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 Introduction to published accounts Alternative presentation Statement of profit or loss plus statement of comprehensive income A recommended format for the statement of profit or loss is as follows: XYZ Statement of profit or loss for the year ended 31 December 20X2 Revenue Cost of sales Gross profit Distribution costs Administrative expenses Profit from operations Finance costs Investment income Profit before tax Income tax expense Profit for the year $ X (X) –– X (X) (X) –– X (X) X –– X (X) –– X A recommended format for the presentation of other comprehensive income is: XYZ Statement of other comprehensive income for the year ended 31 December 20X2 Profit for the year $ X Other comprehensive income Gain/loss on property revaluation X Gain/loss on fair value through other comprehensive income financial X assets – Total comprehensive income for the year X – KAPLAN PUBLISHING chapter 2 Introduction to published accounts The following questions enable preparation of published accounts utilising knowledge gained at F3 Financial Accounting. In order to be able to complete an F7 published accounts question these basic preparation techniques must be followed and the accounting standards in chapters 2 – 14 must first be learned. Example – Published accounts The following information has been extracted from the books of Picklette for the year to 31 March 20X9. Administrative expenses Interest paid Called up share capital (ordinary shares of $1 each) Dividend Cash at bank and in hand Income tax (remaining balance from previous year) Warranty provision Distribution costs Land and buildings: at cost (Land $110,000, Buildings $100,000) accumulated depreciation (at 1 April 20X8) Plant and machinery: at cost accumulated depreciation (at 1 April 20X8) Retained earnings (at 1 April 20X8) 10% Loan (issued in 20X7) Purchases Sales Inventory (at 1 April 20X8) Trade payables Trade receivables KAPLAN PUBLISHING Dr $000 170 5 Cr $000 200 6 9 10 90 240 210 48 125 75 270 80 470 1,300 150 60 728 ––––– 2,123 ––––– ––––– 2,123 ––––– Introduction to published accounts Additional information (1) Inventory at 31 March 20X9 was valued at $250,000 (2) Buildings and plant and machinery are depreciated on a straight line basis (assuming no residual value) at the following rates: On cost: Buildings Plant and machinery 5% 20% (3) There were no purchases or sales of noncurrent assets during the year to 31 March 20X9 (4) The depreciation charges for the year to 31 March 20X9 are to be apportioned as follows: Cost of sales Distribution costs Administrative expenses 60% 20% 20% (6) Income taxes for the year to 31 March 20X9 (at a rate of 30%) are estimated to be $135,000 (7) The loan is repayable in five years (8) The year end provision for warranty claims has been estimated at £75,000. Warranty costs are charged to administrative expenses Required: Prepare Picklette plc’s statement of profit or loss for the year to 31 March 20X9 and a statement of financial position as at that date Solution Picklette statement of profit or loss Revenue Cost of sales (470 + 150 – 250 + (60% × 30)) Gross profit Distribution ((20% × 30) + 240) Administration ((20% × 30) + 170 – 15) 10 $000 1,300 (388) ––––– 912 (246) (161) ––––– KAPLAN PUBLISHING chapter Profit from operations Finance costs (80 × 10%) 505 (8) ––––– 497 (145) ––––– 352 ––––– Profit before tax Income Tax (135 + 10) Profit for the year Statement of financial position Noncurrent assets Tangible (W1) Current assets Inventory Receivables Bank $000 $000 182 250 728 9 ––––– 987 ––––– 1,169 ––––– Share capital Retained earnings (W2) 200 616 ––––– 816 Noncurrent liabilities Loan Provision for warranties Current liabilities (60 + 135 + (3 accrued interest)) 80 75 ––––– 155 198 ––––– 1,169 ––––– KAPLAN PUBLISHING 11 Introduction to published accounts Working 1 Cost b/f Depreciation b/f Charge c/f Carrying amount c/f Land and buildings $000 Plant and machinery $000 Total 210 –––– 125 –––– 335 –––– 48 5 –––– 53 –––– 75 25 –––– 100 –––– 123 30 –––– 153 –––– 157 –––– 25 –––– 182 –––– $000 Working 2 Profit for the year Dividends Retained earnings b/f Retained earnings c/f 12 $000 352 (6) –––– 346 270 –––– 616 –––– KAPLAN PUBLISHING chapter Test your understanding The following trial balance has been extracted from the books of Arran as at 31 March 20X7: Administration expenses Distribution costs Share capital (all ordinary shares of $1 each) Share premium Revaluation surplus Dividend paid Cash at bank and in hand Receivables Interest paid Dividends received Interest received Land and buildings at cost (land 380, buildings 100) Land and buildings: accumulated depreciation Plant and machinery at cost Plant and machinery: accumulated depreciation Retained earnings account (at 1 April 20X6) Purchases Sales Inventory at 1 April 20X6 Trade payables Bank loan KAPLAN PUBLISHING $000 $000 250 295 270 80 20 27 3 233 25 15 1 480 30 400 170 235 1,260 2,165 140 27 100 ––––– ––––– 3,113 3,113 ––––– ––––– 13 Introduction to published accounts Additional information (1) Inventory at 31 March 20X7 was valued at a cost of $95,000. Included in this balance were goods that had cost $15,000. These goods had become damaged during the year and it is considered that following remedial work the goods could be sold for $5,000 (2) Depreciation for the year to 31 March 20X7 is to be charged against cost of sales as follows: Buildings 5% on cost (straight line) Plant and machinery 30% on carrying amount (reducing balance) (3) Income tax of $165,000 is to be provided for the year to 31 March 20X7 (4) Land is to be revalued upwards by $100,000 Prepare the statement of profit or loss and other comprehensive income, statement of changes in equity and statement of financial position for year ended 31 March 20X7. Note: Show all workings but notes are not required. 3 Notforprofit and public sector entities Notforprofit and public sector entities Comparison of aims The main aims of notforprofit and public sector entities are very different to those of profitorientated entities: Profitorientated sector Notforprofit/public sector Financial aim is to make profit Financial aim is to achieve value for and increase shareholder money/provide service. wealth. Managers are accountable to Directors are accountable to trustees/government/public. shareholders. Finance limited to donations/ External finance freely available government subsidies. in the form of loans and share capital. 14 KAPLAN PUBLISHING chapter Accounting standards and notforprofit and public sector entities Accounting standards are designed to: • • • measure financial performance accurately and consistently report the financial position accurately and consistently account for the directors' stewardship of the resources and assets Notforprofit and public sector organisations: • do not aim to achieve a profit but will have to account for their income and costs • • will have to account for their effectiveness, economy and efficiency do not have to produce financial statements for the public (but in many cases may do so) Some measurement accounting standards will be relevant such as those relating to inventory, noncurrent assets, leasing, etc. Others relating purely to reporting such as earnings per share (EPS) will not be so relevant. KAPLAN PUBLISHING 15 Introduction to published accounts Chapter summary 16 KAPLAN PUBLISHING chapter Test your understanding The following trial balance relates to P at 31 March 20X1: Revenue Cost of sales Dividends received Administration expenses Distribution costs Interest paid Prepayments Dividends paid Property, plant and equipment Shortterm investments Inventory at 31 March 20X1 Trade receivables Cash and cash equivalents Trade payables Longterm loans (repayable 20X9) Share capital Share premium Retained earnings at 31 March 20X0 Dr $000 1,350 490 370 190 25 390 4,250 2,700 114 418 12 –––––––– 10,309 –––––––– Cr $000 5,300 210 136 1,200 1,500 800 1,163 –––––––– 10,309 –––––––– The following information should also be taken into account: (1) The tax charge for the year has been estimated at $470,000. (2) The directors declared a final dividend of $270,000 on 3 April 20X1 Required: Prepare, in a form suitable for publication, the statement of profit or loss and other comprehensive income, statement of financial position and statement of changes in equity for the year ended 31 March 20X1. KAPLAN PUBLISHING 17 Introduction to published accounts Test your understanding answers Test your understanding Statement of profit or loss and other comprehensive income for the year ended 31 March 20X7 Revenue Cost of sales (W1) Gross profit Administration Distribution Operating profit Finance cost Interest receivable Investment income Profit before tax Income tax expense Profit for the year $000 2,165 (1,389) –––––– 776 (250) (295) –––––– 231 (25) 1 15 –––––– 222 (165) –––––– 57 –––––– Other comprehensive income Gain on land revaluation Total comprehensive income for the year 18 100 –––––– 157 –––––– KAPLAN PUBLISHING chapter Statement of changes in equity B/f Total comprehensive income for the year Dividends C/f Share Share Revaluation Retained Total capital premium surplus earnings equity $000 $000 $000 $000 $000 270 80 20 235 605 100 57 157 ––– 270 ––– 80 ––– 120 (27) ––– 265 (27) ––– 735 Statement of financial position as at 31 March 20X7 $000 Noncurrent assets: Property, plant and equipment (W2) Current assets: Inventory Receivables Bank Share capital (from SOCIE) Share premium (from SOCIE) Revaluation surplus (from SOCIE) Retained earnings (from SOCIE) Noncurrent liabilities Current liabilities Tax liability KAPLAN PUBLISHING 706 85 233 3 –––– 321 –––– 1,027 –––– 270 80 120 265 –––– 735 100 27 165 –––– 1,027 –––– 19 Introduction to published accounts Workings (W1) Cost of sales Opening inventory Purchases Closing inventory (95 – 10) Depreciation (5% × 100) + (400 – 170) × 30% Total $ 140 1,260 (85) 74 ––––– 1,389 ––––– (W2) Property, plant and equipment Carrying amount b/f Revaluation Depreciation charge Carrying amount c/f 20 Land and Plant and Total buildings machinery $000 $000 $000 450 230 680 100 100 (5) (69) (74) ––––– ––––– –––– 545 161 706 KAPLAN PUBLISHING chapter Test your understanding P Ltd Statement of profit or loss and other comprehensive income for the year ended 31 March 20X1 Revenue Cost of Sales Gross profit Distribution costs Administration expenses Profit from operations Income from investments Finance cost Profit before tax Income tax expense Profit for period Other comprehensive income $000 5,300 (1,350) ––––– 3,950 (370) (490) ––––– 3,090 210 (190) ––––– 3,110 (470) ––––– 2,640 – ––––– 2,640 ––––– Total comprehensive income for the period P Ltd Statement of changes in equity for the year ended 31 March 20X1 Share Share Retained Total capital premium earnings Balance at 1 April 20X0 Total comprehensive income Dividends Balance at 31 March 20X1 $ $ $ $ 1,500 800 1,163 3,463 2,640 2,640 ––––––– ––––––– (390) (390) ––––––– ––––––– 1,500 ––––––– 800 ––––––– 3,413 5,713 ––––––– ––––––– Note: Dividends declared after the year end will not be adjusted for. KAPLAN PUBLISHING 21 Introduction to published accounts P Ltd Statement of financial position as at 31 March 20X1 Noncurrent assets $000 $000 4,250 Inventories 114 Trade receivables 418 Property, plant and equipment Current assets Prepayments Investments Cash and cash equivalents 2,700 12 –––––– 3,269 ––––––– Total assets Equity and liabilities 7,519 ––––––– Capital and reserves 1,500 800 3,413 –––––– 5,713 Longterm loans Current liabilities 1,200 Trade payables 136 470 –––––– Total equity and liabilities Issued ordinary share capital Share premium Retained earnings Noncurrent liabilities Income tax 22 25 606 ––––––– 7,519 ––––––– KAPLAN PUBLISHING ... 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, ... Explain the need for an accounting standard on financial instruments [1] Ch 10 (b) Define financial instruments in terms of financial assets and financial liabilities.[1] Ch 10 (c) Explain and account for the factoring of receivables.[1]... 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.