Paper F7



Paper F7

Question 2 – Single Company Accounts Guide

Step 1: Read Requirements

- See if it is asking to prepare statements of Comprehensive Income, Financial Position, and/or Changes in Equity.

Step 2: Check Additional Notes for:

|Non-Current Assets Chap 4 |Intangible Assets Chap 5 |

|Costs |Research and development costs |

|Revaluations |Amortisation (depreciation of intangibles) |

|Depreciation |Goodwill |

|Government Grants | |

|Investment Property |Impairment of Assets Chap 6 |

|Borrowing Costs |Accounting treatment |

| |Cash generating units |

|Reporting Financial Performance Chap 7 | |

|Changes in accounting policies |Inventories Chap 12 |

|Changes in estimates |Measurement |

|Errors |Cost |

|Non-current assets held for sale |Recognition of Expense |

|Discontinued Operations | |

| |Construction Contracts Chap 12 |

|Provisions, Contingent Liabilities, and Contingent Assets Chap |Revenue |

|13 |Costs |

| | |

|Financial Assets and Liabilities Chap 14 |Legal Vs Commercial View Chap 15 |

|Measurement |Consignment Inventory |

|Amortised cost |Sale and Repurchase Agreements |

|Compound Financial Instrument |Sale and Leaseback transactions |

| |Factoring Receivables |

|Leasing Chap 16 |Recognition of Revenue |

|Operating Lease | |

|Finance Lease |Accounting for Taxation Chap 17 |

| |Current Tax |

|Limitations of Financial Statements Chap 20 |Deferred Tax |

|Effect of Related parties p 327 | |

|Events After Reporting Period p 328 |Dividends |

| |if suggested (no calculation) |

| |Declared (calculation) |

| |"Charged" (no calculation, already included) |

| |Dividends reduce expenses allocated if included. |

Step 3: Start With Income Statement

- calculate Cost of Sales

- admin and distribution Expenses

- Other Income

- Taxation

- Other Comprehensive income

Step 4: Statement of Changes in Equity

Step 5: Statement of Financial Position

- Calculation of non-current assets

Step 3: Statement of Comprehensive Income Statement

| |$'000 |

|Revenue |X |

|Cost of Sales calculation below |(X) |

|Gross Profit |X |

|Administration Expenses calculation below |(X) |

|Distribution Expenses calculation below |(X) |

|Finance Cost (interest on preference shares and loans etc) |(X) |

|Finance Income |X |

|Other Income (like rental, grant income etc) |X |

|Profit Before Tax |X |

|Income Tax Expense |(X) |

|Profit for the Year from continuing Operations |X |

| | |

|Profit from Discontinued Operations |X |

| | |

|Other Comprehensive Income |X |

|Gains on Revaluation |X/(X) |

|Other income/ losses |X |

|Total Comprehensive Income for the Year | |

Cost of Sales

|Opening Inventory |X |

|Purchases |X |

|Less: Closing Inventory |(X) |

|Direct Costs for Manufacturing |X |

|Depreciation relating to P,P,E |X |

|Other Expenses allocated |X |

|Cost of Sales |X |

|Administration Expenses |Distribution Costs |

|Legal Fees |Motor Vehicles Expense X |

|X |Motor Vehicles depreciation X |

|Amortisation Expense X |Other Expenses Allocated X |

|Other Expenses Allocated X | |

Step 4: Statement of Changes in Equity

| |Share |Share Premium |Retained |General Reserve|Revaluation |Total |

| |Capital | |Earnings | |Reserve | |

|Opening Balance |X |X |X |X |X |X |

|Change in Acc. Policy | | |- | |- |X |

|Transfer to RE | | |X | |(X) |X |

|Errors | | |- | | |X |

|Issue of Capital |X | | | | |X |

|Dividends | | |(X) | | |X |

|Comprehensive income |_____ |_____ |_____ |______ |X |X |

|Closing Balance |X |X |X |X |X |X |

Step 4: Statement of Financial Position

| |$'000 |

|Assets | |

|Non-Current Assets | |

|Property, Plant and Equipment see below |X |

|Intangible Assets (goodwill, patents etc) chap 5 |X |

|Investment Properties Chap 7 |X |

|Other Assets (motor vehicles etc) |X |

| | |

|Current Assets | |

|Inventories |X |

|Trade Receivables |X |

|Other Current Assets |X |

|Assets held for sale |X |

|Cash and Equivalents |___X___ |

| |X |

|Total Assets | |

| | |

|Equity and Liabilities | |

|Equity |X |

|Share Capital |X |

|General Reserve |X |

|Revaluation Reserve |X |

|Retained Earnings | |

| | |

|Non-Current Liabilities |X |

|Long-term Borrowings (debentures, preference shares etc) |X |

|Deferred Tax |X |

|Long-term Provisions chap 13 | |

| | |

|Current Liabilities |X |

|Trade Payables |X |

|Other Payables (interest payable on loans and preference shares) |X |

|Liabilities for assets held for sale |X |

|Current Portion of Long-term Borrowings |X |

|Short-term Borrowings |X |

|Current Tax Payable |__X__ |

|Short-term Provisions chap 13 |X |

| | |

|Total Equity and Liabilities | |

|P, P, and E |Freehold land |Leasehold |P,P, and E |Fixtures and |Motor Vehicles |Total |

| | |Property | |Furniture | | |

|Cost (per trial bal) |X |X |X |X |X | |

|Accumulated Depre. |____ |(X) |(X) |(X) |(X) | |

|NBV | | | | | | |

|Fee's adding to cost |X |X |X |X |X | |

|Disposals |(X) |(X) |(X) |(X) |(X) | |

|Additions |X |X |X |X |X | |

|Depreciation |(X) |(X) |(X) |(X) |(X) | |

|Impairment |(X) |(X) |(X) |(X) |(X) | |

|Change in Policy |- |- |- |- |- | |

|Revaluation Gain |X |X |X |X |X | |

|Closing |X |X |X |X |X | |

Non Current Assets Chapter 4

Initially measured at cost: Cost is made up of:

- Purchase price less trade discount or rebate

- Import duties and non-refundable purchase taxes

- Directly attributable costs of bringing asset to working condition for intended use.

- Unavoidable costs of dismantling

Not part of P, P, and E

- administration and other general overheads

- start-up and pre-production costs

- Initial operating losses before asset reaches planned performance

When asset is exchanged it is valued at fair value for both assets.

Revaluation

Gain on revaluation after asset was reduced in value

Dr. Asset Value 7,000 B/S

Cr. Income Statement 2,000 P/L

Cr. Revaluation surplus 5,000 B/S

Decrease in valuation after asset increased in value

Dr. Revaluation surplus 5,000 B/S

Dr. Income Statement 2,000 P/L

Cr. Asset Value 7,000 B/S

Revalued higher and depreciation

Dr. Depreciation 4,000 P/L

Dr. Asset Value 2,000 B/S

Cr. Revaluation surplus 6,000 B/S

Depreciation methods

- straight line

- Reducing balance

- Machine hour

- Sum-of-digits

Depreciation for Complex Assets – assets made up of separate components are each depreciated over their useful life.

Overhauls – treated as additional component and depreciated over the period to next overhaul. If overhaul not qualified, then reverse all old overhauls and charge a new depreciation for the asset overhauls were associated with.

Government Grants

- method 1 – Reduce cost of asset by grant to get carrying value

- Set-up as deferred income. Reducing it every year by its life.

Grant income = grant accrued during year plus grant current liability – grant repaid

Investment Property –property, land, or building held to earn rentals or for capital appreciation or both. Measured at Fair Value or Cost Model. Increase in investment FV is an investment income. Except if it is stated to be part of comprehensive income.

Borrowing Costs – interest and other costs incurred by an entity in connection with borrowing of funds. This increases the cost of asset by funds borrowed for making the asset (capitalization).

Specific loan = Loan utilized X (loan rate %) X (# of months / 12)

For General loan = amount utilized X (weigthed average rate) (X # of months / 12)

Intangible Assets Chapter 5

Research – written off as an expense as they are incurred. P. 92 for examples

Development Costs – may qualify for recognition as intangible asset thus making one. P. 92 for criteria.

Amortisation – "depreciated" over its expected life

Impairment of Assets Chapter 6

Treatment – Asset is measured at Lower of:

Carrying Amount (NBV = Cost – Accumulated Depreciation), or

Recoverable Amount (if lower there is an impairment), which is higher of

- Fair Value (market value at arm's length)

- Value in use. Which is present value of all future cash flows.

Allocating loss for Impairment of Cash Generating Unit

- First, reduce to any assets that are obviously damaged or destroyed

- Next, to goodwill

- Then all other assets on a pro-rated basis

Reporting Financial Performance Chapter 7

Changes in Accounting Policy – applied retrospectively, to events and transactions as though it had always been in use.

Changes in Accounting Estimates – not applied retrospectively. Effect of change should be included in the determination of net profit or loss in one of:

- Period of Change (if only that period is affected)

- Period of Change and future periods

Errors – corrected retrospectively. Most of the time, can be corrected through net profit or loss for the current period.

Assets held for sale – measured lower of Carrying Amount or Recoverable Amount.

Discontinued Operations – present and disclose separately in the Income statement.

Inventories Chapter 12

Measurement – lower of cost or Net Realizable Value.

Inventories include:

- Goods purchases and held for sale

- Finished goods

- Work in Progress

- Raw materials

Cost consists of purchase price, costs of conversion, and other costs bringing them to present location and condition.

Recognition of expense

- Carrying amount is recognized as an expense in the period which the related revenue is recognized.

- The amount of any write-down of inventories to NRV and all losses of inventories are recognized as an expense in the period the write down or loss occurs

- The amount of any reversal of any write down of inventories, arising from an increase in NRV, is recognized as a reduction in the amount of inventories recognized as an expense in the period in which the reversal occurs.

Construction Contracts Chapter 12

|Extract of Balance Sheet step 4 |$'000 |

|Receivables | |

|Gross Amounts due from customers |X |

|Trade Receivables |- |

| | |

|Current Liabilities | |

|Gross Amounts due to customers |X |

|Extract of Income Statement |$'000 |

|Revenue step 3 |X |

|Expenses step 3 |(X) |

|Expected Losses step 2 |(X) |

|Profit/(loss) step 2 |X |

| |$'000 |

|Step 1: Compare Contract Value and Total Costs | |

|Contract Value (Total Revenue) |X |

|Total Costs: Costs Incurred to date X | |

|Estimated Costs to Completion X | |

|Other Costs Associated with construction X |(X) |

|Total Expected Profit/ (loss) |X |

| | |

|Step 2: Expected Profit/ (loss) for the period | |

|Total Expected Profit / (loss) |X |

|Times % completed to date (sometimes needs calculation) |% |

|Profit / (loss) |X |

| | |

|Step 3: Revenue, Expenses, and Profit and loss for the period | |

|Total Revenue X % completed less revenue previously recognized |X |

|Total Costs X % Completed less Costs previously recognized |(X) |

|Add: Foreseeable losses (100% - % completed) |X |

|Profit/ (loss) recognized in period |X |

| | |

|Step 4: Calculate amounts due to/ from customers | |

|Contract costs to date |X |

|Recognized Profit/ (loss) to date step 2 |X |

|Progress Billings to Date |(X) |

|Amounts due from/ (to) customers |X/(X) |

Provisions, Contingent Liabilities, and Contingent Assets Chapter 13

Provision – a probable outflow of resources embodying economic benefits/ liabilities. Calculated on the present value of future outflow of resources.

Future Operating Losses – not recognized as provision.

Onerous contracts – should be measured and recognized as a provision.

Restructuring costs – sale or termination of line of business, closure of business locations, relocation, changes in management structure, and changes on nature and focus of operations.

Includes direct expenditures, necessary to restructuring and not associated with ongoing activities.

The following are not restructuring:

- Retraining

- Marketing

- Investment in new systems and distribution networks

Treatment of Contingent Liabilities – should not be recognized in financial statements but they should be disclosed. If outflow is virtually certain, then it will be a provision.

Treatment of contingent Asset – same as contingent liability but if virtually certain an inflow will occur it will become an asset.

Financial Assets and Liabilities Chapter 14

Measurement

Initial – Fair value plus transaction costs directly attributable

Subsequent – amortised cost or fair value

Compound Financial Instrument – for convertible debt

| |$'000 |

|Step 1: Calculate Present Value of Principal amount | |

|(Principal) X 1/(1+r^n) |X |

|Step 2:Present Value of Interest | |

|Principal X (interest rate) X 1/(1+r^1) |X |

|Principal X (interest rate) X 1/(1+r^2) |X |

|Principal X (interest rate) X 1/(1+r^3) |X |

|(add more of interest if needed) |___ |

|Total Liability Component |X |

|Equity Component (Principal – Total liability component) |X |

|Principal Amount |X |

N= total years n^1= 1 year r= discount rate

Liability Component for when acquired = Present Value of Principal amount

Finance Cost for year 1 = Principal X Interest rate X 1/ (1+r^1). This adds to Liability component

Dr. Finance Cost X

Cr. Liability Component X

Amortised Cost

|For purchased debt instrument |$'000 |

|Cost at beginning (Cost less issue cost less discount) |X |

|Interest Income @ effective rate % (above X effective rate) |X |

|Less: Interest Received (Principal X interest rate) |(X) |

|Amortised Cost at End of Year 1 |X |

|Interest Income @ effective rate % (above X effective rate) |X |

|Less: Interest Received (Principal X interest rate) |(X) |

|Amortised Cost at End of Year 2 |X |

|(may go on as needed) | |

If loan note issued: Same as above except instead of interest income it will be finance cost.

The Legal versus the Commercial View of Accounting Chapter 15

Consignment Inventory

Indications of asset status p. 245

Inventory in substance an asset of dealer

- Recognized in dealer's book with corresponding liability to manufacturer

- Any deposit should be deducted from liability and excess as a trade payable

Inventory not in substance an asset of dealer

- Not included in dealer's statement of financial position

- Any deposit should be included under "other receivables"

Sale and Repurchase Agreements

Indications of sale of asset p.247

If repurchase unlikely, it will be treated as a sale.

If it is likely to be repurchased, it will be treated as a secured loan. The seller should continue to recognize the original asset and record proceeds received from buyer as a liability. Interest should be accrued.

Sale and leaseback Transactions

If it results in a finance lease – it is in substance a loan from the lessor to lesse.

If it results in an operating lease –and was conducted at fair value, then it can be regarded as a normal sale transaction. Operating lease installments are treated as lease payments, rather than repayments of capital.

Factoring of Receivables/ debt

Indications of treatment p 249

If not an asset of seller – receivables should be removed from statement of financial position and no liability shown in respect of the proceeds received from the factor. Profit and loss should be recognized.

If it is an asset of seller – a gross asset should be shown in the statement of financial position of the seller within assets and a corresponding liability in respect of proceeds received from factor should be shown within liabilities. Interest element of the factor's charges should be recognized as it accrues and included in profit or loss with other interest charges.

Recognition of Revenue Criteria

Generally recognized as earned at point at sale

- provided to the buyer

- buyer recognized his liability

- Buyer has indicated his willingness to hand over cash

- Monetary value has been established

Leasing Chapter 16

p. 260 for indications of whether it is operating lease or finance lease.

Operating Lease – a lease other than a finance lease.

Pose no accounting problem. The lessee pay amounts periodically to the lessor and these are charged to the income statement. If a rent-free period or cash back incentive is given, this is effectively a discount. It will be spread over the period of the operating lease in accordance with accruals principal.

Finance Lease – a lease that transfers substantially all the risks and rewards incident to ownership of an asset. Title may or may not be eventually transferred.

|Extract of Income Statement |20X1 |20X2 |20X3 |

|Depreciation |12,500 |12,500 |12,500 |

|Finance Costs step 2 Interest of the year |11,250 |8,063 |4,078 |

|Extract of Financial Position Statement |20X1 |20X2 |20X3 |

|Non-current Assets | | | |

|Leasehold Assets (FV less acc. Depreciation) |41,500 |29,000 |16,500 |

| | | | |

|Non-current Liabilities | | | |

|Finance Lease liability step 2 Next year's balance |16,313 |0 |0 |

| | | | |

|Current Liabilities | | | |

|Finance Lease Liability step 3 |15,937 |16,313 |0 |

| |$'000 |

|Step 1: Calculate opening balance | |

|FV less deposit or PV less deposit (54,000 – 9,000) |45,000 |

|Step 2: Finance Costs and Finance non-current Lease Liability | |

|Add: interest @ 25% (above X 25%) |11,250 |

|Less: installment |(24,000) |

|Balance 31 Dec 20X1 |32,250 |

|Add: interest @ 25% (above X 25%) |8,063 |

|Less: installment |(24,000) |

|Balance 31 Dec 20X2 |16,313 |

|Add: interest @ 25% (above X 25%) |4,078 |

|Less: installment |(20,391) |

|Balance 31 Dec 20X3 |0 |

Step 3: Current Liabilities Finance Lease Liability

This year's balance less next year's balance

20X1 = 32,250 – 16,313 = 15,937

20X2 = 16,313 – 0 = 16,313

20X3 = 0 – 0 = 0

Accounting for Taxation Chapter 17

Current Tax – is the amount actually payable to the tax authorities in relation to the trading activities of the entity during the period.

Any unpaid tax in respect of the current period to be recognized as a liability. Excess tax paid should be recognized as an asset.

Deferred Tax – an accounting measure used to match the tax effects of transactions with their accounting impact. Makes future tax payments higher or lower. IAS 12 requires companies to recognize this as a deferred tax liability or asset.

|Extract from Income Statement |$'000 |

|Profit before tax (Income Tax + Proceeds of sale) |1,260,000 |

|Income Tax Expense |(402,000) |

|Profit for the year |858,000 |

| |$'000 |

|Tax on profits (income and gain) (AKA Provision) |378,000 |

|Deferred Taxation transferred |20,000 |

|Under Provision / (over provision) (Tax by tax authorities less estimated tax) |4,000 |

|Charge for the year |402,000 |

|Extract from Statement of Financial Position |$'000 |

|Current Liabilities | |

|Tax payable next period (tax on profits) |378,000 |

| | |

|Non-current Liabilities | |

|Deferred Taxation (opening balance + transfer) |120,000 |

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