1. 1 Published Account

2. 2 Introduction Limited liability companies are governed by Companies Ordinance (Cap.32 Tenth Schedule) to prepare and publish accounts annually which should have to comply with Hong Kong Statements of Standard Accounting Practice (HKSSAP) issued by Hong Kong Society of Accountants Published accounts set out in standardized format

3. 3 Components of Published Accounts Components need special attention: - Extraordinary items - Exceptional items - Prior year adjustments - Post balance sheet events - Contingencies

4. 4 Exceptional items

5. 5 Exceptional Items Definition Items related to the ordinary activities of the business but due to exceptional size, nature or incidence Items must be material in size, unusual in nature and expected not to recur frequently and regularly Example exceptional bad debts are written off profits or losses related to discontinued operations e.g. loss on the closure of a transport depot exceptional bad debts are written off profits or losses on the disposal of long-term investments e.g. profit on the disposal of a subsidiary company

6. 6 Exceptional Items Example (cont’l) exceptional bad debts are written off profits or losses on the disposal of fixed assets e.g. loss on the disposal of land, machinery or equipment exceptional bad debts are written off e.g. a major debtor is declared bankrupt exceptional stock is written off e.g. a large amount of obsolete stock amortization of intangible fixed assets which had been capitalized previously e.g. write off goodwill at 2% per annum income or expenses arising from the restructuring of the activities of a business amounts transferred to employee share schemes amounts of litigation settlements

7. 7 Disclosure requirement : Disclosed in the published profit and loss account as follows:$ Profit before taxation is arrived atX after charging: DepreciationX Director’s remunerationX Audit feeX Hire of plantX InterestX Exceptional lossX And after crediting: Income from investmentX Rental incomeX Exceptional gainX Exceptional Items

8. 8 Extraordinary items

9. 9 Extraordinary Items Definition those items which are derived from events or transactions outside the ordinary activities of the business items which are material and expected not to recur frequently and regularly. Events which are completely outside the control of the management Examples: - Losses arising from a natural catastrophe - Losses arising from the expropriation of assets

10. 10 Extraordinary Items Disclosure requirement - Profits or losses from extraordinary items should be excluded from ordinary profit before tax (internal profit and loss) $ Profit before taxation X Less: Taxation X Net Profit after taxation X Extraordinary item (note) X Profit after taxation and extraordinary items X

11. 11 Prior Year Adjustment

12. 12 Prior Year Adjustments Definition Material adjustments made to the previous year’s retained profits of there is a fundamental error in one of the previous year’s accounts or a change in the accounting policy Example- fundamental error in previous year -the omission of a significant amount of purchases in the previous year.

13. 13 Prior Year Adjustments Example- change in accounting policy -Completely written off intangible fixed assets (research and development expenditures or goodwill) which had been capitalized previously -Change in stock valuation method -Change in depreciation method

14. 14 Disclosure Requirement Opening retained profits should be adjusted:$ Profit before taxationX Less: TaxationX X Add/less: Extraordinary itemX Profit after tax and extraordinary itemX Less: Appropriation X Retained profits for the yearX Add: Retained profit bought forwardX Retained profits brought forwardX Add/Less: Prior year adjustmentXX Prior Year Adjustments A note is required to show the nature of the prior year adjustment

15. 15 Contingencies

16. 16 Contingencies Definition condition which exists at the balance sheet date, where the outcome will be confirmed only on the occurrence or non occurrence of one or more uncertain future events

17. 17 Contingencies Possibility of Occurrence For Contingent Gain For Contingent Loss With certaintyAccruals ProbableA contingency (to be disclosed in notes) Accruals PossibleNot to discloseA Contingency (to be disclosed in notes) With a slight chanceNot to disclose Accounting treatment- depending on the degree of contingency

18. 18 Contingencies Examples of contingent losses: -A discounted bill of exchange -A guarantee given for a borrowing by another company -A pending legal claim Example of a contingent gain: -A pending litigation settlement from another company Disclosure requirement: Contingencies should not be recognized in the accounts. A note is required to describe the nature of a contingency.

19. 19 Post Balance Sheet Events

20. 20 Post Balance Sheet Events Definition: Those events, both favourable and unfavourable, which occur between the balance sheet date and the date on which the financial statements are approved by the board of directors

21. 21 Post Balance Sheet Events Adjusting Events Non-adjusting Events

22. 22 Adjusting Events Definition: Those events, both favourable or unfavourable, which occur between the balance sheet date and the date on which the financial statements are approved by the board of directors

23. 23 Adjusting Events - Example determination of the purchase or sale price of a fixed assets purchased or sold during the year permanent diminution in the value of a property permanent diminution in the value of a long-term investment in an unlisted company determination of the net realizable value of stock based on the available evidence, the determination that the estimate of the accrued profit on a long-term contract was incorrect a major trade debtor goes into liquidation dividends declared by subsidiaries and associated companies for periods prior to the balance sheet date a change in the taxation rate applicable to periods prior to the balance sheet date determination or receipt of insurance claims relating to the current year discovery of errors or fraud which affect the true and fair view of thefinancial statements

24. 24 Non-adjusting Events Definition Those events which concern conditions that did not exist at the balance sheet date.

25. 25 Non-adjusting Events - Example mergers and acquisitions reconstructions and proposed reconstructions issuance of shares and debentures purchases and sales of fixed assets and investments losses of fixed assets as a result of a disaster such as fire or flood extending trading activities or starting new activities changes in foreign exchange rates government actions such as the expropriation of assets strikes and industrial actions changes in pension benefits

26. 26 Example Refer to textbook P. 159

27. 27 Harbour Ltd. Profit and Loss Account for the year ended 31 December 1994 $ $ after charging: and after crediting: Turnover (note 1) 1,881,600 Profit before taxation is arrived at (working) 111,600111,600 Fire loss (2) 20,000 Auditor’s remuneration (2) 1,000 Directors’ remuneration (25600+5000) (2) 30,600 Goodwill written off (2) 1,500 Debenture interest ($200,000 x 4%) (2,12) 8,000 Loss on disposal (trial) 2,000 Exceptional bad debts (13) 70,000 Depreciation (note 1,3) 29,600 Income from quoted investments 3,000 Income from unquoted investments 1,000 Profit tax for the year (1) 44,000 Less: overprovision in previous year (1) 2,200 41,800 69800

28. 28 Adjustment for profit before tax: Original 185600 Less disposal loss (trial) 2000 Bad debt (13) 70000 Debenture interest (8000-6000) (12,2) 2000 11600 Working:

29. 29 Cont’ $ $ 69,806 Appropriations: Debenture redemption reserve (trial) 50,000 Dividends (400000*0.0402) (1) 16,080 66,080 Retained profits for the year 3,720 Retained profits brought forward (trial) 86,200 Less: Prior year adjustment (note 2) 1,200 85,000 88,720

30. 30 Harbour Ltd. Balance Sheet as at 31 December 1994 $ $$ Intangible Fixed Assets Investments Fixed Assets (note 3) 1,149,000 Goodwill (trial) 4500 Quoted investments, at cost (market value: $57,000)(4, trial) 50,000 Current Assets Stocks (5, trial) 108,460 Debtors (80000-70000-1200) (13, trial) 8,800 Bills Receivable (trial) 22000 Prepayment (trial) 7600 Short-term investment, at cost (director’s valuation: $38,000) (14, trial) 30,000 Called up capital not paid (250*0.6) (14) 150 Cash at bank (trial) 285,670 462,680

31. 31 $ $ Less: Current Liabilities Financed by: Long-term Liabilities Creditors (trial) 60000 Bills Payable (trial) 17000 Proposed dividends (40000*0.0402) (1) 16,080 Provision for tax (4000+44000-2200) (1, trail)45800 4% Debentures (next year:1995) 50,000 Net Current Assets/Working Capital 270,220 1,473,720 Share Capital (note 4) (14, trial) Reserves (note 5) 475,000 848,720 4% Debentures (note 6) (after 2 nd year: 96,97,98) 150,000 1,473,720

32. 32 Harbour Ltd. Notes to the Accounts 1.Principal Accounting Policies (a)Turnover Turnover represents the invoiced amount of goods sold less returns. (b)Depreciation Depreciation is calculated to write off the cost of fixed assets over their estimated useful lives on a straight line basis at the following annual rates: Buildings 2% Plant and machinery10% Office equipment15% No depreciation is provided on leasehold land. ( c )Stocks Stocks are valued at the lower of cost and net realizable value. Cost is determined on a first-in-first-out basis. Work in progress and finished goods include an appropriate proportion of production overhead expenses. (d)Goodwill Goodwill is amortized over a period of 5 years in equal instalments.

33. 33 2.Prior Year Adjustment The prior year adjustment relates to a change of accounting policy in the treatment of development expenditures.

34. 34 3. Fixed assets Aggregate Dep At 1 Jan 94 Disposals Charge for the year(3) At 31 Dec 94 (trial) Net book value At 31 Dec 93 At 31 Dec 94 Land $000 Buildings $000 Plant and Machinery $000 Office Equipment $000 Total $000 2.3 100.0 108.0 (12.0) 24.0 120.0 4.7 3.3 8.0 210.4 (12.0) 29.6 228.0 400.0 1,000.0 17.3 15.0 192.0 120.0 17.3 14.0 626.6 1,149. 115000*2%24000*10% 22000*15% 400.0300.0 115.0 600.0 115.01000.0 (60.0) 240.0 22.0 837.0 (60.0) 600.0 1,377.0 240+60 (11, trial) Cost At 1 Jan 94 Disposals (11) Revaluation (3) At 31 Dec 94

35. 35 During the year, the leasehold land was revalued to $1,000,000 and the surplus on revaluation of $600,000 was credited directly to the revaluation reserve. The valuation was made by a firm of independent valuers.

36. 36 4.Share Capital $ Authorized: 1,000,000 ordinary shares of $1 each 1,000,000 Issued and called up: 475,000 ordinary shares of $1 each 475,000 In March 1994, 75,000 ordinary shares were offered to the public at 1.8 per share payable as follows: On application$1.2 per share including premium On allotment$0.6 per share These new shares rank pari passu in all respects with the existing shares except that they are not entitled to receive the final dividend declared for the year.

37. 37 5. Reserves At 1 Jan 94 (trial) Transfer from P&L (trial) Revaluation (3) Issue of share Prior yr adj. (10) Retained profits for the year At 31 Dec 94 DRR $ Share premium $ Revaluation reserve $ Retained Profits $ Total $ Debenture Redemption Reserve 50,000 60,000 110,000 600,000 86,200 (1,200) 3,720 88,720 100,000 86,200 600,000 60,000 (1,200) 3,720 848,720 1000000-40000

38. 38 6.4% Debentures (12) The company redeemed $50,000 4% debentures on 1 Jan. 94 at par. 7.Capital Commitments (6) Commitments outstanding at 31 Dec. 1994 not provided for in the financial statement were as follows: $ Contracted for200,000 Authorized but not contracted for300,000 500,000 250000/5

39. 39 8.Contingent Liabilities (7) At 31 Dec. 1994, there was an unsecured guarantee given by the company for the bank overdraft facility of a supplier in the amount of $95,000. 9.Post Balance Sheet Event (8) On 3 Jan. 1995, the company acquired the business of Foreign Company for a cash consideration of $139,000.