ACCA F7 - Financial Reporting INT UK Passcards

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ACCA Passcards
Paper F7
Financial Reporting
Passcards for exams
up to June 2015
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Fundamentals Paper F7
Financial Reporting
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First edition 2007, Eighth edition June 2014 All rights reserved. No part of this publication may be
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Preface Contents
Welcome to BPP Learning Media's ACCA Passcards for Paper F7 Financial Reporting.
They focus on your exam and save you time.
They incorporate diagrams to kick start your memory.
They follow the overall structure of the BPP Learning Media Study Texts, but BPP Learning Media's ACCA
Passcards are not just a condensed book. Each card has been separately designed for clear presentation.
Topics are self contained and can be grasped visually.
ACCA Passcards are still just the right size for pockets, briefcases and bags.
Run through the Passcards as often as you can during your final revision period. The day before the exam, try
to go through the Passcards again! You will then be well on your way to passing your exams.
Good luck!
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Preface Contents
Page Page
1 The conceptual framework 1 13 Provisions, contingent liabilities and
2 The regulatory framework 9 contingent assets 73
3 Presentation of published financial 14 Financial instruments 77
statements 13 15 Revenue 87
4 Non-current assets 19 16 Leasing 101
5 Intangible assets 25 17 Accounting for taxation 107
6 Impairment of assets 31 18 Earnings per share 113
7 Reporting financial performance 39 19 Analysing and interpreting financial
8 Introduction to groups 47 statements 117
9 The consolidated statement of financial 20 Limitations of financial statements and
position 51 interpretation techniques 123
10 The consolidated statement of profit 21 Statements of cash flows 127
or loss and other comprehensive income 61
22 Alternative models and practices 133
11 Accounting for associates 67
23 Not-for-profit and public
12 Inventories and biological assets 69 sector entities 137
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1: The conceptual framework
The IASB's Framework for the Preparation and

Topic List Presentation of Financial Statements has now been
replaced by the Conceptual Framework for Financial
Conceptual framework Reporting.
GAAP
Objectives: assumptions
Qualitative characteristics
Elements
Capital maintenance
Conceptual GAAP Objectives: Qualitative Elements Capital

framework assumptions characteristics maintenance
Conceptual framework – a statement of generally accepted theoretical principles which form the
frame of reference for financial reporting.
Advantages Disadvantages
Avoids 'patchwork' or firefighting approach Financial statements are intended for a variety
of users – single framework may not suit all
Less open to criticism of political/external
pressure May need different standards for different
purposes
Some standards may concentrate on the
income statement, others on the balance sheet Preparing and implementing standards is still
difficult with a framework

GAAP signifies all the rules, from whatever source, which govern accounting.
Sources for individual countries Non-mandatory sources

National company law Other countries' statutory requirements
National accounting standards
Local stock exchange requirements
IASs/IFRSs if applicable
In many countries, like the UK, GAAP does not have any statutory or regulatory authority or definition. GAAP is
a dynamic concept.
Page 3 1: The conceptual framework


Objectives of financial statements

Financial position Changes in financial performance
Statement of financial position Statement of profit or loss and other comprehensive
income
Statement of cash flows
Financial performance
Statement of changes in equity
Statement of profit or loss and other comprehensive
income Notes to the financial statements
Statement of cash flows Directors' report
Underlying assumption Going concern


FUNDAMENTAL
Relevance Faithful representation
Materiality Freedom Neutrality Completeness

from error
ENHANCING
Comparability Verifiability Timeliness Understandability
Consistency Disclosure of Users' knowledge

accounting policies


Position Performance
Elements
Assets Liabilities Income Expenses
+ Equity
Probable that any future Recognition The item has a cost or

economic benefit value that can be measured
associated with the item will with reliability
flow to the entity
Probability = a degree of uncertainty that the future economic benefits will flow to or from the entity.
Measurement
Historic cost
(acquisition value)
Current cost (amount if Present value (present

How should an item discounted value of future
acquired currently) be valued? net cash inflows item
expected to generate)
Realisable (settlement)
value (amount selling
in current state)


Financial capital maintenance Physical capital maintenance

Profit is earned if the financial amount of the net Profit is earned if the physical productive capacity
assets at the end of a period exceeds the financial (or operating capacity) of the entity at the end of the
amount of net assets at the beginning of a period period exceeds the physical productive capacity at
after excluding any distributions to, and the beginning of the period, after excluding any
contributions from, owners during period. distributions to and contributions from, owners
during the period. This concept requires the current
Can be measured in either nominal monetary units
cost basis of measurement.
or units of constant purchasing power.
The selection of the measurement bases and concept of capital maintenance together determine the
accounting model used.
2: The regulatory framework
You'll already have covered the IASB in your earlier

Topic List studies.
IASB
IFRS
Criticisms
IASB IFRS Criticisms
IASB
Financial reporting is governed on a worldwide basis by the International Accounting Standards Board.
Decisions on accounting principles are made by the Board and issued in the form of IFRS (IAS).
Remember! Remember! Remember!

May 2000 – IOSCO gave EC directive: since 2005 Detailed comparison of
qualified backing to 30 IAS. consolidated accounts of international and national
listed entities must use IFRS. standards – The
Convergence Handbook.
The IASB issued 41 IASes. Standards are now called IFRS and 14 IFRSs have been issued so far. The
procedure for issuing an IFRS can be summarised as follows.
During the early stages of a project, IASB may establish an Advisory Committee to give advice on
1 issues arising in the project. Consultation with the Advisory Committee and the Standards Advisory
Council occurs throughout the project.
2 IASB may develop and publish Discussion Documents for public comment.
Following the receipt and review of comments, IASB would develop and publish an Exposure Draft for
3
public comment.
4 Following the receipt and review of comments, the IASB would issue a final International Financial
Reporting Standard.
Page 11 2: The regulatory framework

Criticisms
Rigidity Criticisms Too much choice

Lack of flexibility in applying rules Benchmark treatment and allowed
alternatives. These have been
Recent standards eg IFRS 9 very
largely eliminated.
detailed and prescriptive
Standards may be subject to
Rules may not be applicable in all
lobbying or government pressure.
circumstances
3: Presentation of published financial

statements
All of your studies for Paper F7 will be concerned with

Topic List the accounts of limited liability companies, so it is
important that you are familiar with the IAS 1 formats.
Statement of financial position
Statement of profit or loss and other
comprehensive income
Changes in equity
Other matters
Statement of financial position (IAS 1 revised)
matters
20X7 20X6
Other
$'000 $'000 $'000 $'000

Assets
Non-current assets
Property, plant & equipment X X
Goodwill X X
Other intangible assets X X
Changes in
Investments in associates X X
equity
Available-for-sale investments X
__ X
__
X X
Current assets
Inventories X X
Trade receivables X X
Other current assets X X
Cash and cash equivalents X X
Statement of profit or loss and
__ __
other comprehensive income
X
__ X
__
Page 14
Total assets X
__ X
__
__ __
Equity and liabilities
Equity attributable to owners of the parent
Share capital X X
Other reserves X X
2:52 AM
Retained earnings X
__ X
__
X X
Non-controlling interest X
__ X
__
Total equity X X
6/4/2014
Non current liabilities

financial position
Long-term borrowings X X
Statement of
Deferred tax X X
Long-term provisions X
__ X
__
Total non-current liabilities X X
Current liabilities
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Trade and other payables X X

Short term borrowings X X
Current portion of long-
term borrowings X X
Current tax payable X X
Short-term provisions X
__ X
__
Total current liabilities X
__ X
__
Total equity and liabilities X
__ X
__
__ __
Statement of profit or loss and other comprehensive
3: Presentation of published financial statements
income (IAS 1 revised)

matters
Other
20X2 20X1
$'000 $'000
Revenue X X
Cost of sales (X)
___ (X)
___
Gross profit X X
Changes in
Other income X X
equity
Distribution costs (X) (X)

Administrative expenses (X) (X)
Other expenses (X) (X)
Finance costs (X) (X)
Share of profit of associates X
___ X
___
Statement of profit or loss and
Profit before tax X X

Income tax expense (X) (X)
Page 15
___ ___
Profit for the year X
___
___ X
___
___
Other comprehensive income:
Items that will not be reclassified to profit or loss:
2:52 AM
Investments in equity instruments X X

Gains on property revaluation X X
Income tax relating to components
of other comprehensive income (X)
___ (X)
___
6/4/2014
Other comprehensive income for the

financial position
year, net of tax X X

Statement of
___ ___
Total comprehensive income for the year X
___
___ X
___
___
Profit attributable to:
Owners of the parent X X

___ X
___
X
___
___ X
___
___
Total comprehensive income attributable to:
Page 15
___ X
___
X
___
___ X
___
___
Statement of Statement of profit or loss and Changes in Other

financial position other comprehensive income equity matters
Statement of changes in equity (IAS 1 revised)

Share Retained Revaluation Non-controlling Total
capital earnings surplus Total interest equity
$'000 $'000 $'000 $'000 $'000 $'000
Balance at 1 January 20X6 X X X X X X
Changes in accounting policy ___ X
___ ___ X
___ X
___ X
___
Restated balance X
___ X
___ X
___ X
___ X
___ X
___
Changes in equity for 20X6:
Dividends (X) (X) (X)
Total comprehensive income for the year ___ X
___ X
___ X
___ X
___ X
___
Balance at 31 December 20X6 X
___ X
___ X
___ X
___ X
___ X
___
Changes in equity for 2007:
Issue of share capital X X X
Dividends (X) (X) (X)
Total comprehensive income for the year X X X X X
Transfer to retained earnings ___ X
___ (X)
___ ___ ___ ___
Balance at 31 December 20X7 X
___ X
___ X
___ X
___ X
___ X
___
___ ___ ___ ___ ___ ___
Statement of Statement of profit or loss and Changes in Other

financial position other comprehensive income equity matters
IAS 1
The standard suggests that all sets of financial statements should apply the disclosures. An entity must
explain all departures and, if relevant, why by following IAS/IFRS fair presentation is not achieved.
Current assets
All other assets are non-current. Each
Expected to be realised/held for sale in normal entity must decide whether to present
course of entity's operating cycle current/non-current assets/liabilities
Held for trading purposes and expected to be separately. If not, present them in
realised within twelve months order of liquidity.
Cash or cash equivalent asset not restricted in
use
Page 17 3: Presentation of published financial statements

Notes
4: Non-current assets
IAS 16 should be familiar to you from your earlier

Topic List studies.
Borrowing costs are covered by IAS 23 (revised).
IAS 16
IAS 40
IAS 23
IAS 16 IAS 40 IAS 23
IAS 16 Property, plant and equipment covers all aspects of accounting for these items, which are most tangible
non-current assets.
Probable that future
economic benefits Cost of asset can be
associated with the assets Recognition reliably measured
will flow to the entity
Initial measurement
Purchase price Directly attributable costs Other costs
Import duties Site preparation Estimate of
dismantling/removal costs and
Non-refundable purchase taxes Delivery/handling
siite restoration (IAS 37)
LESS Testing
Finance costs (IAS 23)
Trade discounts/rebates Professional fees
Subsequent expenditure
Same criteria as initial costs. Otherwise do not capitalise but charge to profit or loss.
Subsequent measurement
Cost model Revaluation model Depreciation
Cost less accumulated Revalued amount (fair value at Systematic basis over useful
depreciation and the date of revaluation) less life reflecting pattern of use
accumulated impairment subsequent accumulated of asset's economic benefits
losses depreciation and impairment
losses Periodic review of useful life
Revalue sufficiently regularly and depreciation method and
so carrying amount not any change accounted for as
materially different from fair change in accounting
value estimate
All items of same class
should be revalued
Page 21 4: Non-current assets

Changes in value
Surplus Impairment
Recognise and credit To extent of any revaluation Beyond revaluation

to revaluation surplus* surplus for same asset surplus
Charge to revaluation Charge to profit or

surplus loss
* Unless reversing a previously recognised revaluation decrease of the same asset, in which case recognise as
income to the extent of reversal of the previous decrease.
Investment Property is property held to earn rentals or for capital appreciation or both,
rather than for:
a) use in the production or supply of goods or services or for administrative purposes
b) sale in the ordinary course of business
Owner – occupied property cannot be classified as investment property.
Accounting treatment
An entity can choose to hold investment property under either:
a) the fair value model; or
b) the cost model
This choice will apply to all of its investment property.
Page 23 4: Non-current assets

IAS 23 Borrowing costs

The standard deals with borrowing costs for self-constructed assets. Included in borrowing costs
Borrowing costs
Interest on bank overdrafts and short
Interest and other costs incurred by an entity in connection with and long term borrowings
the borrowing of funds Amortisation of discounts or premiums
related to borrowings
Qualifying asset Amortisation of ancillary costs incurred
with the arrangement of borrowings
An asset that necessarily takes a substantial period of time to Finance charges in respect of finance
get ready for its intended sale or use leases under IAS 17
Exchange differences as far as they
are an adjustment to interest costs
Capitalisation is mandatory if the costs are directly attributable to the acquisition, construction or production of
a qualifying asset.
5: Intangible assets
IAS 38 aims to prescribe the accounting treatment for

Topic List intangible assets not dealt with under another IFRS. The
standard deals with the criteria for recognition and
IAS 38 measurement.
Goodwill Goodwill is a controversial area. It comes up again in

connection with group accounts.
IAS 38 Goodwill
Definition
An intangible asset is an identifiable non-monetary asset without physical substance held for use in the
production or supply of goods or services, for rental to others, or for administrative purposes.
Recognition Initial measurement

Recognise if and only if: Intangible assets should initially be measured at cost.
It is probable that the future economic benefits
that are attributable to the asset will flow to the
entity
The cost of the asset can be measured reliably
INTERNALLY GENERATED INTANGIBLE ASSETS
Research phase Development phase
Recognise as expense Capitalise and amortise if Recognise as expense

when incurred following conditions are met: when incurred
P robable future economic benefits

I ntention to complete and use/sell
R esources adequate to complete and use/sell
A bility to use/sell
T echnical feasibility
E xpenditure can be reliably measured
Internally generated bands, mastheads, publishing titles, customer lists and similar items should not be
recognised as intangible assets.
Page 27 5: Intangible assets

IAS 38 Goodwill
Subsequent expenditure Subsequent re-measurement

Subsequent expenditure must meet the original Cost model: cost less accumulated amortisation and
recognition criteria to be added to the cost of the impairment losses
intangible asset. Revaluation model: revalued amount less subsequent
accumulated amortisation and impairment losses
Amortisation Revalued amount is fair value at date of revaluation
by reference to an active market
Should be charged on a systematic basis over the
useful life of the asset. Should commence when All other assets in the same class should be revalued
asset available for use. Period and method to be unless there is no active market for them, in which
reviewed at each year end. case the cost model value should be used for those
assets.
Intangibles with indefinite useful life are not
amortised, but reviewed at least annually for Revaluations so that the carrying value does not offer
impairment. materially from fair value
Impairment losses
The recoverable amount of the asset should be determined at least at each financial year end and any
impairment loss should be accounted for in accordance with IAS 36.
Disclosures
Need to make the following disclosures.
Distinguish between internally generated and other intangible assets
Useful lives of assets and amortisation methods
Gross carrying amount and accumulated amortisation at start and end of period
Where the amortisation is included in the statement of profit or loss and other comprehensive income
A reconciliation of opening balance to closing balance
If research and development, how much was charged as expense
Page 29 5: Intangible assets

IAS 38 Goodwill
Goodwill can be purchased or be acquired as part of a business combination. In either case, the treatment is
capitalisation at cost or fair value under IFRS 3.
Negative goodwill Goodwill

Arises when acquirer's interest in identifiable net Future economic benefits arising from assets that
assets exceeds the cost of the combination. Results are not capable of being individually identified and
from errors or a bargain separately recognised
Reassess cost of combination and assets. Recognise as an asset and measure at cost/excess
of purchase cost over acquired interest
Recognise any remaining goodwill immediately in
profit or loss. Do not amortise
Test at least annually for impairment (IAS 36)
You may be asked for a complicated calculation of goodwill as part of a group accounts question.
6: Impairment of assets
IAS 36 covers impairment of assets.

Topic List
IAS 36
IAS 36
The aim of IAS 36 Impairment of assets is to ensure that assets are carried in the financial statements at no
more than their recoverable amount. Note that IAS 36 does not apply to non-current assets held for sale which
are covered by IFRS 5.
Recoverable amount = higher of
Net selling price (NSP) Value in Use (VIU)
Amount obtainable from the sale of PV of estimated future cash flows

an asset at fair value less cost of expected to arise from the continuing
disposal use of an asset and its disposal at the
end of its useful life
Where it is not possible to estimate the recoverable amount of an individual asset, an entity should determine
the recoverable amount of the cash-generating unit to which it belongs.
The standard also specifies when an entity should reverse an impairment loss and prescribes certain
disclosures for impaired assets.
Indicators of impairment
A review for impairment of a non-current asset or goodwill should be carried out if events or changes in
circumstances indicate that the carrying amount of the non-current asset or goodwill may not be recoverable.
External indicators Internal indicators
Fall in market value Obsolescence or physical damage
Change in technological, legal or economic Adverse changes in use
environment
Adverse changes in asset's economic
Increase in market interest rate likely to affect performance
discount rates
Carrying amount of entity's net assets > market
capitalisation
It may not be possible to associate cash flows with individual assets so the review of the recoverable amount
will often have to be applied to cash generating units that contain groups of related assets.
Page 33 6: Impairment of assets

IAS 36
Calculation of value in use

Include cash flows Exclude cash flows
Directly attributable Any future restructuring to which the enterprise

is not yet committed
An appropriate proportion that can be allocated
on a reasonable and consistent basis Future capital expenditure that will
improve/enhance asset in excess of originally
Net cash flows to be received or paid for the
assessed standard of performance
disposal of the asset at the end of its useful life
on a fair value basis Financing activities
Income tax receipts or payments
The discount rate should be a pre-tax rate that reflects current market assessments of the time value of money
and the risks specific to the asset.
Allocation of impairment loss Recognition of losses

To the goodwill allocated to the cash Assets carried at historic cost – profit or loss
1 generating unit
Revalued assets – under rules of applicable IAS
Depreciation adjusted in future periods to allocate
To all other assets in the cash generating unit the asset's revised carrying amount less residual
2 on a pro rata basis value over its remaining useful life

IAS 36
Reversal of past impairments

Where the recoverable amount increases, the resulting reversal should be recognised in the current period to
the extent that it increases the carrying amount up to the amount that it would have been (net of amortisation or
depreciation) had no impairment loss been recognised in prior years.
Individual assets: recognise as income immediately unless the asset is carried at revalued amount under
another IFRS in which case apply the rules of that IFRS
CGUs: exact opposite of its original recognition while ensuring that assets are not increased above the
lower of their recoverable amount and their carrying amount (after depreciation or amortisation) had there
been no impairment loss
Goodwill: not reversed in subsequent period unless:
– The impairment was caused by a specific external event of an exceptional nature not expected to recur
– Subsequent external events have occurred which reverse the effect of that event
Disclosure
The amount of impairment losses recognised in the statement of profit or loss and other comprehensive
income during the period and the line items affected
The amount of impairment loss reversals recognised in the statement of profit or loss and other
comprehensive income during the period and the line items affected
The amount of impairment losses debited directly against equity in the period
The amount of impairment loss reversals credited directly to equity in the period for material impairment
losses or loss reversals:
– The events and circumstances
– The amount
– The nature of the asset or cash generating unit
– For initial losses whether recoverable amount is NSP or VIU (and details of basis of selling price or
discount rate as appropriate)

Notes
7: Reporting financial performance
This chapter is largely concerned with the statement of

Topic List profit or loss. There is no one single IFRS concerned
with reporting financial performance as there is in the
IAS 8 UK.
IFRS 5
IAS 8 IFRS 5
IAS 8
Should include all items of income and expense for the period (ie not hidden in reserves) unless an IAS
requires/permits otherwise.
Accounting policies
Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in
preparing and presenting statements.
An entity follows extant Standards and Interpretations when determining its accounting policies.
In the absence of a Standard or Interpretation covering a specific transaction, other event or condition,
management uses its judgement to develop an accounting policy which results in information that is relevant and
reliable, considering in the following order:
1. Standards or Interpretations dealing with similar and related issues
2. The Conceptual Framework definitions and recognition criteria
3. Other national GAAPs based on a similar conceptual framework (providing the treatment does not conflict with
extant Standards, Interpretations or the Conceptual Framework)
Changes in accounting policy

Only allowed if:
Required by standard or interpretation
The change will provide more relevant or reliable information about events or transactions
Accounting treatment:
Restate prior year statement of profit or loss and other comprehensive income and statement of
financial position
Restate opening balance of retained earnings
Include as second line of SOCIE
Show effect on prior period at foot of prior year SOCIE
Page 41 7: Reporting financial performance

IAS 8 IFRS 5
Changes in accounting estimates Prior period errors

Apply prospectively, ie in the current period Omissions from and misstatements in the entity's
(and future periods if also affected) financial statements for one or more periods
Correct material prior period errors retrospectively in the first set of financial statements authorised for issue
after their discovery.
Restate comparative amounts for each prior period presented in which the error occurred
Restate the opening balances of assets, liabilities and equity for the earliest prior period presented
Include any adjustment to opening equity as the second line of the statement of changes in equity
Disclose the nature of the error and the amount of the correction to prior periods for each line item in each
period affected
Where it is impracticable to determine the period-specific effects or the cumulative effect of the error, the entity
corrects the error from the earliest period/date practicable (and discloses that fact).
IAS 8 IFRS 5
IFRS 5 Non-current assets held for sale and discontinued operations was published in 2004.
Definitions
Discontinued operation A component of an entity that either has been disposed of or is classified as held for sale and:
(a) Represents a separate major line of business or geographical area of operations
(b) Is part of a single co-ordinated plan to dispose of a separate major line of business or
geographical area of operations, or
(c) Is a subsidiary acquired exclusively with a view to resale
Component of an Operations and cash flows that can be clearly distinguished, operationally and for financial
entity reporting purposes, from the rest of the entity
Disposal group A group of assets to be disposed of (by sale or otherwise) together as a group in a single
transaction; and liabilities directly associated with those assets that will be transferred in
the transaction
Asset held for sale Its carrying amount will be recovered principally through sale rather than continuing use
Page 43 7: Reporting financial performance

IAS 8 IFRS 5
Non-current assets held for sale

Criteria Presentation
The asset (or disposal group) must be available for Assets and disposal groups (including associated liabilities)
immediate sale in its present condition, subject only to classified as held for sale are presented:
usual and customary sales terms and
On the face of the statement of financial position
The sale must be highly probable.
Separately from other assets and liabilities
For this to be the case:
– The appropriate level of management must be Normally as current assets and liabilities (not offset)
committed to a plan to sell; Measurement
– An active programme to locate a buyer and complete
the plan must have been initiated An entity must measure a non-current asset or disposal group
– The asset (or disposal group) must be actively classified as held for sale at the lower of:
marketed for sale at a price that is reasonable in Carrying amount
relation to its current fair value Fair value less costs to sell.
– The sale should be expected to qualify for recognition as
a completed sale within one year from the date of Immediately before initial classifications, measure asset per
classification as held for sale (subject to limited specified applicable IFRS. Any impairment loss accounted for as normal.
exceptions)
– Actions required to complete the plan should indicate Non-current assets/disposal groups classified as held for sale
are not depreciated.
that it is unlikely that significant changes to the plan
will be made or that the plan will be withdrawn
7: Reporting financial performance
Proforma disclosure
XYZ GROUP – STATEMENT OF PROFIT OR LOSS
FOR THE YEAR ENDED 31 DECEMBER 20X7
20X7 20X6
$'000 $'000
Continuing operations
Revenue X X
Cost of sales (X)
__ (X)
__
Gross profit X X
Other income X X
Distribution costs (X) (X)
Administrative expenses (X) (x)
Page 45
Other expenses (X) (X)

Finance costs (X) (X)
Share of profit of associates X
__ X
__
Profit before tax X X
2:51 AM
Income tax expense (X)

__ (X)
__
Profit for the year from
continuing operations X
__ X
__
6/4/2014
Discontinued operations
Profit for the year from
discontinued operations X
__ X
__
Profit for the year X
__
__ X
__
__
Profit attributable to
__ X
__
X
__
__ X
__
__
Page 45
Notes
8: Introduction to groups
Consolidation is a very important area of your Paper F7

Topic List syllabus, likely to appear as a long question in Part B.
This chapter looks at the basic definitions and relevant
Group accounts accounting standards.
IFRS 10
Group IFRS 10
accounts
Control: An investor controls an investee when the

Subsidiary investor is exposed, or has rights to, variable
An entity that is controlled by another entity known returns from its involvement with the investee and
as the parent has the ability to affect those returns through
power over the investee.
Associate Significant influence: the power to participate in

An entity in which an investor has significant the financial and operating policy decisions of an
influence and which is neither a subsidiary nor a economic activity but not control or joint control
joint venture of the investor over those policies
Easy marks can be gained for reproducing

these definitions. But make sure you
understand them!
Summary of classification and treatment

Investment Criteria Required treatment in group accounts
Subsidiary Control (>50% rule) Full consolidation (see Chapter 9)
Associate Significant influence Equity accounting (see Chapter 11)

(20% + rule)
Investment which is none Assets held for As for single entity accounts
of the above accretion of wealth
Page 49 8: Introduction to groups

Group IFRS 10
accounts
Other provisions of IFRS 10

Consolidated financial statements:
The financial statements of a group presented as Exclusion
those of a single economic entity
IAS 27 effectively removed any exclusions.
Subsidiaries held for sale must be accounted for in
Exemption accordance with IFRS 5.
A parent need not prepare group accounts if it is

itself a wholly owned subsidiary Other
If it is partially owned and the other owners do
not object Different reporting dates – adjustments should
Its securities are not publicly traded be made
The ultimate or intermediate parent publishes Uniform accounting policies – if not, disclose
IFRS – compliant consolidated accounts why. Adjustments should be made on
Disclosures apply consolidation
9: The consolidated statement of financial position
This chapter introduces the basic techniques you will

Topic List need to prepare a consolidated statement of financial
position.
Consolidated statement of financial The revision to IFRS 3 has brought another issue into
position consolidation questions. There is now the option to value
IFRS 3 revision the non-controlling interest at fair value. Look out for this.
Method
Fair values
Consolidated statement IFRS 3 revision Method Fair values

of financial position
Purpose To show the assets and liabilities which it controls and their ownership
Assets and liabilities Always 100% P plus S providing P has control
Share capital P only
Reason Simply reporting to the parent's shareholders in another form

100% P plus group share of post-acquisition retained reserves of S less
Retained earnings
consolidation adjustments
To show the extent to which the group actually owns assets and liabilities included in
Reason
the statement of financial position
Non-controlling interest NCI share of S's consolidated assets less liabilities or fair value*
To show the extent to which other parties own assets and liabilities but under the
Reason
control of the parent
* Note. If the NCI is at fair value you may be given a) the share price or b) the fair value of the NCI

IFRS 3 revision
IFRS 3 now introduces the option to value the non-controlling interest at fair value. This affects the goodwill and non-
controlling interest calculations. The options are as follows: [P holds 60% of S. Goodwill impaired by $100,000. Fair
value of NCI $900,000]
Non-controlling interest at share of net assets Non-controlling interest at fair value
Goodwill $'000 Goodwill $'000
Consideration transferred 1,600 Consideration transferred 1,600
Non-controlling interest (2,000 × 40%) 800 Non-controlling interest 900
Net assets (2,000) Net assets (2,000)
Goodwill 400 Goodwill 500
Impairment (100) Impairment (100)
Carrying value 300 Carrying value 400
Note that the total goodwill is now $400,000, reflecting the
$100,000 goodwill attributable to the non-controlling interest.
Page 53 9: The consolidated statement of financial position


Non-controlling interest at end of reporting period

The option to value the non-contolling interest at fair value applies to non-controlling interest at acquisiton. However,
it will affect the valuation of non-controlling interest at the year end.
Under the two options above, this will be as follows (net assets now $3m)
Non-controlling interest at share of net assets Non-controlling interest at fair value
$'000 $'000
S net assets 3,000 Fair value of NCI 900
NCI 40% 1,200 NCI share of increase in net assets
((3,000 – 2,000) × 40%) 400
Goodwill impairment (100 × 40%) (40)
1,260
Fair value options

If you are required to account for NCI at fair value there are two options:
1) You may be told what fair value of the NCI is
2) You may be given the share price at the date of acquisition
The examiner has said that he will usually examine NCI at FV, so be prepared for this.


1 Read the question and the requirements. 2 Group structure noting dates of acquisition.
Prepare necessary proforma required by question. Level of detail is dictated by level of detail
3
in question
Leave out cost of investment
Include line for non-controlling interest
Consider adjustments and note on question paper. Dividends
4 PUP
Revaluation to fair value
Reconciliation of intra-group balances
Support adjustments by working eg PUP
5 Aggregate adjusted assets and liabilities. Incorporate adjustments

Cancel any intra-group items eg current
a/c balances, dividends, loan notes
6 Share capital of P only.
7 Goodwill
Consideration transferred X
Non-controlling interest X Remember that
Net assets acquired as represented by goodwill is retained in
Share capital X the statement, subject
Share premium X to impairment reviews.
Reserves X Remember rules for
Retained earnings X
___ gain on a bargain
(X)
_____ purchase.
Goodwill (gain on bargain purchase) X/(X)
_____
_____
Retained earnings
P S
8 Per question
Adjustments as noted on question paper
X
X/(X)
X
X/(X)
______ ______
X Y
Share of S post acquisition % X
______
X
Any impairment of goodwill (X)
______
X
______
______


9 Non-controlling interest
Fair value at acquisition X
Share of post-acquisition retained earnings (per 8) X
Share of any goodwill impairment (X)
X

Fair values (IFRS 3) Fair value (IFRS 3)

On consolidation, the fair value of the consideration
The amount for which an asset could be
paid for a subsidiary is compared with the fair value of
exchanged, or a liability settled, between
the net assets.
knowledgeable, willing parties in an arm's length
IFRS 3 sets out rules determining the fair value of the transaction.
purchase consideration, the fair value of identifiable
assets and liabilities acquired and the fair value of
specific net assets. New definition (IFRS 13)
The price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction
between market participants at the measurement
date.


Fair value adjustment calculations

Goodwill is the difference between the cost of the acquisition and the acquirer's interest in the fair value of the
identifiable assets and liabilities. So far we have used book value for the assets and liabilities. However, IFRS 3
states that we should use fair value. Therefore revaluations may be necessary to ensure that book value is equal
to fair value.
Subsidiary Parent
Revalues assets and liabilities to fair value OR Revalues assets and liabilities as a
consolidation adjustment
Subsidiary's books unchanged
In the exam the usual scenario is that the subsidiary has not
revalued to fair value and so a consolidation adjustment is needed.
10: The consolidated statement of profit or

loss and other comprehensive income
Under the revised IAS 1 the full statement is now called

Topic List the 'statement of profit or loss and other comprehensive
income'. At F7 level some questions will only require the
Consolidated statement of profit or first part of the statement, which will be referred to as the
loss 'statement of profit or loss.'
Consolidated statement of profit or

loss and other comprehensive income
Consolidated Consolidated statement of profit or

statement of profit or loss loss and other comprehensive income
Purpose To show the results of the group for an accounting period as if it were a single entity
Sales revenue to profit after 100% P + 100% S (excluding dividend receivable from subsidiary and adjustments
tax for intra-group transactions)
Reason To show the results of the group which were controlled by the parent
Intra-group sales Strip out intra-group activity from both sales revenue and cost of sales
Unrealised profit on (a) Goods sold by P: increase cost of sales by unrealised profit
intra-group sales
(b) Goods sold by S: increase cost of sales by full amount of unrealised profit and
decrease non-controlling interest by their share of unrealised profit
If the value of S's non-current assets have been subjected to a fair value uplift then
Depreciation any additional depreciation must be charged in the consolidated statement of profit
or loss. The non-controlling interest will need to be adjusted for their share
Transfer of non-current Expenses must be increased by any profit on the transfer and reduced by any
assets additional depreciation arising from the increased carrying value of the asset.
The net unrealised profit (ie the total profit on the sale less cumulative 'excess'
depreciation charges) should be eliminated from the carrying amount of the asset
and from the profit of the company that made the profit.
For instance, H transfers an asset with a carrying value of $1,000 to S for $1,100.
Depreciation is 10% p.a. The net unrealised profit is $90. This is debited to H's
statement of profit or loss and to the carrying value of the asset
Non-controlling interests NCI% of S's PAT
Page 63 10: The consolidated statement of profit or loss and other comprehensive income

Consolidated statement of profit or loss

Adjustments required
Eliminate intra group sales and purchases
Eliminate unrealised profit on intra group purchases still in
inventory at the year end
Eliminate intra group dividends
Split profit for the year between group and NCI
Procedure
Combine all P and S results from revenue to profit after tax. Unrealised profits and losses:
Time apportion where the acquisition is mid-year
Only where S sells to P, allocate the
Exclude intra group investment income unrealised profit between NCI and
Calculate NCI (NCI% × PAT) P: Debit group retained earnings,
Debit NCI, Credit inventory

Consolidated statement of comprehensive income

If there is a revaluation gain or loss in the parent or subsidiary you will prepare a consolidated statement of profit or loss
and other comprehensive income. This will only require a few additions to the consolidated statement of profit or loss.
Revaluation gain in parent Revaluation gain in subsidiary (80%)
$'000 $'000
Profit for the year 8,000* Profit for the year 8,000*
Other comprehensive income: Other comprehensive income:
Gains on property revaluation 2,000 Gains on property revaluation 2,000
Total comprehensive income for the year 10,000 Total comprehensive income for the year 10,000
Total comprehensive income Total comprehensive income

attributable to: attributable to:
Owners of the parent (5,000+2,000) 7,000 Owners of the parent (5,000+(2,000 × 80%) 6,600
Non-controlling interest 3,000 Non-controlling interest (3,000+(2,000 × 20%)) 3,400
10,000 10,000
*3,000 attributable to NCI
Page 65 10: The consolidated statement of profit or loss and other comprehensive income
Notes
11: Accounting for associates
As you know, an investment can be carried at cost, fully

Topic List consolidated or accounted for using the equity method,
depending on the degree of control exercised. An
Associates associate is accounted for using the equity method.
Associates
Individual investor's books Consolidated financial statements

Carry at cost, or Use equity method unless:
In accordance with IFRS 9 as an equity investment Investment acquired and held exclusively with a
view to disposal soon
Investor ceases to have significant influence
Statement of financial position In these cases record at cost.
Initial cost X
Add/less: post acquisition share of
profits/losses (before dividends) X/(X)
Less: post-acquisition dividends received
Statement of profit or loss
Group share of associate's PAT
to avoid double counting (X)
_____
Carrying value X
_____
_____
12: Inventories and biological assets
You've met inventory and inventory valuation in your

Topic List earlier studies, so only a brief summary is given here.
Biological assets are regulated by IAS 41 Agriculture – a
IAS 2 new standard for this syllabus.
IAS 41
IAS 2 IAS 41
Inventories
Lower of
Cost Net realisable value
Cost of Cost of Other Estimated selling price less costs to

purchase conversion costs completion less costs necessary to
make the sale
Permitted treatment of cost: FIFO or weighted average

LIFO is not permitted under IAS 2.
IAS 2 IAS 41
IAS 41: Agriculture

IAS 41 identifies the critical events associated with biological transformation as growth, procreation,
production and degeneration.
In the statement of financial position biological assets should be measured at fair value less estimated point-
of-sale costs. Agricultural produce derived from biological assets is also measured at fair value less estimated
point-of-sale costs.
Page 71 12: Inventories and biological assets

Notes
13: Provisions, contingent liabilities and

contingent assets
IAS 37 should be familiar to you from your earlier

Topic List studies. It is particularly topical in the light of increasing
environmental awareness.
IAS 37
IAS 37
IAS 37
IAS 37 Provisions, contingent liabilities and contingent assets was brought in to remedy some abuses of
provisions.
Entities should not provide for costs that need to be incurred to Provision
operate in the future, if those costs could be avoided by the
entity's future actions A liability of uncertain timing or
amount. Liabilities are obligations to
Costs of restructuring are to be recognised as a provision only transfer economic benefits as a
when the entity has an obligation to carry out the restructuring result of past transactions or events.
The full amount of any decommissioning costs or environmental
liabilities should be recognised from the date on which they arise
Contingent liability Contingent asset

Should be disclosed unless the possibility of any Should be disclosed where an inflow of economic
outflow of economic benefits to settle it is remote benefits is probable
Page 75 13: Provisions, contingent liabilities and contingent assets

Notes
14: Financial instruments
A financial instrument is defined in IAS 32 as any

Topic List contract that gives rise to both a financial asset of one
entity and a financial liability or equity instrument of
IAS 32 another. IAS 39 deals with how financial investments are
measured and IFRS 7 covers disclosure.
IFRS 9
IFRS 9 is the most recent standard which deals with
IFRS 7 classification and measurement of assests. It now
replaces IAS 39 for all issues covered by the F7 syllabus.
IAS 32 IFRS 9 IFRS 7
Because of the inherent difficulties in this complex area, it is Financial instrument:

hard for users to assess the nature, amount and cost of an
entity's debt and equity resources.
Any contract that gives rise to a financial
Before IAS 32 and IAS 39 many financial instruments were asset of one entity and a financial liability
treated as off balance sheet finance and invisible to the user or equity instrument of another
of accounts. Because of their significance, the IASB tackled
the project in 3 phases:
1. IAS 32: Presentation (1995) ensured the user was aware
of the instruments and risks
Financial asset:
2. IAS 39: Recognition and Measurement (1998) prescribed Cash; equity instrument of another entity;
specific accounting treatment as an interim measure contractual right to receive cash/other
Both standards were revised in December 2003 and IAS 39 is financial assets; contract that can be
now being replaced by IFRS 9. settled in the entity's own equity
3. IFRS 7: Disclosure (2005) effective from 1 January 2007 instruments and may be either a derivative
specifies disclosures required for financial instruments or a non-derivative
IAS 32 presentation Financial liability:

Contractual obligation to deliver cash/other
Financial instruments should be classified as either financial asset; contractual obligation to
– Liability (debt) or exchange financial instruments under
– Equity potentially unfavourable conditions
Compound instruments (exhibiting characteristics of both)
must be split into their debt and equity components
Substance rather than legal form applies (eg
redeemable preference shares are a financial liability)
Equity instrument:
Interest, dividends, loss or gains relating to a financial Contract that evidences a residual interest
instrument claimed as a liability are reported in the I/S, in the assets of an entity after deducting all
while distributions to holders of equity instruments are its liabilities
debited directly to equity (in the SOCIE)
Offset of a financial asset and liability is only allowed
where there is a legally enforceable right and the entity
intends to settle net or simultaneously
Page 79 14: Financial instruments

IFRS 9
IFRS 9 deals with recognition and measurement of financial assets and liabilities. It classifies assets on the
basis of the entity's business model and the cash flow characteristic of the financial asset.
Initial measurement
Fair value Exceptionally fair value

through profit or loss
Subsequent measurement
Fair value Amortised cost Exceptionally fair value

through profit or loss
Subsequent measurement: Subsequent measurement:

financial assets (FA) financial liabilities (FL)
Amortised cost Fair value Fair value Amortised cost
Where held to Financial assets at Financial liabilities All others

collect contractual fair value through at fair value
cash flows as profit or loss through profit or
specified dates Equity investments loss
FL arising when
transfer of FA
does not qualify
for derecognition

Calculations
The method used in the following example applies to deep discount bonds and other similar instruments
(including zero coupon bonds).
Debt issued for $400,000 (nominal) on $

1.1.20X1 for proceeds of $315,526;
Annual interest payments
redeemed for $400,000 (ie par) on
(4% × $400,000 × 5) 80,000
31.12.20X5
Deep discount $(400,000 – 315,526) 84,474
______
Interest rate = 4%
164,474
______
______
Effective interest rate = 9.5%
At inception DEBIT Cash $315,526
CREDIT Liability $315,526
Rolled up
P or L Actual interest interest charged Closing
Year charge payable to P or L liability
*$ $ $ $
20X1 29,975 16,000 13,975 329,501
20X2 31,303 16,000 15,303 344,804
20X3 32,756 16,000 16,756 361,560
20X4 34,348 16,000 18,348 379,908
20X5 36,092
______ 16,000
______ 20,092
______ 400,000
164,474
______
______ 80,000
______
______ 84,474
______
______
*9.5% × opening liability in statement of financial position (315,526).
Fair value is measured as quoted market price in an active market where possible.

Gains and losses (on Impairment

remeasurement Impairment review where evidence of financial asset being impaired
to fair value) Original effective interest rate should be used when discounting
future cash flows to calculate the impairment
Held at fair value: profit or loss
Impairment loss is charged to profit or loss
Investments in equity instruments:
reported in equity and under other Where investment in equity instrument suffers impairment loss, this
comprehensive income is recognised in statement of changes in equity and under other
comprehensive income.
IFRS 7: Financial instruments: Disclosure

The objective of IFRS 7 is to require entities to provide disclosures in their financial statements that enable
users to evaluate:
(a) The significance of financial instruments for the entity's financial position and performance
(b) The nature and extent of risks arising from financial instruments to which the entity is exposed and how the
entity manages those risks
This information can influence a user's assessment of the financial position and performance of an entity and of
the nature of its future cash flows.
In addition to the numerical disclosures required by IFRS 9, IFRS 7 encourages a narrative commentary by
issuers of financial instruments, which will enable users to understand their attitude to risk.
You will not be examined on the risks inherent in financial instruments.

Notes
15: Revenue
This is a very topical issue given the financial scandals of

Topic List recent years.You must be aware of the various forms of
off-balance sheet finance and the measures taken to
Off balance sheet finance prevent it.
Substance over form
Conceptual Framework
Revenue recognition
IAS 20
IAS 11
Off balance Substance Conceptual Revenue IAS 20 IAS 11

sheet finance over form Framework recognition
Off balance sheet finance

The funding or refinancing of an entity's operations in such a way that, under legal requirements and existing
accounting conventions, some or all of the finance may not be shown on its statement of financial position
Perceived benefits The problem

A situation is created where users of accounts do
Stock market advantages: lower gearing ratio not have a clear view on the state of the entity's
Keep a company within loan covenants affairs. Insufficient disclosure creates problems.
Exclude highly geared subsidiary from
consolidation for reasons of dissimilar activities
and thereby reduce gearing
Expectation of rights issue (to reduce gearing)
decreased, thereby maintaining share price
Consignment inventory
Benefits Risks
The future cash flows from sales to 3rd parties Being compelled to retain inventory that is not
easily saleable or is obsolete
Insulation from changes to the transfer price
charged by the manufacturer The risk of slow movement resulting in higher
costs of financing and holding costs
Factoring of debts
Benefits Risks
Future cash flows from payment by debtors Slow payment
Non payment
Page 89 15: Revenue


Substance over form

Transactions and other events should be accounted for and presented in accordance with their substance and
financial reality and not merely with their legal form (IAS 1).
Examples
IAS 17 Leases: if risks and rewards of ownership transferred lease is an asset of the lessee even though
title has not passed
IAS 11Construction contracts: taking attributable profits
IAS 24: related party transactions
IFRS 3: definition of subsidiary based on control
Learn these – they may well come up!


Conceptual Framework
Faithful representation implies that items are accounted for according to their substance and economic reality.
Majority of transactions: no difference, so no issue
Other transactions: substance and form diverge; choice of treatment can give different results due to non-
recognition of an asset/liability even though benefits/obligations result
Determining the substance of transactions

Does the transaction change the existing assets/liabilities of the entity, either by creating new ones, or altering
the existing ones?
Assets Liabilities
Resources controlled by the entity as a result of Present obligations of the entity arising from past
past events and from which future economic events, the settlement of which is expected to result in
benefits are expected to flow to the entity an outflow from the entity of economic benefits
Page 91 15: Revenue


Recognition
The process of incorporating an item into the primary financial statements with appropriate headings. It involves
depiction of the item in words and by monetary amount and the inclusion of that amount in the statement totals.
Recognise asset and liability Do not recognise

Where significantly all the risks and benefits will Where significantly all the risks and benefits have
flow to the entity been transferred
Sufficient evidence that benefits exist
Able to measure in monetary terms with sufficient
reliability

IAS 18
Revenue is that which arises in the course of ordinary activities such as that from sales, services provided,
interest, royalties and dividends.
Measurement Includes only those amounts receivable by the entity

on its own account. Not sales, goods and sales tax
(eg VAT) collected by agent to be passed to the
Fair value of consideration received/receivable. principal.
Deferred amounts discounted
In a sale financed by the seller, any difference
between the fair value of the item and the nominal
sales value should be accounted for as interest
revenue
Page 93 15: Revenue


Recognition
Goods Services
When the following conditions are met: Conditions 3 to 5 as for goods

1. Transfer of significant risks and rewards of The stage of completion of the transaction at
ownership (usually legal title) the balance sheet date can be measured
reliably and a proportion applied to the revenue
2. No more control over goods sold
Interest – time proportion basis (effective yield)
3. Amount of revenue can be reliably measured
Royalties – accruals basis
4. Probable that debt will be repaid
Dividends – when the right to the dividend is
5. Transaction costs can be reliably measured established
Disclosure
Accounting policy for each recognition; the amount of each significant category of revenue; amount of revenue
from exchange of goods or services

IAS 20 Accounting for government grants and disclosure of government assistance requires the following
accounting treatment.
Grants related to income Grants related to assets

Either show as credit in profit or loss (other income) Treat as deferred income and credit to profit or loss on
or deduct in reporting the related expense systematic rational basis over useful life of asset OR
deduct grant in arriving at carrying value of asset and
recognise as income over asset's life by means of
reduced depreciation charge
Disclose:
Accounting policy
Nature and extent of grants recognised
Unfulfilled conditions and other contingencies Recognise only when reasonable assurance that any
relating to grants recognised conditions will be met and monies received.
Page 95 15: Revenue


Construction contracts
Outcome can be A contract specifically negotiated for Outcome cannot be

estimated reliably. the construction of an asset or a estimated reliably.
combination of assets that are
closely interrelated or
Recognise contract interdependent in terms of their Recognise revenue
revenue and contract design, technology and function or only to extent of
costs by reference to their ultimate use. contract costs incurred
stage of completion of that it is probable will
contract. be recovered.
Recognise as expense
Any expected loss should be in period incurred.
recognised as an expense
immediately.
Where the outcome of a contract can be estimated reliably, a proportion of contract revenue and costs should
be recognised in profit or loss by reference to the stage of completion (ie a proportion that fairly reflects the
amount of work done).
The stage of completion can be calculated in various ways including:
Proportion of contract costs Surveys of work performed: Physical proportion completed

incurred:
Work certified × Estimated total
___________
Costs to date × Estimated total
_____________ Contract price revenue/costs
Total estimated revenue/costs
costs
Page 97 15: Revenue


Disclosure
Statement of profit or loss Statement of financial position
Revenue (x% × total contract revenue) X Gross amount due from/to customers
Expenses (x% × total contract cost) (X)
___ Contract costs incurred X
X Recognised profits less recognised losses X
___
Expected loss (X)
___ X
Recognised profit/loss X
___
___ Less progress billings to date (X)
___
X/(X)
_____
_____
Trade receivables
Progress billings to date X
Less cash received (X)
___
X
___
___
The following, not covered above, must also be disclosed under IAS 11 (revised).
Methods used to determine contract revenue
Methods used to determine stage of completion of contracts in progress
Any contingent gains and losses, eg due to warranty costs, claims, penalties or possible losses, in
accordance with IAS 37
Amount of advances received
Amount of any retentions (progress billings not paid until the satisfaction of certain conditions)
Page 99 15: Revenue

Notes
16: Leasing
Leasing transactions are very common in practice. It is

Topic List important that you get to grips with the basics of IAS 17.
Types of lease
Disclosures: lessees
Types of Accounting Disclosures:

lease treatment lessees
IAS 17
IAS 17 Leases standardises the accounting treatment and disclosure of assets held under lease. It follows the
substance over form principle.
Finance lease Lease Operating lease

A lease that transfers An agreement whereby the A lease other than a finance
substantially all the risks and lessor conveys to the lessee lease
rewards of ownership of an in return for rent the right to
asset use an asset for an agreed
period of time

Finance lease Operating lease
Capitalise asset (lower of fair value and present Charge rentals on a systematic basis over lease
value of minimum lease payment) period
Set up finance lease liability Statement of financial position
Repayments split between finance charge and – Only accruals/prepayments for rentals
capital
– Rental expense
– Carrying amount
– Finance lease liability
– Depreciation
– Finance charge
Page 103 16: Leasing



Non current liabilities
1 Non current assets 2 Finance lease liabilities (note 4) X
Included in the net book value of plant and
equipment is $X in respect of assets held Current liabilities
under finance leases 3 Finance lease liabilities (note 4) X
Accruals (note 4) X
Finance lease liabilities: reconciliation of minimum lease payments and present value
4 Within one year X (gross)
Later than one year and not later than five years X (gross)
Later than five years X (gross)
Less future finance charges (X)
___
Present value of finance lease liabilities X
___
___
Statement of financial position (continued)

Operating leases
5 Present value of finance lease liabilities 6 The future minimum lease payments under
Within one year X (net)
non-controllable operating leases are as
Later than one year and follows:
not later than five years X (net)
Within one year X
Later than five years X (net)
___
X Later than one year and
___
___ not later than five years X
Note. The minimum lease payments include Later than five years X
___
the finance charge element. The present
X
___
___
value is the capital element only of the lease
liability.
Page 105 16: Leasing


Statement of profit or loss and other comprehensive income

Although not specifically required by IAS 17, companies tend to also disclose the following in the notes.
Profit from operations Finance cost

7 Profit from operations is stated after
8 Finance charge on finance leases: X
charging:
Depreciation on assets held under
finance leases X
17: Accounting for taxation
In nearly all countries entities pay tax on their trading

Topic List income. There are two aspects to this: current tax and
deferred tax.
Current tax Most students find deferred tax more difficult than current
Deferred tax tax, so study this section carefully. Questions in Paper F7
should not generally be too complicated.
Taxable temporary differences
Deductible temporary differences
Disclosure
Current Deferred Taxable temporary Deductible Disclosure

tax tax differences temporary differences
IAS 12
IAS 12 covers both current and deferred tax. Current tax is fairly easy.
Tax charge
Current tax: an estimate of income tax
Current tax X payable for the current year
Under/overstatement of prior periods X/(X)
Deferred tax X
___ Under/overstatement of prior periods: as
X
___ the income tax charge on taxable profits is
___ only an estimate, there may be adjustments
required in the next accounting period
Deferred tax: see next card


The tax charge in the income statement often bears little relationship to the profit before tax figure because of
the differences which exist between tax rules and financial accounting principles.
Accounting for deferred tax

Is recognition of the item different No No deferred tax implications
for tax and accounts purposes?
Yes
Is the difference potentially No deferred tax implications

No (permanent difference)
only temporary in nature?
Liability method
Yes
Recognise a deferred tax asset or liability using the rate of income tax enacted by end of reporting period that is
expected to apply to the period when the asset is realised or the liability settled.
Page 109 17: Accounting for taxation


1 Timing differences
Temporary timing differences arise as a result of the fact that certain items of income/expenditure are dealt
with for tax purposes on a receipts basis and on an accruals basis for accounts purposes.
At the end of the reporting period, the timing difference is equivalent to the difference between the accrued
income asset and the tax base of the income (amount received ie nil).
2 Specific timing differences – accelerated capital allowances

When tax (or 'capital') allowances/tax
depreciation rates are available at a rate On a cumulative basis calculated as:
higher than the accounting depreciation Net book value (NBV) X
rates applied to the same assets. Less tax written down value (TWDV) ___
(X)
X
___
3 Revaluations
___
The revaluation of an asset will create a temporary difference when it is incorporated in the statement of
financial position, insofar as the profit or loss that would result from realisation at the revalued amount is
taxable. Deferred tax is normally provided out of the revaluation surplus.

Deductible temporary differences

Deductible temporary differences At the end of the reporting period, the
arise since certain items of timing difference is equivalent to
expenditure are dealt with for tax differences between the accrual and
purposes on a payments basis and on the tax base of the payment (amount
an accruals basis for accounts paid ie nil).
purposes.
Page 111 17: Accounting for taxation


Disclosure
Statement of financial position Statement of profit or loss and
Deferred tax liability
Balance brought forward X Current tax X
Amount charged/(credited) Under/overstatement of prior periods X/(X)
to profit or loss X/(X) Deferred tax X
_____
Amount charged/(credited) to equity X/(X)
_____ X
_____
_____
Balance carried forward X
_____
_____
18: Earnings per share
Earnings per share is a widely used measure of an

Topic List entity's performance. It is useful for comparing the results
of one entity over time and comparing the performance
Basic EPS of an entity's equity against the performance of another
entity's equity.
Changes in capital structure
Diluted EPS
Basic EPS Changes in capital Diluted EPS

structure
IAS 33
This standard aims to improve the comparison of different entities in the same period and of the same entity in
different periods.
Basic calculation
Net profit/loss attributable to ordinary shareholders The net profit or loss used is after interest, tax
__________________________________________________ and deductions in respect of non-equity shares.
Weighted average no. of shares in issue during the
period
Basic EPS Changes in Diluted EPS

capital structure
Changes in capital structure

It is necessary to match the earnings for the year against the capital base giving rise to those earnings.
Bonus issue Issue at full market Rights issue

The earnings of the entity will not
rise (no new funds injected); to
price For purposes of calculating the
number of shares, treat this as an
calculate the number of shares: New capital is introduced issue at full market price followed
therefore earnings would be by a bonus issue:
Treat bonus shares as if in issue expected to rise from date of new
for the full year issue; to calculate the number of Use weighted average number of
shares: shares in issue for the period
Apply retrospectively, reducing the
modified by the retrospective effect
reported EPS for the previous Use time weighted average of the bonus element
year by the reciprocal of the number of shares for period
bonus fraction Bonus element
No retrospective effect Actual cum – rights price
______________________
Theoretical ex – rights price
Page 115 18: Earnings per share

Basic EPS Changes in capital Diluted EPS

structure
Diluted EPS Convertible loan notes or preference

Required where a listed entity has outstanding
convertible loan notes, preferred shares,
shares
debentures, options or warrants Earnings
Must be shown on the face of the statement of Net basis earnings X

profit or loss and other comprehensive income Add back loan note interest net of tax
and given equal prominence with basic EPS (or preference dividends) 'saved' X
___
Numerators of calculations must be Diluted earnings X
___
___
disclosed. Denominators must be disclosed
No of shares
and reconciled to each other
Basic weighted average X
Other amounts per share may be shown but
profit used must be reconciled to a line item Add additional shares on conversion (use
in the statement of profit or loss. terms giving max dilution available after y/e) X
___
Diluted number X
___
___
19: Analysing and interpreting

financial statements
The emphasis here is on interpretation. Calculation of

Topic List ratios will provide only a fraction of available marks. There
are many standard ratios, so variations of those shown
here may come up and will be acceptable.
Profitability
The exercise must be done with a clear objective in mind –
Liquidity and apply your general financial knowledge, don't just rely
on the ratios. And acceptable values will depend on
Gearing industry, market strategy etc.
Investors' ratios
Profitability Liquidity Gearing Investors'

ratios
Return on capital employed Return on equity

PBIT PBIT PAT and pref div
ROCE = Capital employed = ROE = %
Total assets less current liabilities Ord share capital+reserves
When interpreting look for: More restricted view of capital than ROCE, but
same principles
– How risky is the business?
– How capital intensive is it? Profit margin
– What ROCE do similar businesses have? PBIT
Problems: which items to consider to achieve Profit margin =
Sales
% Gross profit = Gross profit
margin Sales
comparability?
Useful to compare profit margin to profit % to
– Revaluation reserves investigate movements which do not match
– Policies, eg goodwill, R&D
– Bank overdraft: short-long-term liability Asset turnover
– Investments and related income: exclude Sales
Examine Asset turnover =
Total assets less current liabilities
– Change year to year Measures efficiency of use of assets; can
– Comparison to similar entities amend to just non-current assets for capital
– Comparison with current market borrowing rates intensive business

ratios
Current ratio Inventory turnover/days

Current assets Av inv
Current ratio = Current liabilities Turnover = Cost of sales Days = × 365
Av inv Cost of sales
Assume assets realised at book value Higher the better? But remember:
2:1 acceptable? 1.5:1? Depends on industry – Lead times
– Seasonal fluctuations in orders
Quick ratio – Alternative uses of warehouse space
Current assets – Inventory
Quick ratio (acid test) = – Bulk buying discounts
Current liabilities
– Likelihood of inventory perishing or
Eliminates illiquid and subjectively valued inventory becoming obsolete
Could be high if overtrading with rec'bles, but no cash
1:1 OK? But supermarkets etc on 0.3 (no rec'bles)
A/cs payable payment period
A/cs receivable collection period Trade accounts payable × 365
Trade receivables Purchases
Credit sales × 365
Use cost of sales if purchases not disclosed
Consistent with quick/current ratio? If not, investigate
Page 119 19: Analysing and interpreting financial statements


ratios
Cash cycle Why liquidity changes

Credit control efficiency altered
Raw
WIP
Finished Altering payment period of suppliers: many
materials goods companies in the recession used their
suppliers as a source of funding
Inventory control: in the recession many
companies reduced their inventory holdings
Payables Cash Receivables Profit in to maintain their liquidity
In an economic downturn, liquidity becomes a

crucial issue.
Cash flow timing ≠ sales/cost of sales timing as
credit is taken
Holding inventory delays time between payments
for goods to suppliers and sales receipts from Example
customers Just think of all those dot.com businesses!

ratios
Gearing These ratios deal with long-term liquidity.

Prior charge capital
Gearing ratio = Total capital
%
There are difficulties in assessing gearing.
Use of equity accounting to lower gearing
Interest cover
Elements included are subjective. Following
Interest cover = PBIT (incl int receivable) could have an impact.
Interest payable
– Convertible loan notes
Is interest cover a better way to measure gearing? – Preference shares
– Company must generate enough profit to cover – Deferred tax
interest – Goodwill and development expenditure
– Is 3+ safe? Consider relevance of profit vs cash capitalisation
– Revaluation surplus
Debt/equity ratio
Prior charge capital
Debt/equity ratio = Ordinary share capital and reserves %
(> 100% = high)
Page 121 19: Analysing and interpreting financial statements


ratios
Used by someone contemplating investment. Consider an entity's shares as a source of income (dividends)
and/or source of capital growth (share price).
Dividend yield P/E ratio

Div per share
Dividend yield = Mid-market price % P/E ratio = Mid-market price
EPS
Low yield: retains large proportion of profits to reinvest Higher the better; reflects confidence of market
High yield: risky company or slow-growing Rise in EPS will cause decrease in P/E ratio,
but maybe not to same extent: context of
Dividend cover market, industry norms
Dividend cover = EPS
Net div per ordinary share
or Earnings yield
EPS
Profit after tax and pref div Earnings yield = Mid-market price
Div on ordinary shares
Shows dividend yield if no retention
Shows how safe the dividend is, or extent of profit
retention. Variations due to maintaining dividend vs Compare entities with different dividend policies
declining profits Shows growth rather than earnings
20: Limitations of financial statements and

interpretation techniques
In this chapter we look at some of the issues which may

Topic List make financial statements, and ratios based upon them,
less reliable than they appear.
Limitations of financial statements
Accounting policies and the limitations
of ratio analysis
Limitations of Accounting policies and the

financial statements limitations of ratio analysis
Limitations of financial statements

A number of factors may make financial statements less reliable than they appear:
Problems of historic cost information – especially in periods of inflation

Creative accounting – often aimed at reducing gearing
The effect of related parties, in particular involving group companies
Seasonal trading – timing of year end
Asset acquisition – especially just before the year end
Limitations of Accounting policies and the

financial statements limitations of ratio analysis
Accounting policies
Choice of accounting policy can affect the financial statements – such as whether to revalue assets
or capitalise interest costs.
Change of accounting policy can only be justified on grounds of fairer presentation.
Limitations of ratio analysis

In first year of trading no comparative figures
Comparison against industry averages may not be very revealing
If based on historic cost, undervalued assets may distort ROCE and gearing
Ratios influenced by choice of accounting policy
May be distorted by creative accounting measures
Results may be distorted by inflation
No two companies have the same risk profile, therefore comparison difficult
Page 125 20: Limitations of financial statements and interpretation techniques

Notes
21: Statements of cash flows
Statements of cash flows were brought in because profit

Topic List does not always give a useful picture of an entity's
operations.
IAS 7 You've covered statements of cash flow earlier, so this
Workings should serve as revision.
Interpretation
IAS 7 Workings Interpretation
Indirect method
STATEMENT OF CASH FLOWS FOR YEAR ENDED 31.12.X1
Cash flows from operating activities
Net profit before taxation X
Adjustments for
Depreciation X Think carefully about what
Investment income (X) you are adding and
Interest expense X subtracting.
___
Operating profit before working capital changes X
Increase in trade and other receivables (X)
Decrease in inventories X
Decrease in trade payables (X)
___
Cash generated from operations X
Interest paid (X)
Income taxes paid (X)
___
Net cash from operating activities X
Net cash from operating activities brought forward X

Cash flows from investing activities
Purchase of property, plant and equipment (X)
Proceeds from sale of equipment X
Interest received X
Dividends received X
___
(X)
Cash flows from financing activities
Proceeds from issuance of share capital X
Proceeds from long-term borrowings X
Payment of finance lease liabilities (X)
Dividends paid (X)
___
Net cash used in financing activities (X)
___
Net increase in cash and cash equivalents X
Cash and cash equivalents at beginning of period X
___
Cash and cash equivalents at end of period X
___
___
Page 129 21: Statements of cash flows

Cash equivalents Direct method

The operating activities element of the cash flow
Short-term, highly liquid investments that are readily
statement is different.
convertible to known amounts of cash and which are
subject to an insignificant risk of changes in value
Note. Cash and cash equivalents

Cash and cash equivalents consist of cash on hand
and balances with banks, and investments in money $'000
market instruments. Cash and cash equivalents Cash flows from operating activities
included in the statement of cash flows comprise the Cash receipts from customers X
following amounts. Cash paid to suppliers and employees (X)
___
20X1 20X0 Cash generated from operations X
$m $m
Cash on hand and balances with banks X X Interest paid (X)
Short-term investments X
___ X
___ Income taxes paid (X)
___
Cash and cash equivalents X
___
___ X
___
___ Net cash from operating activities X
___
___
TAX PAID
Deferred tax b/d X
Note. These can be ∴ Tax paid X Income tax b/d X
presented as T accounts Charge for year X
(shown here) or as shown Deferred tax c/d X
in the corresponding text Income tax c/d X
___ ___
chapter.
X
___
___ X
___
___
FINANCE LEASE LIABILITY NON-CURRENT ASSETS

∴ Finance lease B/d liability Bal b/d
payments X < 1 year X (NBV) X Depreciation X
> 1 year X Revaluation X
C/d liability New finance lease in ∴ Addition X
< 1 year X year X Bal c/d
> 1 year X
___ ___ ___ (NBV) X
___
X
___ X
___ X
___
___ X
___
___
___ ___
Page 131 21: Statements of cash flows

Extra information Examining relationships
Extra information not found in other primary Cash flow gearing: compare operating cash
statements flows and financing flows, particularly borrowing
Relationships between profit and cash shown Operating cash flows to investment flows: match
cash recovery from investment to investment
Cash equivalents are included in cash balances,
giving a better picture of the liquidity of the Investment to distribution: indicates the
company proportion of total cash outflow designated
specifically to investor return and reinvestment
Financing inflows and outflows must be shown,
rather than simply passed through reserves
22: Alternative models and practices
There are different theories of capital maintenance.

Topic List
In the UK, when inflation was high, attempts were made to
introduce a form of CCA, but companies consistently
Capital maintenance ignored it and the standard was eventually abandoned.
Without the impetus of high inflation, there is unlikely to be
CPP/CCA any more need to address capital maintenance issues.
You are unlikely to be asked anything complex in these
areas; make sure you can explain the main terms.
Capital CPP/CCA
maintenance
Financial capital maintenance Operating capital maintenance

Under historical cost accounting (HCA), the amount Capital is looked at as the capacity to maintain a
maintained is the capital sum put into the business level of assets, alternatively referred to as the
by the owner. physical capacity capital maintenance concept, or the
entity concept. By using replacement cost for our
Focusing on the equity ownership of the entity is
cost of sales we will set aside enough cash to buy
often referred to as the proprietary concept of capital:
replacement assets.
if we pay all profits out as dividends and inflation
exists then in future our business will gradually run
down, as our cash will become insufficient to buy
replacement inventory.
Capital CPP/CCA
maintenance
Current purchasing power (CPP) Current cost accounting (CCA)

The idea behind CPP accounting is that all CCA uses the operating capital maintenance concept.
accounts items are restated in terms of a stable The assets consumed or sold, and those in the BS,
monetary unit: the $CPP. are stated at their value to the business, the deprival
Changes in purchasing power are based on the value, defined as shown in the diagram adjacent.
general level of inflation using the RPI Depreciation is charged on non-current assets on
CPP measures profits as the increase in the the basis of gross replacement cost of the asset
current purchasing power of equity; profits are (where RC is the deprival value)
stated after allowing for the declining purchasing Where NRV or EV is the deprival value, the
power of money due to price inflation charge against CCA profits will be the loss in
Lower of value of the asset during the accounting period
Goods sold are charged at their replacement cost
Replacement Higher of
cost (RC) A typical set of CCA is prepared by adjusting BS
values with a supporting current cost reserve, and
Net realisable Economic taking a HC P&L and making CCA adjustments
value (NRV) value
Page 135 22: Alternative models and practices

Notes
23: Not-for-profit and public sector entities
Any questions on this will only be general ones.

Topic List
Primary aims
Regulatory framework
Performance measurement
Primary Regulatory Performance

aims framework measurement
Primary aims
Public sector entities Private sector entities
Examples: Examples:
Government departments Charities
Health services (if government funded)
Education services
Aims Aims
To provide services to the public To provide services to beneficiaries
To make good use of taxpayers' funds To raise funds for this purpose

Regulatory framework
Public sector
International Public Sector Accounting Standards (IPSASs), based on IFRS
Private sector
Regulated nationally eg by Charities Commission in UK
Statement of Recommended Practice (SORP) 2005. Charities must use accruals basis (unless revenue below
£100,000 p.a.) and apply UK standards.
In other countries, requirements will be different.
Page 139 23: Not-for-profit and public sector entities


Performance measurement
Not judged by bottom line profit but must show that they have managed their funds properly.
Performance measured in terms of achievement of stated purpose
Possible performance measures are:
3Es – Economy, Efficiency, Effectiveness
KPIs – Key performance indicators – specific to that organisation
VFM – Value for money – and best value for outside services
Impact report – produced by some charities to show measure of achievement – what impact did they have?

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ACF7(INT)PC14.indd 1 30/05/2014 10:46

Your learning materials, published by BPP Learning

1: The conceptual framework

The IASB's Framework for the Preparation and

Conceptual GAAP Objectives: Qualitative Elements Capital

Conceptual GAAP Objectives: Qualitative Elements Capital

Sources for individual countries Non-mandatory sources

Page 3 1: The conceptual framework

Conceptual GAAP Objectives: Qualitative Elements Capital

Objectives of financial statements

Underlying assumption Going concern

Conceptual GAAP Objectives: Qualitative Elements Capital

Relevance Faithful representation

Materiality Freedom Neutrality Completeness

Comparability Verifiability Timeliness Understandability

Consistency Disclosure of Users' knowledge

Page 5 1: The conceptual framework

Conceptual GAAP Objectives: Qualitative Elements Capital

Probable that any future Recognition The item has a cost or

Current cost (amount if Present value (present

Page 7 1: The conceptual framework

Conceptual GAAP Objectives: Qualitative Elements Capital

Financial capital maintenance Physical capital maintenance

2: The regulatory framework

You'll already have covered the IASB in your earlier

IASB IFRS Criticisms

Remember! Remember! Remember!

IASB IFRS Criticisms

Page 11 2: The regulatory framework

IASB IFRS Criticisms

Rigidity Criticisms Too much choice

3: Presentation of published financial

All of your studies for Paper F7 will be concerned with

$'000 $'000 $'000 $'000

Non current liabilities

Trade and other payables X X

income (IAS 1 revised)

Distribution costs (X) (X)

Profit before tax X X

Investments in equity instruments X X

Other comprehensive income for the

year, net of tax X X

Owners of the parent X X

Statement of Statement of profit or loss and Changes in Other

Statement of changes in equity (IAS 1 revised)

Statement of Statement of profit or loss and Changes in Other

Page 17 3: Presentation of published financial statements

IAS 16 should be familiar to you from your earlier

IAS 16 IAS 40 IAS 23

Page 21 4: Non-current assets

IAS 16 IAS 40 IAS 23

Recognise and credit To extent of any revaluation Beyond revaluation

Charge to revaluation Charge to profit or

IAS 16 IAS 40 IAS 23

Page 23 4: Non-current assets

IAS 16 IAS 40 IAS 23

IAS 23 Borrowing costs

IAS 38 aims to prescribe the accounting treatment for

Goodwill Goodwill is a controversial area. It comes up again in