S T U D Y OPERATIONAL PAPER F1 FINANCIAL OPERATIONS Our text is designed to help you study effectively and efficiently In this edition we: Highlight the most important elements in the syllabus and the key skills you will need Signpost how each chapter links to the syllabus and the learning outcomes Provide lots of exam alerts explaining how what you're learning may be tested Include examples and questions to help you apply what you've learnt Emphasise key points in section summaries Test your knowledge of what you've studied in quick quizzes Examine your understanding in our exam question bank Reference all the important topics in the full index SUITABLE FOR EXAMS UP TO NOVEMBER 2014 T E X T ii First edition 2009 Fifth edition 2013 ISBN 9781 4453 7129 (Previous ISBN 9781 4453 9605 7) e-ISBN 9781 4453 7174 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 United Kingdom by Polestar Wheatons Hennock Road Marsh Barton Exeter EX2 8RP Your learning materials, published by BPP Learning Media Ltd, are printed on paper sourced from sustainable, managed forests 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 The contents of this book are intended as a guide and not professional advice Although every effort has been made to ensure that the contents of this book are correct at the time of going to press, BPP Learning Media makes no warranty that the information in this book is accurate or complete and accept no liability for any loss or damage suffered by any person acting or refraining from acting as a result of the material in this book We are grateful to the Chartered Institute of Management Accountants for permission to reproduce past examination questions The suggested solutions in the exam answer bank have been prepared by BPP Learning Media Ltd © BPP Learning Media Ltd 2013 A note about copyright Dear Customer What does the little © mean and why does it matter? 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BPP Learning Media strives to make our materials available at prices students can afford by local printing arrangements, pricing policies and partnerships which are clearly listed on our website A tiny minority ignore this and indulge in criminal activity by illegally photocopying our material or supporting organisations that If they act illegally and unethically in one area, can you really trust them? iii Contents Page Introduction How our Study Text can help you pass Features in our Study Text Streamlined studying Syllabus and learning outcomes Studying F1 The exam paper iv v vi vii xiv xvii Part A Regulation and ethics of financial reporting The regulatory framework External audit Ethics 31 51 Part B Single company financial accounts 10 11 12 Presentation of published financial statements Reporting financial performance Accounting for non-current assets Intangible non-current assets IAS 17: Leases Statements of cash flows Miscellaneous standards Inventories and construction contracts Capital transactions and financial instruments 69 95 115 141 159 175 195 213 237 Part C Group financial statements 13 14 15 16 Introduction to group accounting Consolidated statement of financial position Consolidated statement of profit or loss and other comprehensive income Associates 265 273 299 311 Part D Principles of business taxation 17 18 19 General principles of taxation Types of taxation IAS 12: Income taxes Appendix: Mathematical tables and exam formulae Objective test question and answer bank Exam question and answer bank Index Review form 325 335 367 383 387 401 437 iv INTRODUCTION How our Study Text can help you pass Streamlined studying Exam expertise Regular review We show you the best ways to study efficiently Our Text has been designed to ensure you can easily and quickly navigate through it The different features in our Text emphasise important knowledge and techniques Studying F1 on page xiv introduces the key themes of the syllabus and summarises how to pass We highlight throughout our Text how topics may be tested and what you’ll have to in the exam We help you see the complete picture of the syllabus, so that you can answer questions that range across the whole syllabus Our Text covers the syllabus content – no more, no less We frequently summarise the key knowledge you need We test what you’ve learnt by providing questions and quizzes throughout our Text Our other products BPP Learning Media also offers these products for the F1 exam: Practice and Revision Kit Providing lots more question practice and helpful guidance on how to pass the exam Passcards Summarising what you should know in visual, easy to remember, form Success CDs Covering the vital elements of the F1 syllabus in less than 90 minutes and also containing exam hints to help you fine tune your strategy i-Pass Providing computer-based testing in a variety of formats, ideal for self-assessment Interactive Passcards Allowing you to learn actively with a clear visual format summarising what you must know You can purchase these products by visiting www.bpp.com/cimamaterials CIMA Distance Learning BPP's distance learning packages provide flexibility and convenience, allowing you to study effectively, at a pace that suits you, where and when you choose There are four great distance learning packages available Online classroom live Through live interactive online sessions it provides you with the traditional structure and support of classroom learning, but with the convenience of attending classes wherever you are Online classroom Through pre-recorded online lectures it provides you with the classroom experience via the web with the tutor guidance & support you’d expect from a face to face classroom Basics Plus A guided self study package containing a wealth of rich e-learning & physical content Basics Online A guided self study package containing a wealth of rich e-learning content You can find out more about these packages by visiting www.bpp.com/cimadistancelearning INTRODUCTION Features in our Study Text Section Introductions explain how the section fits into the chapter Key Terms are the core vocabulary you need to learn KEY TERM Key Points are points that you have to know, ideas or calculations that will be the foundations of your answers KEY POINT Exam Alerts show you how subjects are likely to be tested Exam Skills are the key skills you will need to demonstrate in the exam, linked to question requirements Formulae To Learn are formulae you must remember in the exam Exam Formulae are formulae you will be given in the exam Examples show how theory is put into practice Questions give you the practice you need to test your understanding of what you’ve learnt Case Studies link what you’ve learnt with the real-world business environment CASE STUDY Links show how the syllabus overlaps with other parts of the qualification, including Knowledge Brought Forward that you need to remember from previous exams Website References link to material that will enhance your understanding of what you’re studying Further Reading will give you a wider perspective on the subjects you’re covering Section Summaries allow you to review each section v vi INTRODUCTION Streamlined studying What you should In order to Read the Chapter and Section Introductions See why topics need to be studied and map your way through the chapter Go quickly through the explanations Gain the depth of knowledge and understanding that you'll need Highlight the Key Points, Key Terms and Formulae To Learn Make sure you know the basics that you can't without in the exam Focus on the Exam Skills and Exam Alerts Know how you'll be tested and what you'll have to Work through the Examples and Case Studies See how what you've learnt applies in practice Prepare Answers to the Questions See if you can apply what you've learnt in practice Revisit the Section Summaries in the Chapter Roundup Remind you of, and reinforce, what you've learnt Answer the Quick Quiz Find out if there are any gaps in your knowledge Answer the Question(s) in the Exam Question Bank Practise what you've learnt in depth Should I take notes? Brief notes may help you remember what you’re learning You should use the notes format that’s most helpful to you (lists, diagrams, mindmaps) Further help BPP Learning Media’s Learning to Learn Accountancy provides lots more helpful guidance on studying It is designed to be used both at the outset of your CIMA studies and throughout the process of learning accountancy It can help you focus your studies on the subject and exam, enabling you to acquire knowledge, practise and revise efficiently and effectively INTRODUCTION Syllabus and learning outcomes Paper F1 Financial Operations The syllabus comprises: Topic and Study Weighting A B C Principles of Business Taxation Regulation and Ethics of Financial Reporting Financial Accounting and Reporting 25% 15% 60% Learning Outcomes Lead Component A Principles of business taxation (25%) Explain the types of tax that can apply to incorporated businesses, their principles and potential administrative requirements (a) Identify the principal types of taxation likely to be of relevance to an incorporated business in a particular country; (b) Describe the features of the principal types of taxation likely to be of relevance to an incorporated business in a particular country; (c) Explain key administrative requirements and the possible enquiry and investigation powers of taxing authorities associated with the principal types of taxation likely to be of relevance to an incorporated business; (d) Explain the difference in principle between tax avoidance and tax evasion; (e) Illustrate numerically the principles of different types of tax based on provided information Syllabus content (i) Concepts of direct versus indirect taxes, taxable person and competent jurisdiction (ii) Types of taxation, including direct tax on the company’s trading profits and capital gains, indirect taxes collected by the company, employee taxation and withholding taxes on international payments, and their features (eg in terms of who ultimately bears the tax cost, withholding responsibilities, principles of calculating the tax base) (iii) Sources of tax rules (eg domestic primary legislation and court rulings, practice of the relevant taxing authority, supranational bodies, such as the EU in the case of value added/sales tax, and international tax treaties) (iv) Indirect taxes collected by the company: – in the context of indirect taxes, the distinction between unit taxes (eg excise duties based on physical measures) and ad valorem taxes (eg sales tax based on value); vii viii INTRODUCTION Learning Outcomes Lead Component Syllabus content – (v) the mechanism of value added/sales taxes, in which businesses are liable for tax on their outputs less credits for tax paid on their inputs, including the concepts of exemption and variation in tax rates depending on the type of output and disallowance of input credits for exempt outputs Employee taxation: – the employee as a separate taxable person subject to a personal income tax regime; – use of employer reporting and withholding to ensure compliance and assist tax collection (vi) The need for record-keeping and record retention that may be additional to that required for financial accounting purposes (vii) The need for deadlines for reporting (filing returns) and tax payments (viii) Types of powers of tax authorities to ensure compliance with tax rules: (ix) – power to review and query filed returns; – power to request special reports or returns; – power to examine records (generally extending back some years); – powers of entry and search; – exchange of information with tax authorities in other jurisdictions The distinction between tax avoidance and tax evasion, and how these vary among jurisdictions (including the difference between the use of statutory general antiavoidance provisions and case law based regimes) INTRODUCTION Learning Outcomes Lead Explain fundamental concepts in international taxation of incorporated businesses Prepare corporate income tax calculations Component Syllabus content (a) (i) (b) (a) Identify situations in which foreign tax obligations (reporting and liability) could arise and methods for relieving foreign tax; International taxation: – the concept of corporate residence and the variation in rules for its determination across jurisdictions (eg place of incorporation versus place of management); – types of payments on which withholding tax may be required (especially interest, dividends, royalties and capital gains accruing to non-residents); – means of establishing a taxable presence in another country (local company and branch); – the effect of double tax treaties (based on the OECD Model Convention) on the above (eg reduction of withholding tax rates, provisions for defining a permanent establishment) Explain sources of tax rules and the importance of jurisdiction Prepare corporate income tax calculations based on a given simple set of rules (i) Direct taxes on company profits and gains: – the principle of nondeductibility of dividends and systems of taxation defined according to the treatment of dividends in the hands of the shareholder (eg classical, partial imputation and imputation); – the distinction between accounting and taxable profits in absolute terms (eg disallowable expenditure on revenue account, such as entertaining, and on capital account, such as formation and acquisition costs) and in terms of timing (eg deduction on a paid basis); – the concept of tax ix 424 Notes Notes 425 426 Notes Notes 427 428 Notes Notes 429 430 Notes Notes 431 432 Notes Notes 433 434 Notes Notes 435 436 Notes Review Form – Paper F1 Financial Operations (6/13) Please help us to ensure that the CIMA learning materials we produce remain as accurate and user-friendly as possible We cannot promise to answer every submission we receive, but we promise that it will be read and taken into account when we up-date this Study Text Name: Address: During the past six months you recall seeing/receiving any of the following? 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Enterprise Operations Your financial accounting studies in this paper will be useful when studying working capital and investment appraisal in P1 Performance Operations The exam paper Format of the paper. .. forward knowledge Paper F1 builds on the knowledge learned in the certificate level paper C2: Fundamentals of Financial Accounting You should make sure that you are familiar with basic financial accounting