CIMA OFFICIAL REVISION CARDS OPERATIONAL LEVEL SUBJECT F1 Financial Reporting and Taxation FINANCIAL REPORTING AND TAXATION British library cataloguing-in-publication data A catalogue record for this book is available from the British Library Published by:Kaplan Publishing UK Unit The Business Centre Molly Millars Lane Wokingham Berkshire RG41 2QZ ISBN 978-1-78415-947-4 © Kaplan Financial Limited, 2017 Printed and bound in Great Britain 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, all other Kaplan group companies, the International Accounting Standards Board, and the IFRS Foundation 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 Printed and bound in Great Britain FINANCIAL REPORTING AND TAXATION Acknowledgements This Product includes propriety content of the International Accounting Standards Board which is overseen by the IFRS Foundation, and is used with the express permission of the IFRS Foundation under licence 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 prior written permission of Kaplan Publishing and the IFRS Foundation Trade Marks The IFRS Foundation logo, the IASB logo, the IFRS for SMEs logo, the “Hexagon Device”, “IFRS Foundation”, “eIFRS”, “IAS”, “IASB”, “IFRS for SMEs”, “IFRS”, “IASs”, “IFRSs”, “International Accounting Standards” and “International Financial Reporting Standards”, “IFRIC” and “IFRS Taxonomy” are Trade Marks of the IFRS Foundation This product contains material that is ©Financial Reporting Council Ltd (FRC) Adapted and reproduced with the kind permission of the Financial Reporting Council All rights reserved For further information, please visit www.frc.org.uk or call +44 (0)20 7492 2300 The IFRS Foundation logo, the IASB logo, the IFRS for SMEs logo, the “Hexagon Device”, “IFRS Foundation”, “eIFRS”, “IAS”, “IASB”, “IFRS for SMEs”, “NIIF” IASs” “IFRS”, “IFRSs”, “International Accounting Standards”, “International Financial Reporting Standards”, “IFRIC”, “SIC” and “IFRS Taxonomy” Further details of the Trade Marks including details of countries where the Trade Marks are registered or applied for are available from the Foundation on request FINANCIAL REPORTING AND TAXATION How to use Revision Cards The concept •• Revision Cards are a new and different way of learning, based upon research into learning styles and effective recall •• The cards are in full colour and have text supported by a range of images, making them far more effective for visual learners and easier to remember •• Unlike a bound text, Revision Cards can be rearranged and reorganised to appeal to kinaesthetic learners who prefer to learn by doing •• B eing small enough to carry around means that you can take them anywhere This gives the opportunity to keep going over what you need to learn and so helps with recall •• The content has been reduced down to the most important areas, making it far easier to digest and identify the relationships between key topics •• Revision Cards, however you learn, whoever you are, wherever you are FINANCIAL REPORTING AND TAXATION How to use them Revision Cards are a pack of approximately 52 cards, slightly bigger than traditional playing cards but still very easy to carry and so convenient to use when travelling or moving around They can be used during the tuition period or at revision They are broken up into sections •• An overview of the entire subject in a mind map form (orange) •• A mind map of each specific topic (blue) •• Content for each topic presented so that it is memorable (green) Each one is a different colour, allowing you to sort them in many ways •• Perhaps you want to get a more detailed feel for each topic, why not take all the green cards out of the pack and use those •• You could create your own mind maps using the blue cards to explore how different topics fit together •• And if there are some topics that you understand, take those out of the pack, leaving yourself only the ones you need to concentrate on There are just so many ways you can use them FINANCIAL REPORTING AND TAXATION Contents Fundamentals of Business Taxation Regulatory Environment for Financial Reporting and Corporate Governance Single Entity Financial Statements Accounting Standards Consolidated Financial Statements Short-Term Finance and Investments Working Capital Management Working Capital Management – Receivables and Payables Working Capital Management – Inventory Control 10 Working Capital Management – Cash Control Examinable legislation http://www.cimaglobal.com/Students/2010-professional-qualification/Operational-level/F1-study-resources/ FINANCIAL REPORTING AND TAXATION Assessment guidance The assessment will involve 60 objective testing questions in a one and a half hour period covering all of the syllabus learning outcomes The pass rate is 70% Core areas of the syllabus The syllabus comprises of: A Regulatory Environment for Financial Reporting and Corporate Governance – 10% B Financial Accounting and Reporting – 45% C Management of Working Capital, Cash and Sources of Short-Term Finance – 20% D Fundamentals of Business Taxation – 25% Quality and accuracy are of the utmost importance to us so if you spot an error in any of our products, please send an email to mykaplanreporting@kaplan.com with full details, or follow the link to the feedback form in MyKaplan Our Quality Co-ordinator will work with our technical team to verify the error and take action to ensure it is corrected in future editions RevisionCards Overview financial reporting and taxation RevisionCards FINANCIAL REPORTING AND TAXATION Regulatory environment for financial reporting and corporate governance Financial accounting & reporting 10 Fundamentals of business taxation Financial reporting and taxation Management of working capital, cash and sources of the short-term finance Fundamentals of business taxation financial reporting and taxation RevisionCards FINANCIAL REPORTING AND TAXATION – Fundamentals of Business Taxation Change to International tax Accounting for taxation FOREIGN / OVERSEAS Definitions Direct tax Trading income Fundamentals of business tax Employment tax Capital taxes Indirect tax Consumption tax 12 Misc taxes FINANCIAL REPORTING AND TAXATION – Fundamentals of Business Taxation Trading losses Carry loss forward against income of the same trade Carry loss back Capital losses Carry loss forward against future capital gains DIRECT TAX – imposed directly on a person/enterprise Trading Income – Profit NetProfit Profit Net Disallowable Income 13 Expenses Depreciation Tax depreciation Capital Taxes – Sell assets e.g Shares Allowable expenses e.g Capital cost, costs to buy, improvements Proceeds less cost FINANCIAL REPORTING AND TAXATION – Fundamentals of Business Taxation Trading Income – Proforma Capital Taxes – Proforma $ $ Accounting profit X Proceeds X (X) Add back: disallowable expenses X Less: costs to sell Less: cost to buy (X) Less: disallowable income (X) Less: original cost (X) Add: depreciation X (X) Less: tax depreciation (X) Less: enhancements X Taxable profit X Compensation for inflation (% X cost) (X) Taxable gain X THIS IS A LEARN, COVER, PRACTICE THIS IS A LEARN, COVER, PRACTICE PROFORMA! PROFORMA! The taxable profit will then be charged The taxable gain will then be charged at at the appropriate tax rate for that the appropriate tax rate for accounting period that accounting period 14 FINANCIAL REPORTING AND TAXATION – Fundamentals of Business Taxation INDIRECT TAX – imposed on one part of the economy with the intention to pass onto another Consumption Taxes Property Taxes Multi Stage Wealth Taxes Tax at each stage of production Excise Duties Exempt supplies Taxable supplies Standard rate Cascade Tax VAT Single stage Tax at one stage of production 15 No Refunds Refunds Zero rate Outputs less inputs FINANCIAL REPORTING AND TAXATION – Fundamentals of Business Taxation Personal allowances – amount of tax relief PAYE – Tax deducted at source by employer Employment Tax Income – Salary, bonus, benefits 16 Expenses – Subscriptions to professional bodies, occupational pension schemes, business expenses FINANCIAL REPORTING AND TAXATION – Fundamentals of Business Taxation OECD Model Residency – country of incorporation or control Tax gross income in country of residency International Tax FOREIGN / OVERSEAS Gross income = amount received + total foreign income Tax relief in country of residency (if tax treaty exists) Total foreign tax Deduction method Withholding tax Tax at source Underlying tax Tax on profits used to distribute a dividend 17 Types of operation Branch Subsidiary Double tax relief: Exemption method Tax credit method FINANCIAL REPORTING AND TAXATION – Fundamentals of Business Taxation Payment made greater than last years liability – add to current tax estimate Payment made less than last year’s liability – deduct from current tax expense Under provision Over-provision Under/over provisions Dr tax expense (SPL) Cr tax liability (SOFP) Accounting for tax SOFP Disclosures Current liability SPL Current tax estimate (SOFP) X Under provisions X Over-provisions (X) Tax expense for the year X 18 Current tax estimate FINANCIAL REPORTING AND TAXATION – Fundamentals of Business Taxation Current tax This is the estimated amount of taxation payable on the taxable profits for the period: $ Accounting profit X Add back: disallowable expenses X Less: disallowable income (X) Add: depreciation X Less: tax depreciation (X) _ Taxable profit X THIS IS A LEARN, COVER, PRACTICE PROFORMA! 19 The taxable profit will then be charged at the appropriate tax rate for that accounting period This is recorded as: Dr Income tax expense (SPL) Cr Income tax liability (SOFP) The income tax liability is always shown under current liabilities on the SOFP and the liability should always represent this year’s estimate for taxation FINANCIAL REPORTING AND TAXATION – Fundamentals of Business Taxation Under/over-provisions In the following period the income tax will be paid but it is unlikely that the exact amount provided for will be the same as the amount paid This will result in an under/over-provision This must be adjusted for in the current accounting period Under-provision = more tax is paid than provided for in the previous accounting period E.g Liability $20,000 and a payment of $21,000 will result in a debit balance in the trial balance on the tax account This under provision must be added to the current tax expense in the SPL REMEMBER + 20 Over-provision = less tax is paid than provided for in the previous accounting period E.g Liability $20,000 and a payment of $19,000 will result in a credit balance in the trial balance on the tax account This under provision must be deducted from the current tax expense in the SPL REMEMBER – FINANCIAL REPORTING AND TAXATION – Fundamentals of Business Taxation Definitions Incidence The incidence of a tax is the distribution of the tax burden and can be split into formal and actual incidence Formal incidence This is the person who has direct contact with the tax authorities, i.e who is legally obliged to pay the tax Actual incidence This is the person who actually ends up bearing the cost of the tax Taxable person The person accountable for the tax payment, e.g Individual or company 21 Competent jurisdiction A taxable person normally pays tax in the country of origin Competent jurisdiction is the tax authority that has the legal powers to assess and collect the taxes Hypothecation This means that certain taxes are devoted entirely to certain types of expenditure, e.g road tax is used entirely on maintaining roads Progressive taxes These take an increased proportion of income as income rises FINANCIAL REPORTING AND TAXATION – Fundamentals of Business Taxation Proportional taxes – These take the same proportion of tax as income rises Withholding tax – This is a tax deducted at source from foreign income Regressive taxes – These take a decreasing proportion of tax as income rises Underlying tax – This is the tax on foreign profits that are used to distribute a dividend Tax consolidation – This is a type of group relief enabling trading losses to be surrendered between different companies Current tax – The estimated amount of tax payable on the taxable profits of the entity for the period Excise duties – This is a tax imposed on certain products to discourage over consumption of harmful products, to pay for extra costs (such as increased healthcare) and to tax luxuries, hence raise more revenue for the government Taxable profit – This is the profit on which taxation authorites base their tax calculations Consumption taxes – This is a tax imposed on the consumption of goods and added to the purchase price 22 Accounting profit – This is the profit before tax reported to the shareholders in the financial statements THESE ARE ALL LEARN, COVER, PRACTICE DEFINITIONS! ... for financial reporting and corporate governance Financial accounting & reporting 10 Fundamentals of business taxation Financial reporting and taxation Management of working capital, cash and. .. of business taxation financial reporting and taxation RevisionCards FINANCIAL REPORTING AND TAXATION – Fundamentals of Business Taxation Change to International tax Accounting for taxation FOREIGN... can use them FINANCIAL REPORTING AND TAXATION Contents Fundamentals of Business Taxation Regulatory Environment for Financial Reporting and Corporate Governance Single Entity Financial Statements