non-current assets – intangible:

In addition to the capitalised development expenditure (of $20 million), further research and development costs
were incurred on a new project which commenced on 1 October 2007. The research stage of the new project
lasted until 31 December 2007 and incurred $1.4 million of costs. From that date the project incurred
development costs of $800,000 per month. On 1 April 2008 the directors became confident that the project
would be successful and yield a profit well in excess of its costs. The project is still in development at 30
September 2008.

Capitalised development expenditure is amortised at 20% per annum using the straight-line method.
All expensed research and development is charged to cost of sales.

Required;

Extract of SOPOL and SOFP.

Question – 2

The following trial balance extracts relate to Moston as at 30 June 2015;

Research and developments 7,800

Moston’s commenced a research and development project on 1 January 2015. It spent $1 million per month on
research until 31 March 2015, at which date the project passed into the development stage. From this date it
spent $ 1.6 million per mount until per year end (30 June 2015), at which date development was completed.
However,it was not until 1 May 2015 that the director of Moston were confident that the new product would be
commercial success.

Expense research and development costs should be charged to cost of sale.

Required;
Extract of SOPOL and SOFP.

43
 DIP IFR FOUNDATION COURSE

Current IAS/ IFRS

The current list is as follows.
International Accounting Standards Date of issue/
revision
IAS 1 (revised) Presentation of Financial Statements Sep 2007
IAS 2 Inventories Dec 2003
IAS 7 Statements of Cash Flows Dec 1992
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors Dec 2003
IAS 10 Events After the Reporting Period Dec 2003
IAS 12 Income Taxes Nov 2000
IAS 16 Property, Plant and Equipment Dec 2003
IAS 19* Employee Benefits Dec 2004
IAS 20 Government Grants and Disclosure of Government Assistance Jan 1995
IAS 21* The Effects of Changes in Foreign Exchange Rates Dec 2003
IAS 23 (revised) Borrowing Costs Jan 2008
IAS 24* Related Party Disclosures Dec 2003
IAS 26* Accounting and Reporting by Retirement Benefit Plans Jan 1995
IAS 27 (revised) Separate Financial Statements May 2011
IAS 28 Investments in Associates and Joint Ventures ** Dec 2003
IAS 29* Financial Reporting in Hyperinflationary Economies Jan 1995
IAS 30* Disclosure in the Financial Statements of Banks and Similar Financial Jan 1995
Institutions (not examinable)
IAS 32 Financial Instruments: Presentation Dec 2003
IAS 33 Earnings per Share Dec 2003
IAS 34* Interim Financial Reporting Feb 1998
IAS 36 Impairment of Assets Mar 2004
IAS 37 Provisions, Contingent Liabilities and Contingent Assets Sept 1998
IAS 38 Intangible Assets Mar 2004
IAS 40 Investment Property Dec 2003
IAS 41 Agriculture Feb 2001
IFRS 1* First time adoption of International Financial Reporting Standards June 2003
IFRS 2* Share – based Payment Feb 2004
IFRS 3 (revised) Business Combinations Jan 2008
IFRS 4* Insurance Contracts Mar 2004
IFRS 5 Non – current Assets Held for Sale and Discontinued Operations Mar 2004
IFRS 6* Exploration for and Evaluation of Mineral Resources Dec 2004
IFRS 7 Financial Instruments: Disclosures Aug 2005

44
 DIP IFR FOUNDATION COURSE

IFRS 8* Operating Segments Nov 2006

IFRS 9 Financial Instruments Jul 2014
IFRS 10 Consolidated Financial Statements May 2011
IFRS 11* Joint Arrangements May 2011
IFRS 12* Disclosures of Interests in Other Entities May 2011
IFRS 13 Fair Value Measurement May 2011
IFRS 14* Regulatory Deferral Accounts Jan 2014
IFRS 15 Revenue from Contracts with Customers May 2014
IFRS 16 Leases Jan 2016
IFRS 17* Insurance Contracts May 2017

45
 DIP IFR FOUNDATION COURSE

Groups and consolidation: an overview

Consolidation means presenting the results, assets and liabilities of a group of companies as if they were one
company.
Subsidiaries
A subsidiary is an entity controlled by another entity.
Definitions
 Control. An investor controls an investee when the investor is exposed, or has rights, to variable returns
from its involvement with the investee and has the ability to affect those returns through its power over the
investee.
 Power. Existing rights that give the current ability to direct the relevant activities.
 Subsidiary. An entity that is controlled by another entity (known as the parent).
 Parent. An entity that controls one or more entities.
 Group. A parent and all its subsidiaries.
 Consolidated financial statements. The financial statements of a group in which the assets, liabilities,
equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a
single economic entity.
 Non-controlling interest. The equity in a subsidiary not attributable, directly or indirectly, to a parent.
 A trade (or 'simple') investment. An investment in the shares of another entity, that is held for the accretion
of wealth, and is not an associate or a subsidiary.

Investments in subsidiaries
You should be able to tell from the definitions given above that the important point here is control. In most
cases, this will involve the holding company or parent owning a majority of the ordinary shares in the subsidiary
(to which normal voting rights are attached). There are circumstances, however, when the parent may own only a
minority of the voting power in the subsidiary, but the parent still has control.
Control can usually be assumed to exist when the parent owns more than half (ie over 50%) of the voting
power of an entity unless it can be clearly shown that such ownership does not constitute control (these
situations will be very rare).
What about situations where this ownership criterion does not exist? The following situations show where control
exists, even when the parent owns only 50% or less of the voting power of an entity.
(a) The parent has power over more than 50% of the voting rights by virtue of agreement with other investors.
(b) The parent has power to govern the financial and operating policies of the entity by statute or under an
agreement.
(c) The parent has the power to appoint or remove a majority of members of the board of directors (or
equivalent governing body).
(d) The parent has power to cast a majority of votes at meetings of the board of directors.

46
 DIP IFR FOUNDATION COURSE

Associates and trade investments

An associate is an entity over which another entity exerts significant influence. Associates are accounted for in
the consolidated statements of a group using the equity method.

Investments in associates
 Associate. An entity over which the investor has significant influence.
 Significant influence. The power to participate in the financial and operating policy decisions of the
investee but which is not control or joint control of those policies.

Trade investments
A trade investment is a simple investment in the shares of another entity that is not an associate or a
subsidiary.

Question
Which two of the following investments would be treated as an associate in the consolidated financial statements
of Smith Co?
A. Smith Co owns 15% of the ordinary shares of Red Co and has significant influence over Red Co.
B. Smith Co owns 45% of the ordinary shares of Pink Co and can appoint 4 out of 5 directors to the board of
directors of Pink Co.
C. Smith co owns 40% of the preference shares (non-voting) and 15% of the ordinary shares of Yellow Co.
D. Smith Co owns 60% of the preference shares (non-voting) and 40% of the ordinary shares of Aquamarine
Co.
Ans:
The correct answers are A and D.
Red Co is an associate of Smith Co, as Smith Co has significant influence over Red Co.
Pink Co is a subsidiary of Smith Co, as Smith Co's ability to appoint 4 out of 5 directors gives it control over
Pink Co.
Yellow Co is a trade investment of Smith Co, as Smith Co holds less than 20% of the voting rights of Yellow Co,
so is assumed not to have significant influence. Note that the preference shares do not have voting rights so do
not have any influence over the running of the company. Remember that shareholdings are not the only way of
demonstrating control or significant influence. If it could be shown in another way that Smith Co does have
significant influence over Yellow Co, Yellow Co would be classified as an associate.
Aquamarine Co is an associate of Smith Co, as Smith Co holds more than 20% of the voting rights of
Aquamarine Co and is therefore presumed to have significant influence over Aquamarine Co.

47
 DIP IFR FOUNDATION COURSE

Content of consolidated financial statements

Consolidated financial statements present the results of the group; they do not replace the separate financial
statements of the individual group companies.
Most parent companies present their own individual accounts and their group accounts in a single package. The
package typically comprises the following.
 Parent company financial statements
 Consolidated statement of financial position
 Consolidated statement of profit or loss and other comprehensive income
 Consolidated statement of cash flows

Goodwill arising on consolidation

Goodwill arising on consolidation is recognised as an intangible asset in the consolidated statement of financial
position.
Fair value of net assets at acquisition
The land and buildings of the subsidiary may be worth more than their carrying amount at acquisition. If this is
the case, it must be taken into account in the consolidated financial statements, as follows.
a. The subsidiary's land and buildings must be included in the consolidated statement of financial position at
their fair value.
b. The difference between the fair value of the subsidiary's land and buildings and the carrying value of those
land and buildings must be taken into account in the goodwill calculation.

Example – 1
Micro Co acquired 90 % of the $100,000 ordinary share capital of Minnie Co for $300,000 on 1 January 20X9
when the retained earnings of Minnie Co were $ 156,000. At the date of acquisition, the fair value of plant held by
Minnie Co $20,000 higher than its carry amount. The fair value of the non- controlling interest at the date of
acquisition was $75,000.
Required
What was the goodwill arising on acquisition?

Example – 2
Micro Co acquired 90 % of the $200,000 ordinary share capital of Minnie Co for $600,000 on 1 January 20X7
when the retained earnings of Minnie Co were $ 312,000. At the date of acquisition, the fair value of plant held by
Minnie Co is $180,000 and its carry amount is 140,000. The fair value of the non- controlling interest at the date
of acquisition was $150,000.
Required
What was the goodwill arising on acquisition?

Example – 3
Crash acquired 70% of Bang's 100,000 $1 ordinary shares for $800,000 when the retained earnings of Bang
were $570,000 and the balance in its revaluation surplus was $150,000. Bang also has an internally developed
customer list which has been independently valued at $90,000. The non-controlling interest in Bang was judged
to have a fair value of $220,000 at the date of acquisition.
Required
What was the goodwill arising on acquisition?

48
 DIP IFR FOUNDATION COURSE

Example – 4
On 1 April 20X7 Root acquired 232 million of Branch's 290 million ordinary shares for an immediate cash
payment of $210 million and issued at par one 10% $100 loan note for every 200 shares acquired.
Required
What is the consideration amount paid to Branch’s (excluding fair value of non- controlling interest)?

Example – 5
Plateau obtained 3 million holding in 4,000 $ 1 equity shares in Savannah on 1 October 20X6.
Consideration comprised an exchange of one share in Plateau for every two shares in Savannah plus $1.25 per
acquired Savannah share in cash. The market price of each Plateau share at the date of acquisition was $6 and
the market price of each Savannah share at the date of acquisition was $3.25.
Required
What is the total cost of investment (including fair value of non- controlling interest)?

Example – 6
Fanta Co acquired 100% of the ordinary share capital of Tizer Co 1 October 20X7.
On 31 December 20X7 the share capital and retained earning of Tizer Co were as follows:
$000
Ordinary shares of $1 each 400
Retained earnings at 1 January 20X7 100
Retained profit for the year ended 31 December 20X7 80
580
The profit of Tizer Co have accrued evenly throughout 20X7. Goodwill arising on the acquisition of Tizer Co was
$30,000.
What was the cost of the investment in Tizer Co?

49
 DIP IFR FOUNDATION COURSE

Non-controlling interests
The non-controlling interest (NCI) shows the extent to which net assets controlled by the group are owned by
other parties.
Intra-group trading
A consolidation adjustment is required to remove unrealised profit on intra-group trading.
Example: intra-group trading and unrealised profits
Suppose that a holding company P Co buys goods for $1,600 and sells them to a wholly owned subsidiary S Co
for $2,000. The goods are all still in S Co's inventory at the year end and appear in S Co's statement of financial
position at $2,000. In this case, P Co will record a profit of $400 in its individual accounts, but from the group's
point of view the figures are:
Cost $1,600

External sales Nil

Closing inventory at cost $1,600

Profit/loss Nil

If we add together the figures for retained reserves and inventory in the individual statements of financial position
of P Co and S Co, the resulting figures for consolidated reserves and consolidated inventory will each be
overstated by $400. A consolidation adjustment is therefore necessary as follows.
DEBIT Group reserves
CREDIT Group inventory (statement of financial position)
with the amount of profit unrealised by the group.
We call this the 'provision for unrealised profit' or PUP, as it is a provision against inventory for the unrealised
profit generated by the intra-group sale.

Example – 1
Swing purchased 80% of Cat’s equity on 1 January 20X8 for $120,000 when Cat’s retained earnings were
$50,000. The fair value of the non-controlling interest on that date was $40,000.
Statements of financial position at 31 December 20X8
Swing Cat
$’000 $’000
Equity and liabilities
Equity
Share capital 2,000 100
Retained earnings 400 200
2,400 300
Required;
(a) Calculate the goodwill arising on the acquisition of Cat.
(b) Calculate the non-controlling interest
(c) Calculate the group’s retain earnings.

50
 DIP IFR FOUNDATION COURSE

Example – 2
The following are the financial statements relating to relating to Black, a limited company, and its subsidiary
company Bury.
Statement of financial position
Black Bury
$’000 $’000
Assets
Non-current assets 110,000 40,000
Property, plant and equipment (Investments
21,000,000 $1 ordinary shares in Bury at cost) 21,000 -
131,000 40,000

Equity and Liabilities

Equity
$1 Ordinary shares 100,000 30,000
Retained earnings 33,500 10,280
133,500 40,280

Additional information
(a) Black purchased its $1 ordinary share in Bury on 1 November 20X0. At that date the balance on Bury’s
retained earnings was $2 million. The fair value of the non-controlling interest at the date of acquisition was
$11,800,000.
(b) During the year ended 31 October 20X5 Black sold goods which originally cost $12 million to Bury. Black
invoiced Bury at cost plus 40%. Bury still has 30% of these goods in inventory at 31 October 20X5.

Required:
(a) Calculate the goodwill arising on the acquisition of Bury.
(b) Calculate the non-controlling interest
(c) Calculate the group’s retain earnings.

51
 DIP IFR FOUNDATION COURSE

Acquisition of a subsidiary part way through the year

When a parent acquires a subsidiary part way through the year, the profits for the period need to be apportioned
between pre- and post-acquisition. Only post-acquisition profits are included in the group's consolidated
statement of financial position.
Summary: consolidated statement of financial position

Example – 1
P Co purchased 75% of the share capital of S Co on 1 January 20X1 for $60,000 when the retained earnings of
S Co were $5,000. The fair value of the NCI in S Co at that date was $15,000. The statements of financial
position of P Co and S Co as at 31 December 20X1 are given below.
P CO
STATEMENT OF FINANCIAL POSITION
Assets $ $
Non-current assets
Tangible assets 50,000
30,000 $1 ordinary shares in S Co at cost 60,000
110,000
Current assets 45,000
Total assets 155,000
Equity and liabilities
Equity
80,000 $1 ordinary shares 80,000
Retained earnings 55,000
135,000
Current liabilities 20,000
Total equity and liabilities 155,000

52
 DIP IFR FOUNDATION COURSE

S CO
STATEMENT OF FINANCIAL POSITION
$
Assets
Tangible non-current assets 35,000
Current assets 40,000
Total assets 75,000
Equity and liabilities
Equity
40,000 $1 ordinary shares 40,000
Retained earnings 15,000
55,000
Current liabilities 20,000
Total equity and liabilities 75,000

Required
Prepare the consolidated statement of financial position at 31 December 20X1.
Question – 2
Prestend is the parent company of Northon. The following are the statements of financial position for both
companies as at 31 October 20X7.
Prestend Northon
$'000 $'000 $'000 $'000
Assets
Non-current assets
Property, plant and equipment 4,200 3,300
Investments: shares in Northon at cost 3,345 –
Current assets
Inventory 1,500 800
Receivables 1,800 750
Bank 600 350
3,900 1,900
Total assets 11,445 5,200

Equity and liabilities

Equity
$1 ordinary shares 9,000 4,000
Retained earnings 525 200
9,525 4,200

53
 DIP IFR FOUNDATION COURSE

Current liabilities
Payables 1,220 200
Tax 700 800
Total equity and liabilities 11,445 5,200

The following information is also available.

(a) Prestend purchased 2,800,000 shares in Northon a year ago when Northon had retained earnings of
$60,000. The fair value of the non-controlling interest at the date of acquisition was $1,415,000.
(b) During the year Prestend sold goods with an invoice value of $240,000 to Northon. These goods were
invoiced at cost plus 20%. Half of the goods are still in Northon's inventory at the year end.
(c) Northon owes Prestend $30,000 at 31 October 20X7 for goods it purchased during the year.

Required
(a) Calculate the goodwill on acquisition.
(b) Prepare the consolidated statement of financial position for the Prestend group as at 31 October 20X7.
Note. A working should be included for group retained earnings. Disclosure notes are not required.

54
 DIP IFR FOUNDATION COURSE

Introduction to the consolidated statement of profit or loss

The consolidated statement of profit or loss is prepared by combining the statements of profit or loss of each
group company on a line by line basis.
Intra-group trading
Intra-group sales and purchases are eliminated from the consolidated statement of profit or loss.
Acquisitions part way through the year
If a subsidiary is acquired during the year, only the post-acquisition element of the statement of profit or loss
balances is included on consolidation.
Summary: consolidated statement of profit or loss

55
 DIP IFR FOUNDATION COURSE

Example: consolidated statement of profit or loss

P Co acquired 75% of the ordinary shares of S Co on that company's incorporation in 20X3. The summarised
statements of profit or loss of the two companies for the year ending 31 December 20X6 are set out below.
P Co S Co
$ $
Revenue 75,000 38,000
Cost of sales 30,000 20,000
Gross profit 45,000 18,000
Administrative expenses 14,000 8,000
Profit before taxation 31,000 10,000
Income taxes 10,000 2,000
Profit for the year 21,000 8,000

Note: Movement on retained earnings

Retained earnings brought forward 87,000 17,000
Profit for the year 21,000 8,000
Retained earnings carried forward 108,000 25,000

Required
Prepare the consolidated statement of profit or loss and movement on retained earnings for the group.

56
 DIP IFR FOUNDATION COURSE

Question-1
The following information relates to the Wheeler group for the year to 30 April 20X7.
Wheeler Brookes
Co Co
$'000 $'000
Revenue 1,100 500
Cost of sales 630 300
Gross profit 470 200
Administrative expenses 105 150
Profit before tax 365 50
Income taxes 65 10
Profit for the year 300 40

Note.
Retained earnings brought forward 460 106
Retained earnings carried forward 760 146

Additional information
(a) The issued share capital of the group was as follows.
Wheeler Co: 5,000,000 ordinary shares of $1 each
Brookes Co: 1,000,000 ordinary shares of $1 each
(b) Wheeler Co purchased 80% of the issued share capital of Brookes Co in 20X0. At that time, the retained
earnings of Brookes amounted to $56,000.

Required
Prepare the consolidated statement of profit or loss and the movement on retained earnings for the Wheeler
group for the year to 30 April 20X7.

Question – 2
Pumpkin has held 90% of the equity share capital of Squash for many years. Cost of sales for each entity for the
year ended 31 December 20X3 was as follows.
$
Pumpkin 100,000
Squash 80,000

During the year, Squash sold goods costing $5,000 to Pumpkin for $8,000. At the year end, all these goods
remained in inventory.

57
 DIP IFR FOUNDATION COURSE

Required
(a) What figure should be shown as cost of sales in the consolidated statement of profit or loss of the Pumpkin
group for the year ended 31 December 20X3?
A. $172,000
B. $175,000
C. $180,000
D. $183,000
(b) If Squash's profit for the year was $16,000, what is the profit attributable to the NCI?

Question – 3
Percy has held 75% of the equity share capital of Mercy for many years.
Draft summarised statements of profit or loss for Percy and Mercy for the year ended 31 December 20X3 are
below.
STATEMENTS OF PROFIT OR LOSS AT 31 DECEMBER 20X3
Percy Mercy
$ $
Revenue 500,000 300,000
Cost of sales 300,000 200,000
Gross profit 200,000 100,000
Administrative expenses 90,000 45,000
Profit before taxation 110,000 55,000
Income taxes 10,000 5,000
Profit for the year 100,000 50,000

During the year, Percy sold goods which cost $20,000 to Mercy at a margin of 20%. At the year end, all of these
goods remained in inventory.
Required
Prepare the consolidated statement of profit or loss for the Percy group as at 31 December 20X3.

Question – 4
P Co acquired 60% of the equity of S Co on 1 April 20X5. The statements of profit or loss of the two companies
for the year ended 31 December 20X5 are set out below.
P Co S Co S Co (9/12)
$ $ $
Revenue 170,000 80,000 60,000
Cost of sales 65,000 36,000 27,000
Gross profit 105,000 44,000 33,000
Administrative expenses 43,000 12,000 9,000
Profit before tax 62,000 32,000 24,000
Income taxes 23,000 8,000 6,000
Profit for the year 39,000 24,000 18,000

58
 DIP IFR FOUNDATION COURSE

Note.
Retained earnings brought forward 81,000 40,000
Retained earnings carried forward 108,000 58,000
Required
Prepare the consolidated statement of profit or loss and movements on retained earnings.

59