ACCA Paper F7 Financial Reporting Complete Text British library cataloguinginpublication data A catalogue record for this book is available from the British Library. Published by: Kaplan Publishing UK Unit 2 The Business Centre Molly Millars Lane Wokingham Berkshire RG41 2QZ ISBN 9781784152154 © Kaplan Financial Limited, 2015 The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials. 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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 Kaplan Publishing. ii KAPLAN PUBLISHING Contents Page Chapter Introduction to published accounts Chapter Tangible noncurrent assets 23 Chapter Intangible assets 61 Chapter Impairment of assets 75 Chapter Noncurrent assets held for sale and discontinued operations 95 Chapter A conceptual and regulatory framework Chapter Conceptual framework – Measurement of items 139 Chapter Other standards 157 Chapter Leases 179 Chapter 10 Financial assets and financial liabilities 205 Chapter 11 Revenue 245 Chapter 12 Provisions, Contingent Liabilities and Contingent 285 Assets Chapter 13 Taxation 313 Chapter 14 Earnings per share 341 Chapter 15 Statement of cash flows 373 Chapter 16 Principles of consolidated financial statements 431 Chapter 17 Consolidated statement of financial position 445 Chapter 18 Consolidated statement of profit or loss 505 Chapter 19 Associates 539 Chapter 20 Interpretation of financial statements 581 Chapter 21 Appendix 633 KAPLAN PUBLISHING 113 iii iv KAPLAN PUBLISHING chapter Intro Paper Introduction v How to Use the Materials These Kaplan Publishing learning materials have been carefully designed to make your learning experience as easy as possible and to give you the best chances of success in your examinations. 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Footsteps – helpful tutor tips. Syllabus Paper introduction Paper background The aim of ACCA Paper F7, Financial reporting, is to develop knowledge and skills in understanding and applying accounting standards and the theoretical framework in the preparation of financial statements of entities, including groups and how to analyse and interpret those financial statements. Objectives of the syllabus viii • Discuss and apply a conceptual and regulatory framework for financial reporting • Account for transactions in accordance with International accounting standards • • Analyse and interpret financial statements Prepare and present financial statements for single entities and business combinations which conform with International Financial Reporting Standards KAPLAN PUBLISHING Core areas of the syllabus • • • • • A conceptual framework for financial reporting A regulatory framework for financial reporting Financial statements Business combinations Analysing and interpreting financial statements Syllabus objectives and chapter references We have reproduced the ACCA’s syllabus from September 15 to June 16. Below shows where the objectives are explored within this book. Within the chapters, we have broken down the extensive information found in the syllabus into easily digestible and relevant sections, called Content Objectives. These correspond to the objectives at the beginning of each chapter. A A CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING The need for a conceptual framework (a) Describe what is meant by a conceptual framework of accounting [2] Ch (b) Discuss whether a conceptual framework is necessary and what an alternative system might be.[2] Ch (c) Discuss what is meant by relevance and faithful representation and describe the qualities that enhance these characteristics.[2] Ch (d) Discuss whether faithful representation constitutes more than compliance with accounting standards.[1] Ch (e) Discuss what is meant by understandability and verifiability in relation to the provision of financial information.[2] Ch (f) Discuss the importance of comparability and timeliness to users of financial statements.[2] Ch (g) Discuss the principle of comparability in accounting for changes in accounting policies.[2] Ch 8 KAPLAN PUBLISHING ix 2 Recognition and measurement (a) Define what is meant by ‘recognition’ in financial statements and discuss the recognition criteria.[2] Ch (b) Apply the recognition criteria to.[2] Ch 6 (i) assets and liabilities (ii) income and expenses (c) Explain the following measures and compute amounts using.[2] Ch 7 (i) historical cost (ii) fair value/current cost (iii) net realisable value (iv) present value of future cash flows (d) Describe the advantages and disadvantages of the use of historical cost accounting.[2] Ch (e) Discuss whether the use of current value accounting overcomes the problems of historical cost accounting.[2] Ch (f) Describe the concept of financial and physical capital maintenance and how this affects the determination of profits.[1] Ch Specialised, notforprofit and public sector entities (a) Distinguish between the primary aims of notfor profit and public sector entities and those of profit oriented entities.[1] Ch (b) Discuss the extent to which International Financial Reporting Standards (IFRSs) are relevant to specialised, notforprofit and public sector entities.[1] Ch Regulatory framework (a) Explain why a regulatory framework is needed also included the advantages and disadvantages of IFRS over a national regulatory framework.[2] Ch (b) Explain why accounting standards on their own are not a complete regulatory framework.[2] Ch (c) Distinguish between a principles based and a rules based framework and discuss whether they can be complementary.[1] Ch (d) Describe the IASB’s standard setting process including revisions to and interpretations of standards.[2] Ch (e) Explain the relationship of national standard setters to the IASB in respect of the standard setting process.[2] Ch x KAPLAN PUBLISHING Appendix (W2) Property, Plant and Equipment Plant $ Vehicles $ Total $ Cost b/f 40,315 13,720 54,035 Disposals (5,000) – (5,000) ––––––– ––––––– ––––––– At 31 March 20X4 35,315 ––––––– 13,720 ––––––– 49,035 ––––––– 7,060 2,670 9,730 (2,600) – (2,600) 7,063 ––––––– 2,763 ––––––– 9,826 ––––––– 11,523 ––––––– 5,433 ––––––– 16,956 ––––––– ––––––– ––––––– ––––––– 23,792 ––––––– 8,287 ––––––– 32,079 ––––––– Accumulated depreciation: At 1 April 20X3 Disposals Charge for year At 31 March 20X4 Carrying amount At 31 March 20X4 Depreciation for plant = $35,315 × 20% = $7,063 (taken to cost of sales) Depreciation for vehicles = (13,720 – 2,670) × 25% = $2,763 (taken to distribution costs) (W3) Disposal of asset Asset has been sold for $2,500. This needs to be added to cash, with the carrying value of $2,400 removed from P,P,E (see W2) and the gain of $100 taken to cost of sales (W1). (W4) Accruals The loan carries 7% interest. 7% × $18,000 = $1,260. As only $630 has been paid, $630 needs to be accrued (Dr Finance costs, Cr accruals). The preference dividend is 5% × $10,000 = $500. This must also be accrued (Dr Retained earnings, Cr accruals) 658 KAPLAN PUBLISHING chapter 21 Test your understanding Arthur statement of profit or loss and other comprehensive income for the year ended 31 December 20X3 Revenue Cost of Sales (W1) Gross profit Distribution costs Administration expenses Profit from operations Income from investments Finance cost (3,500 (W4) + 1,877 (W8)) Profit before tax Income tax expense (W3) Profit for year Other comprehensive income Revaluation gain Total comprehensive income KAPLAN PUBLISHING $ 246,500 (104,075) ––––––––– 142,425 (51,000) (34,000) ––––––––– 57,425 2,000 (5,377) ––––––––– 54,048 (10,100) ––––––––– 43,948 ––––––––– 63,000 ––––––––– 106,948 ––––––––– 659 Appendix Arthur Ltd Statement of changes in equity for the year ended 31 December 20X3 Share Retained capital earnings Balance at 1 April 20X3 Total comprehensive income Share issue $ $ 200,000 163,750 43,948 Revaluation reserve $ Total $ 363,750 63,000 106,948 20,000 (20,000) (9,500) ––––––– ––––––– (9,500) ––––––– ––––––– Balance at 31 March 20X1 220,000 178,198 63,000 461,198 ––––––– ––––––– ––––––– ––––––– Dividends 0 The bonus of issue of 1:10 means that 20,000 new shares have been issued for free (10% of 200,000 shares). Usually this would be debited to share premium. However, as no share premium exists, this must be debited to retained earnings instead. Arthur statement of financial position as at 31 December 20X3 $ $ Noncurrent assets Property, plant and equipment (435,000 (W2) + 459,000 24,000 (W8)) Intangible assets (W5) 19,800 478,800 Current assets Inventories (W6) 39,700 Trade receivables 48,000 Cash and cash equivalents 12,500 100,200 Asset held for sale (W7) 1,425 ––––––– Total assets 580,425 ––––––– 660 KAPLAN PUBLISHING chapter 21 Equity and liabilities Capital and reserves Share capital $1 Revaluation reserve Retained earnings Noncurrent liabilities 7% loan Finance lease (W8) Deferred tax liability Current liabilities Trade payables Finance lease (W8) Interest accrual (W4) Income tax 220,000 63,000 178,198 –––––––– 50,000 19,877 9,600 –––––––– 17,000 5,000 1,750 16,000 –––––––– 461,198 79,477 39,750 –––––––– 580,425 –––––––– Workings (W1) Cost of sales Purchases Opening inventory Closing inventory Impairment (W7) Depreciation – buildings (W2) Depreciation – plant (W2) Depreciation – lease (W8) Amortisation (W5) Research KAPLAN PUBLISHING $ 78,500 35,500 (39,700) 575 6,000 15,000 4,000 200 4,000 ––––––– 104,075 ––––––– 661 Appendix (W2) Property, Plant and Equipment Land & buildings Cost b/f $ Cost c/f Accumulated depreciation: Balance b/f $ Total $ 403,000 96,000 499,000 Held for sale Revaluation Plant (8,000) (8,000) (3,000) (3,000) –––––––– ––––––– –––––––– 400,000 88,000 488,000 –––––––– ––––––– –––––––– 60,000 44,000 104,000 Revaluation Held for sale (66,000) Charge for year 6,000 15,000 21,000 ––––––– ––––––– ––––––– At 31 December 20X3 Carrying amount At 31 December 20X3 – (66,000) (6,000) (6,000) 0 53,000 53,000 ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– 400,000 35,000 435,000 ––––––– ––––––– ––––––– Depreciation for buildings = $403,000 – $163,000 land = $240,000/40 years = $6,000 Note: The revaluation takes place at the end of the year and therefore depreciation is calculated on the cost before revaluation. Depreciation for plant = (88,000 cost c/f – 38,000 acc depreciation (b/f depreciation less held for sale asset depreciation)) × 30% = $15,000 662 KAPLAN PUBLISHING chapter 21 (W3) Income tax expense: Current year estimate Decrease in deferred tax provision (9,600 15,500) $ 16,000 (5,900) –––––– 10,100 –––––– The year end estimate of $16,000 is held in current liabilities The year end deferred tax liability is $9,600 ($32,000 × 30%). This is held in noncurrent liabilities, with the decrease in liability from the prior year taken to the tax expense as above. (W4) Finance costs The loan carries 7% interest. 7% × $50,000 = $3,500. As only $1,750 has been paid, $1,750 needs to be accrued (Dr Finance costs, Cr accruals). (W5) Intangibles Of the $24,000 in the trial balance, the $4,000 research should be taken to the SPorL as an expense (taken to COS). The remaining $20,000 is capitalised as a noncurrent asset. Amortisation on this begins on 30 September, so there has been 3 months amortisation by the year end. Amortisation is therefore $200 ($20,000 × 4% × 3/12). The amortisation of $200 is taken to cost of sales, and the carrying amount of intangibles in the SOFP is $19,800. (W6) Inventory The inventory is in at a total cost of $40,000. Of this amount, some items need to be adjusted. The item costing $1,500 has a NRV of $1,200, and therefore a writeoff of $300 is required. This makes closing inventory $39,700 (Dr Inventory, Cr COS) KAPLAN PUBLISHING 663 Appendix (W7) Held for sale The asset must be removed from Property, Plant & Equipment (see W2), and then is held under current assets at the lower of carrying amount and fair value less costs to sell. The asset has a carrying value of $2,000, but the fair value less costs to sell = $1,500 less 5% commission = $1,425. The asset should be held at $1,425, with a $575 impairment being shown in cost of sales. (W8) Lease The lease asset should initially be included at $28,000. This should be depreciated over 7 years, giving a depreciation charge of $4,000 (included in cost of sales) and a carrying amount of $24,000 included within P,P,E. The liability is then shown as follows: Year b/f Payment Subtotal Interest 8.16% 20X3 28,000 (5,000) 23,000 1,877 20X4 24,877 (5,000) 19,877 1,622 c/f 24,877 21,499 From this, the interest of 1,877 is taken to finance costs. The year end liability of $24,877 is split between noncurrent and current, with $19,877 shown as a noncurrent liability and $5,000 being held within current liabilities. 664 KAPLAN PUBLISHING chapter 21 Test your understanding Thistle Ltd Statement of financial position as at 30 June 20X1 Noncurrent assets Property, plant and equipment (W1) Investments (W6) $ $ 1,449,800 20,200 ––––––– 1,470,000 Current assets Inventories 62,200 Trade receivables 72,470 229,360 ––––––– 364,030 ––––––––– Cash and cash equivalents (W9) Total assets 1,834,030 ––––––––– Equity and liabilities Capital and reserves Share capital 500,000 Share premium 100,000 Retained earnings 655,650 Revaluation surplus 400,000 ––––––– 1,655,650 Noncurrent liabilities 10% Loan (80,000 + 1,600 (W3)) 81,600 Deferred tax (8,400 – 300 (W7)) 8,100 ––––––– Current liabilities Trade payables Loan interest owing (W3) Income tax Total equity and liabilities KAPLAN PUBLISHING 89,700 62,180 8,000 18,500 ––––––– 88,680 ––––––––– 1,834,030 ––––––––– 665 Appendix Thistle Ltd Statement of changes in equity for the year ended 30 June 20X1 Share Share Revaluation Retained capital premium surplus earnings $ $ Balance at 30 450,000 June 20X0 Total comprehensive income (W8) Issue of share capital (W2) $ Total $ $ 60,000 300,000 540,000 1,350,000 100,000 115,650 215,650 50,000 40,000 – 90,000 ––––––– ––––––– ––––––– ––––––– –––––––– Balance at 30 500,000 100,000 June 20X1 ––––––– ––––––– 400,000 655,650 1,655,650 ––––––– ––––––– –––––––– Workings (W1) Property, plant and equipment Land and buildings Motor vehicles Total $ $ $ Cost/Valuation At 1 July 20X0 1,400,000 67,500 1,487,300 100,000 –––––––– 100,000 (24,000) ––––––– (24,000) –––––––– 1,500,000 – ––––––– 43,500 ––––––– 1,543,500 –––––––– Revaluation Disposals At 30 June 20X1 Accumulated depreciation: At 1 July 20X0 Charged during the year (W7) Disposals At 30 June 20X1 Carrying amount At 30 June 20X1 666 58,000 30,250 88,250 14,000 ––––––– 5,450 19,450 (14,000) ––––––– (14,000) ––––––– 72,000 21,700 ––––––– ––––––– 93,700 ––––––– 1,428,000 21,800 1,449,800 –––––––– –––––––– –––––––– KAPLAN PUBLISHING chapter 21 (W2) Share issue No. Number of issued shares at 30 June 20X1 ($500,000/ $0.50) 1,000,000 Number Issued in the year (100,000) ––––––––– Number of issued shares at 1 July 20X0 (Balance) 900,000 ––––––––– Total proceeds = 100,000 × $0.90 = $90,000 Nominal value = 100,000 × $0.50 = $50,000 (share capital account) Premium = 100,000 × $0.40 = $40,000 (share premium account) (W3) Loan interest The loan is a financial liability and should be held at amortised cost. The interest charged to the statement of profit or loss is $9,600 ($80,000 × 12%). Of this, the interest due for the year $8,000 ($80,000 × 10%) is payable 1 July 20X1, so should be held as a current liability. The remaining $1,600 should be added on to the value of the loan within noncurrent liabilities to take into account the premium on redemption of the loan. (W4) Gain on disposal Proceeds Carrying value (24,000 – 14,000) Profit on disposal KAPLAN PUBLISHING $ 12,000 10,000 –––––– 2,000 667 Appendix (W5) Depreciation Building 2% × $700,000 ($1,400,000 – land $700,000) = $14,000 Motor vehicles 20% × (cost $43,500 – depn ($30,250 – $14,000)) = 20% × $27,250 = $5,450 (W6) Investments The default position for equity investments is fair value through profit or loss (FVPL). As the value has increased by $400 in the year, this will be added to the investment value, with the $400 gain taken to profit for the year. (W7) Tax The tax estimate of $18,500 will be taken to profit for the year and held within current liabilities. The deferred tax liability has decreased by $300. This will decrease the liability and reduce the tax expense for the year. (W8) Profit for year Per TB Gain on disposal (W4) Depreciation(W5) – buildings – motor vehicles Income tax expense Reduction in deferred tax (W7) Finance cost (W3) Investment gain (W6) Profit for the year $ 160,500 2,000 (14,000) (5,450) (18,500) 300 (9,600) 400 –––––––– 115,650 –––––––– (W9) Cash and cash equivalents $ TB Proceeds from sale of NCAs 217,360 12,000 –––––––– Cash and cash equivalents 668 229,360 KAPLAN PUBLISHING Index A D Accounting estimates 160 Accounting policies 158, 159 Actuarial method 185 Adjusting events 297 Agriculture… 169 Amortisation 63 Amortised cost 210 Assets (definition) 128 Associate 539 Deferred consideration 458 Deferred tax 314 Depreciation 27 Development expenditure 67 Diluted EPS 351 Direct method 397 Discontinued operations 98 Dividends 218 Dividend cover 609 Dividend yield 608 B Bargain purchase 450 Basic EPS 343 Bonus issue 344 Borrowing costs 40 Business model test 212 C Capital grants 38 Capital maintenance 149 Cash equivalents 376 Cash generating unit 80 Cash in transit 465 Comparability 125 Completeness 136 Compound instruments 219 Conceptual framework 115 Consignment inventory 253 Consolidated statement of profit or loss… 505 Consolidated statement of profit or loss and other comprehensive income 521 Consolidated statement of financial position 445 Constant purchasing power 145 Constructive obligation 289 Contingent assets 291 Contingent consideration 458 Contingent liabilities 290 Contractual cash flow characteristics test 211 Control 252, 432 Convertibles 219 Cost model 30 Creative accounting 400 Current cost accounting 145 Current ratio 592 Current tax 314 KAPLAN PUBLISHING E Earnings per share (EPS) 341 Economic value 141 Equity accounting 541 Equity instrument 206 Elements of the financial statements 127 Events after the reporting date 297 Exceptional items Excluded subsidiaries 438 Exemption from preparation of group financial statements 438 F Factoring of receivables 222 Fair value measurement 164 Faithful representation 124 Finance lease 181 Financial assets 205 Financial instruments 205 Financial liabilities 205 Future operating losses 292 G Gearing 603 Going concern 123 Goods in transit 465 Goodwill 450 Government grants 36 Gross profit margin 571 Group accounts 586 Guarantees 292 H Held for sale… 97 Historical cost accounting 141 I.1 Index I M IAS Presentation of financial statements IAS Inventory valuation 166 IAS Statement of cash flows 373 IAS Accounting policies, estimates & errors 158 IAS 10 Events after the reporting date 297 IAS 12 Income taxes 313 IAS 16 Property, plant and equipment 24 IAS 17 Leases 181 IAS 20 Accounting for government grants 36 IAS 23 Borrowing costs 40 IAS 27 Separate financial statements 438 IAS 28 Investments in associates 540 IAS 32 Financial instruments: presentation 207 IAS 33 Earnings per share 342 IAS 36 Impairment of assets 76 IAS 37 Provisions, contingent liabilities and contingent assets 286 IAS 38 Intangible assets 61 IAS 40 Investment properties 42 IFRS Business combinations 452 IFRS Non-current assets held for sale and discontinued operation 96 IFRS Financial instruments: disclosures 207 IFRS Financial instruments 207 IFRS 10 Consolidated financial statements 435 IFRS 12 Disclosure of interests in other entities 435 IFRS 13 Fair value measurement 456 IFRS 15 Revenue….246 IFRS Advisory council 119 IFRS Foundation 117 IFRS Interpretations committee… 119 Impairment 76 Income 127 Indirect method 397 Intangible asset 61 Interest cover 604 International Accounting Standards Board 117 Interpretation of financial information 581 Intra-group trading 464 Inventories 166 Inventory turnover period 595 Investment property 42 Materiality 124 J Joint venture 540 L Leases 181 Legal obligations 289 Limitations of financial analysis 611 I.2 N Negative goodwill 453 Net asset turnover 590 Net Realisable Value (NRV) 143 Neutrality 124 Non-adjusting events 297 Non-controlling interest 454 Non-coterminous year-end 439 Not-for-profit entities 615 O Objective of financial reporting 122 Onerous contracts 292 Operating lease 181 Operating profit margin 587 Options (share) 355 Overhaul costs 27 Overtrading 401 P Payables payment period 597 Permanent differences 317 Physical capital maintenance 149 Preference shares 217 Price earnings ratio 357 Prior period errors 162 Property, plant and equipment 24 Proposed dividends 300 Provisions 286 Prudence 36 Public sector entities 615 Q Qualitative characteristics 123 Quick ratio 593 R Ratio analysis 581 Receivables collection period 596 Recoverable amount 77 Relevance 123 Replacement cost 143 Research costs 66 Restructuring 294 Return on capital employed (ROCE) 588 Revaluations 30 Revenue grants 37 Revenue recognition 246 Rights issue 347 KAPLAN PUBLISHING Index S Sale and leaseback 188 Sale and repurchase 255 Share exchange 459 Significant influence 540 Statement of cash flow 373 Statement of changes in equity Statement of financial position Statement of profit or loss… Statement of profit or loss and other comprehensive income Subsidiary 432 Substance over form 182 T Taxation 313 Tax losses 321 Temporary differences 321 Timeliness 126 U Understandability 126 Unrealised profit 471 V Value in use 77 Verifiability 126 W Warranties 302 Warrants 351 Window dressing 611 KAPLAN PUBLISHING I.3 Index I.4 KAPLAN PUBLISHING ... Detailed study guide and syllabus objectives (2) Description of the examination (3) Study skills and revision guidance (4) Complete text or essential text (5) Question practice The sections on the study guide, the syllabus objectives, the examination ... are designed to familiarise you with the nature and content of the examination and give you tips on how to best to approach your learning. The complete text or essential text comprises the main learning materials and gives guidance as to the importance of topics and where ... If you are subscribed to our online resources you will find: (1) Online referenceware: reproduces your Complete or Essential Text on line, giving you anytime, anywhere access (2) Online testing: provides you with additional online objective testing so