ACCA APPROVED CONTENT PROVIDER ACCA Passcards Paper F7 Financial Reporting Passcards for exams from September 2015 – 31 August 2016 ACF7(INT)PC15.indd 23/03/2015 11:30 (000)ACF7PC14_FP_Ricoh.qxp 3/25/2015 1:08 PM Page i Fundamentals Paper F7 Financial Reporting (000)ACF7PC14_FP_Ricoh.qxp 3/25/2015 1:08 PM First edition 2007, Ninth edition Apr il 2015 ISBN 9781 4727 2702 e ISBN 9781 4727 2767 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Published by BPP Learning Media Ltd BPP House, Aldine Place 142-144 Uxbridge Road London W12 8AA www.bpp.com/learningmedia Printed in the UK by RICOH UK Limited Unit Wells Place Merstham RH1 3LG Your learning materials, published by BPP Learning Media Ltd, are printed on paper obtained from traceable sustainable sources Page ii 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 BPP Learning Media Ltd © BPP Learning Media Ltd 2015 (000)ACF7PC14_FP_Ricoh.qxp 3/25/2015 1:08 PM Page iii Preface Contents Welcome to BPP Learning Media's ACCA Passcards for Paper F7 Financial Reporting They focus on your exam and save you time They incorporate diagrams to kick start your memory They follow the overall structure of the BPP Learning Media Study Texts, but BPP Learning Media's ACCA Passcards are not just a condensed book Each card has been separately designed for clear presentation Topics are self contained and can be g rasped visually ACCA Passcards are still just the right size for pockets, briefcases and bags Run through the Passcards as often as you can during your final revision period The day before the exam, try to go through the Passcards again! You will then be well on your way to passing your exams Good luck! Page iii (000)ACF7PC14_FP_Ricoh.qxp 3/25/2015 1:08 PM Page iv Preface 10 11 12 The conceptual framework The regulatory framework Tangible non-current assets Intangible assets Impairment of assets Revenue Introduction to groups The consolidated statement of financial position The consolidated statement of profit or loss and other comprehensive income Accounting for associates Financial instruments Leasing Page 13 19 25 33 41 45 55 61 63 79 13 14 15 16 17 18 19 20 21 22 23 Contents Page Provisions and events after the reporting period 79 Inventories and biological assets 83 Taxation 87 Presentation of published financial statements 93 Reporting financial performance 99 Earnings per share 107 Calculation and interpretation of accounting ratios and trends 111 Limitations of financial statements and interpretation techniques 117 Statements of cash flows 121 Accounting for inflation 127 Not-for-profit and public sector entities 131 (001)ACF7PC14_CH01.qxp 3/25/2015 10:07 AM Page 1: The conceptual framework Topic List Conceptual framework GAAP Objectives: assumptions Qualitative characteristics Elements Capital maintenance The IASB's Framework for the Preparation and Presentation of Financial Statements has now been replaced by the Conceptual Framework for Financial Reporting (001)ACF7PC14_CH01.qxp Conceptual framework 3/25/2015 GAAP 10:07 AM Objectives: assumptions Page Qualitative characteristics Elements Capital maintenance Conceptual framework – a statement of generally accepted theoretical principles which form the frame of reference for financial reporting Advantages Avoids 'patchwork' or firefighting approach Less open to criticism of political/external pressure Some standards may concentrate on the income statement, others on the balance sheet Disadvantages Financial statements are intended for a variety of users – single framework may not suit all May need different standards for different purposes Preparing and implementing standards is still difficult with a framework (001)ACF7PC14_CH01.qxp Conceptual framework 3/25/2015 GAAP 10:07 AM Objectives: assumptions Page Qualitative characteristics Elements Capital maintenance GAAP signifies all the rules, from whatever source, which govern accounting Sources for individual countries National company law National accounting standards Local stock exchange requirements IASs/IFRSs if applicable Non-mandatory sources Other countries' statutory requirements In many countries, like the UK, GAAP does not have any statutory or regulatory authority or definition GAAP is a dynamic concept Page 1: The conceptual framework (001)ACF7PC14_CH01.qxp Conceptual framework 3/25/2015 GAAP 10:07 AM Objectives: assumptions Objectives of financial statements Financial position Statement of financial position Financial performance Statement of profit or loss and other comprehensiv e income Statement of cash flows Underlying assumption Page Qualitative characteristics Elements Capital maintenance Changes in financial performance Statement of profit or loss and other comprehensiv e income Statement of cash flows Statement of changes in equity Notes to the financial statements Directors' report Going concern (001)ACF7PC14_CH01.qxp Conceptual framework 3/25/2015 GAAP 10:07 AM Page Qualitative characteristics Objectives: assumptions Elements Capital maintenance FUNDAMENTAL Faithful representation Relevance Materiality Freedom from error Neutrality Completeness ENHANCING Comparability Consistency Page Verifiability Disclosure of accounting policies Timeliness Understandability Users' knowledge 1: The conceptual framework (021)ACF7PC14_CH21.qxp 3/25/2015 1:00 PM Page 126 IAS Extra information Extra information not found in other primary statements Relationships between profit and cash shown Cash equivalents are included in cash balances, giving a better picture of the liquidity of the company Financing inflows and outflows must be shown, rather than simply passed through reser ves Workings Interpretation Examining relationships Cash flow gearing: compare operating cash flows and financing flows, particularly borrowing Operating cash flows to investment flows: match cash recovery from investment to investment Investment to distribution: indicates the proportion of total cash outflow designated specifically to investor return and reinvestment (022)ACF7PC14_CH22.qxp 3/25/2015 1:01 PM Page 127 22: Accounting for inflation Topic List There are different theories of capital maintenance Capital maintenance In the UK, when inflation was high, attempts were made to introduce a form of CCA, but companies consistently ignored it and the standard was eventually abandoned CPP/CCA Without the impetus of high inflation, there is unlik ely to be any more need to address capital maintenance issues You are unlikely to be asked anything complex in these areas; make sure you can explain the main terms (022)ACF7PC14_CH22.qxp 3/25/2015 1:01 PM Page 128 Capital maintenance CPP/CCA Financial capital maintenance Operating capital maintenance Under historical cost accounting (HCA), the amount maintained is the capital sum put into the b usiness by the owner Capital is looked at as the capacity to maintain a level of assets, alternatively referred to as the physical capacity capital maintenance concept , or the entity concept By using replacement cost for our cost of sales we will set aside enough cash to b uy replacement assets Focusing on the equity ownership of the entity is often referred to as the proprietary concept of capital : if we pay all profits out as dividends and inflation exists then in future our business will gradually run down, as our cash will become insufficient to b uy replacement inventory (022)ACF7PC14_CH22.qxp 3/25/2015 1:01 PM Page 129 CPP/CCA Capital maintenance Current purchasing power (CPP) Current cost accounting (CCA) The idea behind CPP accounting is that all accounts items are restated in ter ms of a stable monetary unit: the $CPP CCA uses the operating capital maintenance concept The assets consumed or sold, and those in the SFP, are stated at their value to the business, the deprival value, defined as shown in the diagram adjacent Changes in purchasing power are based on the general level of inflation using the RPI CPP measures profits as the increase in the current purchasing power of equity; profits are stated after allowing for the declining purchasing power of money due to price inflation Lower of Replacement cost (RC) Net realisable value (NRV) Page 129 Higher of Economic value Depreciation is charged on non-current assets on the basis of gross replacement cost of the asset (where RC is the deprival value) Where NRV or EV is the depr ival value, the charge against CCA profits will be the loss in value of the asset during the accounting period Goods sold are charged at their replacement cost A typical set of CCA is prepared b y adjusting SFP values with a supporting current cost reserve, and taking a HC P&L and making CCA adjustments 22: Accounting for inflation (022)ACF7PC14_CH22.qxp 3/25/2015 1:01 PM Page 130 Notes (023)ACF7PC14_CH23.qxp 3/25/2015 1:05 PM Page 131 23: Not-for-profit and public sector entities Topic List Primary aims Regulatory framework Performance measurement Any questions on this will only be gener al ones (023)ACF7PC14_CH23.qxp 3/25/2015 1:05 PM Page 132 Primary aims Regulatory framework Performance measurement Primary aims Public sector entities Examples: Government departments Health services (if government funded) Education services Aims: To provide services to the public To make good use of taxpayers' funds Private sector entities Examples: Charities Aims: To provide services to beneficiaries To raise funds for this purpose (023)ACF7PC14_CH23.qxp 3/25/2015 1:05 PM Page 133 Primary aims Regulatory framework Performance measurement Regulatory framework Public sector International Public Sector Accounting Standards (IPSASs), based on IFRS Private sector Regulated nationally eg by Charities Commission in UK Statement of Recommended Practice (SORP) 2005 Charities must use accruals basis (unless revenue below £100,000 p.a.) and apply UK standards In other countries, requirements will be different Page 133 23: Not-for-profit and public sector entities (023)ACF7PC14_CH23.qxp 3/25/2015 1:05 PM Page 134 Primary aims Regulatory framework Performance measurement Performance measurement Not judged by bottom line profit but must show that they have managed their funds properly Performance measured in terms of achievement of stated purpose Possible performance measures are: 3Es – Economy, Efficiency, Effectiveness KPIs – Key performance indicators – specific to that organisation VFM – Value for money – and best value for outside services Impact report – produced by some charities to show measure of achievement – what impact did they have? (023)ACF7PC14_CH23.qxp 3/25/2015 1:05 PM Page 135 Notes (023)ACF7PC14_CH23.qxp 3/25/2015 1:05 PM Page 136 Notes (023)ACF7PC14_CH23.qxp 3/25/2015 1:05 PM Page 137 Notes (023)ACF7PC14_CH23.qxp 3/25/2015 1:05 PM Page 138 Notes (023)ACF7PC14_CH23.qxp 3/25/2015 1:05 PM Page 139 Notes (023)ACF7PC14_CH23.qxp 3/25/2015 1:05 PM Page 140 Notes ... permission of BPP Learning Media Ltd © BPP Learning Media Ltd 2015 (000)ACF7PC14_FP_Ricoh.qxp 3/25/2015 1:08 PM Page iii Preface Contents Welcome to BPP Learning Media's ACCA Passcards for Paper F7 Financial... kick start your memory They follow the overall structure of the BPP Learning Media Study Texts, but BPP Learning Media's ACCA Passcards are not just a condensed book Each card has been separately...(000)ACF7PC14_FP_Ricoh.qxp 3/25/2015 1:08 PM Page i Fundamentals Paper F7 Financial Reporting (000)ACF7PC14_FP_Ricoh.qxp 3/25/2015 1:08 PM First edition