CIMA f1 ELSEVIER Financial Operations

CIMA Official Learning System Operational Level F1 – Financial Operations Jo Watkins CIMA Publishing is an imprint of Elsevier Linacre House, Jordan Hill, Oxford OX2 8DP, UK 30 Corporate Drive, Suite 400, Burlington, MA 01803, USA Copyright © 2009 Elsevier Ltd All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without the prior written permission of the publisher Permissions may be sought directly from Elsevier’s Science & Technology Rights Department in Oxford, UK: phone (ϩ44) (0) 1865 843830; fax (ϩ44) (0) 1865 853333; e-mail: permissions@elsevier.com Alternatively you can visit the Science and Technology Books website at www.elsevierdirect.com/rights for further information Notice No responsibility is assumed by the publisher for any injury and/or damage to persons or property as a matter of products liability, negligence or otherwise, or from any use or operation of any methods, products, instructions or ideas contained in the material herein British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloguing in Publication Data A catalogue record for this book is available from the Library of Congress ISBN: 978-1-85617-791-7 For information on all CIMA publications visit our website at www.elsevierdirect.com Typeset by Macmillan Publishing Solutions (www.macmillansolutions.com) Printed and bound in Hungary 09 10 11 11 10 Working together to grow libraries in developing countries www.elsevier.com | www.bookaid.org | www.sabre.org Contents The CIMA Learning System xvii xvii xvii xviii xviii xxi Acknowledgements How to use the CIMA Learning System Guide to the Icons used within this Text Study technique Paper F1 – Financial Operations Principles of Business Taxation – Introduction 1.1 1.2 1.3 1.4 1.5 1.6 1.7 Learning Outcomes Learning aims Introduction Taxation as a source of government revenue Principles of taxation 1.3.1 Canons of taxation 1.3.2 The American Institute of Certified Public Accountants’ (AICPA) statement – Guiding Principles of Good Tax Policy: A Framework for Evaluating Tax Proposals Basic tax terminology 1.4.1 Direct taxes 1.4.2 Indirect taxes 1.4.3 Incidence 1.4.4 Taxable person 1.4.5 Competent jurisdiction 1.4.6 Hypothecation 1.4.7 Withholding responsibilities 1.4.8 Tax rate structure 1.4.9 The tax gap Tax bases and classification of taxes Sources of tax rules Summary Revision Questions 5 6 6 7 8 9 11 Solutions to Revision Questions 13 Direct Taxes on Company Profits and Gains 2.1 3 4 Learning Outcome Introduction iii 15 17 17 FINANCIAL OPERATIONS F1 CONTENTS iv 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 The corporate tax base 2.2.1 Schedular systems of corporate taxation 2.2.2 Classification of income 2.2.3 Expenditure 2.2.4 Capital gains Nominal corporate tax rates The interaction of the corporate tax system with the personal tax system 2.4.1 Classical system 2.4.2 Imputation system 2.4.3 Partial imputation system 2.4.4 Split rate systems 2.4.5 Examples to illustrate the difference between traditional and imputation systems Rules recharacterising interest as dividends Treatment of losses 2.6.1 Trading losses 2.6.2 Capital losses 2.6.3 Cessation of business Principles of relief for foreign taxes The concept of tax consolidation 2.8.1 Capital losses and tax groups Summary Revision Questions Solutions to Revision Questions Indirect Taxes and Employee Taxation 3.1 3.2 3.3 3.4 3.5 3.6 3.7 Learning Outcomes Introduction Indirect taxes collected by the entity 3.2.1 Unit taxes and ad valorem taxes Consumption taxes 3.3.1 Single-stage sales taxes 3.3.2 Multi-stage sales taxes Value-added tax 3.4.1 Transactions liable to VAT Indirect taxes paid by the entity 3.5.1 Excise duties 3.5.2 Property taxes 3.5.3 Wealth taxes Employee taxation 3.6.1 The employee as a separate taxable person subject to a personal income tax regime 3.6.2 Social security contributions 3.6.3 Other payroll taxes Use of employer reporting and withholding to ensure compliance and assist tax collection 18 18 19 20 23 24 24 25 25 25 25 26 26 27 27 27 28 28 28 29 29 31 35 37 39 39 40 40 40 40 40 41 42 43 43 44 44 45 45 46 46 46 FINANCIAL OPERATIONS Example of the tax regime information given in the exam Summary Revision Questions Solutions to Revision Questions Administration of Taxation 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 Learning Outcomes Introduction The need for record-keeping and record retention 4.2.1 Corporate income tax 4.2.2 Sales tax or VAT 4.2.3 Overseas subsidiaries 4.2.4 Employee taxes and social security The need for deadlines for reporting (filing returns) and tax payments Types of powers of tax authorities to ensure compliance with tax rules 4.4.1 Power to review and query filed returns 4.4.2 Power to request special reports or returns 4.4.3 Power to examine records (generally extending back some years) 4.4.4 Powers of entry and search 4.4.5 Exchange of information with tax authorities in other jurisdictions Tax avoidance and tax evasion 4.5.1 Tax evasion 4.5.2 Tax avoidance 4.5.3 Statutory general anti-avoidance provisions and case law regimes Forum on tax administration International tax dialogue Summary Revision Questions Solutions to Revision Questions International Taxation 5.1 5.2 5.3 5.4 5.5 5.6 5.7 Learning Outcomes Introduction The Organisation for Economic Co-operation and Development (OECD) – Model tax convention The concept of corporate residence 5.3.1 Place of control and central management of an entity 5.3.2 Place of incorporation 5.3.3 Place of control and place of incorporation The OECD Articles of the model convention with respect to taxes on income and on capital Withholding tax Underlying tax Means of establishing a taxable presence in another country 5.7.1 Subsidiary 5.7.2 Branch 47 47 49 53 57 59 59 60 60 60 61 61 61 62 62 62 63 63 63 63 64 64 64 65 65 66 67 69 71 73 73 73 74 74 74 74 75 75 76 76 76 77 CONTENTS 3.8 3.9 v FINANCIAL OPERATIONS F1 CONTENTS vi 5.8 5.9 Double taxation treaties 5.8.1 The OECD model tax convention Summary Revision Questions Solutions to Revision Questions Taxation in Financial Statements 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 Learning Outcome Introduction Calculation of current tax Accounting for current tax Calculation of deferred tax 6.4.1 Introduction to deferred tax 6.4.2 Timing difference approach 6.4.3 Temporary difference approach 6.4.4 Deferred tax assets 6.4.5 Tax losses Accounting for deferred tax Income tax charge Disclosure Summary Revision Questions Solutions to Revision Questions The IASC and the Standard-Setting Process 7.1 7.2 7.3 7.4 7.5 Learning Outcomes Learning aims The need for regulation of financial statements Variation from country to country 7.2.1 Sources of finance and capital markets 7.2.2 The political system 7.2.3 Entity ownership 7.2.4 Cultural differences Harmonisation versus standardisation 7.3.1 The need for harmonisation of accounting standards Elements that might be expected in a regulatory framework for published accounts 7.4.1 Local law that applies to entities 7.4.2 Locally adopted accounting standards 7.4.3 Local stock exchange requirements 7.4.4 International body requirements 7.4.5 International accounting standards 7.4.6 Locally developed or international conceptual framework for accounting Generally accepted accounting practice (GAAP) 77 78 78 79 83 85 87 87 88 88 89 89 90 91 93 93 94 95 96 96 97 101 105 107 107 108 108 108 108 109 109 109 109 110 110 111 111 111 111 111 111 FINANCIAL OPERATIONS The International Accounting Standards Committee Foundation (IASC Foundation) 7.6.1 Structure of the IASC Foundation 7.6.2 IASC Foundation 7.6.3 The International Accounting Standards Board (IASB) 7.6.4 The International Financial Reporting Interpretations Committee (IFRIC) 7.6.5 The Standards Advisory Council (SAC) 7.7 Objectives of the IASC Foundation 7.8 The International Organisation of Securities Commissions (IOSCO) 7.9 Local regulatory bodies 7.9.1 Convergence activities 7.9.2 International reaction 7.10 The standard-setting process 7.10.1 Development of a standard 7.10.2 Other aspects of due process 7.10.3 Co-ordination with national standard-setting 7.10.4 Benchmark treatments and allowed alternatives 7.11 Ways in which IFRS’s are used by countries 7.11.1 Adoption as local GAAP 7.11.2 Model for local GAAP 7.11.3 Persuasive influence in formulating local GAAP 7.11.4 Local GAAP developed with little or no reference to IFRS’s 7.12 Summary Revision Questions Solutions to Revision Questions Regulatory Framework 8.1 8.2 8.3 8.4 8.5 8.6 Learning Outcome Introduction The development of the Framework 8.2.1 Purpose of the Framework 8.2.2 Status of the Framework 8.2.3 Scope of the Framework The Framework 8.3.1 The objective of financial statements 8.3.2 Underlying assumptions 8.3.3 The qualitative characteristics of financial information 8.3.4 The elements of financial statements 8.3.5 Recognition of the elements of financial statements 8.3.6 Measurement of the elements of financial statements 8.3.7 Concepts of capital and capital maintenance Usefulness of a conceptual Framework The IASB’s Framework and the standard-setting process Summary Revision Questions Solutions to Revision Questions 112 113 113 114 114 115 115 115 116 116 116 117 117 118 118 118 118 119 119 119 119 119 121 125 129 131 131 132 132 132 132 133 133 133 134 135 136 136 136 137 138 138 139 143 CONTENTS 7.6 vii CONTENTS viii FINANCIAL OPERATIONS F1 The Role of the External Auditor 9.1 9.2 9.3 9.4 Learning Outcome External audit 9.1.1 The purpose of an audit 9.1.2 The auditor’s duties 9.1.3 The powers of auditors 9.1.4 The audit process The audit report 9.2.1 A closer look at the report Modified audit reports 9.3.1 Materiality 9.3.2 The wording of a modified audit report 9.3.3 Independent auditor’s report showing qualified opinion 9.3.4 Independant auditor’s report-adverse opinion Summary Revision Questions Solutions to Revision Questions 10 CIMA Code of Ethics for Professional Accountants 10.1 10.2 11 Learning Outcomes Fundamental principles of the code 10.1.1 Integrity 10.1.2 Objectivity 10.1.3 Professional competence and due care 10.1.4 Confidentiality Section 220 of CIMA’s code of conduct preparation and reporting of information Published Financial Statements Learning Outcome Learning aims 11.1 Introduction 11.2 General requirements 11.2.1 Purpose of financial statements 11.2.2 Responsibility for financial statements 11.2.3 Components of financial statements 11.2.4 Fair presentation and compliance with IFRSs 11.2.5 Other requirements affecting the preparation of financial statements 11.3 The statement of financial position 11.3.1 Specimen statement of financial position 11.3.2 Information to be presented in the statement of financial position 11.3.3 Information to be presented either in the statement of financial position or in the notes 11.3.4 Share capital and reserves disclosures 11.3.5 The current/non-current distinction 147 149 149 149 150 151 151 152 154 156 157 158 159 160 161 163 167 171 173 173 173 174 174 175 176 179 181 181 181 182 182 183 183 183 184 185 185 186 187 188 188 FINANCIAL OPERATIONS 11.5 11.6 11.7 11.8 Revision Questions Solutions to Revision Questions 12 Reporting Financial Performance Learning Outcome Introduction IAS 18 Revenue Recognition 12.2.1 Introduction 12.2.2 Sale of goods 12.2.3 Rendering of services 12.2.4 Interest, royalties and dividends 12.2.5 Disclosure requirements 12.3 Profit or loss for the period 12.3.1 Extraordinary items 12.3.2 Profit or loss from ordinary activities 12.4 Definitions – Accounting policies, accounting estimates and errors 12.5 Changes in accounting policies 12.5.1 Treatment and disclosure 12.6 Changes in accounting estimates 12.7 Errors 12.7.1 Treatment and disclosure 12.8 Discontinuing operations 12.8.1 Objective 12.8.2 Definition of a discontinued operation 12.8.3 Measurement of a non-current asset (or disposal group) held for sale 12.8.4 Presentation and disclosure 12.9 International financial reporting standard Operating Segments (IFRS 8) 12.9.1 IFRS Operating Segments – core principle 12.9.2 Definition of operating segment 12.9.3 Reportable segments 12.9.4 Segment accounting policies 12.9.5 Disclosure 12.1 12.2 189 189 189 190 190 192 194 194 195 196 196 201 203 209 215 217 217 218 218 218 218 218 218 219 219 219 220 220 220 222 222 223 224 224 225 226 226 230 230 231 231 231 232 CONTENTS 11.4 11.3.6 Current assets 11.3.7 Current liabilities The statement of comprehensive income 11.4.1 Information to be presented in the statement of comprehensive income 11.4.2 Specimen statements of comprehensive income 11.4.3 Information to be presented either in the statement of comprehensive income or in the notes Changes in equity 11.5.1 Format for the statement of changes in equity Notes to financial statements 11.6.1 Accounting policies An illustrative question Summary ix FINANCIAL OPERATIONS Classical system, corporate income tax, 25, 26 Classifications, taxes, 8–9 Close companies: co-ordination, national standard-setting, 118 process, 117–18 see also Companies Code law countries, 108 Code of ethics, for professional accountants, 173 code of conduct preparation and reporting of information, 176–7 fundamental principles, 173–6 Collection amounts, taxation, 5, Commissions, 115–16 Common law, 65, 108, 110 see also Case law Communication, 64, 116 Companies: branches, 77 corporate income tax, 18, 19, 24, 60, 61, 63, 74, 75 indirect taxes, 6, 8, 39–47 listed companies, 111 losses, 27–8, 93–4 overseas subsidiaries, 61 residence criteria, 74 subsidiaries, 61, 76–7 terminal losses, 28 VAT registration, 43 see also Business taxation; Groups of companies Company profits and gains, 17–29 Comparability, financial information, 109, 134, 135, 145 Competent jurisdictions, concepts, 6–7 Completeness, financial information, 135 Compliance powers, 62–3, 183–4, 195 see also Enforcement issues Components, financial statements, 183 Conceptual framework, 109, 137–8 Confidentiality, 175–6 Consolidated accounts, 156, 286 Consolidated financial statements, 286 fair value adjustment, 307–9 intragroup balances, 302–4 intra-group loans and preference shares, 304 principles, 297–302 unrealised profits, from group companies, 304–7 INDEX Capital gains tax (CGT), 20, 23, 24, 25, 29 exemptions, 23 IAS 12 Income Taxes, 87–8, 91, 93, 96, 187 indexation, 23 losses, 27–8, 29 record-keeping needs, 60 reliefs, 24, 27, 28 shares and securities, 23, 25 Capital income, concepts, 19–20 Capital losses, 27–8, 29 Capital maintenance concepts, 133, 137 Capital markets, disclosure requirements, 108, 114, 115, 116 Capitalisation concepts, 356–7, 433 Carrying amount, concepts, 348 Carrying back: losses, 27–8 terminal losses, 28 Carrying forward, losses, 27–8, 93–4 Cars: fuel for private use, 60 see also Motor vehicles Case law, 64–5, 108, 110 anti-avoidance provisions, 64–5 tax rules, see also Legislation Cases and Schedules, CT, 19 Cash: concepts, 251–63 definition, 252 equivalents concepts, 255 Miller-Orr model, 607, 608 see also Short-term finance Cash budgets, 564, 565, 599, 600, 601 Cash-flows: direct method, 253–5, 258–60 financing activities, 252, 253, 255, 262 indirect method, 252–3, 260–1 interest received, 261, 262 investment activities, 252, 277 long-term borrowing proceeds, 262 operating activities, 252–3, 261, 262 share issue proceeds, 262 tangible asset purchase, 432 Cashback incentives, 375 Cashbooks, 60 Certainty principle, taxation canons, 4, Cessation of business, 28 CGT see Capital gains tax (CGT) Chattels, CGT exemptions, 23 Children’s wear, VAT, 43 513 INDEX 514 FINANCIAL OPERATIONS F1 Consolidated statement of comprehensive income: intra-group trading, 326–8 principles, 325–6 Consolidation of tax: concepts, 28–9 see also Groups of companies Construction contracts, 401–18 accounting, 404–5 aggregated balances, 46 disclosures, 401, 412 examples, 402, 407–10, 432 expected contract losses, 408–9 foreseeable losses, 412 general principles, 404 illustrations, 412–18 inventories, 402–4, 410 payables, 411–12 receivables, 411 recognisable contract profit, 407–8 sales revenue, 406–7 uncertain outcomes, 409–10 VAT, 41 Consumption taxes, 8, 39, 40 tax classifications, 8–9 see also Indirect taxes; Sales Contingencies: assets, 490 disclosures, 491 liabilities, 488–90 probability, 488–90 problems, 491 Contingent liabilities, 289 Contracts: construction, 404–18 losses, 408–9 profits, 407–8 Control, principle of, 284–5 Control issues: corporate residence, 74 disclosure, 493–4 Convenience principle, taxation canons, 4, Convergence activities, 116 Conversion costs, 402 Corporate income tax, 17, 18–19, 25, 26, 60, 63, 74, 76, 77, 88 allowable revenues and expenditures, 20–3 classical system, 25, 26 collection options, 44, 46 concepts, 17–29, 74, 87–96 current taxation, 87–9 deadlines, 61–2 deferred taxation, 18, 89–94 dividends, 24, 75, 76, 88 group relief, 27 IAS 12 Income Taxes, 87–96 imputation system, 25 income sources, 18–20 interest received, 18, 19, 93 interest-recharacterisation rules, 26–7 losses, 27–8, 29, 93 OECD Model tax convention, 74, 75, 78 personal tax system interactions, 24–6 rates, 25 record-keeping needs, 60 residence criteria, 74 retained profits, 25 returns, 61–2 schedular systems, 18–19 see also Corporation tax (CT) Corporate profits, 630 Corporate tax base, concepts, 17–24 Corporation tax (CT), 5–6, 17–29, 60, 61–2 assessments, 61–2 collection options, 61–2 compliance powers, 62–3 deadlines, 61–2 losses, 27–8, 29, 93–4 pay and file system, 61–2 rates, 24, 25 record-keeping needs, 60–1 returns, 60, 61, 62 Schedules and Cases, 19 Cost(s) borrowing, 356–7 conversion, 402 elements, 349 IAS 16, 347 intangible assets, 433, 440 inventories, 402, 404, 410 purchase, 402 Counterclaims, 491 Craven v White, 65 Creative accounting, 453 Credit notes, VAT, 60 CT see Corporation tax (CT) Cultural issues, regulations, 109 Current assets, 189 Current liabilities, 189 Current taxation: accounting treatments, 405 calculations, 88 FINANCIAL OPERATIONS D Deadlines: taxation concepts, 61–2 see also Time limits Debit notes, VAT, 60 Deductible expenses, employment income, 45–6 Deductions: allowable expenses, 23 double taxation treaties, 77 Deferrals, CGT, 24 Deferred taxation: accounting treatments, 94–5 assets, 93 calculations: accounting for, 94–5 deferred tax assets, 93 permanent difference, 89 tax losses, 93–4 temporary difference, 89–90 timing difference approach, 90 concepts, 18, 89–94 depreciation, 90–2 financial statements, 87–96, 108, 109 IAS 12 Income Taxes, 87 permanent differences, 89 statement: of comprehensive income, 189–94 of financial position, 94, 95 tax base, 93 tax losses, 93–4 temporary differences, 91–2 timing difference approach, 90–1 see also Taxation Depreciable amounts, IAS 16, 348 Depreciation, 20–1, 226, 253, 348, 350–2 accelerated tax depreciation, 21, 95 accumulated amounts, 350 allowable expenditure, 23 calculation methods, 20–2, 90, 91–2 deferred taxation, 89–94 intangible assets, 434 international comparisons, 18, 65 plant & equipment, 347, 348, 349, 350–2 property, 348–51 useful life review, 350 Determination, profit, 17 Development: concepts, 433–4 Framework for the Preparation and Presentation of Financial Statements, 131 standards, 119 Direct taxes: company profits and gains, 17–29 concepts, 5–6, 17–29 rates, 7–8 record-keeping needs, 60 Directors: benefits-in-kind, 46 external audits, 154 financial statements, 182 taxable benefits, 45 Disagreement classification, 157 Disallowable expenditure, CT, 22–3, 89 Disclosures: accounting policy changes, 222 balances, 493 borrowing costs, 357 capital markets, 108 construction contracts, 404 contingencies, 490–1 control, 493 corporate governance, 159 discontinuing operations, 224–7 equipment, 348 events after reporting period, 486–7 finance leases, 383–4 financial statements, 223 fundamental errors, 222–3 impairments, 436 intangible assets, 436–7 international financial reporting standard operating segments, 232 inventories, 410 lessees, 373–4 lessors, 372, 377 management judgements, 222 needs, 109 operating leases, 372 ownership factors, 109 property, plant and equipment, 347–50 R&D, 453 related party disclosures, 491–2 revenue, 218 INDEX concepts, 87–96 financial statements, 87–96 IAS 12 Income Taxes, 87–96 Current/non-current distinction, statement of financial position, 188–9 515 INDEX 516 FINANCIAL OPERATIONS F1 Disclosures: (Continued ) share capital transactions, 188, 458–9 shareholder factors, 108 significant accounting transactions, 485–94 transactions, 494 see also Regulations Discontinuing operations, 224–7 definition, 225–6 disclosures, 96, 224–7 initial disclosure event, 226 presentation, 229 Discounts: invoice discounting, 605 Disposals: assets, 23, 438 CGT exemptions, 23 intangible assets, 436 part, 22 Distributable profits, share purchases, 471 Dividends: cash flows, 255 corporate income tax, 25, 74, 88 double taxation, 25, 73, 75, 77–8 events after reporting period, 486–7 financial statements, 88 interest, 26–7 revenue, 218 tax credits, 25 underlying tax, 76 withholding tax, 75 see also Shares Donations: charities, 23, 45 political donations, 23 Double taxation: dividends, 25, 75, 76 OECD Model tax convention, 78 Drugs, VAT, 43 E Earnings concepts, 7, 46 see also Employment income; Salaries; Wages Economic-effects principle, taxation canons, Effective incidence, concepts, 5–6 Efficiency principle, taxation canons, Emoluments see Earnings concepts Employers, record-keeping needs, 60–1 record-keeping needs, 60–1 social security, 61 see also Income tax; Pay-as-you-earn (PAYE) Employment income: allowable expenses, 23 basis of assessment, 45 benefits-in-kind, 46 deductible expenses, 45 efficiency principle, social security, 46 taxation, 45–6 see also Income tax; Pay-as-you-earn (PAYE) Enforcement issues: legislation, 7, 62–5 see also Compliance powers Entertainment expenses, 22 Entry and search powers, officers, 63 Equipment, 347–57 Equity, 4, accounting, 336–9 changes, 194–5 statement of changes, 183, 194, 194–5 see also Share capital transactions Equity principle, taxation canons, 4, 5, 63 Errors: financial performance, 220 see also Fundamental errors, disclosures Estimates, 220, 222, 439 European reaction to IOSCO, 115–16 European Union (EU), 9, 116 tax rules, Evasion, taxation, 63–5 Events after reporting period, 486–7 adjusting events, 486–7 disclosures, 488 going concerns, 487 non-adjusting events, 487 proposed dividends, 487 Examination: format, 508–9 preparation, 507–8 Excise duties: concepts, 39, 43–4 record-keeping needs, 60–1 Exemptions: CGT, 23–4 double taxation treaties, 77–8 VAT, 42–3 Expenditure: allowable items, 23 concepts, 20–3 depreciation, 20–1, 90 disallowable items, 22–3, 89 FINANCIAL OPERATIONS F Fair presentation, 183–4 Fair value, 339 in acquisition accounting, 287–9 adjustment, 307–9 IAS 16, 348 IAS 38, 434 intangible assets, 435 Fairness principle, Faithful representation, 135, 144 Finance leases: accounting, 371–85 actuarial method, 378, 381 additional disclosures, 230 in advance/in arrears, 382–3 definition, 372 disclosures, 375–6 implied interest calculation, 378–83 lessees, 384 straight-line method, 378, 379 sum-of-digits method, 378, 380 see also Leases Finance transactions, VAT, 42 Financial information: comparability, 135 materiality, 157–8, 190 qualitative characteristics, 134–5 relevance, 134 reliability, 135 understandability, 134 see also Framework for the Preparation and Presentation of Financial Statements Financial performance, 217–35, 153 accounting policy changes, 220–2 discontinuing operations, 224–30 errors, 222–3 fundamental errors, 222–3 IAS 18 Revenue Recognition, 218, 238 IFRS 8, 230–5 net profit or loss, 219 reporting, 217–35 Financial position, 133, 134 Financial statements: accounting policies, 183, 184, 195, 196 aggregated balances, 406 components, 183 concepts, 18, 19, 20, 60, 87–96, 131, 132–4, 135–6, 181, 225 current taxation, 87–96 deferred taxation, 89–95 directors, 183 disagreement classification, 157 disclosures, 195 dividends, 88 elements, 135–6, 181 equity changes, 183, 194–5 IAS 12 Income Taxes, 87–96 note structure, 195 objectives, 133 preparation, 184–5 presentation, 131, 132, 460–1 of share capital transactions, 459–60 purpose, 182–3 record keeping needs, 60 regulation needs, 108 requirements, 182–5 responsibility, 183 share capital transactions, 457 taxable income, 18, 19 users, 136 see also Accounting statements; Statement of financial position; Statement of cash flows; Framework for the Preparation and Presentation of Financial Statements; Income statements Financing activities: cash flows, 253–5 First in first out (FIFO) approach, 404 INDEX Expenses: allowable expenses, 23, 89 deductible, 45 disallowable expenses, 22–3, 89 disclosures, 96 function, 192, 193 improvements, 22 legal, 22 nature, 192–3 offset, 185 ‘wholly, exclusively and necessarily’ incurred, 45 Exports, VAT, 60 External audits, 149–61 accounting phase, 152 bookkeeping phase, 152 directors, 160–1 exemptions, 149 process, 151–2 purpose, 149–50 qualified reports, 159–60 reports, 149–61 Extraordinary items, 96, 219 517 INDEX 518 FINANCIAL OPERATIONS F1 First-year allowances (FYA), 21 Fixed production overheads, 402 Food, VAT, 42 Foreign tax treaties, 73 Foreign taxes, relief for, 28 Foreseeable losses, construction: contracts, 412 Formal incidence, concepts, Foundation, International Accounting Standards Committee, 112–13 Framework for the Preparation and Presentation of Financial Statements, 131 assumptions, 133–4 development, 132–3 main topics, 133 purpose, 132 scope, 132–3 standard-setting process, 138 status, 132 underlying assumptions, 133–4 usefulness, 137–8 France, 18 Fraud, 63, 151 Fundamental errors, disclosures, 223 Furniss v Dawson, 65 FYA see First-year allowances (FYA) G GAAP see Generally accepted accounting practice (GAAP) Gain or loss, asset sales, 229 Gains: company profits and gains, 17–29 see also Capital gains Gaming, VAT, 43 General principles of business taxation, concepts, 3–9 Generally accepted accounting practice (GAAP), 111–12, 119 concepts, 111–12, 119 IFRSs, 117, 119 Generally accepted accounting practice (GAAP), 18, 19 Germany, 18 Gifts, CGT exemptions, 23 Going concern basis, 184, 487 Goodwill, 286, 287, 300–1, 432–3, 439 see also Intangible assets Governments: competent jurisdictions, 6–7 expenditure, revenue, tax rules, Groups of companies: concepts, 27, 28–9, 76, 439 international comparisons, 24, 76 losses, 27, 28–9, 76 reliefs, 27, 28 subsidiaries, 61, 76–7 transfers of assets, 29, 76, 435 H Harmonisation, accounting standards, 109 Headings, statements of cash flow, 252–3 Health services, VAT, 43 Hire purchase interest, 372 Hypothecation concepts, I In advance/in arrears method, 382–3 IASB see International Accounting Standards Board (IASB) IASC see International Accounting Standards Committee (IASC) IASs see International Accounting Standards (IASs) ‘Ideal’ taxes, IFAC see International Federation of Accountants (IFAC) IFRIC see International Financial Reporting Interpretations Committee (IFRIC) IFRS see International Financial Reporting Standards (IFRSs) Improvement expenses, 22 Imputation system, corporate income tax, 25 Incidence concepts, Income: concepts, 8, 18–20 double taxation, 25, 73, 75 OECD Model tax convention, 74–5, 78 offset, 185 sources, 8, 9, 17–19 tax classifications, 8–9, 19–20 see also Corporate income tax; Employment income Income statements: adjustments, 19–20 current taxation, 88–9 deferred taxation, 89–90 IAS 12 Income Taxes, 87, 187 Income tax: charges, 95 FINANCIAL OPERATIONS internal generation, 433–4 measurement, 435 recognition, 437, 438–40 revaluations, 435 rollover relief, 24 software, 568 subsequent measurement, 435 write-downs/backs, 192, 219 Integrity of professional accountants, 173–4 Interest: allowable expenditure, 20, 23 borrowing costs, 356 cash flows, 262–3 dividends, 26–7 finance leases, 372–3 received, 262 recharacterisation rules, 26–7 revenue, 235 Schedule D, Case III, 19 withholding tax, 75 yield concepts, Interest received, corporate income tax, 18–19, 24–6, 60, 63, 74, 76, 77, 88 Internal generation, intangible assets, 431–40 International Accounting Standards (IASs) compliance, 184, 195 fair presentation, 183–4 IAS Presentation of Financial Statements, 217, 219, 225, 458 IAS Inventories, 402–4 IAS Statement of Cash Flows, 252 IAS Accounting Policies, Changes in Accounting Estimates and Errors, 183, 220 IAS 10 Events After the Reporting Period, 486–7 IAS 11 Construction Contracts, 160, 404–18, 643 IAS 12 Income Taxes, 87 IAS 14 Segment Reporting, 230, 235 IAS 16 Property, Plant and Equipment, 347 IAS 17 Leases, 388 IAS 18 Revenue Recognition, 218 IAS 23 Borrowing Costs, 356–7 IAS 24 Related Party Disclosures, 485, 491 IAS 27 Consolidated and Separate Financial Statements, 284, 343 IAS 28 Accounting for Associates, 284 IAS 32 Financial Instruments, 457, 460–1 IAS 35 Discontinuing Operations, 224–30 INDEX concepts, 45–6, 60, 95 corporate income tax, 18–19, 24–6, 60, 63, 74, 77, 88 current taxation, 88–9 deferred taxation, 89–90 double taxation, 25, 73, 77 efficiency principle, IAS 12 Income Taxes, 87, 187 OECD Model tax convention, 74, 75, 78 residence criteria, 73–4 tax classifications, 8, 9, 19–20 see also Corporate income tax; Employment income; Pay-as-you-earn (PAYE) Incorporation issues, corporate residence, 73, 74 Indexation, CGT, 23 Indirect taxes: concepts, 6, 39–47 excise duties, 39, 43–4, 60 property taxes, 44 rates, 6, 39 record-keeping needs, 60 see also Value added tax (VAT) Inflation effects, CGT, 23 Information presentation, 186–8 financial statements, 187–8 materiality, 157–8 Nestlé Group, 156 notes, 187–8, 195 published, 110, 181 reporting financial performance, 217–36 reserve disclosures, 188 share capital, 188 specimen, 185–6, 190, 194 statements of comprehensive income, 190–4 Inheritance tax, tax classifications, 8–9 Initial allowances, 21 Insolvency, concepts, 486 Insurance: recoverable amounts, 22 VAT, 43 Intangible assets, 289 amortisation, 435–6 concepts, 431–41 definition, 434 depreciation, 434, 440, 445–6 disclosures, 441, 458–9 disposals and retirements, 436 goodwill, 437 impairment losses, 435–7, 441 initial measurement, 432 519 INDEX 520 FINANCIAL OPERATIONS F1 International Accounting Standards (IASs) (Continued ) IAS 36 Impairment of Assets, 226, 431, 436, 438, 439 IAS 37 Provisions, Contingent Liabilities and Contingent Assets, 488, 491 IAS 38 Intangible Assets, 350, 431, 432, 433, 434, 435 IAS 39 Financial Instruments:Recognition and Measurement, 457 USA acceptance, 116 International Accounting Standards Board (IASB), 111, 112–15, 118, 119 International Accounting Standards Committee (IASC) Foundation, 112, 113 Framework for the Preparation and Presentation of Financial Statements, 131, 183 objectives, 115 standard-setting processes, 107–19, 138 structure, 113 International comparisons: competent jurisdictions, 6–7 depreciation treatments, 20–1, 76 foreign tax treaties, 63, 73, 76, 77 groups of companies, 28–9, 76 regulations, 108 tax bases, 18 tax systems, 3–5, 8, 18–19 International Federation of Accountants (IFAC), 115, 152 International Financial Reporting Interpretations Committee (IFRIC), 114–55, 118, 184 International financial reporting standard operating segments (IFRS 8), 230 accounting policies, 231 customers, information about, 234–5 definition, 231 disclosures, 232 geographical areas, information about, 234 principle, 230 reconciliations, 233–4 reportable segments, 231 International Financial Reporting Standards (IFRSs) assets, 183, 230 concepts, 114, 118–19, 132, 183–4, 230 disclosures, 188, 232 GAAP, 111–12, 119 IFRS Business Combinations, 431, 437, 454 immaterial amounts, 185 impairments, 438–40 recognition, 349 International Organisation of Securities Commissions (IOSCO) European reaction, 116 IASC relationship, 115–16 international reaction, 116–17 USA reaction, 116–17 International taxation: branches, 77 concepts, 73–8 OECD Forum on Tax Administration, 65 OECD Model tax convention, 74, 75, 78 residence criteria, 74 subsidiaries, 61 withholding tax, 7, 75 Interpretation, statement of cash flow, 263 Intragroup balances, 302–4 Intra-group loans and preference shares, 304 Intra-group revenue, 326, 327 Intra-group trading, 326–8 Inventories, 185, 188, 289, 401–18, 486 alternative methods, 404 changes, 253 construction contracts, 160, 401–18 cost determination, 402 definitions, 402 disclosures, 404 measurement, 402 overhead allocation, 403 unit costs, 403 Investments: accounting for, 283 in associates, 284, 336 cash flows, 252, 261–2 in subsidiaries, 284–9 Invoices: IOSCO see International Organisation of Securities Commissions (IOSCO) VAT, 6, 8, 9, 40, 41–3, 44 ISA 700 The Auditor’s Report on Financial Statements, 152 J Japan, 119 Job-related accommodation, employment income, 46 Just-in-time purchasing (JIT) policy, 563, 599 FINANCIAL OPERATIONS impairment losses, 226, 348, 435–7, 441 offsetting, 27, 28 subsidiaries, 61, 76, 77 terminal losses, 28 trading, 27 transfers, 87 M Machinery see Plant and machinery Management issues: corporate residence, 74 inventories, 402, 410, 486 judgement disclosures, 222 Material amounts, 185 Material omissions, 222 Materiality: concepts, 157–8, 193 financial information, 134 income statements, 18–20 qualified reports, 157–60 statement of comprehensive income, 189–94 Measurement: intangible assets, 431–41 inventories, 402, 410, 486 property, plant and equipment, 185, 186, 348 purchased goodwill, 437–8 Minimum tax gap principle, Misstatements, 222 Monetary assets and liabilities, 289 Monetary value, financial-statement elements, 146 Motor cars see Cars Motor vehicles: excise duties, 43–4, 60 hypothecation concepts, see also Cars; Vehicles Multinational enterprises: harmonized standards, 109 jurisdiction issues, 6–7 Multi-stage sales taxes, concepts, 40–1 N National standard-setting process co-ordination, 118 Negative goodwill, 302, 437 Nestlé Group: consolidated accounts, 156 income statements, 19–20 intangible assets, 431–41 INDEX L Land and buildings: leases, 373–4 VAT, 6, 41–3, 44 Late returns, penalties, 60, 62 Lease term, definition, 372 Leases: accounting, 371, 374–5 badge of ownership, 373 cashback incentives, 375 characteristics, 372–4 definition, 372 finance, 372–3 land and buildings, 373–4 operating, 373 rent-free period, 374–5 VAT, 6, 41–3, 44 Legal expenses, 22 Legislation: anti-avoidance provisions, 64–5 competent jurisdictions, 6–7, 63 complexity issues, compliance powers, 62–3 enforcement issues, 6–7, 150 tax rules, 7, 9, 20, 23, 62 see also Case law; Regulations Lessees, 372, 384 Lessors, 372, 377 Liabilities: contingencies, 491 offset, 27, 28 timing, 187 see also Statement of financial position Listed companies, 116 see also Companies Loans, benefits-in-kind, 46 Local governments: competent jurisdictions, 6–7 tax rules, 7, 9, 20, 23, 62 Local regulatory bodies, 116–17 Long-term borrowing proceeds, 262–3 Long-term debt, working capital, 219 Loopholes, tax avoidance, 64 Losses, 27–8, 408 allowable, 23 capital losses, 27, 29 carrying back/forward, 27–8, 93–4 concepts, 27–8, 29, 93–4, 253, 408, 412 corporate income tax, 18, 60 deferred taxation, 89–90 groups of companies, 27, 28–9, 74, 76 521 INDEX 522 FINANCIAL OPERATIONS F1 Nestlé Group: (Continued ) segmental information, 230 statement of cash flows, 265 statement of comprehensive income, 189–94 Net profit or loss, 219 accounting estimate changes, 220, 222 definitions, 219 extraordinary items, 219 ordinary activity, 219–20 Neutrality, 5, 135 ‘No gain, no loss’ prices, 29 Non-adjusting events, 487 Non-cash items, 253 Non-current assets: deferred taxation, 89, 93 disposal, 23, 225, 226 intangible assets, 431–41 profit/losses, 222 property, plant and equipment standards, 188, 347 standards, 347–57, 431–41 Norwalk agreement, 117 Notes: income statements, 60 information presentation, 186–7, 187–8, 190 published financial statements, 181–201 structure, 195 O Objectivity of professional accountants, 174 OECD see Organisation for Economic Cooperation and Development (OECD) Offsets: assets, 185 expenses, 434 liabilities, 229 losses, 27–8, 229 VAT restrictions, 6, 41 Opening paragraphs, reports, 154 Operating activity disclosure, 253 Operating leases, 373 definition, 372 disclosures, 375–6 Opportunity costs, cash, 600 Ordinary activity, definition, 219 Organisation for Economic Cooperation and Development (OECD): Forum on Tax Administration, 65 model tax convention, 73–4, 78 tax classifications, Overheads, 403 Overseas subsidiaries, 61 Own shares, purchases, 470 Ownership factors, disclosures, 109 P Partial imputation systems, 25 Partially exempt trades, VAT, 43 Patent royalties, corporate income tax, 18–19, 60 Pay and file system, CT, 61–2 Pay-as-you-earn (PAYE): concepts, 3, 39 efficiency principle, tables, 46 see also Employment income; Income tax Payables: changes, 253 concepts, 411–12, 600–1 construction contracts, 401, 404–5 deadlines, 61–2 Penalties: late returns, 60, 62 record-keeping needs, 60–1 tax evasion, 63–5 Pensions: allowable expenditure, 20, 22, 23 benefits-in-kind, 46 deferred taxation, 89, 93 see also Retirement Periodic reviews, inventories, 185, 401, 410, 487 Permanent differences, deferred taxation, 89, 93 Permanent establishment, concepts, 73, 78 Personal pension schemes, 45 Personal tax systems: concepts, 39 corporate income tax, 18, 60 employment income, 45, 46 Places of control and incorporation, corporate residence, 74 Plant and machinery: allowable expenditure, 20 depreciation, 20–2 proceeds of sale, 262 rollover relief, 24 Points of reference, 118, 119, 138 Political donations, 23 FINANCIAL OPERATIONS disclosures, 356 disposals, 352–3 fair value, 288 measurement, 349–50 recognition, 349 retirements, 352–3 subsequent expenditure, 350 useful life review, 351 Proportional taxes, concepts, Provisions: definition, 488 recognition, 350 for restructuring, 289 Prudence, 135 Public securities markets, USA, 116–17 Published financial statements: general requirements, 182–5 illustrative question, 196–201 notes to, 195 regulatory expectations, 110–11 statement of comprehensive income, 189 statement of financial position, 185 see also Financial statements Purchased goodwill: concepts, 437 see also Intangible assets Purchases: books, 60 own shares, 266 Q Qualified reports: external audits, 149–61 materiality, 157–8 qualifying corporate bonds, 23 wording, 158–9 Qualitative characteristics, financial information, 134–5 Quoted companies, 164 R R&D see Research and development (R&D) Ramsey Ltd v IRC, 65 Receivables: changes, 253 concepts, 411 construction contracts, 401–18 late payments, 46 Recharacterisation rules, interest, 26–7 Recognisable contract profit, 407–8 INDEX Political systems, regulations, 108 Pooling, 21 Postal services, VAT, 42 Precedents, tax rules, Preparation: examinations, 507–9 financial statements, 131, 184–5 see also Framework for the Preparation and Presentation of Financial Statements Prescriptive standards, 112 Presentation: discontinuing operations, 224–30 fair, 183–4 financial statements, 460–1 share capital transactions, 431–41 see also Framework for the Preparation and Presentation of Financial Statements Principles-based standards, 107 Principles of business taxation, concepts, 3–9 Printed matter, VAT, 42 Probabilities: contingencies, 488 Proceeds of sales, 486 Professional accountants: code of ethics for: confidentiality, 175–6 integrity, 173–4 objectivity, 174 professional competence and due care, 174 preparation and reporting of information, 176–7 Professional competence and due care, 174 Professional subscriptions, 45 Profit or loss, 219–20 Profit-sharing payments, 45 Profits: company profits and gains, 17 construction contracts, 401–18 deferred taxation, 18, 89–90 determination, 17 Progress payments, 405–6 Progressive taxes, concepts, Property: rollover relief, 24 tax classifications, see also Buildings; Land and buildings Property, plant and equipment: asset revaluations, 353–5 depreciation accounting, 350–2 523 INDEX 524 FINANCIAL OPERATIONS F1 Recognition: impairment losses, 226 intangible assets, 350 provisions, 350 revenue, 218 significant accounting transactions, 485–94 Record-keeping needs, 60 Recoverable amounts: IAS 16, 347 impairment losses, 348 insurance, 22 Redemption, shares, 466 Reducing balance method, depreciation, 352 Refunds, VAT, 42 Registration, VAT, 43 Regressive taxes, concepts, Regulations: cultural issues, 109 determinating factors, 111 external audits, 149 financial statements, 87–96 framework, 131–8 international comparisons, 116 local bodies, 116–17 published financial statements, 181–201 see also Disclosures; Legislation Related party transactions: definitions, 492 disclosures, 493 examples, 494 exclusions, 492–3 Relevance, financial information, 134 Reliability, financial information, 135 Reliefs: capital allowances, 24 foreign taxes, 28 rollover reliefs, 24 Rendering of services, revenue, 218 Rent-free period, 374–5 Rent received: corporate income tax, 18–19 withholding tax, 75 Repairs, allowable expenditure, 22, 23 Reportable segments, 231 Reporting: financial performance, 217–35 Reports, auditors, 158–9 Research, concepts, 433 Research and development (R&D): allowable expenditure, 22, 23 concepts, 433 disclosures, 436–7 see also Intangible assets Reserve disclosures, 188 Residence criteria: concepts, 74 corporate residence, 74 CT, 26 OECD Model tax convention, 78 Residual amounts, IAS 16, 348 Responsibility, 152–5 Retained profits, corporate income tax, 25 Retirement: annuity policies, 45 intangible assets, 436 property, plant and equipment, 350 see also Pensions Returns: compliance powers, 62 CT, 26 deadlines, 61–2 late returns, 62 record-keeping needs, 60–1 review and query powers, 62 special reports, 62 Revaluations: assets, 353 deficits, 354 surplus, 353–4 Revalued non-current assets, deferred taxation, 93 Revenue: disclosures, 218 dividends, 218 expenditure concepts, 20–3 income concepts, 19–20 interest, 218 recognition, 218 rendering of services, 218 royalties, 218 sale of goods, 218 Review and query powers, returns, 62 Rights issues, 469 Risk: rules, 3–4 social issues, 4, 7, 46 tables, 46 tax gaps, terminology, 5–8 Rollover relief, CGT, 24 Roman law, 108, 110 Royalties, 218 FINANCIAL OPERATIONS Self-constructed assets, concepts, 349 Self-employed persons, 45 Selling price less gross profit margin method, 404 Service rendering, revenue, 218 Share capital transactions: bonus issues, 467–9 costs, 357 disclosures, 188 financial statement, 185–9, 554 information presentation, 188 presentation, 188 share classes, 459 shareholders’ interests, 458 shares issue, 461 treasury shares accounting, 469–70 Share issues: accounting, 188 costs, 466 proceeds, 262 process, 461–2 Shareholders: disclosure requirements, 458–9 interests, 458 Shares: classes, 459–60 IOSCO, 111, 115–16 issues, 461 own-share purchases, 470 purchase, 470 redemption, 470 rights issues, 469 see also Dividends; Equity; Securities Short-term finance: concepts, 603 invoice discounting, 605 see also Cash Short-term solutions, 138 SIC see Standing Interpretations Committee (SIC) Signatures, auditors, 156 ‘Significant influence’, 284 Significant transactions: accounting treatment, 405–6 disclosures, 493–4 recognition, 485–94 Single-stage sales taxes, concepts, 40 Smith, Adam, Social issues, 4, 7, 46 Social security, 46, 61 Software, intangible assets, 218 INDEX S Salaries: allowable expenditure, 23 see also Employment income; Wages Sale of goods, 218 Sales: assets, 23 books, 60 cost of sales, 262 revenue, 406–7 works of art, 23 see also Revenue Sales taxes: compliance powers, 62–3 concepts, 60–1 deadlines, 61–2 entry and search powers, 63 incidence concepts, record-keeping needs, 60–1 review and query powers, 62 single/multi-stage sales taxes, 40 tax classifications, 8–9 see also Indirect taxes; Value added tax (VAT) Schedular systems, corporate income tax, 18–19 Schedule A landed property, 19 Schedule D: Case I profits, 19 Case III interest, 19 Case V foreign dividends, 19 Case VI chargeable income, 19 Schedule E employment income see Employment income Schedules and Cases, CT, 19 Scope: Framework for the Preparation and Presentation of Financial Statements, 131 paragraphs, 154 SEC see Securities and Exchange Commission (SEC) Securities: IOSCO, 115–16 see also Bonds; Shares Securities and Exchange Commission (SEC), 116 Security assets, 45 Self-assessment, 62 see also Corporate income tax Self-assessment, corporation tax, 62 525 INDEX 526 FINANCIAL OPERATIONS F1 Sources of finance, disclosure requirements, 218 Special reports, 62 Split rate systems, 25 Standard costs, 404 Standards: allowed alternatives, 118 Board, 114 committee structures, 113 determinating factors, 117–18 development, 132 harmonisation contrasts, 132 national setting process, 118 non-current asset standards, 93 setting processes, 107–19 see also International Accounting Standards; International Financial Reporting Standards Standards Advisory Council, 115 Standing Interpretations Committee (SIC), 114 Statement of cash flows, 132, 133, 152, 183, 227, 251–63 examples, 253, 263, 350, 351, 352, 353, 354, 355, 373, 374, 375, 378–83, 402, 406 interpretation, 222 non-cash items, 253, 259, 277, 392 objective, 251–2 requirements, 256, 268, 270, 276, 356 worked example, 256–63 Statement of changes in equity, 194–5 Statement of financial position, 410 additional items, 187 cash, 46 current assets, 189 current liabilities, 189 current/non-current distinction, 188–9 deferred taxation, 89–91 information presentation, 186–9 Nestlé Group, 156, 491 published financial statements, 181–201 after reporting period, 486–7 reserve disclosures, 188 share capital, 188 specimen, 185–6 working-capital ratios, 512, 550 Status, Framework for the Preparation and Presentation of Financial Statements, 131 Statutes see Legislation Stock exchanges, local requirements, 111 Stocks see Inventories Straight-line method, depreciation, 352 Subscriptions, trade, 19 Subsequent expenditure, property, plant and equipment, 350 Subsidiaries: international taxation, 73–8 investments in, 284–9 losses, 27–8 record-keeping needs, 60–1 see also Groups of companies Substance over form concept, 135 Sum-of-digits method, leases, 380–1 Surpluses on disposal of intangible assets, 19 T Tangible asset purchase, 261 Tax avoidance, 642 Tax bases: corporate tax base, 18 deferred taxation, 93 international comparisons, 8–9 Tax credits: deferred taxation, 89–95 dividends, 25, 88 Tax evasion, 642 Tax gaps, concepts, tax systems, international comparisons, 4–5 Taxable income, concepts, 18–19 Taxable person, concepts, Taxable supply, VAT, 42 Taxation: accounts, 88, 94–5 administration, 59–65 avoidance, 63–4 canons, 4–5 classifications, collection amounts, 46 compliance powers, 46, 62 current taxation, 88 deadlines, 61–2 double taxation, 75 employees, 45–6 entry and search powers, 63 evasion, 63–4 financial statements, 87–96 and government revenue, hypothecation concepts, incidence concepts, international taxation, 73–8 OECD Forum on Tax Administration, 65 OECD Model tax convention, 78 FINANCIAL OPERATIONS U Uncertain outcomes, construction contracts, 409 Underlying tax, concepts, 76 Understandability, 134 Unit taxes, concepts, 40 Unrealised profits, 304 Unusual item reporting, 219 USA: benchmark tax regimes, consumption taxes, 40 interest-recharacterisation rules, 26–7 public securities markets, 116 reaction to IOSCO, 115–16 Securities and Exchange Commission, 116 subsidiaries, 61 tax classifications, taxable income, 18–19 Useful life review, 351 Users, financial statements, 108, 132–3 V Value: fair value, 348 Value added tax (VAT), 630 apportioning, 43 compliance powers, 62–3 concepts, 41–2 deadlines, 61–2 entry and search powers, 63 exemptions, 42–3 invoices, 60 liable transactions, 42–3 partially exempt trades, 43 rates, 8, 41 record-keeping needs, 60–1 refunds, 42–3 registration, 43 review and query powers, 59, 62 zero rates, 41–3 see also Indirect taxes Variable production overheads, 402 VAT see Value added tax Vehicles: CGT exemptions, 23 see also Cars; Motor vehicles W Wages, 4, 45 allowable expenditure, 22, 23 see also Employment income; Salaries Wasting assets, 23 Wealth of Nations (Smith), Wealth taxes, 44–5 ‘Wholly, exclusively and necessarily’ incurred expenses, 45 Winding-up business payments, 23 Withholding tax: concepts, 7, 75 see also Double taxation Wording, qualified reports, 158 Works of art, CGT exemptions, 23 Z Zero rates, VAT, 42, 43 INDEX payment deadlines, 59 principles, 4–5 rates, 24 record-keeping needs, 60–1 refunds, 27 residence criteria, 74 returns, 61–2 see also Capital gains tax; Corporation tax; Deferred taxation; Income tax; Value added tax Temporary differences, deferred taxation, 93 Terminal losses, 28 Time limits: taxation, 62 see also Deadlines Timeliness, information, 222 Timing, liabilities, 187 Timing difference approach, deferred taxation, 90 Titles, audit reports, 154 Tobacco, excise duties, 40 Trade, subscriptions, 43 Trade payables see Payables Trading income, concepts, 17 Trading loss relief, CT, 27 Transaction disclosures, 493 Transfer pricing, 61, 77 Transfers: assets, 29 group assets, 29, 77, 461 losses, 28–9, 76 Transparency principle, Transport, VAT, 43 Treasury shares accounting, 469 Treaties, 9, 63, 73, 74, 75, 77–8 see also Withholding tax Trial balance example, 198 True and fair view, 19, 150, 152, 153, 155, 156 527 .. .CIMA Official Learning System Operational Level F1 – Financial Operations Jo Watkins CIMA Publishing is an imprint of Elsevier Linacre House, Jordan Hill,... developing countries www .elsevier. com | www.bookaid.org | www.sabre.org Contents The CIMA Learning System xvii xvii xvii xviii xviii xxi Acknowledgements How to use the CIMA Learning System Guide... before you begin, so as to minimise interruptions THE CIMA LEARNING SYSTEM Planning xix THE CIMA LEARNING SYSTEM xx FINANCIAL OPERATIONS F1 (2) Store all your materials in one place, so that