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BPP LEARNING MEDIA ACCA F7 Financial Reporting For exams in June 2014.

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1 BPP LEARNING MEDIA ACCA F7 Financial Reporting For exams in June 2014

2 BPP LEARNING MEDIA Syllabus Technical content Question to consider Answer Past exam question Answer to past exam question Real world example Diagram Key model Tackling the exam Summary Case study Key to Icons

3 BPP LEARNING MEDIA Chapter 1 The conceptual framework Conceptual framework and GAAP The IASB’s Conceptual Framework The objective of general purpose financial reporting Underlying assumption Qualitative characteristics of financial statements The elements of financial statements Recognition and measurement of the elements of financial statements Fair presentation and compliance with IFRS

4 BPP LEARNING MEDIA Syllabus Guide detailed outcomes 1 Describe what is meant by a conceptual framework of accounting Discuss whether a conceptual framework is necessary and what an alternative system might be Discuss what is meant by relevance and faithful representation and describe the qualities that enhance these characteristics Discuss whether faithful representation constitutes more than compliance with accounting standards Indicate the circumstances and required disclosures where a ‘true and fair’ override may apply

5 BPP LEARNING MEDIA Syllabus Guide detailed outcomes 2 Discuss what is meant by understandability and verifiability in relation to the provision of financial information Discuss the importance of comparability and timeliness to users of financial statements

6 BPP LEARNING MEDIA Syllabus Guide detailed outcomes 3 Define what is meant by ‘recognition’ in financial statements and discuss the recognition criteria Apply the recognition criteria to assets and liabilities and income and expenses Discuss revenue recognition issues and indicate when income and expense recognition should occur Demonstrate the role of the principle of substance over form in relation to recognising sales revenue Explain the measurement bases of historical cost, fair value / current cost, net realisable value and the present value of future cash flows and compute amounts using these bases

7 BPP LEARNING MEDIA Chapter summary diagram Need for a conceptual framework Generally accepted accounting practice (GAAP) True and fair view Advantages and disadvantages The IASB’s conceptual framework Conceptual framework and GAAP The conceptual framework

8 BPP LEARNING MEDIA Conceptual Framework and GAAP 1 What is a conceptual framework? A statement of generally accepted theoretical principles which form a frame of reference for financial reporting. These provide a basis for developing new accounting standards and a platform to evaluate those already in existence.

9 BPP LEARNING MEDIA Conceptual Framework and GAAP 2 Advantages of a conceptual framework Having a consistent conceptual base should avoid contradictions and inconsistencies in basic concepts and so produce standardised consistent accounting practices. The development of standards is less subject to political pressure. A consistent statement of financial position driven or profit or loss driven approach is used.

10 BPP LEARNING MEDIA Conceptual Framework and GAAP 3 Disadvantages of a conceptual framework Financial statements have many users all with differing needs. –A single framework cannot satisfy the needs of all users. –There may be a need for a variety of accounting standards, each produced for a different purpose with different conceptual bases. Having a conceptual framework may not make it any easier to prepare accounting standards.

11 BPP LEARNING MEDIA Conceptual Framework and GAAP 4 Generally accepted accounting practice (GAAP) Comprises the rules, from all sources, which govern accounting. The major components include: –National accounting standards, for example the Financial Accounting Standards Board (FASB) in the USA –National company law, for example the Companies Act in the UK –Local stock exchange requirements –Regional bodies, such as the European Union. For example, an Accounting Directive issued by the EU now requires companies listed on an EU stock exchange to prepare their consolidated financial statements using IFRSs.

12 BPP LEARNING MEDIA The IASB’s Conceptual Framework 1 Published in September 2010 to update the IASB Framework for the Preparation and Presentation of Financial Statements which was issued in Joint project by the IASB and FASB to be completed in two phases.

13 BPP LEARNING MEDIA The IASB’s Conceptual Framework 2 Currently comprises four chapters: –Chapters 1 – 3 are from the new Conceptual Framework for Financial Reporting. –Chapter 4 consists of the parts of the former 1989 Framework which will be updated in phase 2 of the project.

14 BPP LEARNING MEDIA The IASB’s Conceptual Framework 3 Chapter 1 –The objective of general purpose financial reporting Chapter 2 –The reporting entity (still to be issued) Chapter 3 –Qualitative characteristics of useful financial information

15 BPP LEARNING MEDIA The IASB’s Conceptual Framework 4 Chapter 4 –Remaining text of the 1989 Framework –Underlying assumption –The elements of financial statements –Recognition of the elements of financial statements –Measurement of the elements of financial statements –Concepts of capital and capital maintenance.

16 BPP LEARNING MEDIA The objective of general purpose financial reporting 1 Chapter 1: The objective of general purpose financial reporting To provide information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity Such decisions are likely to include: –Decisions to buy, hold or sell equity investments –Assessment of management stewardship and accountability –Assessment of the entity’s ability to pay employees –Assessment of the security of amounts lent to the entity

17 BPP LEARNING MEDIA The objective of general purpose financial reporting 2 Chapter 1: The objective of general purpose financial reporting (cont.) The information required therefore relates to: –The economic resources of the entity –The claims against the entity and –Changes in the entity’s economic resources and claims This information should be prepared on an accruals basis.

18 BPP LEARNING MEDIA Underlying assumption Chapter 4: The Framework (1989) remaining text Underlying assumption Going concern: –The financial statements are normally prepared on the assumption that the entity is a going concern and will continue to trade for the foreseeable future. It is assumed that the entity has neither the intention not the need to liquidate the business or curtail major operations. If it did the financial statements would be prepared on a different basis and this basis would be disclosed.

19 BPP LEARNING MEDIA Qualitative characteristics of financial information 1 Chapter 3: Qualitative characteristics of useful financial information These describe the attributes that information needs to have in order for it to be most useful for existing and potential investors, lenders and other creditors for making decisions about the reporting entity. They are categorised into two categories: –Fundamental qualitative characteristics –Enhancing qualitative characteristics

20 BPP LEARNING MEDIA Qualitative characteristics of financial information 2 Fundamental qualitative characteristics RelevanceFaithful representation Relevant financial information is capable of making a difference in the decisions made by users, ie if it has Predictive value, and/or Confirmatory value Information is material if omitting it or misstating it could influence decisions that users make on the basis of financial information. To be useful, financial information must faithfully represent the phenomena it purports to represent. A perfect faithful representation would be: Complete Neutral Free from error Materiality

21 BPP LEARNING MEDIA Qualitative characteristics of financial information 3 Comparability Information is more useful if it can be compared with similar information about Other entities, and Other periods Consistency helps achieve comparability Enhancing qualitative characteristics VerifiabilityTimelinessUnderstandability Assures users that information faithfully represents the economic phenomena it purports to represent Verification can be direct or indirect Having information available to decision-makers in time to be capable of influencing their decisions Classifying, characterising and presenting information clearly and concisely

22 BPP LEARNING MEDIA The elements of financial statements 1 Chapter 4: The Framework (1989) remaining text The elements of financial statements An item can only be recognised in the financial statements if it can be defined as one of the following elements: –Asset –Liability –Equity –Income –Expense

23 BPP LEARNING MEDIA The elements of financial statements 2 ASSETA resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity LIABILITYA present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits EQUITYThe residual interest in the assets of an entity after deducting its liabilities

24 BPP LEARNING MEDIA The elements of financial statements 3 INCOMEIncreases in economic benefits during the period other than contributions from equity participants EXPENSEDecreases in economic benefits during the period other than distributions to equity participants

25 BPP LEARNING MEDIA Recognition and measurement of the elements of fs 1 Chapter 4: The Framework (1989) remaining text Recognition of the elements of financial statements Recognition is the process of recording or showing an item in the financial statements. An item can only be recognised in the financial statements when it satisfies the recognition criteria.

26 BPP LEARNING MEDIA Recognition and measurement of the elements of fs 2 Chapter 4: The Framework (1989) remaining text Recognition of the elements of financial statements Recognition criteria: –An item meets the definition of an element of the financial statements; and –It is probable that any future economic benefit associated with the item will flow to or from the entity; and –The item has a cost or value that can be measured with reliability.

27 BPP LEARNING MEDIA Case study: Footballers 1 Are transfer fees paid for footballers an asset?

28 BPP LEARNING MEDIA Case study: Footballers 2 Are the recognition criteria satisfied? Firstly, is there an asset? –Control –Past event –Expected generation of future economic benefit

29 BPP LEARNING MEDIA Case study: Footballers 3 Asset? –Control: the football club has purchased the right to use the player for match fixtures/ training and merchandising (player rights) –Past event: the transaction to purchase the player –Future economic benefits

30 BPP LEARNING MEDIA Case study: Footballers 4 What are the future economic benefits?

31 BPP LEARNING MEDIA Case study: Footballers 5 Asset? –Yes, an intangible asset Secondly, is there probable future economic benefit? –Yes as discussed above Thirdly, can the amount be measured with reliability? –Fee paid → yes –Value of future ticket sales and merchandising → no Capitalise only the transfer fee paid as an intangible non-current asset

32 BPP LEARNING MEDIA Recognition and measurement of the elements of fs 3 Chapter 4: The Framework (1989) remaining text Measurement of the elements of financial statements The process of determining the monetary amounts at which the elements of the financial statements are to be recognised and carried in the statement of financial position and the statement of profit or loss. There are four choices available: –Historical cost –Realisable value –Current cost –Present value

33 BPP LEARNING MEDIA Recognition and measurement of the elements of fs 4 Measurement basis Definition Historical costAssets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the obligation. Realisable valueThe amount of cash or cash equivalents that could currently be obtained by selling an asset in an orderly disposal.

34 BPP LEARNING MEDIA Recognition and measurement of the elements of fs 5 Measurement basis Definition Current costAssets are recorded at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset was acquired at the current time. Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be required to settle the obligation at the current time. Present valueA current estimate of the present discounted value of the future net cash flows in the normal course of business.

35 BPP LEARNING MEDIA Fair presentation and compliance with IFRS 1 Financial statements should present fairly the financial position, financial performance and cash flows of an entity. It is presumed that this fair presentation will be achieved where an entity complies with both the Conceptual Framework and IFRSs. Fair presentation also requires an entity to: –Select and apply appropriate accounting policies –Present information in a manner that provides relevance information and which is a faithful representation –Provide additional disclosures where further information is required to enable users to understand the impact of transactions

36 BPP LEARNING MEDIA Fair presentation and compliance with IFRS 2 In extremely rare cases management may decide that compliance with an IFRS would make the financial statements misleading. Here departure from the IFRS is required in order for fair presentation to be achieved. Such departures must be disclosed in full including the reason for the departure and the financial impact of the departure on the financial statements.

37 BPP LEARNING MEDIA Recent exam questions Nature of questionExam details Discuss the meaning of understandability and comparability and the role of consistency when preparing financial statements Q4 (a) Dec 2012 Use specific examples to show how IFRS disclosure can assist the predictive nature of historic financial statements Q4 (a) June 2011

38 BPP LEARNING MEDIA Chapter 2 The regulatory framework The need for a regulatory framework The International Accounting Standards Board (IASB) Setting of International Financial Reporting Standards

39 BPP LEARNING MEDIA Syllabus Guide detailed outcomes 1 Explain why a regulatory framework is needed, also including the advantages and disadvantages of IFRS over a national regulatory framework Explain why accounting standards on their own are not a complete regulatory framework Distinguish between a principles based and a rules based framework and discuss whether they can be complementary

40 BPP LEARNING MEDIA Syllabus Guide detailed outcomes 2 Describe the structure and objectives of the IFRS Foundation, the International Accounting Standards Board (IASB), the IFRS Advisory Council (IFRS AC) and the IFRS Interpretations Committee (IFRS IC) Describe the IASB’s Standard setting process including revisions to and interpretations of Standards Explain the relationship of national standard setters to the IASB in respect of the standard setting process

41 BPP LEARNING MEDIA Chapter summary diagram Principles- based versus rules-based approach The IASB's relationship with other standard setters The IASB The regulatory framework The IASB’s structure The standard setting process The need for a regulatory framework

42 BPP LEARNING MEDIA The need for a regulatory framework 1 A regulatory framework is required for two main reasons: –To act as a central source of reference of generally accepted accounting practice (GAAP) in a given market –To designate a system of enforcement of that GAAP to ensure consistency between companies Its aim is to narrow the areas of difference and choice in financial reporting and to improve comparability.

43 BPP LEARNING MEDIA The need for a regulatory framework 2 Principles-based vs. rules-based systems A principles-based system works within a set of laid down principles. International Financial Reporting Standards use a principles-based system: they are written based on the definitions of the elements of financial statements and the recognition and measurement principles as detailed in the Conceptual Framework for Financial Reporting. These principles are designed to cover a wide range of scenarios without the need for a set of rules which govern every eventuality.

44 BPP LEARNING MEDIA The need for a regulatory framework 3 Principles-based vs. rules-based systems A rules-based system regulates for issues as they arise, this means that accounting standards contain rules which apply to specific scenarios. US GAAP has historically used a rules-based system however many of the recent corporate accounting scandals have arisen as a direct result of companies acting in a way that avoids rules. Consequently the US is moving towards a more principles-based system.

45 BPP LEARNING MEDIA The need for a regulatory framework 4 There are both advantages and disadvantages of a principles vs. rules-based system: Advantages: –A principles-based approach on a single conceptual framework ensures that standards are consistent with each other. –Rules can be broken and ‘loopholes’ found whereas principles are more likely to offer a ‘catch all’ scenario. –Principles reduce the need for excessive detail in standards. Disadvantages: –Principles can become out of date and can be overly flexible and therefore subject to manipulation.

46 BPP LEARNING MEDIA The IASB 1 The International Accounting Standards Board (IASB) is an independent accounting standard setter established in It has three formal objectives: –To develop, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require high quality, transparent and comparable information in general purpose financial statements –To promote the use and vigorous application of those standards –To work actively with national accounting standard setters to bring about convergence of national accounting standards and IFRS to high quality solutions

47 BPP LEARNING MEDIA The IASB 2 IFRS Foundation Trustees International Accounting Standards Board (IASB) IFRS Interpretations Committee IFRS Advisory Council

48 BPP LEARNING MEDIA The IASB 3 The IFRS Foundation The IFRS Foundation is the parent entity of the IASB. Its trustees appoint: –The IASB’s Chairman and members of its Board; –The members of the IFRS Interpretations Committee –The members of the IFRS Advisory Council It also seeks to raise funds for the organisations’ activities.

49 BPP LEARNING MEDIA The IASB 4 The IFRS Advisory Council The IFRS Advisory Council’s objective is to give advice to the IASB on areas of work it should prioritise and on major standard setting projects.

50 BPP LEARNING MEDIA The IASB 5 The IFRS Interpretations Committee The IFRS Interpretations Committee prepares interpretations of IFRSAs for approval by the IASB. It also provides guidance on financial reporting issues not specifically addressed by IFRSs.

51 BPP LEARNING MEDIA Setting of IFRS 1 Below are the key steps in the process used to issue an International Financial Reporting Standard: IASB staff prepare an issues paper including studying the approach of national standards setters. The IFRS Advisory Council is consulted about the advisability of adding the topic to the IASB’s agenda. A Discussion Paper may be published for public comment. An Exposure Draft is published for public comment. After considering all comments received, and IFRS is approved by a majority of the IASB. The final standard includes both a basis for conclusions and any dissenting opinions. Issues Paper Discussion Paper Exposure Draft International Financial Reporting Standard

52 BPP LEARNING MEDIA Setting of IFRS 2 For the IASB to achieve its objective in relation to the harmonisation of accounting standards it is important that it works closely with other national standard setters. The IASB is trying to co-ordinate its work plan with national standard setters such that when it adds an item to its agenda that national standard setters do the same thing so that a standard can be agreed which has international consensus. There are also plans to review all standards where there are significant differences between IFRS and national standards.

53 BPP LEARNING MEDIA Setting of IFRS 3 Current standards examinable in paper F7 are: IAS 1 (revised) IAS 2 IAS 7 IAS 8 IAS 10 IAS 11 IAS 12 IAS 16 IAS 17 IAS 18

54 BPP LEARNING MEDIA Setting of IFRS 4 Current standards examinable in paper F7 are: IAS 20 IAS 21 IAS 23 IAS 24 IAS 27 (revised) IAS 28 IAS 32 IAS 33 IAS 34 IAS 36

55 BPP LEARNING MEDIA Setting of IFRS 5 Current standards examinable in paper F7 are: IAS 37 IAS 38 IAS 39 IAS 40 IFRS 1 IFRS 3 (revised) IFRS 5 IFRS 7 IFRS 9 IFRS 10 IFRS 13

56 BPP LEARNING MEDIA Recent exam questions Nature of questionExam details Explain the difference between a principles-based and a rules-based system and state which system is used by International Financial Reporting Standards. Q5 (a) June 2012

57 BPP LEARNING MEDIA Chapter 3 Presentation of published financial statements IAS 1 (revised) Presentation of financial statements Statement of financial position The current/ non-current distinction Statement of profit or loss and other comprehensive income Changes in equity Notes to the financial statements Revision of basic accounts

58 BPP LEARNING MEDIA Syllabus Guide detailed outcomes 1 Describe the structure (format) and content of financial statements presented under IFRS Prepare any entity’s financial statements in accordance with the prescribed structure and content Prepare and explain the contents and purpose of the statement of changes in equity Describe and prepare a statement of changes in equity

59 BPP LEARNING MEDIA Chapter summary diagram IFRS financial statements Formats Financial statement preparation questions Presentation of published financial statements

60 BPP LEARNING MEDIA IAS 1 (revised) 1 IAS 1 applies to the preparation and presentation of general purpose financial statements in accordance with IFRSs and states that a complete set of financial statements comprises: A statement of financial position at the end of the period A statement of profit or loss and other comprehensive income for the period A statement of changes in equity for the period A statement of cash flows for the period Notes to the financial statements including a summary of significant accounting policies an other explanatory information

61 BPP LEARNING MEDIA IAS 1 (revised) 2 Financial statements should also disclose: –The name of the reporting entity –Whether the accounts relate to the single entity only or a group of entities –The date of the end of the reporting period or the period covered by the financial statements –The presentation currency –The level of rounding used in presenting amounts in the financial statements Financial statements must be prepared on a timely basis in order to provide useful information to users.

62 BPP LEARNING MEDIA Statement of financial position 1 XYZ GROUP – STATEMENT OF FINANCIAL POSITION FOR THE YEAR ENDED 31 DECEMBER 20X2 20X220X1 $’000$’000 ASSETS Non-current assets Property, plant and equipmentXX GoodwillXX Other intangible assetsXX Investments in associatesXX Investments in equity instrumentsXXX Current assets InventoriesXX Trade receivablesXX Other current assetsXX Cash and cash equivalentsXXX Total assetsXX

63 BPP LEARNING MEDIA Statement of financial position 2 $’000 $’000 EQUITY AND LIABILITIES Equity Share capitalXX Retained earningsXX Other components of equityXXX Total equityXX

64 BPP LEARNING MEDIA Statement of financial position 3 $’000 $’000 Non-current liabilities Long-term borrowingsXX Deferred taxXX Long-term provisionsXX Total non-current liabilities XX Current liabilities Trade and other payablesXX Short-term borrowingsXX Current portions of long-term borrowings XX Current tax payableXX Short-term provisionsXX Total current liabilities XX Total liabilitiesXX Total equity and liabilitiesXX

65 BPP LEARNING MEDIA Statement of financial position 4 The following items must be presented on the face of the statement of financial position (minimum disclosure) –Property, plant and equipment –Investment property –Intangible assets –Financial assets –Investments accounted for using the equity method (associates)

66 BPP LEARNING MEDIA Statement of financial position 5 –Biological assets (not in syllabus) –Inventories –Trade and other receivables –Cash and cash equivalents –Assets classified as held for sale under IFRS 5 –Trade and other payables –Provisions –Financial liabilities

67 BPP LEARNING MEDIA Statement of financial position 6 –Current tax liabilities and assets as in IAS 12 –Deferred tax liabilities and assets –Liabilities included in disposal groups under IFRS 5 –Non-controlling interests –Issued capital and reserves Other items can be presented in the notes to the financial statements unless they need to be disclosed on the face of the statement of financial position in order for users to properly understand the entity’s financial position.

68 BPP LEARNING MEDIA Statement of financial position 7 Further sub-classification of the above items should be made either on the face of the statement of financial position or in the notes. The degree of further sub-classification depends on the requirements of IFRSs and the nature of the business. They include: –Property, plant and equipment classified by class of asset –Receivables analysed between amounts receivable from trade customers, other group members, related parties, prepayments and other amounts

69 BPP LEARNING MEDIA Statement of financial position 8 They include cont.: –Inventories sub-classified into materials, work in progress and finished goods –Provisions –Equity capital and reserves classified into classes of capital, share premium and reserves Additional specific disclosures must be made: Share capital disclosures: –Authorised share capital and issued share capital (issued and fully paid and issued but not fully paid) –Par value of each share

70 BPP LEARNING MEDIA Statement of financial position 9 Share capital disclosures cont.: –Reconciliation of the number of shares outstanding at the beginning and the end of the year –Rights, preferences and restrictions attaching to the class of shares (including restrictions on distributing dividends and the repayment of capital) –Shares in the entity held by itself or by related group companies –Shares reserved for issuance under options and sales contracts A description of the nature and purpose of each reserve within owners’ equity.

71 BPP LEARNING MEDIA The current/ non-current distinction Assets and liabilities should be classified as either current or non- current on the face of the statement of financial position. Current assets and liabilities comprise assets and liabilities which relate to the operating cycle of the entity. The operating cycle of an entity is the time between the acquisition of assets for processing and their realisation in cash and cash equivalents. Non-current assets and liabilities are used in the long term operations of the entity and will typically be recovered or settled after more than twelve months.

72 BPP LEARNING MEDIA The statement of profit or loss and OCI 1 IAS 1 (revised) allows income and expense items to be presented either: In a single statement of profit or loss and other comprehensive income In two statements: a separate statement of profit or loss and a statement of other comprehensive income

73 BPP LEARNING MEDIA The statement of profit or loss and OCI 2 XYZ GROUP – STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20X2 20X220X1$’000 RevenueXX Cost of sales(X)(X) Gross profitXX Other incomeXX Distribution costs(X)(X) Administrative expenses(X)(X) Other expenses(X)(X) Finance costs(X)(X) Profit before taxXX Income tax expense(X)(X) PROFIT FOR THE YEARXX Other comprehensive income: Gains on property revaluationXX Investments in equity instruments(X)X Income tax relating to components of other comprehensive income(X)X Other comprehensive income for the year, net of taxX(X) TOTAL COMPREHENSIVE INCOME FOR THE YEARXX

74 BPP LEARNING MEDIA The statement of profit or loss and OCI 3 XYZ GROUP – STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 20X220X220X1$’000 RevenueXX Cost of sales(X)(X) Gross profitXX Other incomeXX Distribution costs(X)(X) Administrative expenses(X)(X) Other expenses(X)(X) Finance costs(X)(X) Profit before taxXX Income tax expense(X)(X) PROFIT FOR THE YEARXX

75 BPP LEARNING MEDIA The statement of profit or loss and OCI 4 XYZ GROUP – STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20X2 20X220X1 $’000$’000 Profit for the yearXX Other comprehensive income: Gains on property revaluationXX Investments in equity instruments(X)X Income tax relating to components of other comprehensive income(X)X Other comprehensive income for the year, net of taxX(X) TOTAL COMPREHENSIVE INCOME FOR THE YEARXX

76 BPP LEARNING MEDIA The statement of profit or loss and OCI 5 IAS 1 offers two formats for the statement of profit or loss. The most common format is to classify income and expenses by function as above. Income and expenses can also be classified by nature as detailed on the next slide:

77 BPP LEARNING MEDIA The statement of profit or loss and OCI 6 XYZ GROUP – STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 20X220X220X1$’000 RevenueXX Other operating incomeXX Changes in inventories of FG and WIP(X)X Work performed by the entity and capitalisedXX Raw material and consumables used(X)(X) Employee benefits expense(X)(X) Depreciation and amortisation expense(X)(X) Impairment of property, plant and equipment(X)(X) Other expenses(X)(X) Finance costs(X)(X) Profit before taxXX Income tax expense(X)(X) PROFIT FOR THE YEARXX

78 BPP LEARNING MEDIA The statement of profit or loss and OCI 7 IAS 1 (revised) also requires the following items to be disclosed on the face of the statement of profit or loss (minimum disclosure) –Revenue –Finance costs –Tax expense –Profit or loss Note that dividends do not meet the IASB Conceptual Framework definition of an expense and so are not included in the statement of profit or loss and other comprehensive income. Rather they are shown as a deducted from retained earnings in the statement of changes in equity.

79 BPP LEARNING MEDIA Changes in equity ShareRet’dRevaluationTotal capitalearningssurplusequity $’000 $’000 Balance at 1 January 20X1XX X X Changes in accounting policy - (X) - (X) Restated balanceXX X X Changes in equity for 20X1 Dividends- (X)- (X) Total comprehensive income - X (X)X Balance at 31 December 20X1XX X X Changes in equity for 20X2 Issue of share capitalX- - X Dividends(X)(X) Total comprehensive income - X X X Transfer to retained earnings - X (X) - Balance at 31 December 20X2XX X X

80 BPP LEARNING MEDIA Notes to the financial statements Notes to the accounts amplify the information given in the financial statements. Notes perform the following functions: Provide information about the basis on which the financial statements were prepared and which specific accounting policies were chosen. Disclose information required by IFRSs which has not been disclosed elsewhere in the financial statements. Show any additional information relevant to understanding the financial statements.

81 BPP LEARNING MEDIA Revision of basic accounts 1 In the exam you will be required to prepare a basic set of company accounts from a trial balance incorporating additional information provided in the question. To be successful in these questions you must –Practice as many examples of these questions as you can –Adopt a methodical approach to completing them

82 BPP LEARNING MEDIA Revision of basic accounts 2  Read the requirements and scan the information in the question.  Set up four pages as necessary: Proforma statement of profit or loss and other comprehensive income Proforma statement of financial position Proforma statement of changes in equity A page for workings 3.Read the additional information given and make a mark by each caption in the trial balance that is going to change.

83 BPP LEARNING MEDIA Revision of basic accounts 3 4.Transfer the figures from the trial balance: Unaffected figures may be entered directly on your proforma Figures requiring adjustment can either be put into a working or brackets opened up on the face of your proforma solution 5.Work through the adjustments in the additional information dealing with both sides of the double entry. Once you have attempted all adjustments, balance off your workings and transfer the final figures to your proforma.

84 BPP LEARNING MEDIA Question: AZ Co AZ Co is a quoted manufacturing company. Its finished products are stored in a nearby warehouse until ordered by customers. AZ Co has performed very well in the past, but has been in financial difficulties in recent months and has been reorganising the business to improve performance. The trial balance for AZ Co at 31 March 20X3 was as follows:

85 BPP LEARNING MEDIA Question: AZ Co TRIAL BALANCE AT 31 MARCH 20X3 $'000 $'000 Sales124,900 Cost of goods manufactured in the year to 31 March 20X3 (excluding depreciation)94,000 Distribution costs9,060 Administrative expenses16,020 Restructuring costs121 Interest received1,200 Debenture interest paid639 Land and buildings (including land $20,000,000)50,300 Plant and equipment 3,720 Accumulated depreciation at 31 March 20X2: Buildings6,060 Plant and equipment1,670 Investment properties (at market value)24,000 Inventories at 31 March 20X24,852 Trade receivables9,330 Bank and cash1,190 Ordinary shares of $1 each, fully paid20,000 Share premium430 Revaluation surplus3,125 Retained earnings at 31 March 20X228,077 Ordinary dividends paid1,000 7% debentures 20X718,250 Trade payables8,120 Proceeds of share issue 2,400214,232 SPLOCI SOFP

86 BPP LEARNING MEDIA Question: AZ Co Additional information provided: i.The property, plant and equipment are being depreciated as follows: Buildings: 5% per annum straight line Plant and equipment: 25% per annum reducing balance Depreciation of buildings is considered an administrative cost while depreciation of plant and equipment should be treated as a cost of sale. ii.On 31 March 20X3 the land was revalued to $24,000,000. iii.Income tax for the year to 31 March 20X3 is estimated at $976,000. Ignore deferred tax.

87 BPP LEARNING MEDIA Question: AZ Co iv.The closing inventories at 31 March 20X3 were $5,180,000. An inspection of finished goods found that a production machine had been set up incorrectly and that several production batches, which had cost $50,000 to manufacture, had the wrong packaging. The goods cannot be sold in this condition but could be repacked at an additional cost of $20,000. They could then be sold for $55,000. the wrongly packaged goods were included in closing inventories at their cost of $50,000. v.The 7% loan notes are ten year loans due for repayment by 31 March 20X7. Interest on these loan notes needs to be accrued for the six months to 31 March 20X3. vi.The restructuring costs in the trial balance represent the cost of a major restructuring of the company to improve competitiveness and future profitability.

88 BPP LEARNING MEDIA Question: AZ Co vii.No fair value adjustments were necessary to the investment properties during the period. viii.During the year the company issued 2 million new ordinary shares for cash at $1.20 per share. The proceeds have been recorded as ‘proceeds of share issue’.

89 BPP LEARNING MEDIA Question: AZ Co Required Prepare the statement of profit or loss and other comprehensive income and statement of changes in equity for AZ for the year to 31 March 20X3 and a statement of financial position at that date. Notes to the financial statements are not required, but all workings must be clearly shown.

90 BPP LEARNING MEDIA Answer: AZ Co AZ STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 MARCH 20X3 $'000 Revenue Cost of sales Gross profit Distribution costs Administrative expenses Other expenses Finance income Finance costs Profit before tax Income tax expense PROFIT FOR THE YEAR Other comprehensive income: Gain on property revaluation TOTAL COMPREHENSIVE INCOME FOR THE YEAR 124,900

91 BPP LEARNING MEDIA Answer: AZ Co 1Expenses Cost of salesDistributionAdminOther $’000$’000$’000$’000 Per question 16,020 94,000 9,

92 BPP LEARNING MEDIA Answer: AZ Co AZ STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 MARCH 20X3 $'000 Revenue Cost of sales Gross profit Distribution costs Administrative expenses Other expenses Finance income Finance costs Profit before tax Income tax expense PROFIT FOR THE YEAR Other comprehensive income: Gain on land revaluation TOTAL COMPREHENSIVE INCOME FOR THE YEAR 124,900 1,200 (639)

93 BPP LEARNING MEDIA Answer: AZ Co 2Property, plant and equipment LandBuildingsPlant &Total equipment $’000$’000$’000$’000 Cost Accumulated depreciation b/d - Carrying amount b/d Charge for year - Revaluation (balancing figure) Carrying amount c/d (6,060) 30,300 (1,670) 3,72020,000

94 BPP LEARNING MEDIA Answer: AZ Co Non-current assets Property, plant and equipment Investment properties Current assets Inventories Trade receivables Cash and cash equivalents Equity Share capital Share premium Retained earnings Revaluation surplus Non-current liabilities 7% loan notes 20X7 Current liabilities Trade payables Income tax payable Interest payable 24,000

95 BPP LEARNING MEDIA Answer: AZ Co 1Expenses Cost of salesDistributionAdminOther $’000$’000$’000$’000 Per question 16,020 94,000 9, Opening inventories4,852

96 BPP LEARNING MEDIA – 1,000 Answer: AZ Co Non-current assets Property, plant and equipment Investment properties Current assets Inventories Trade receivables Cash and cash equivalents Equity Share capital Share premium Retained earnings Revaluation surplus Non-current liabilities 7% loan notes 20X7 Current liabilities Trade payables Income tax payable Interest payable 24,000 9,330 1,190 (20,000 (430 (28,077 (3,125 18,250 8,120

97 BPP LEARNING MEDIA Answer: AZ Co 2Property, plant and equipment LandBuildingsPlant &Total equipment $’000$’000$’000$’000 Cost Accumulated depreciation b/d - Carrying amount b/d Charge for year - Revaluation (balancing figure) Carrying amount c/d 30,300 (6,060) (1,670) 3,72020,000 24,240 2,050 30,300 x 5%(1,515)(1,515) 2,050 x 25%(513)(513) 20,000

98 BPP LEARNING MEDIA Answer: AZ Co 1Expenses Cost of salesDistributionAdminOther $’000$’000$’000$’000 Per question 94,000 9,06016, Opening inventories4,852 Depreciation - Buildings (W2)1,515 - P&E (W2)513

99 BPP LEARNING MEDIA Answer: AZ Co 2Property, plant and equipment LandBuildingsPlant &Total equipment $’000$’000$’000$’000 Cost Accumulated depreciation b/d - Carrying amount b/d Charge for year - Revaluation (balancing figure) Carrying amount c/d 30,300 (6,060) (1,670) 3,720 24,240 2,050 30,300 x 5%(1,515)(1,515) 2,050 x 25%(513)(513) 20,000 54,020 (7,730) 46,290 4, ,000 24,00022,7251,53748,262 20,00022,7251,53744,262

100 BPP LEARNING MEDIA (3,125 Answer: AZ Co Non-current assets Property, plant and equipment Investment properties Current assets Inventories Trade receivables Cash and cash equivalents Equity Share capital Share premium Retained earnings Revaluation surplus Non-current liabilities 7% loan notes 20X7 Current liabilities Trade payables Income tax payable Interest payable (20,000 (430 24,000 1,190 8,120 9,330 (28,077 – 1,000 18,250 (W2)48,262 + (W2) 4,000)7,125

101 BPP LEARNING MEDIA Answer: AZ Co AZ STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 MARCH 20X3 $'000 Revenue Cost of sales Gross profit Distribution costs Administrative expenses Other expenses Finance income Finance costs Profit before tax Income tax expense PROFIT FOR THE YEAR Other comprehensive income: Gain on land revaluation TOTAL COMPREHENSIVE INCOME FOR THE YEAR 1, ,900 (639 (976) (W2) 4,000

102 BPP LEARNING MEDIA Answer: AZ Co Non-current assets Property, plant and equipment Investment properties Current assets Inventories Trade receivables Cash and cash equivalents Equity Share capital Share premium Retained earnings Revaluation surplus Non-current liabilities 7% loan notes 20X7 Current liabilities Trade payables Income tax payable Interest payable (430 24,000 1,190 8,120 9,330 (20,000 (28,077 – 1,000 (W2)48,262 18,250 (3,125 + (W2) 4,000)7,

103 BPP LEARNING MEDIA Answer: AZ Co 3Inventories$’000$’000 Defective batch Selling price 55 Costs to complete - repackaging(20)  NRV35 Cost(50)  Write-off required(15)

104 BPP LEARNING MEDIA Answer: AZ Co Non-current assets Property, plant and equipment Investment properties Current assets Inventories Trade receivables Cash and cash equivalents Equity Share capital Share premium Retained earnings Revaluation surplus Non-current liabilities 7% loan notes 20X7 Current liabilities Trade payables Income tax payable Interest payable (430 24,000 1,190 8,120 9,330 (20,000 (28,077 – 1,000 (W2)48,262 18,250 (3,125 + (W2) 4,000)7, (5,180 – (W3) 15)5,165

105 BPP LEARNING MEDIA Answer: AZ Co 1Expenses Cost of salesDistributionAdminOther $’000$’000$’000$’000 Per question 94,000 9,06016, Opening inventories4,852 Depreciation - Buildings (W2)1,515 - P&E (W2)513 Closing inventories (5,180 – (W3) 15)(5,165)

106 BPP LEARNING MEDIA Answer: AZ Co AZ STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 MARCH 20X3 $'000 Revenue Cost of sales Gross profit Distribution costs Administrative expenses Other expenses Finance income Finance costs Profit before tax Income tax expense PROFIT FOR THE YEAR Other comprehensive income: Gain on land revaluation TOTAL COMPREHENSIVE INCOME FOR THE YEAR 1, ,900 (639 (976) (W2) 4,000 + ((18,250 x 7%) – 639) (1,278)

107 BPP LEARNING MEDIA Answer: AZ Co Non-current assets Property, plant and equipment Investment properties Current assets Inventories Trade receivables Cash and cash equivalents Equity Share capital Share premium Retained earnings Non-current liabilities 7% loan notes 20X7 Current liabilities Trade payables Income tax payable Interest payable (430 24,000 1,190 8,120 9,330 (20,000 (28,077 – 1,000 (W2)48,262 18,250 Revaluation surplus (3,125 + (W2) 4,000)7, (1,278 – 639)639 + (2m x $1))22,000 + (2m x $0.20))830 (5,180 – (W3) 15)5,165

108 BPP LEARNING MEDIA Answer: AZ Co 1Expenses Cost of salesDistributionAdminOther $’000$’000$’000$’000 Per question 94,000 9,06016, Opening inventories4,852 Depreciation - Buildings (W2)1,515 - P&E (W2)513 Closing inventories (5,180 – (W3) 15)(5,165) 94,2009,06017,535121

109 BPP LEARNING MEDIA 30,700 3,906 2,930 6,930 Answer: AZ Co AZ STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 MARCH 20X3 $'000 Revenue Cost of sales Gross profit Distribution costs Administrative expenses Other expenses Finance income Finance costs Profit before tax Income tax expense PROFIT FOR THE YEAR Other comprehensive income: Gain on land revaluation TOTAL COMPREHENSIVE INCOME FOR THE YEAR 1, ,900 (639 (976) (W2) 4,000 + (18,250 x 7%) – 639) (1,278) (W1) (94,200) (W1)(9,060) (W1)(17,535) (W1)(121)

110 BPP LEARNING MEDIA 72,262 15,685 87,947 59,962 18,250 9,735 87,947 Non-current assets Property, plant and equipment Investment properties Current assets Inventories Trade receivables Cash and cash equivalents Equity Share capital Share premium Retained earnings Revaluation surplus Non-current liabilities 7% loan notes 20X7 Current liabilities Trade payables Income tax payable Interest payable (430 24,000 1,190 8,120 9,330 (20,000 (28,077 – 1,000 (W2)48,262 18,250 (3,125 + (W2) 4,000)7,125 Answer: AZ Co 976 (1,278 – 639)639 + (2m x $1))22,000 + (2m x $0.20))830 (5,180 – (W3) 15)5, ,930) 30,007

111 BPP LEARNING MEDIA Balance at 1 April 20X2 Issue of share capital Dividends Total comprehensive income Balance at 31 March 20X3 Answer: AZ Co AZ STATEMENT OF CHANGES IN EQUITY ShareShareRet’dRev’nTotal capitalpremiumearningssurplus $’000 $’000 $’000 $’000 $’000 20, ,0773,12551,632 2, ,400(1,000) 2,9304,0006,930 22, ,0077,12559,962

112 BPP LEARNING MEDIA Recent exam questions Nature of questionExam details The financial statement preparation question is tested in Question 2 of the ACCA F7 exam. You should expect to see the following requirement: i.Prepare the statement of profit or loss and other comprehensive income; ii.Prepare the statement of changes in equity iii.Prepare the statement of financial position. Q2 in all past exams


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