acca f7 course note by mezbah uddin

F7 FINANCIAL REPORTING (INT)

Primary objective of this document is to help students with

regular revision. Students are strongly advised to study full

text book chapters, regularly attend class lectures and

participate in discussion sessions for better understanding.

Course Note

Prepared by:

Mezbah Uddin Ahmed,

ACCA

F7 Financial Reporting (INT)

[email protected] Page 1

Contents Exam structure ...................................................................................................................................... 2

Examiner ................................................................................................................................................ 2

Past question analysis ......................................................................................................................... 3

Course plan ........................................................................................................................................... 5

IAS 1 Presentation of Financial Statements .................................................................................... 7

IAS 16 Property, plant and equipment ............................................................................................ 13

IAS 23 Borrowing costs ..................................................................................................................... 17

IAS 40 Investment property .............................................................................................................. 20

IAS 20 Government grants ............................................................................................................... 23

IAS 38 Intangible assets ................................................................................................................... 26

IAS 36 Impairment of assets ............................................................................................................ 29

IAS 8 Accounting policies, changes in accounting estimates and errors .................................. 32

IAS 17 Leases..................................................................................................................................... 35

IAS 18 Revenue ................................................................................................................................. 40

IAS 2 Inventories ................................................................................................................................ 42

IAS 37 Provisions, contingent liabilities and contingent assets .................................................. 44

IFRS 5 Non-current assets held for sale and discontinued operations ..................................... 48

IAS 11 Construction contracts .......................................................................................................... 51

IAS 12 Income taxes .......................................................................................................................... 53

Financial instruments ......................................................................................................................... 61

Consolidated statement of financial position.................................................................................. 65

Consolidated statement of comprehensive income ...................................................................... 69

IAS 7 Statement of cash flows ......................................................................................................... 71

Ratio analysis ...................................................................................................................................... 77

IAS 33 Earnings per share ................................................................................................................ 87

Receivables factoring ........................................................................................................................ 94

IAS 10 Events after reporting period ............................................................................................... 99

Important definitions......................................................................................................................... 101



Exam structure

5 Questions

Question No. Topic Marks

1 Consolidated financial statements 25 Marks

2 Single company financial statements 25 Marks

3 Cash flow statement &/ Ratios & interpretation of financial statements

25 Marks

4 IFRS individual topic (one or two) 15 Marks

5 IFRS individual topic (one or two) 10 Marks

Examiner

The examiner is Steve Scott. Steve has many years experience in accounting lecturing at a leading

UK university. He qualified as an accountant with Stott and Golland and his background is in Audit

and Financial Reporting. He has been an ACCA examiner since 1998.



Past question analysis

FRMRK IAS 2 IAS 7 Ratios IAS 8 IAS 10 IAS 11 IAS 12

Dec '07 4 (a), 5 (a) 3 5 (b) 2 (ii)

Jun '08 4 (a) 4 (b) 3 2 (iv) 2 (v, vi)

Dec '08 3 2 (v)

Jun '09 3 3 4 2 (ii) 2 (v)

Dec '09 4 (a) 3 (a-ii) 3 (b) 2 (v)

Jun '10 4 (a) 3 3 2 (vi) 2 (v)

Dec '10 3 4 (a), 4

(b-ii) 2 (v)

Jun '11 4 (a) 3 5 2 (iv),

Dec '11 3 2 (iii) 2 (vi)

Jun '12 5 3 2 (a-iii) 2 (a-iv)

IAS 16 IAS 17 IAS 18 IAS 20 IAS 23 IAS 32 IAS 33 IAS 36

Dec '07 2 (i) 4 (b) 2 (iii)

Jun '08 2 (ii) 2 (i) 2 (iii), 3 (ii), 5

Dec '08 2 (i), 5 2 (iv) 2 (ii),

Jun '09 2 (i) 2 (i) 2 (iii) 2 (iv) 5

Dec '09 2 (vi), 3 (i) 3 (i) 2 (i) 2 (iii), (iv), 3

(iii) 5

2 (vi), 3(ii), 4 (b-iii)

Jun '10 2 (ii), 3 (i) 3 (i) 4 (b) 5 2 (i)

Dec '10 2 (iii), 4 (b-i) 2 (ii)

Jun '11 2 (iii) 2 (ii), (vi) 4

Dec '11 2 (ii) 2 (i) 2 (v)

Jun '12 2 (a-ii) 2 (a-ii) 2 (b) 4

IAS 37 IAS 38 IAS 40 IFRS 5 PASS RATE

Dec '07 5 (b) 40%

Jun '08 3 (iv) 3 (i) 33%

Dec '08 2 (iii), 4 42%

Jun '09 30%

Dec '09 1 (i), 3 (ii), 4 (b)

39%

Jun '10 2 (ii) 28%

Dec '10 2 (iii), 5 47%

Jun '11 38%

Dec '11 56%

Jun '12 48%



The secret of getting ahead is getting started. - Agatha

Christie (British Novelist)



Course plan

Class No.

Date Syllabus Area BPP Text Book Ref.

Questions to Practice

1

Introduction to F7

IAS 1 Presentation of financial statements Chapter 3

IAS 16 Property, plant and equipment Chapter 4 17-Broadoak-a, c(i), 19-Dearing

2 IAS 16 Property, plant and equipment Chapter 4 18-Elite Leisure

3 IAS 16 Property, plant and equipment Chapter 4 17-Broadoak-b, c(ii), 55-Jedders (a)

4 IAS 23 Borrowing costs Chapter 4 21-Apex

IAS 40 Investment properties Chapter 4

5 IAS 20 Government grants Chapter 4 16-Derringdo II, 96-Errsea

6

IAS 38 Intangible assets

Chapter 5 23-Dexterity, 24-Darby (except b-iii), 54-Peterlee II (a), 90-Shiplake (c)

(IFRS 3 Business combinations will cover later)

7 IAS 36 Impairment of assets Chapter 6 20-Flightline, 25-Advent, 26-Wilderness, 24-Derby (b-iii), Jun '12-Q4-Telepath

8

IAS 36 Impairment of assets Chapter 6 90-Shiplake (b, d), BPP text Q-8-Multiplex

IAS 8 Accounting policies, changes in accounting estimates and errors

Chapter 7 100-Tunshill, 22-Emerald, 30-Partway (b-i), 57-Triangle (ii)

9 IAS 17 Leases Chapter 16 60-Branch, 61-Evans,

10

IAS 17 Leases Chapter 16 62-Bowtock, 63-Fino

IAS 18 Revenue Chapter 15 27-Derringdo III, 30-Partway (b-ii), 57-Triangle (iv), 59-Wardle

11

IAS 2 Inventories Chapter 12

IAS 37 Provisions, Contingent Liabilities and Contingent Assets

Chapter 13

51-Bodyline (a, b, d), 53-Promoil, 54-Peterlee II (b), 57-Triangle (i, ii, iii), 58-Angelino (iii), 95-Atomic Power, Dec '11-Q4-Borough (a, b-i)

12

IAS 37 Provisions, Contingent Liabilities and Contingent Assets

Chapter 13 30-Partway (a)

IFRS 5 Non-current assets held for sale and discontinued operations

Chapter 7 101-Manco

13 IAS 11 Construction contracts Chapter 12 48-Preparation question; 49-Linnet, 50-Beetie, June '11-Q5-Mocca

14 IAS 12 Income taxes Chapter 17 66-Bowtock II;



* Financial reporting is a core area of ACCA study. Experience shows that students with poor F7

performance struggle in P2 & P7, and also working as professional accountant.

* Cherry picking of the syllabus areas shall never be a study strategy for ACCA.

* In most cases overlapping IAS/IFRS knowledge required to solve a problem. So, frequent revision of

previously learned IASs/IFRSs is mandatory.

15

IAS 12 Income taxes Chapter 17 64-Julian; 65-Deferred taxation

IAS 32 Financial instruments: presentation

Chapter 14 54-Peterlee II, 55-Jedders (c), 56-Pingway, Dec '11-Q5-Bertrand

IAS 39, IFRS 9 Financial instruments: recognition and measurement

IFRS 7 Financial instruments: disclosures

16

Preparing single company accountants

6-Winger (IAS 18, 17, 16, 36, 38, 12), 7-Harrington (IAS 12, 16, Fin. Inst), 8-Llama (IAS 12, 16, Fin. Inst), 9-Tadeon (12, 17, Fin. Inst.), 10-Wellmay (IAS 18, 10, 37, 16, 40, 12, Fin. Inst), 11-Dexton (IAS 18, 16, 8, 12, Fin. Inst), 12-Candel (IAS 16, 38, 37, 12, Fin. Inst), 14-Sandown (IAS 18, 12, 16, 36, 38, Fin. Inst), 29-Tourmalet (IAS 2, 12, 17, 16, 40, IFRS 5), 88-Tintagel (IAS 17, 16, 40, 18, 37, 12, Fin. Inst), 93-Kala (IAS 2, 12, 16, 40, 17), 98-Cavern (IAS 12, 16, 37, Fin. Inst.), 13-Pricewell (IAS 11, 16, 17, 18, 12, Fin. Inst), 15-Dune (IAS 16, 18, 12, 11, Fin. Inst, IFRS 5)

17

18 Consolidated Statement of Financial Position; Consolidated Statement of Comprehensive Income, IFRS 3 Business combinations, IAS 27 Consolidated and separate financial statements, IAS 28 Investment in associates

Chapter 5, 8, 9, 10, 11

All questions from Part-8, 9, 10 &11 of the BPP question bank

19

20

21 IAS 7 Statement of cash flows Chapter 21

All question from BPP question bank Part-21 22

23 Ratios Chapter 19

70-Reactive, 71-Victular, 72-Crosswire, 73-Harbin, 74-Breadline, 94-Greenwood, 99-Hardy, J-11-Bengal,

24 IAS 33 Earnings per share Chapter 18

67-Fenton, 68-Savoir, 69-Barstead, J-11-Q4-Rebound 25

26

Receivables factoring Chapter 15 55-Jedders (b), 58-Angelino (b-i), 28-Telenorth (note-c)

IAS 10 Events after reporting period

Chapter 20

FINAL MOCK - I

FINAL MOCK - II



Optimism is the faith that leads to achievement. Nothing

can be done without hope and confidence. - Helen

Keller (author, political activist, lecturer, and first deaf-blind

person to earn a Bachelor of Arts degree)



IAS 1 Presentation of Financial Statements

XYZ plc

Statement of Comprehensive Income for the year ended 31 December 20X9

Income Statement for the year ended 31 December 20X9

$’000

Revenue X

Cost of sales (X)

Gross profit X

Other income X

Distribution costs (X)

Administrative expenses (X)

Other expenses (X)

Profit/ (loss) from operations X/(X)

Finance costs (X)

Profit/ (loss) before tax X

Tax expense: Current + Deferred (X)

Profit/ (loss) for the year from continuing operations X/(X)

Profit/ (loss) for the year form discontinued operations (single amount) X/(X)

Profit/ (loss) for the year X/(X)

Earnings per share:

Basic $X

Diluted $X

$’000 $’000


Other comprehensive income:

Changes on revaluation X/(X)

Gain/ (loss) on re-measuring available for sale financial assets X/(X)

Tax relating to components of other comprehensive income X/(X)

Other comprehensive income for the year, net of tax X/(X)

Total comprehensive income for the year X/(X)

IAS 1 allows Comprehensive Income to be presented in two ways: [IAS 1: 81]

i. A single Statement of Comprehensive Income

ii. Two separate statements as shown above

IFRS do not specify whether revenue can be presented only as a single line item in the statement

of comprehensive income, or whether an entity also may include the individual components of

revenue (for example: various sub-totals for banks).

Expenses can be classified by: [IAS 1: 99]

- Function: more common in practice (as the above statement)

- Nature (e.g. purchase of materials, depreciation, wages and salaries, transport costs)

Finance income cannot be netted against finance costs; it is included in ‘Other income’ or show

separately in the income statement.



- Where finance income is an incidental income, it is acceptable to present finance income

immediately before finance costs and include a sub-total of ‘Net finance costs’ in the income

statement.

- Where earning interest income is one of the entity’s main line of business, it is presented as

‘revenue’.

Entities must prominently display: [IAS 1: 51]

- name of the reporting entity

- whether the statements are for a single entity or a group of entities

- date of the end of the reporting period, or the period covered

- presentation currency

- the level of rounding used in the preparation of the statements

XYZ plc –Statement of Changes in Equity for the year ended 31 December 20X9

Ordinary

share

capital

Irredeemable

preference

share capital

Share

premium

Retained

earnings

Revaluati

on

reserve

Surplus from

financial

assets

through OCI

Opening balance X X X X X X

Right issue or market

price issue of ordinary

share capital

X

X

Bonus issue of ordinary

share capital (if from SP) X

(X)

Bonus issue of ordinary

share capital (if from

RE)

X

(X)

Dividend

(X)

Profit/ (loss) after tax for

the year X/(X)

Revaluation gain/ (loss)

(IAS 16) X/(X)

Transfer of excess

depreciation from RR to

RE (IAS 16)

X (X)

Gain/(loss) from Y/end

re-measurement of

financial assets through

other comprehensive

income

X/(X)

Closing balance (in

SFP) X X X X/(X) X X/(X)

IAS 16 (PPE) permits and it is best practice to make a transfer between reserves of the excess

depreciation arising as a result of revaluation. [IAS 1: 41]

When an asset carrying using revaluation model is disposed, any remaining revaluation reserve

relating to that asset is transferred directly to retained earnings. [IAS 1: 41]

An entity can present components of changes in equity either in the ‘Statement of Changes in

Equity’ or in the notes to the financial statements. [IAS 1: 106]



XYZ plc – Statement of Financial Position as at 31 December 20X9

$’000 $’000

ASSETS

Non-current assets

Property, plan and equipment X

Intangibles X

Deferred tax asset X

Long-term investments X

X

Current assets

Inventories X

Trade and other receivables X

Short-term investments X

Current tax asset X

Cash and cash equivalents X

X

Held-for-sale non-current assets X

X

Total assets X

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Ordinary share capital X

Preference share capital (irredeemable) X

Share premium account X

Revaluation surplus X

Retained earnings X

X

Non-current liabilities

Preference share capital (redeemable) X

Finance lease liabilities (non-current portion) X

Deferred tax liability X

Long-term borrowings X

X

Current liabilities

Trade and other payables X

Dividends payable X

Current tax liability X

Provisions X

Short-term borrowings X

Finance lease liabilities (current portion) X

X

Total equity and liabilities X

Reserves other than share capital and retained earnings may be grouped as ‘other components

of equity’.

Entities must present a set of previous year’s statements for comparison purposes.



An entity shall classify an asset as current when: [IAS 1: 66]

(a) It expects to realise the asset, or intends to sell or consume it, in its normal operating cycle;

(b) It holds the asset primarily for the purpose of trading;

(c) It expects to realise the asset within twelve months after the reporting period; or

(d) The asset is cash or cash equivalents unless the asset is restricted from being exchanged or

used to settle a liability for at least twelve months after the reporting period.

An entity shall classify a liability as current when: [IAS 1: 69]

(a) It expects to settle the liability in its normal operating cycle;

(b) It holds the liability primarily for the purpose of trading;

(c) The liability is due to be settled within twelve months after the reporting period; or

(d) It does not have unconditional right to defer settlement of the liability for at least twelve

months after the reporting period.



Believe in yourself! Have faith in your abilities! Without a

humble but reasonable confidence in your own powers

you cannot be successful or happy. - Norman Vincent

Peale (Author)



IAS 16 Property, plant and equipment

An asset is a resource controlled by the entity as a result of past events and from which future

economic benefits are expected flow to the entity.

Property, plant and equipment are tangible assets that:

- are held for use in the production or supply of goods or services, for rental to others, or for

administrative purposes; and

- are expected to be used during more than one period.

Initial recognition:

- PPE should initially be recognised in an entity's statement of financial position at cost.

Cost is the amount of cash and cash equivalents paid to acquire the asset at the time of its

acquisition or construction PLUS the fair value of any other consideration given.

Elements of Cost: Cost can include:

- Purchase price less any trade discount (not prompt payment discount) or rebate

- Import duties and non-refundable purchase taxes

- Directly attributable costs of bringing the asset to working condition for its intended use.

Examples:

- Costs of site preparation

- Initial delivery and handling costs

- Installation and assembly costs

- Professional fees such as legal fees, architects fees

- Initial costs of testing that asset is functioning correctly

(after deducting the net proceeds from selling any items

produced)

- The initial estimate of dismantling and removing the item and restoring the site where it

is located if the entity is obliged to do so (to the extent it is recognised as a provision per

IAS 37). Gains from the expected disposal of assets should not be taken into account in

measuring a provision.

- In case of a land, if initial estimation of restoration cost is capitalised then this capitalised

restoration cost shall be depreciated.

- Borrowing costs incurred in the construction of qualifying assets if in accordance

with IAS 23 Borrowing costs.

Any abnormal costs incurred by the entity, for example those arising from design errors,

wastage or industrial disputes, should be expensed as they are incurred and do not form part

of the capitalised cost of the PPE asset.

Estimated economic life and residual value of asset should be reviewed at the end of each

reporting period. If either changes significantly, the change should be accounted for over the

useful economic life remaining.

The residual value of an asset is the estimated amount that an entity would currently obtain

from disposal of the asset, after deducting the estimated costs of disposal, if the asset were

already of the age and in the condition expected at the end of its useful life. [IAS 16: 6]

Where these costs are

incurred over a period of time,

the period for which the costs

can be included in the cost of

PPE ends when the asset is

ready for use, even if not

brought into use.



Subsequent expenditure only to be capitalised if enhances the life of the asset, or improves

quality or quantity of output, or reduces the cost. If not capitalised then recognise as expense

in I/S.

Examples of subsequent expenditure to be capitalised can include:

- Modification of an item of plant to extend its useful life

- Upgrade of machine parts to improve the quality of output

- Adoption of a new production process, leading to large reductions in operating costs

Where an asset is made up of many distinct (i.e. significant) parts (examples: aircraft, ship),

these should be separately identified and depreciated.

Major inspections or overhauls should be recognised as part of (i.e. increase) carrying

amount of the item of PPE, assuming that this meets the recognition criteria.

- An example is where an aircraft is required to undergo a major inspection after so many

flying hours. Without the inspection the aircraft would not be permitted to continue flying.

- As a separate component of PPE, the capitalised overhaul cost shall be depreciated over

the period to next overhaul.

Measurement after initial recognition: After initially recognising an item of property,

plant and equipment in its statement of financial position at cost, an entity has two

choices about how it accounts for that item going forwards.

Upwards Downwards

No No

Yes Yes

Cost model:

Carrying asset at cost less accumulated

depreciation and impairment losses

Revaluation model:

Carrying asset at revalued amount less

subsequent accumulated depreciation and

impairment losses

ASSET IS REVALUED

Has the asset previously

suffered a downward valuation?

Has the asset previously

suffered a upward valuation?

Recognise the increase as a

revaluation surplus. (Other

comprehensive income)

Recognise the decrease

directly in profit or loss

Recognise the increase in profit or loss up to

the value of the downward valuation. Any

excess should be recognised as a revaluation

surplus. (Other comprehensive income)

Recognise the decrease against the

revaluation surplus up to the value of the

upward valuation. Any excess should be

recognised directly in profit or loss.



Revaluation model:

- An entity can, if it chooses, revalue assets to their fair value (only if the fair value of the item

can be measured reliably)

- For land and buildings this is normally determined based on their market values as

determined by an appraisal undertaken by professionally qualified valuers.

- If this model is applied to one asset, it must also be applied to all other assets in the same

class.

- Note that when the revaluation model is used PPE must still be depreciated. The revalued

amount is depreciated over the asset's remaining useful life.

- For a revalued asset, IAS 16 allows (and encourage) a reserve transfer in the statement

of changes in equity (from ‘revaluation reserve’ to ‘retained earnings’) of the 'excess'

depreciation because of an upward revaluation.

Methods of depreciation:

- Straight line method

- Reducing balance method

- Machine hour method

- Sum-of-the-digits method

Derecognition: Property, plant and equipment shall be derecognised (i.e. removed from the

statement of financial position) either:

- On disposal; or

- When no future economic benefits are expected from its use or disposal.

The gain or loss arising from de-recognition is included in profit or loss.

- This gain or loss is calculated by comparing the sale proceeds to the asset's carrying

amount.

- The gain or loss is calculated in the same way, regardless of whether the asset is revalued

or not.

- Any gain should not be classified as part of the entity's revenue.

If on disposal of a revalued asset there remains a balance on the revaluation surplus relating

to the asset, this balance should be transferred to retained earnings.

Sum of the years of asset’s expected life = N X (N+1)/2 where N is the asset’s expected life

Cost of a lorry was $15,000 and expected to last for five years. No scrap value.

Sum of the years of asset’s expected life = N X (N+1)/2 = 5 X (5+1)/2 = 15

Depreciation in Year

1 $15,000 X 5 /15 = $5,000

2 $15,000 X 4 /15 =$4,000

3 $15,000 X 3 /15 = $3,000

4 $15,000 X 2 /15 = $2,000

5 $15,000 X 1 /15 = $1,000



Sal (Salman) Khan, founder of Khan Academy, in MIT 2012

commencement address:

'. . . Many of you will soon enter the outside world and be

somewhat taken aback. It will be far less efficient, far less

fair, far less productive, and far more political than what

you may have imagined it to be. There will be pessimism

and cynicism everywhere. It is easy to succumb to this, to

become cynical or negative yourself. If you do, you with the

potential that you have, it would be a loss for yourself and

for humanity.

To fight these forces of negativity, to increase the net

positivity in the world, to optimize the happiness of yourself

and the people you love, here are some tips and tools that I

like to return to. . .

Start every morning with a smile — even a forced one — it

will make you happier. Replace the words “I have to” with “I

get to” in your vocabulary. Smile with your mouth, your

eyes, your ears, your face, your body at every living thing

you see. Be a source of energy and optimism. Surround

yourself with people that make you better. Realize or even

rationalize that the grass is truly greener on your side of the

fence. Just the belief that it is becomes a self-fulfilling

prophecy . . .

Remember that real success is maximizing your internally

derived happiness. It will not come from external status or

money or praise. It will come from a feeling of contribution.

A feeling that you are using your gifts in the best way

possible. . . '



IAS 23 Borrowing costs

An entity shall capitalise (i.e. as part of the asset) borrowing costs that are directly attributable to

the acquisition, construction or production of a qualifying asset as part of the costs of that asset.

[IAS 23: 8]

An entity shall cease capitalisation borrowing costs when substantially all the activities necessary

to prepare the qualifying asset for its intended use or sale are complete. [IAS 23: 22]

The commencement date for capitalisation: [IAS 23: 17]

When the following three conditions are first met:

- Expenditures for the asset are being incurred

- Borrowing costs are being incurred, and

- Activities that are necessary to prepare the asset for its intended use are being undertaken.

-

Capitalisation is suspended if active development is interrupted for extended periods.

(Temporary delays or technical/administrative work will not cause suspension).

- Interest income from deposit during this period is not deductible from capitalised borrowing

cost since cost from this suspended period is not capitalised. [IAS 23: 21]

01.01.12 - $1m loan @10% for 2 years

28.02.12 - Purchase order made to buy the asset

31.03.12 - Payment made to buy the asset

Borrowing cost (i.e. interest expense) of 3 months (i.e. $25,000) to be recognised in Income Statement under Finance Costs

All three conditions are met at this point.

31.12.12 - Asset is delivered & ready to use

Borrowing cost of 9 months (i.e. $75,000) to be capitalised as part of asset in Statement of Financial Position

31.12.13 - Loan is matured and repaid

Borrowing cost of 12 months (i.e. $100,000) to be recognised in I/S

Borrowing costs are interest and other

costs that an entity incurs in connection

with the borrowing of funds. [IAS 23: 5]

A qualifying asset is an asset that necessarily

takes a substantial period of time to get ready

for its intended use or sale. [IAS 23: 5]

Borrowing costs eligible for capitalisation are those that would have been

avoided otherwise. [IAS 23: 10]



Amount of borrowing costs available for capitalisation is actual borrowing costs incurred less any

investment income from temporary investment of those borrowings. [IAS 23: 13]

For borrowings obtained generally, apply the capitalisation rate to the expenditure on the asset

(weighted average borrowing cost). [IAS 23: 14]

On 1 January 20X6 Stremans Co borrowed $1.5m to finance the production of two assets, both of which

were expected to take a year to build. Work started during 20X6. The loan facility was drawn down and

incurred on 1 January 20X6, and was utilised as follows, with the remaining funds invested temporarily.

Asset A Asset B

$'000 $'000

1 January 20X6 250 500

1 July 20X6 250 500

The loan rate was 9% and Stremans Co can invest surplus funds at 7%.

Required: Ignoring compound interest, calculate the borrowing costs which may be capitalised for each of

the assets and consequently the cost of each asset as at 31 December 20X6.

Asset A Asset B

$ $

Borrowing costs: To 31 December 20X6 ($500,000/$1,000,000 × 9%) 45,000 90,000

Less investment income: To 30 June 20X6 ($250,000/$500,000 × 7% × 6/12) (8,750) (17,500)

36,250 72,500

Costs capitalised as part of assets:

Expenditure incurred 500,000 1,000,000

Borrowing costs 36,250 72,500

536,250 1,072,500

Acruni Co had the following loans in place at the beginning and end of 20X6.

1 January 31 December

20X6 20X6

$m $m

10% Bank loan repayable 20X8 120 120

9.5% Bank loan repayable 20X9 80 80

8.9% debenture repayable 20X7 – 150

The 8.9% debenture was issued to fund the construction of a qualifying asset (a piece of mining

equipment), construction of which began on 1 July 20X6.

On 1 January 20X6, Acruni Co began construction of a qualifying asset, a piece of machinery for a

hydroelectric plant, using existing borrowings. Expenditure drawn down for the construction was: $£30m on

1 January 20X6, $20m on 1 October 20X6.

Required: Calculate the borrowing costs that can be capitalised for the hydro-electric plant machine.

Capitalisation rate = weighted average rate = (10% × (120/ (80 + 120))) + (9.5% × (80 / (120 + 80))) = 9.8%

Borrowing costs = ($30m × 9.8%) + ($20m × 9.8% × 3/12) = $3.43m



By failing to prepare, you are preparing to fail. - Benjamin

Franklin (one of the Founding Fathers of the United States,

author, printer, political theorist, politician, postmaster,

scientist, musician, inventor, satirist, civic activist,

statesman, and diplomat)



IAS 40 Investment property

Investment property is a property (land or a building – or part of a building – or both) held (by

the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or

both, rather than for:

- Use in the production or supply of goods or services or for administrative purposes; or

- Sale in the ordinary course of business. [IAS 40: 5]

IAS 40 lists the following as examples of investment property: [IAS 40: 8]

- Land held for long-term capital appreciation rather than short-term sale in the ordinary

course of business

- Land held for a currently undetermined future use

- A building owned by the entity (or held under a finance lease) and leased to a third party

under operating lease

- A building which is vacant but is held to be leased out under an operating lease

- Property being constructed or developed for future use as an investment property (property

constructed for sale is not investment property)

Followings are outside the scope of IAS 40: [IAS 40: 9]

- Property intended for sale in the ordinary course of business: IAS 2 Inventories

- Property being constructed or developed on behalf of third parties: IAS 11 Construction

Contracts

- Owner-occupied property, including property held for future use as owner-occupied: IAS 16

Property, Plant and Equipment

- Property occupied by employees whether or not the employees pay rent at market rates:

IAS 16 PPE

- Property leased to another entity under a finance lease: IAS 17 Leases

Points to note:

- If a portion of an asset meets investment property criteria and other portion is not, then an

entity accounts for the portions separately (e.g. one portion under IAS 40 and another

under IAS 16) if those portions could be sold separately or leased out separately under

finance lease. [IAS 40: 10]

- Where an entity owns property that is leased to, and occupied by, its parent or another

subsidiary, the property is treated as an investment property in the entity's own accounts.

However, the property does not qualify as investment property in the consolidated financial

statements as it is owner-occupied from the group perspective. [IAS 40: 15]

Initial recognition and measurement:

- An investment property should be initially measured at cost (IAS 16’s initial recognition

rules applies). [IAS 40: 20]



Measurement after recognition: After initial measurement at cost, an entity can choose between

two models: [IAS 40: 30]

- The IAS 16 cost model

- The fair value model

The policy chosen should be applied consistently to all of the entity's investment property

IAS 40 encourages the assessment of fair value by independent, appropriately qualified and

experienced professionals but does not require it.

If the fair value model is adopted, the accounting treatment of investment properties will be as

follows:

- All investment properties should be measured at fair value at the end of each reporting

period provided fair value can be measured reliably.

- Changes in fair value, whether gains or losses, should be recognised in profit or loss

for the period in which they arise. [IAS 40: 35]

When determining fair value, do not deduct ‘costs to sale’ from the fair value. [IAS 40: 37]



Laziness is a secret ingredient that goes into failure. But

it's only kept a secret from the person who fails.

– Robert Half



IAS 20 Government grants

An entity should not recognise government grants until it has reasonable assurance that: [IAS 20:

7]

- The entity will comply with any conditions attached to the grant

- The entity will actually receive the grant

Receiving the grant not necessarily prove that the conditions attached to it have been or will

be fulfilled.

The treatment will be same whether the grant is received in cash or given as a reduction in a

liability to government. [IAS 20: 10]

Grants relating to assets: IAS 20 allows two alternatives:

Option 1:

Present the grant in the statement of financial

position as deferred income and systematically

recognise it in profit or loss over the asset's

useful life. [IAS 20: 26]

Option 2:

Deduct the grant when arriving at the cost of the

asset. The asset is included in SFP at cost minus

the grant. Depreciate the net amount over the

useful life of the asset. [IAS 20: 27]

Example: A company receives a grant from the EU for CU100,000 towards the cost of a new factory.

The overall cost of the factory is CU1,000,000. It has a 50 year useful life and NIL residual value. The

company's policy is to apply the straight-line method of depreciation.

At recognition:

Statement of financial position

Assets:

Factory 1,000,000

Liabilities:

Deferred income 100,000

At recognition:


Assets:

Factory (1,000,000 – 100,000) 900,000

Option 1 Option 2

At Year 1 end:


Assets: NCA

Factory 1,000,000

Accumulated depreciation (20,000)

980,000

Liabilities:

Deferred income 100,000

Income released in the year (2,000)

98,000

(Current liabilities 2,000; Non-current liabilities

96,000)

Statement of comprehensive income

Other income 2,000

Depreciation (20,000)

At Year 1 end:


Assets: NCA

Factory 900,000

Accumulated depreciation (18,000)

882,000

Statement of comprehensive income

Depreciation (18,000)



Government grant recognised as ‘Deferred income’ (Option 1) needs to be amortised (i.e.

recycled in I/S as Income) over the useful life of the asset.

Grants relating to income: Such grants should be recognised in profit or loss as other income or

deducted from the related expense. [IAS 20: 29]

- As with grants related to assets, the benefit of the grant should be recognised in profit or loss

over the periods in which the entity recognises as expenses the related costs for which the

grants are intended to compensate.

A non-monetary asset (example: land, building, etc.) may be transferred by government to an

entity as a grant.

- The fair value of such an asset is usually assessed and this is used to account for both the

asset and the grant.

- Alternatively, both may be valued at a nominal (i.e. insignificant) amount. [IAS 20: 23]

Government grants that cannot reasonably have a value placed on them (for example the

provision of free services by a government department) are excluded from the definition of

government grants.

Repayment of government grant: If a grant must be repaid it should be accounted for as a

revision of an accounting estimate (IAS 8). [IAS 20: 34]

- Repayment of grant related to income: apply first against any unamortised deferred income

set up in respect of the grant, any excess should be recognised immediately as an expense.

[IAS 20: 32]

- Repayment of a grant related to an asset: increase the carrying amount of the asset or reduce

the deferred income balance by the amount repayable. The cumulative additional

depreciation that would have been recognised to date in the absence of the grant should be

immediately recognised as an expense. [IAS 20: 32]

It is possible that the circumstances surrounding repayment may require a review of the

asset value and an impairment of the new carrying amount of the asset.

IAS 20 does not cover: [IAS 20: 2]

- Accounting for government grants in financial statements reflecting the effects of changing

prices

- Government assistance given in the form of ‘tax breaks’

- Government acting as part-owner of the entity



‘Everybody is a genius. But, if you judge a fish by its ability

to climb a tree, it’ll spend its whole life believing that it is

stupid.’ – Albert Einstein



IAS 38 Intangible assets

An intangible asset is an identifiable non-monetary asset without physical substance. [IAS 38: 8]

IAS 38 states that an intangible asset is to be recognised if, and only if, the following criteria are met:

[IAS 38: 21]

- it is probable that future economic benefits from the asset will flow to the entity

- the cost of the asset can be reliably measured.

Pu

rch

ased

At recognition the intangible should be recognised at cost. [IAS 38: 24]

Examples of expenditures that are not part of the cost of an intangible asset are: [IAS 38: 29]

- Costs of advertising and promotional activities) [IAS 38: 69(c)]

- Costs of staff training [IAS 38: 67(c), 69(b)]

- Administration and other general overhead costs.

After initial recognition an entity can choose between: [IAS 38: 72]

- the cost model, and

- the revaluation model: if an active market exists for that type of asset [IAS 38: 75]

An active market cannot exist for brands, newspaper mastheads, music and film

publishing rights, patents or trademarks, because each such asset is unique and

transactions are relatively infrequent. The price paid for one asset may not provide

sufficient evidence of the fair value of another. Moreover, prices are often not available

to the public. [IAS 38: 78]

An intangible asset (other than goodwill) acquired as part of business combination should be

recognised at fair value. [IAS 38: 33]

An asset is identifiable if it either: [IAS 38: 12]

(a) is separable, i.e. is capable of being separated or divided from

the entity and sold, transferred, licensed, rented or exchanged,

either individually or together with a related contract, identifiable

asset or liability, regardless of whether the entity intends to do

so; or

(b) arises from contractual or other legal rights, regardless of

whether those rights are transferable or separable form the

entity or from other rights and obligations.

An asset is a resource

controlled by the entity as

a result of past event(s)

and from which future

economic benefits are

expected to flow to the

entity. [IAS 38: 8]



Inte

rnall

y g

en

era

ted

Rese

arc

h p

hase

Research is original and planned investigation, undertaken with the prospect of gaining new

scientific or technical knowledge and understanding. [IAS 38: 8]

The result of research is unknown and, so, no probable future economic benefit can be

expected

IAS 38 states that all expenditure incurred at the research stage should be written off

to the income statement as an expense when incurred [IAS 38: 54], and will never be

capitalised as an intangible asset. [IAS 38: 71]

Develo

pm

en

t p

hase

An intangible asset arising from development must be capitalised if an entity can

demonstrate all of the following criteria: [IAS 38: 57]

- the technical feasibility of completing the intangible asset (so that it will be available for

use or sale)

- intention to complete and use or sell the asset

- ability to use or sell the asset

- existence of a market or, if to be used internally, the usefulness of the asset

- availability of adequate technical, financial, and other resources to complete the asset

- the cost of the asset can be measured reliably

If any of the recognition criteria are not met then the expenditure must be charged to the

income statement as incurred.

If an entity cannot distinguish the research phase from the development phase, treat that as

in the research phase. [IAs 38: 53]

Each development project must be reviewed at the end of each accounting period to ensure

that the recognition criteria are still met.

Internally generated goodwill should not be recognised as an asset. [IAS 38: 48]

Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance

shall not be recognised as intangible assets. [IAS 38: 63]

An intangible asset with a finite useful life should be amortised over its expected useful life [IAS 38: 89]

An intangible asset with an indefinite life should not be amortised [IAS 38: 89], but should be reviewed

for impairment on an annual basis [IAS 38: 108]

- There must be an annual review of whether the indefinite life assessment is still appropriate. [IAS 38:

109]

Residual values should be assumed to be nil, except if an active market exists or there is a commitment

by a third party to purchase the asset at the end of its useful life [IAS 38: 100]

An active market is a market in which all the following conditions exist:

(a) The items traded in the market are homogeneous (i.e. similar)

(b) Willing buyers and sellers can normally be found at any time; and

(c) Prices are available to the public.



‘Throughout life people will make you mad, disrespect you and

treat you bad. Let God deal with the things they do, cause

hate in your heart will consume you too.’

- Will Smith



IAS 36 Impairment of assets

An asset is impaired when its ‘carrying amount’ is higher than its ‘recoverable amount’. [IAS 36: 6]

Impairment loss = Carrying value – Recoverable amount [IAS 36: 59]

Recognition of impairment losses in financial statements: [IAS 36: 60, 61]

- Asset carried out at historical cost: in profit or loss.

- Revalued assets: first against any revaluation surplus relating to the asset and then (if amount left) in

profit or loss.

If no impairment loss then do nothing!

After impairment review: the depreciation/amortisation should be adjusted for future periods. [IAS

36: 63]

If goodwill is valued at fair value (in full) the non-controlling share of impairment will be allocated to

non-controlling goodwill (i.e. will reduce NCI).

Where it is not possible to estimate the recoverable amount of an individual asset, the entity estimates

the recoverable amount of the cash-generating unit to which it belongs. [IAS 36: 66]

- A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that

are largely independent of the cash inflows from other assets or groups of assets. [IAS 36: 68]

- If an active market exists for the output produced by an asset or a group of assets, this group of

assets should be identified as a CGU even if some or all of the output is used internally. [IAS 36: 70]

- If the cash inflows are affected by internal transfer pricing, management’s best estimate of future

price that could be achieved in arm’s length transactions are used in estimating the CGU’s value in

use. [IAS 36: 70]

Impairment loss is allocated among the asset/CGU in the following order: [IAS 36: 104]

1. any individual asset that is specifically impaired

2. goodwill allocated to the CGU

3. other assets pro rata to their carrying amount in the CGU (subject of the carrying amount of an asset

not being reduced below its individual recoverable amount. [IAS 36: 105]

higher of

Fair value less costs to sell:

- Value in a binding sale agreement

less incremental costs directly

attributable to the asset’s disposal.

[IAS 36: 25]

- Otherwise, the asset’s market price

(where there is an active market), or

amount obtainable in an arm’s

length transaction (i.e. fair value),

less costs of disposal. [IAS 36:

26]

Value in use:

- Based on cash-flow projections

- Cash flows should include expected disposal proceed.

[IAS 36: 31(a)]

- Future cash flows shall be estimated for the asset in its

current condition. Estimates of future cash flows shall not

include estimated future cash inflows or outflows that are

expected to arise from improving or enhancing the asset’s

performance. [IAS 36: 44]

- Cash outflows to maintain the level of economic benefits

from the asset in its current condition should be included

(e.g. repair and replacement of parts). [IAS 36: 41]

Cash flows from financing activities or income tax receipts

and payments should be excluded.



Reversal of past impairment:

I/S:

- An impairment loss reversal on property, plant and equipment first reverses the loss recorded in profit

or loss (and any remainder is credited to the revaluation surplus, subject to IAS 16 requirements) [IAS

36: 119]

SFP:

- A reversal for a CGU is allocated to the assets of the CGU, except for goodwill, pro rata with the

carrying amounts of those assets [IAS 36: 122]

Once recognised, impairment losses on goodwill are not reversed [IAS 36: 124]

In case of a reversal, the carrying amount of an asset must not increase above the lower of:

- Its recoverable amount; and

- Its depreciated carrying amount had no impairment loss originally been recognised. [IAS 36: 123]

Impairment indicators:

The entity should look for evidence at the end of each period and conduct an impairment review on any

asset where there is evidence of impairment. [IAS 36: 9]

- Intangible assets with an indefinite useful life or not yet available for use, and goodwill acquired in

business combination are subject to annual impairment test irrespective of whether there are

indications of impairment. [IAS 36: 10]

External indicators: [IAS 36: 12]

- Significant decline in market value of asset

- Significant change in technological,

economic or legal environment

- Increased market interest rate; thus reducing

value in use

- Carrying amount of net assets of the entity

exceeds market capitalisation

Internal indicators: [IAS 36: 12]

- Evidence of obsolescence or physical

damage

- Significant changes with an adverse effect

on the entity

- Evidence available that asset performance

will be worse than expected.



‘Being busy does not always mean real work. The object of all

work is production or accomplishment and to either of these

ends there must be forethought, system, planning,

intelligence, and honest purpose, as well as perspiration.

Seeming to do is not doing.’

- Thomas A. Edison



IAS 8 Accounting policies, changes in accounting estimates and errors

Changes in accounting policies

o The same accounting policies are usually adopted from period to period, to allow users to analyse

trends over time in profit, cash flows and financial position.

o Examples of accounting policies:

- Alternative presentation of government grant (IAS 20)

- FIFO or Weighted average method of inventory valuation

- Fair value model of cost model for investment properties (IAS 40: 31)

o A change in accounting policy must be applied retrospectively.

- Retrospective application means that the new accounting policy is applied to transactions

and events as if it had always been in use. In other words, at the earliest date such

transactions or events occurred, the policy is applied from that date.

- This involves restating opening balances of current year and comparative previous year.

o Two types of event which do not constitute changes in accounting policy:

(i) Adopting an accounting policy for a new type of transaction or event not dealt with

previously by the entity.

(ii) Adopting a new accounting policy for a transaction or event which has not occurred in

the past or which was not material.

o Changes in accounting policy will be very rare and should be made only if:

- The change is required by an IFRS, or

- The change will result in a more appropriate presentation of events or transactions in the

financial statements of the entity, providing more reliable and relevant information.

Revaluation of non-current assets should not be treated as changes in accounting policy (i.e. no

retrospective effect for revaluation).

Changes in accounting estimates

o Management applies judgement based on information available at the time

o Examples of accounting estimates:

- Useful life or residual value of a non-current asset (IAS 16)

- Provision made for future loss or expenses (IAS 37)

o A change in accounting estimate must be applied prospectively.

From earliest date of same transaction

(i.e. retrospective effect)

- Unless impractical On future transactions

Policy change date

Changes in accounting estimate



Errors:

o Errors discovered during a current period which relate to a prior period may arise through:

- Mathematical mistakes

- Mistakes in the application of accounting policies

- Misinterpretation of facts

- Omissions

- Fraud

o Prior period errors correct retrospectively.

- Either restating the comparative amounts for the prior period(s) in which the error occurred, or

- when the error occurred before the earliest prior period presented, restating the opening balances

of assets, liabilities and equity for that period

Error/ fraud discovered



‘Life is pretty simple: You do some stuff. Most fails. Some

works. You do more of what works. If it works big, others

quickly copy it. Then you do something else. The trick is the

doing something else.’

- Leonardo da Vinci



IAS 17 Leases

Operating lease: Any lease other than a finance lease.

- Treat this as normal rental agreement.

Finance lease: A lease that transfers substantially all the risks and rewards incidental to ownership of

an asset to the lessee (who took the lease). Title may or may not eventually be transferred.

IAS 17 identifies five situations which would normally lead to a lease being classified as a finance

lease:

i. Transfer of ownership of the asset to the lessee at the end of the lease term

ii. The lessee has the option to purchase the asset at a price sufficiently below fair value at the

option exercise date, that it is reasonably certain the option will be exercised

iii. The lease term is for a major part of the asset’s economic life even if title is not transferred at

end of lease term

iv. Present value of minimum lease payment amounts to substantially all of the asset’s fair value at

inception

v. The leased asset is so specialised that it could only be used by the lessee without major

modifications being made

At commencement of a finance lease, leasee (i.e. user of the asset) recognises a Non-current asset and

a Liability in Statement of financial position.

Example: Leasee accounting: Payment quarterly in advance

On 1 October 20X3 Evans entered into a non-cancellable agreement whereby Evans would lease a new

rocket booster. The terms of the agreement were that Evans would pay 26 rentals of $3,000 quarterly in

advance commencing on 1 October 20X3, and that after this initial period Evans could continue, at its option,

to use the rocket booster for a nominal rental which is not material. The cash price of this asset would have

been $61,570 and the asset has a useful life of 10 years. Evans has a policy to charge full year’s

depreciation in the year of purchase of a non-current asset. The rate of interest implicit in the lease is 2% per

quarter.

Required: Identify whether this is a finance lease and show how these transactions would be reflected in the

financial statements for the year ended 31 December 20X3.

Present value of minimum lease payments is the payments over the lease term that the

lessee is required to make discounted applying implicit interest rate.

Non-current asset is subsequently depreciated over shorter of:

- Asset’s useful life, and

- Lease term including any secondary period

use useful life if reasonable certainty exists that the lessee will obtain ownership (IAS 17: 27)

Liability component comprises a current

portion and a non-current portion; and

amortised over the lease term.

The amount of non-current asset to be capitalized is

lower of: [IAS 17: 20]

- Present value of minimum lease payment, and

- Fair value of the leased asset

In F7 using cash price (fair value) given in the

question should be sufficient.



Answer:

Though the lease term is only 6.5 years ((26 quarter X 3)/ 12 months), the lease assumed to be a finance

lease because the present value of the minimum lease payment is similar to the fair value of the leased

asset.

Present value of the minimum lease payment: $

1st instalment (in advance, so already at present value) 3,000

Present value 2nd

– 26th installment ($3,000 X 19.5234) (25 years annuity at 2%) 58,570

61,570

And, fair value of the lease asset at commencement of the lease (Cash price) 61,570

Leaseee accounting:

Income statement for the year ending 31 Dec

20X3

Statement of financial position as at 31 Dec 20X3

Non-current assets: Leased assets

Depreciation (6,157) At lease commencement (@01 Oct

20X3)

61,570

Finance cost (1,171) Accumulated depreciation (1st year) (6,157)

Carrying value 55,413

Liabilities:

Non-current liabilities: Finance lease 51,033

Current liabilities: Finance lease 8,708

Lease amortization schedule:

Y/ending 31 Dec 20X3 31 Dec 20X4

Quarter 1 2 3 4 5

$ $ $ $ $

Opening liability 61,570 59,741 57,876 55,974 54,033

Instalment in

advance (3,000) (3,000) (3,000) (3,000) (3,000)

58,570 56,741 54,876 52,974 51,033

Interest @ 2%

(I/S) 1,171 1,135 1,098 1,059 1,020

Closing liability

(SFP)

59,741 57,876 55,974 54,033 52,053

Current portion of total closing liability will be

calculated as:

(Total instalment payable within next one year –

Total interest expense charge before last

instalment in the next year) =

($3,000 + $3,000 + $3,000 + $3,000) – ($1,135 +

$1,098 + $1,059) = $8,708

Non-current portion of total closing liability will be

calculated as:

Total closing liability – Current portion of the

liability = $59,741 - $8,708 = $51,033



Example: Leasee accounting: Payment annually in arrears

Branch acquired an item of plant and equipment on a finance lease on 1 January 20X1. The terms of the

agreement were as follows:

Deposit : $1,150 (non-refundable)

Instalments : $4,000 per annum for seven years payable in arrears

Cash price : $20,000 (Fair value of the lease asset at commencement of the lease)

The asset has useful life of four years and the interest rate implicit in the lease is 11%. Required: Prepare extracts from the income statement and statement of the financial position of Branch for the year ending 31 December 20X1. Answer:

It is assumed that fair value of the leased asset and present value of minimum lease payments are same at

the commencement of the lease.

Income statement for the year ending 31 Dec

20X1

Statement of financial position as at 31 Dec 20X1


Depreciation (5,000) At lease commencement (@01

January 20X1)

20,000

Finance cost (2,074) Accumulated depreciation (1st year)

(20,000/4)

(5,000)


Liabilities:




Y/ending 31 Dec 20X1 31 Dec 20X2

$ $

Opening liability 20,000 16,924

Initial non-refundable deposit (1,150) -

18,850

Interest @ 11% (I/S) 2,074 1,862

Instalment in arrears (4,000) (4,000)

Closing liability (SFP) 16,924 14,786


calculated as:




($4,000 – $1,862) = $2,138


calculated as:


liability = $16,924 - $2,138 = $14,786



Example: Leasee accounting: Complex

Bowtock has leased an item of plant. Commencement of the lease was 1 January 20X2 and term of the

lease is 5 years. Payments of $12,000 to be made annually in advance. Cash price and fair value of the

asset - $52,000 at 1 January 20X2 – equivalent to the present value of the minimum lease payments. Implicit

interest rate within the lease 8% per annum. The company’s depreciation policy for this type of plant is 20%

per annum on cost (apportioned on a time basis where relevant).

Required: Prepare extracts of the income statement and statement of financial position for Bowtock for the

year to 30 September 20X3 for the above lease.

Answer:

Leaseee accounting:

Income statement for the year ending 30

September 20X3

Statement of financial position as at 30 September

20X3


Depreciation (10,400) At lease commencement (@01 January

20X2)

52,000

Finance cost (800+1,872) (2,672) Accumulated depreciation:

1st year–9 months (52,000X20%)X(9/12)

(7,800)

2nd

year – full year (52,000X20%) (10,400)


Liabilities:




Point to note: lease year runs from 01 Jan to 31 Dec, but accounting year runs from 01 Oct to 30 Sept.

Accounting year ending 30 Sep 20X2 30 Sep 20X3 30 Sep 20X4

$ $ $

Opening liability 52,000 42,400 33,072

Interest @ 8% (I/S) – remaining 3 months of the lease year

((40,000X8%)X3/12)

((31,200X8%)X3/12)

- 800

624

Instalment in advance (1 Jan) (12,000) (12,000) (12,000)

40,000 31,200 21,696

Interest @ 8% (I/S) – 9 months

((40,000X8%)X9/12)

((31,200X8%)X9/12)

((21,696X8%)X9/12)

2,400

1,872

1,302

Closing liability (SFP) 42,400 33,072 22,998


calculated as:




($12,000 – $624) = $11,376


calculated as:


liability = $33,072 - $11,376 = $21,696



‘People who say it cannot be done should not interrupt those

who are doing it.’

- George Bernard Shaw



IAS 18 Revenue

Amounts collected on behalf of third parties such as sales taxes, goods and services taxes and value

added taxes are not part of revenue. [IAS 18: 8]

In an agency relationship, for an agent, revenue is only the amount of his commission. [IAS 18: 8]

In certain circumstances, it is necessary to apply the revenue recognition criteria to the

separately identifiable components of a single transaction in order to reflect the substance of the

transaction. For example, when the selling price of a product includes an identifiable amount for

subsequent servicing, that amount is deferred and recognised as revenue over the period during which

the service is performed. [IAS 18: 13]

In some cases two or more transactions are considered together. For example, an entity may sell goods

and, at the same time, enter into a separate agreement to repurchase the goods at a later date. This

sale and repurchase agreement may constitute a secured loan and recognised as loan liability instead of

sales revenue. [IAS 18: 13]

Seller transfer significant risks and

rewards:

- In most cases the transfer of

significant risks and rewards of

ownership coincides with the

transfer of legal title or the

passing of possession to the

buyer.

Income

Income is increases in economic benefits during the accounting period in the form of

inflows or enhancements of assets or decreases of liabilities that result in increases in

equity, other than those relating to contributions from equity participants. [Framework:

4.25(a)]

Revenue Revenue is income that arises in the course of ordinary activities of an entity. [IAS 18:

Objectives]

From sale of goods should only be recognised

when all of the five criteria are met: [IAS 18: 14]

- It is probable that future economic benefits will

flow to the entity.

- The amount of revenue can be measured

reliably.

- The costs incurred in relation to the transaction

can be reliably measured.

- The seller no longer has management

involvement or effective control of the goods.

- The seller must have transferred to the buyer

all of the significant risks and rewards of

ownership.

From rendering of services should only be

recognised when all of the four criteria are met: [IAS

18: 20]

- It is probable that future economic benefits will

flow to the entity.

- The amount of revenue can be measured

reliably.

- The costs incurred and the costs to complete in

relation to the transaction can be reliably

measured.

- The stage of completion can be measured

reliably.

Where consideration (e.g. money) from sales is received but

above revenue recognition criteria are not met:

DR Asset: Cash

CR Liability: Deferred income

When revenue recognition criteria are met:

DR Liability: Deferred income

CR I/S: Revenue/Income



‘It is no use saying, 'We are doing our best.' You have got to

succeed in doing what is necessary.’

- Winston Churchill



IAS 2 Inventories

Inventories are assets:

- held for sale in the ordinary course of business;

- in the process of production for such sale; or

- in the form of materials or supplies to be consumed in the production process or in the rendering of

services.

Inventories needs to be valued lower of:

+

Costs should not include:

- Abnormal waste, finished goods storage, unrelated administrative overheads

Write-down to NRV:

- If inventories are write-down to their NRV, this will result closing inventory with lower carrying value,

which will have automatic effect on cost of sales (i.e. cost of sales will be increased).

IAS 2 does not apply to inventories covered by other standards, such as:

- Work in progress under construction contracts (IAS 11 Construction contracts)

Cost Net Realisable

Value (NRV)

Cost of purchase Cost of conversion

Supplier’s gross

price for raw

materials

+

Import duties, etc

+

Costs of transporting

materials to

business premises

-

Trade discounts

Costs directly

related to the units

of production (e.g.

direct materials,

direct labours)

+

Fixed and variable

production

overheads incurred

in converting

materials to finished

goods, allocated on

a systematic basis

+

Borrowing costs (if

met IAS 23 criteria)

Estimated selling

price in the ordinary

course of business,

when completed

-

Estimated costs to

completion and the

estimated costs

necessary to make

the sale.



‘What is success? I think it is a mixture of having a flair for the

thing that you are doing; knowing that it is not enough, that

you have got to have hard work and a certain sense of

purpose.’

- Margaret Thatcher



IAS 37 Provisions, contingent liabilities and contingent assets

Provision: is a liability where there is uncertainty over its timing or the amount at which it will be settled.

A provision should be recognised where:

- An entity has a present obligation (legal or constructive) as a result of a past event;

- It is probable (i.e. more likely than not) that there will be an outflow of resources in the form of

cash or other assets; and

- A reliable estimate can be made of the amount [IAS 37: 10]

A provision should not be recognised in respect of future operating losses since there is no present

obligation arising from a past event. [IAS 37: 63]

An entity can be required to recognise a provision and capitalise (DR Non-current asset: Property, plant

& equipment; CR Liability: Provision) initial estimation of future dismantling and restoration cost if above

provision recognition criteria and IAS 16 capitalisation criteria are met. [IAS 16: 16, 18]

- Gains from the expected disposal of assets shall not be taken into account in measuring a

provision. [IAS 37: 51]

If an entity sells goods with a warranty, a provision recognition (DR I/S: Expense; CR Liability: Provision)

can be required based on the best estimate of the expenditure required to settle the present obligation at

the end of the reporting period. [IAS 37: 36]

- When the selling price includes an identifiable (i.e. distinguishable) amount for subsequent

servicing, that amount is deferred (DR Asset: Cash/ Receivable; CR Liability: Deferred income)

and recognised as revenue over the period during which the service is performed (DR Liability:

Deferred income; CR I/S: Revenue). [IAS 18: 13]

Where the provision being measured involves a large population of items, the obligation is estimated

by ‘expected value’ calculation. [IAS 37: 39]

i.e. established past practice

Restructuring costs: A constructive obligation, requiring a provision, only arises in respect of

restructuring costs where the following criteria are met:

- A detailed formal plan has been made, identifying the areas of the business and number of

employees affected with an estimate of likely costs an timescales; and

- An announcement has been made to those who will e affected by the restructuring.

A restructuring provision does not include costs of retraining or relocating continuing staff,

marketing, or investment in new systems [IAS 37: 81]



Contingent liability: is a possible obligation that arises from past events and whose existence will be

confirmed only by occurrence or non-occurrence of one or more uncertain future events not wholly within

the control of the entity.

- Contingent liability is not recognised in the financial statements because either it is not probable,

or the amount cannot be measured with sufficient reliability.

- Contingent liability is only disclosed in the notes of financial statements. [IAS 37: 10, 13]

Reimbursement: An entity may be entitled to reimbursement from a third party for all or part of the

expenditure required to settle a provision. Such a reimbursement:

- Should only be recognised (DR Assets: Receivable; CR I/S: Other income) where receipt is

‘virtually certain’, and

- Should be treated as a separate asset in the statement of financial position (i.e. not netted off

against the provision) at an amount no greater than that provision.

- The provision and the amount recognised for reimbursement may be netted off in the I/S. [IAS

37: 53]

Discounting to present value: When there is a significant period of time between the end of

reporting period and settlement of the obligation, the amount of provision should be discounted to

present value. [IAS 37: 45] -

Discount factor: (1+r)-n

-The discount rate shall be a pre-tax rate that reflects current market assessment of the time

value of money and the risks specific to the liability.

Example: If a provision of $1,000 is required to settle a liability after 2 years; at 10% discount

rate the provision will be recognised at Year-0 is $827 ($1,000 X 0.827).

Unwinding of discount: When a provision is included in the statement of financial position at a

discount value (i.e. at present value) the amount of the provision will increase over time, to reflect

the passage of time.

- Unwinding of discount will be included in the finance cost.

- Unwinding of discount (i.e. the amount to be charged in finance cost and by the amount the

provision needs to be increased) can be found by applying ‘discount rate’ on opening balance of

the provision.

At end of Year-1: $83 ($827X10%); DR I/S: Finance cost; CR Liability: Provision (that makes

closing provision liability = $910 ($827+$83))

At end of Year-2: $91 ($910X10%); DR I/S: Finance cost; CR Liability: Provision (that makes

closing provision liability = $1,000 ($910+$91))



Contingent asset: is a possible asset that arises from past events and whose existence will be

confirmed only by occurrence or non-occurrence of one or more uncertain future events not wholly within

the control of the entity.

- A contingent asset should not be recognised in the financial statements

- Contingent assets should only be disclosed in the notes of financial statements when the

expected inflow of economic benefits is probable. [IAS 37: 31, 34]

When the realisation of income is virtually certain, then the related receivable is recognised in the

financial statements (DR Asset: Receivable; CR I/S: Other income) [IAS 37: 33]

No

Yes Yes

No

Yes

Disclosure let out: IAS 37 permits reporting entities to avoid disclosure requirements relating to

provisions, contingent liabilities and contingent assets if they would be expected to be seriously prejudicial

(i.e. will cause serious disadvantage) to the position of the entity in dispute with other parties.

Asset or income receivable because of past event

Probable

Reliable estimate

Disclosure as contingent asset

Do nothing (i.e. do not

recognise or disclose in the

FSs.

Virtually certain

Recognise in financial statements

(DR Asset: Receivable; CR I/S:

Other income



‘I have been impressed with the urgency of doing. Knowing is

not enough; we must apply. Being willing is not enough; we

must do.’

- Leonardo da Vinci



The asset's current condition

should be adequate to be

effectively ‘sold as seen’.

IFRS 5 Non-current assets held for sale and discontinued operations

Held for sale:

An entity shall classify a non-current asset (or disposal group) as held for sale if its carrying amount will

be recovered principally through a sale transaction rather than through continuing use. [IFRS 5: 6]

To be classified as held for sale, the following conditions must

be met:

- Available for immediate sale in present condition [IFRS

5: 7].

- Sale is highly probable [IFRS 5: 8].

- The sale should be expected to take place within one year from the date of classification [IFRS

5: 8].

Once an asset or group of assets and related liabilities is classified as held for sale, the following rules

should be followed:

- Carry at lower of its carrying amount and fair value less cost to sell, which may give rise to an

impairment loss [IFRS 5: 15].

- Do not depreciate even if still being used by the entity. [IFRS 5: 1]

- Present separately in the statement of financial position. [IFRS 5: 1]

- Non-current asset held for sale recognise under current asset. [IFRS 5: 3]

Presentation of a non-current asset or a disposal group classified as held for sale: [IFRS 5: 38]

Non-current assets and disposal groups classified as held for sale should be presented separately from

other assets in the statements of financial position. The liabilities of a disposal group should be

presented separately from other liabilities in the statement of financial position.

- Assets and liabilities held for sale should not be offset.

- The major classes of assets and liabilities held for sale should be separately disclosed either on

the face of the statement of financial position or in the notes.

On ultimate disposal of an asset classified as held for sale, any difference between its carrying amount

and the disposal proceeds is treated as a loss or gain recognised in income statement.

A non-current asset or disposal group that is no longer classified as held for sale (for example,

because the sale has not taken place within one year) is measured at the lower of: [IFRS 5: 27]

- Its carrying amount before it was classified as held for sale, adjusted for any depreciation that

would have been charged had the asset not been held for sale.

- Its recoverable amount at the date of the decision not to sell.

A group of assets and liabilities that will be disposed of in

a single transaction are referred to as disposal group.

For a sale to be highly probable, the following must apply:

- Management must be committed to a plan to sell the asset

- There must be an active programme to locate a buyer

- The asset must be marketed for sale at a price that is

reasonable in relation to its current fair value

. . . can include transport costs and

costs to advertise that the asset is

available for sale

This is an exception to the normal IAS 36 rule. IAS 36

impairment of assets requires an entity to recognise

an impairment loss only when an asset’s recoverable

amount is lower than its carrying amount.

Fair value less cost to sell is equivalent to net realisable value



An asset that is to be abandoned should not be classified as held for sale. [IFRS 5: 13]

Discounted operation:

Discontinued operation is a component of an entity that has either been disposed of, or is classified as

‘held for sale’, and:

- represents a separate major line of business or geographical area of operations

- is part of a single co-ordinated plan to dispose of a separate major line of business or geographical

area of operations, or

- is a subsidiary acquired exclusively with a view to resale. [IFRS 5: 32]

For discontinued operations, an entity should disclose a single amount in the statement of

comprehensive income comprising the total of: [IFRS 5: 33]

- The post-tax profit or loss from discontinued operations; and

- The post-tax gain or loss on the re-measurement to ‘fair value less costs to sell’ or on the disposal of

the discontinued operation.

An entity should also disclose an analysis of the above single amount either on the face of the

statement of comprehensive income or in the notes.

An entity shall disclose the amount of income from continuing operations and from discontinuing

operations attributable to owners of the parent.

An entity should also disclose the net cash flows attributable to the operating, investing and financing

activities of discontinued operations. These disclosures may be presented either on the face of the

statement of cash flows or in the notes.

Gains and losses on the re-measurement of a non-current asset or disposal group that is not a

discontinued operation but is held for sale should be included in profit or loss from continuing operations.

[IFRS 5: 37]

- operations and cash flows that can be clearly distinguished, operationally

and for financial reporting purposes, from the rest of the entity. [IFRS 5: 31]

XYZ plc - Consolidated statement of comprehensive income for the year ended 31 December 20X9

$’000

Revenue X

Cost of sales (X)

Gross profit X

Other income X

Distribution costs (X)

Administrative expenses (X)

Other expenses (X)

Profit/ (loss) from operations X/(X)

Finance costs (X)

Share of profit/(loss) of associates X/(X)

Profit/ (loss) before tax X

Income tax expense (X)

PROFIT/ (LOSS) FOR THE YEAR FROM CONTINUING OPERATIONS X/(X)

PROFIT/ (LOSS) FOR THE YEAR FORM DISCONTINUED OPERATIONS (SINGLE AMOUNT) X/(X)




‘I don't pity any man who does hard work worth doing. I

admire him. I pity the creature who does not work, at

whichever end of the social scale he may regard himself as

being.’

- Theodore Roosevelt



IAS 11 Construction contracts

Revenue and cost: should be recognised according to the stage of completion of the contract at the end

of the reporting period, but only when the outcome of the activity can be estimated reliably.

When outcome of the contract cannot be reliably estimated:

- Revenue: Only recognise revenue to the extent of contract costs incurred which are expected to be

recoverable

- Cost: Recognise contract costs as an expense in the period they are incurred

Contract costs which cannot be recovered should be recognised as an expense straight away.

If a loss is predicted (i.e. the contract value < total contract cost) on a contract then it should be

recognised immediately in I/S.

Costs that should be EXCLUDED from construction contract costs:

- General administration costs (unless reimbursement is specified to the contract)

- Selling costs

- Research and development (unless reimbursement is specified to the contract)

- Depreciation of idle plant and equipment not used on in the contract

Penalty charged by client (may be for delay) will reduce the revenue; will not increase the cost.

Finance costs should be included in contract costs under IAS 23 Borrowing Costs.

Accounting treatments:

Income Statement:

Revenue X

((Total contract value X % completed) – Revenue recognised in previous periods )

Cost of sales (X)

((Total contract costs X % completed) – Costs and losses charged in previous periods)

Foreseeable loss not previously recognised (ALWAYS test for foreseeable loss) (X)

(((Total contract value – Total contract cost) X % yet to complete)

– Any of this loss previously recognised)

Profit/(loss) (before non-reimbursable abnormal cost) X/(X)

Abnormal cost (e.g. rectification cost which is not reimbursed by client) (X)

Net profit/(loss) X/(X)

(Any rectification cost which will be reimbursed by client will increase both ‘total contract value’ and

‘total contract costs’)

Statement of financial position:

Contract costs incurred to date X

Profits/(losses) recognised to date (before deducting non-reimbursable abnormal cost) X/(X)

X

Progress billing to date (X)

Receivables / (payables) (current asset/liability) X/(X)

- Probable that economic benefit of the

contract will flow to the entity.

- Costs and revenue can be identified

clearly and be reliably measured.

- Either, proportion of total contract costs incurred

for work carried out to date

- Or, physical proportion of the contract work

completed

Costs incurred to date + costs will be incurred



‘Moral excellence comes about as a result of habit. We

become just by doing just acts, temperate by doing temperate

acts, brave by doing brave acts.’

- Aristotle



IAS 12 Income taxes

Tax

Sales tax Income tax Deferred tax

Also known as VAT (value added tax).

Seller collect ‘sales tax’ at the point of sale and the

purchaser pays ‘sales tax’ at the point of purchase.

If 15% sales tax applicable on sales made by

Company ‘T’; the accounting for $100 sales will be:

DR SFP: Cash 115

CR I/S: Revenue 100

CR SFP: Current liability: Sales tax payable 15

(Because as per IAS 18, revenue cannot be

recognised for the amount ($15) collected on behalf

of others (i.e. sales tax collected on behalf of

government).

If 15% sales tax applicable on purchases made by

Company ‘T’ and if the sales taxes paid by

Company ‘T’ is recoverable; the accounting for $80

purchase will be:

DR Purchase 80

DR SFP: Current asset: Sales tax recoverable 12

(or, DR SFP: Current liability: Sales tax payable,

if there is already a sales tax payable balance)

CR SFP: Cash 92

If sales tax paid by Company ‘T’ on purchase is

NOT recoverable; the accounting for $80

purchase will be:

DR Purchase 92

CR SFP: Cash 92

Also known as current tax.

This is the tax on ‘taxable profit’ (NOT on

‘accounting profit’).

Companies prepare profit or loss account

based on accounting standards; but taxable

profit is calculated based on tax rules.

If taxable profit for the year is $100 (accounting

profit can be different) and applicable tax rate

is 30%; then the accounting treatment will be:

DR I/S: Expense: Income tax 30

CR SFP: Current liability: Tax payable 30

(If tax is paid as incurred; then CR SFP: Cash)

If there is a tax loss for the year is $100; then

the accounting treatment will be:

DR SFP: Current asset: Tax recoverable 30

(or, DR SFP: Current liability: Tax payable, if

there is already a tax payable balance)

CR I/S: Income tax (will reduce expenses) 30

Under-provision or over-provision of tax:

The actual tax liability for the year and the tax

charge in the income statement are not

necessarily the same amount. The actual tax

liability for the year is agreed with tax

authorities, may be, in a later year.

- If tax charge in Year-1 on Year-1 taxable

profit is $100 and in Year-2 the actual tax

charge for Year-1 determined $120; then

the tax charge for Year-2 will be increased

by $20 (this is the ‘under-provision’ made

in Year-1). I.e. if tax charge in Year-2 on

Year-2 taxable profit is $150, the tax

expense amount in Year-2 I/S will be

$150+$20=$170.

o An over-provision of tax from year

1 is deducted from total tax charge

for year 2.

o The other side of the double entry

is an adjustment to the current tax

liability.



Deferred tax: This is an accounting measure rather than a tax levied by government; it represents tax

payable or recoverable in future accounting periods in relation to transactions which have already taken

place.

Temporary differences are differences between the carrying amount of an asset or liability in the

statement of financial position and its tax base. Temporary differences may be either taxable or

deductible.

- Taxable temporary differences will result in taxable amounts in determining taxable profit (loss) of

future periods when the carrying amount of the asset or liability is recovered or settled.

Deferred tax liabilities: are the amounts of income taxes payable in future periods in respect

of taxable temporary differences.

DR Tax charge

CR SFP: Non-current liabilities: Deferred tax liability

- Deductible temporary differences will result in amounts that are deductible in determining taxable

profit (tax loss) of future periods when the carrying amount of the asset is recovered or settled.

Deferred tax assets: are the amounts of income taxes recoverable in future periods in respect

of deductible temporary differences (and in respect of the carry forward of unused tax losses or

tax credits).

DR SFP: Non-current assets: Deferred tax asset

CR Tax charge

Recognise deferred tax (that is the difference between the opening and closing deferred tax

balances in the SFP) normally in profit or loss. But, exceptions are:

- Deferred tax relating to items dealt with as other comprehensive income (such as revaluation)

should be recognised as tax relating to other comprehensive income within the statement of

comprehensive income

- Deferred tax relating to items dealt with directly in equity (such as the correction of an error or

retrospective application of a change in accounting policy) should also be recognised directly in

equity

Steps to follow in determining deferred tax balances:

o Step 1: Determine the item’s carrying amount (i.e. book value; i.e. SFP value) and tax base value

as at year beginning and year end.

o Step 2: Calculate the temporary difference (i.e. difference between carrying value and tax base

value) at year beginning and at year end.

- Temporary difference will be either ‘taxable temporary difference’ or ‘deductible temporary

difference’. Check the decision tree below.

- In the question sometime the temporary differences are given. In that case you don’t need to apply Step 1.

o Step 3: Apply tax rate on temporary differences to identify deferred tax asset or liability at year

beginning and at year end.

- The deferred tax asset or liability identified from year end balances is the amount to be

shown in Statement of Financial Position.

- The movement from year beginning deferred tax asset or liability to year end deferred tax

asset or liability to be shown in I/S (in other comprehensive income if the portion related to

revaluation).

Expense:

Asset

Liability

Income:

Asset

Liability



- The tax rate to be used in the calculation for determining a deferred tax asset or liability is

the rate that is expected to apply when the asset is realised, or the liability is settled.

For asset: Tax base value < Carrying amount

For liability:

Tax base > Carrying amount

Temporary differences

Tax base =

Carrying

amount

For asset: Tax base value > Carrying amount

For liability:

Tax base value < Carrying amount

Taxable temporary differences Deductible temporary differences

Deferred tax liability Deferred tax asset

No deferred

tax

implications

The most important temporary difference is that between depreciation charged in the financial statements and capital allowances in the tax computation. In practice capital allowances tend to be higher than depreciation charges, resulting in accounting profits being higher than taxable profits. This means that the actual tax charge (current tax) is too low in comparison with accounting profits. However, these differences even out over the life of an asset, and so at some point in the future the accounting profits will be lower than the taxable profits, resulting in a relatively high current tax charge. These differences are misleading for investors who value companies on the basis of their post-tax profits (by using EPS for example). Deferred tax adjusts the reported tax expense for these differences. As a result the reported tax expense (the current tax plus the deferred tax) will be comparable to the reported profits, and in the statement of financial position a provision is built up for the expected increase in the tax charge in the future. There are different ways that deferred tax could be calculated. IAS 12 states that the balance sheet liability method should be used. [IAS 12: IN2]



Question:

Company 'T' buys equipment for $50,000 and depreciates it on a straight line basis over its expected useful life of five years (i.e. @20%). For tax purposes, the equipment is depreciated at 25% per annum on a straight line basis (i.e. will be fully depreciated at end of Year-4). Accounting profit before tax is $5,000 for each of Year 1 to 5. The tax rate is 40%. Show current and deferred tax impacts from Year 1 to 5. Answer:

Current tax calculation: (background workings) Year 1 2 3 4 5

$ $ $ $ $

Accounting profit before tax 5,000 5,000 5,000 5,000 5,000

Add-back: Accounting depreciation 10,000 10,000 10,000 10,000 10,000

(since not deductible by tax rules)

(50,000X20%)

Less: Tax depreciation

(12,500)

(12,500)

(12,500)

(12,500) -

(50,000X25%)

Taxable profit 2,500 2,500 2,500 2,500 15,000

Current tax expense @ 40% on taxable

profit (DR I/S: Expense: Current tax)

(1,000)

(1,000)

(1,000)

(1,000)

(6,000)

Temporary difference: (background workings)

Year 1 2 3 4 5

$ $ $ $ $

Asset's carrying value (i.e. book value) 40,000 30,000 20,000 10,000 0

(Cost - Accumulated accounting depreciation)

Asset's tax base value

37,500

25,000

12,500 0 0

(Cost - Accumulated tax depreciation)

Taxable temporary difference

2,500

5,000

7,500

10,000 -

(since asset's carrying value is higher than the tax base

value)

Deferred tax liability: (background workings)

(since taxable temporary difference results deferred tax liability)

Year 1 2 3 4 5

$ $ $ $ $

Opening liability 0

1,000

2,000

3,000

4,000 Closing liability (in SFP under Non-current liabilities)

1,000

2,000

3,000

4,000

-

(Apply tax rate of 40% on temporary difference)

Liability (increase)/decrease

(1,000)

(1,000)

(1,000)

(1,000)

4,000

I/S: For the year ending (part of FS presented) 1 2 3 4 5

$ $ $ $ $

Profit before tax 5,000 5,000 5,000 5,000 5,000

Tax expense:

Current tax

(1,000)

(1,000)

(1,000)

(1,000)

(6,000)

Deferred tax

(1,000)

(1,000)

(1,000)

(1,000)

4,000

Profit after tax 3,000 3,000 3,000 3,000 3,000

Income:

Asset

Liability

Expense:

Asset

Liability



Determining tax base of assets:

o The tax base of an asset is the amount that will be deductible for tax purposes against any

taxable economic benefits that will flow to an entity when it recovers the carrying amount of the

asset. If those economic benefits are not taxable, the tax base of the asset is equal to its carrying

amount. [IAS 12: 7]

o Putting above into a formula:

Tax base = Carrying amount – Future taxable amounts + Future deductible amounts

Carrying amount

Future taxable amounts

Future deductible amounts

Tax base

Note

$ $ $ $

Plant & equipment costing $10,000 has a carrying amount of $5,400; accumulated tax depreciation of $6,500 already deducted.

5,400 (5,400) 3,500 3,500 1

Interest receivable has a carrying amount of $1,000. The related interest revenue will be taxed on a cash basis.

1,000 (1,000) Nil Nil 2

Trade receivables have a carrying amount of $1,000. The related revenue has already been included in taxable profit.

1,000 Nil Nil 1,000 3

Dividends receivables have a carrying amount of $1,000. The dividends are not taxable.

1,000 Nil Nil 1,000 4

A loan receivable has a carrying amount of $1,000. The repayment of the loan will have no tax consequences.

1,000 Nil Nil 1,000 5

Note:

1.

- Future taxable amount considered as equivalent to the Carrying amount since the economic

benefit (e.g. operations of the business which will generate income) from using the P&E yet to be

taxable.

- Future deductible amount is $3,500 since $6,500 already claimed as tax depreciation in taxable

profit calculation. $3,500 will be deductible in the future periods’ taxable profit calculation.

2.

- The amount will be taxable on cash basis; i.e. when the cash will be received in the future. So, the

whole $1,000 amount is Future taxable amount.

- The amount will never be deductible in taxable profit calculation. So, ‘Nil’ Future deductible

amount.

3.

- The amount already been taxed; so will not be taxed further. That is why Future taxable amount is

‘Nil’.

- The amount will never be deductible in taxable profit calculation. So, ‘Nil’ Future deductible

amount.

4. The amount not taxable and not deductible in the future. So, Future taxable amount and Future

deductible amount both are Nil.

5. The amount will not be taxed or deductible in the future. So, both of the values are ‘Nil’.

For depreciable assets Future taxable amounts are equal to carrying amounts.



Determining tax base of liabilities:

o The tax base of a liability is its carrying amount, less any amount that will be deductible for tax

purposes in respect of that liability in future periods. In the case of revenue which is received in

advance, the tax base of the resulting liability is its carrying amount, less any amount of the revenue

that will not be taxable in future periods. [IAS 12: 8]

o Putting this into a formula:

Tax base = Carrying amount + Future taxable amount* – Future deductible amount

*Exception applies for unearned revenue (i.e. revenue received in advance) (see following Note-2)

Carrying amount

Future taxable amounts

Future deductible amounts

Tax base

Note

$ $ $ $

Current liabilities include accrued expenses with a carrying amount of $1,000. The related expense will be deducted for tax purposes on a cash basis.

1,000 Nil (1,000) Nil 1

Current liabilities include interest revenue received in advance, with a carrying amount of $10,000. The related interest revenue was taxed on a cash basis.

10,000 (10,000) Nil Nil 2

Current liabilities include accrued fines and penalties with a carrying amount of $100. Fines and penalties are not deductible for tax purposes.

100 Nil Nil 100 3

A loan payable has a carrying amount of $1,000. The repayment of the loan will have no tax consequences.

1,000 Nil Nil 1,000 4

Note:

1.

- The related expense will be deducted for tax purposes on a cash basis. Since the amount yet to

be paid, the $1,000 will be Future deductible amount.

- The amount is an expense, so will not the taxable in the future.

2.

- The amount is charged for tax on cash basis. Since the cash is already received, the amount is

already taxed and will not be taxed again. That is why Future taxable amount is taken as a

negative figure, instead of positive (as given in the formula). This is exception to the general

formula, but in compliance with IAS 12 requirements.

- Alternative way of calculating Tax base of Unearned revenue is: Carrying amount – Amount that

will not be taxable in the future. Thus the calculation will be: 10,000 - 10,000 = Nil

3. The amount will not be deductible, or chargeable for tax purposes.

4. The amount will not be deductible, or chargeable for tax purposes.



‘You never achieve success unless you like what you are

doing.’

- Dale Carnegie



Financial instruments

Four standards on financial instruments:

o IAS 32 Financial instruments: Presentation

IAS 32 deals with classification of financial instruments between liabilities and equity,

and presentation of certain compound instruments

o IFRS 7 Financial instruments: Disclosures

IFRS 7 revised, simplified and incorporated disclosure requirements previously in IAS 32

o IAS 39 Financial instruments: Recognition and measurement

IAS 39 deals with recognition, derecognition and measurement of financial instruments

and hedge accounting

o IFRS 9 Financial instruments

IFRS 9 is a work in progress and will replace IAS 39. It will come into force for

accounting periods ending in 2013.

Financial instruments

A financial instrument is any contract that gives rise to both a financial asset of one entity and a

financial liability or equity instrument of another entity.

A financial asset is any asset that

is:

(a) cash

(b) an equity instrument of another

entity; or

(c) a contractual right to receive

cash or another financial asset

from another entity;

. . . .

A financial liability is any liability

that is:

(a) a contractual obligation:

(i) to deliver cash or another

financial asset to another

entity,

. . . .

An equity instrument is

any contract that

evidences a residual

interest in the assets of

an entity after deducting

all of its liabilities.

Examples:

- Cash and timed deposits - Trade and loan receivables - Investments in shares issued

by other entities (typically below 20%)

Examples:

- Trade payables - Loans and redeemable

preference shares

- Bank overdraft

Examples:

- Company’s own equity share

Example 1: Accounting for a liability using amortised cost Giles issues a debt instrument at discount of $500 and is redeemed at a premium of $1,075 (i.e. total of $11,075). Nominal value of the instrument is $10,000 and redeemable in two years. Coupon rate is 2% and effective rate is 10%. Opening balance Charge in I/S @ 10% Cash flow Y/end balance (SFP) Year 1 9,500 (10,000-500) 950 (9,500X10%) (200) (10,000X2%) 10,250 Year 2 10,250 1,025 (200) 11,075

- If there was a issue cost of $500, instead of initial $500 discount, the result would have been same.



Compound financial instruments: A compound or ‘hybrid’ financial instrument is one that contains both a liability component and an equity component. As an example, an issuer of a convertible bond has:

- The obligation to pay annual interest and eventually repay the capital – the liability component - The possibility of issuing equity, should bondholders choose the conversion option – the equity

component. In substance the issue of such a bond is the same as issuing separately a non-convertible bond and an option to purchase shares. At the date of issue the components of such instruments should be classified separately according to their substance. This is often called ‘split’ accounting. The amount received on the issue (net of any issue expense) should be allocated between the separate components as follows:

- The fair value of the liability component should be measured at the present value of the periodic interest payments and the eventual capital repayment assuming the bond is redeemed.

- The fair value of the equity component should be measured as the remainder of the net proceeds.

Note that the rate of interest on the convertible will be lower than the rate of interest on the comparable instrument without the convertibility option, because of the value of the option to acquire equity.

Note that the rate of interest on the convertible will be lower than the rate of interest on the comparable instrument without the convertibility option, because of the value of the option to acquire equity.

The present value should be discounted at the market rate for an instrument of comparable credit status and the same cash flows but without the conversion option.

On 1 January 20X7 an entity issued 10,000 6% convertible bonds at a par value of £100. Each bond is redeemable at par or convertible into four shares on 31 December 20X8. Interest is payable annually in arrears. The market rate of interest for similar debt without the conversion option is 8%. Year Cash flow Discount factor Present value

£ £ 20X7 60,000 0.9259 55,554 20X8 1,060,000 0.8573 908,738 Total liability component 964,292 Total proceeds (10,000 × £100) 1,000,000 Equity element 35,708 The subsequent accounting for the liability component should be as follows: Year Opening balance Interest expense (8%) Interest paid Closing balance

£ £ £ £ 20X7 964,292 77,143 (60,000) 981,435 20X8 981,435 78,515 (60,000) 999,950 If on 31 December 20X8 all the bond holders elect to convert into equity, then the £1 million liability should be reclassified to equity, making £1,035,708 in total. The double entry should be:

DR Financial liability £1 million CR Equity £1 million

If none of the bonds are converted to equity, the liability of £1 million will be extinguished by the cash repayment. However, the amount already included in equity of £35,708 should remain there. The double entry should be:

DR Financial liability £1 million CR Cash £1 million

Will be charged in

I/S as Finance cost

The actual interest payment;

will reduce cash in SFP

Amount

will be in

SFP:

Liabilities

Will be given in Q

The amount should have been

£1,000,000. The mismatch is

due to decimal places of the

Discount factor used. (not

incorrect in exam!)



Equity

Share capital Reserves

Ordinary share capital

- This represents the

face value of total

issued share.

- To identify number

shares in issue,

divide total share

capital by face

value per share.

Preference share

Irredeemable

preference share

- Treat this preference

share as equity, and

recognise dividend

paid to irredeemable

preference

shareholders in

‘Statement of

changes in Equity’ as

distribution of

retained earnings.

Redeemable preference

share

- Treat this preference

share as liability in

SFP.

- Recognise dividend

paid to Redeemable

preference

shareholders as

Finance cost in I/S

(i.e. do not recognise

in Statement of

changes in equity).

Cumulative

- Dividend will be due

irrespective of

declaration during

the year.

- Typically redeemable

and convertible

preference shares

are cumulative.

Non-cumulative

- Dividend will be due only when it is declared.

But, ordinary shareholders typically cannot

get dividend before preference shareholders.

- Ordinary shares and, generally, Irredeemable

preference shares are non-cumulative.

Share premium

- This

represents

the additional

amount than

the face

value

collected on

issue of

ordinary

share.

- If face value

is $1 of per

ordinary

share and

$1.2

collected on

issue of per

1,000 share:

DR Cash

1,200

CR Share

capital 1,000

CR Share

premium 200

Retained

earnings

- Generally,

this is amount

accumulated

from year-on-

year

undistributed

(i.e. retained)

profit after

tax.

- Profit after

tax can be

distributed to

ordinary

shareholders

and

irredeemable

preference

shareholders.

Revaluation

reserves

- This is the

amount

derived from

IAS 16

Property,

plant and

equipment

revaluation.

Convertible

preference share

- This is also

known as

compound or

hybrid financial

instrument.

- It has liability

component and

equity

component.

(see compound

instrument note)



‘Half of the harm that is done in this world is due to people

who want to feel important. They don't mean to do harm. But

the harm does not interest them.’

- T. S. Eliot



Consolidated statement of financial position

Different types of investment and required accounting:

INVESTMENT CRITERIA REQUIRED TREATMENT IN GROUP ACCOUNTS

Subsidiary Control (> 50% rule) Full consolidation, i.e. single entity IAS 27 Consolidated and Separate Financial Statements IFRS 3 Business Combinations IFRS 10 Consolidated Financial Statements

Associate Significant influence (50% > 20% rule)

Equity accounting IAS 28 Investment in Associates and Joint Ventures

Joint venture (jointly controlled entity)

Contractual agreement Proportionate consolidation or equity accounting IAS 28 Investment in Associates and Joint Ventures IFRS 11 Joint Arrangements

Investments which is none of the above

Asset held for accretion (i.e. increase) of wealth

As for single company accounts (IFRS 9: Financial instruments)

Investments ‘held for sale’ (IFRS 5: Non-Current Asset Held for Sale and Discontinued Operations)

Sale is highly probable + rule Present assets or group of assets separately in Statement of Financial Position and results of discontinued operations to be presented separately in the Statement of Comprehensive Income.

Investments in Subsidiary:

- Control achieved by owning more than 50% voting power. But, control can still exist with less than 50% voting power.

- Parent should cease to consolidate an entity which was a subsidiary when control is lost. - Control may be lost even without changing the ownership levels; when subsidiary becomes subject

to control of a government, court administration or regulator.

Exemptions from preparing group accounts: A parent need not present consolidated financial statements if ALL of the following conditions are satisfied:

- It is a wholly-owned subsidiary or a partially-owned subsidiary of another entity and its other owners have not objected to the parent not presenting consolidated financial statements

- Its securities are not publicly traded - It is not in the process of issuing securities in public securities markets - The ultimate or intermediate parent publishes consolidated financial statements that comply with

IFRS

Different reporting dates: If a subsidiary’s reporting date is different then parent and bulk of other subsidiaries in the group:

- the subsidiary may prepare another set of financial statements - OR, if it is not possible, the subsidiary’s accounts may still be used provided that the gap is not more

than three months and adjustments are made to reflect significant transactions or other events.

Differing accounting policies: Uniform accounting policies should be used. Adjustments should be made where accounting policies of subsidiary differ from parent.

When parent has:

- Power over more than 50% of the voting rights by virtue of agreement with other investors. - The power to govern the financial and operating policies of the entity by statue or under an

agreement. - The power to appoint or remove a majority of members of the board of directors. - The power to cast a majority of votes at meetings of the board of directors.



1) GROUP STRUCTURE: Parent

50% + (control) 20% + (significant influence)

Subsidiary Associate

2) NET ASSETS AT FAIR VALUE AT THE DATE OF:


Acq. Y/end Acq. Y/end

$ $ $ $

Share capital X X X X

Reserves:

Retained earnings: credit/(debit) balance X / (X) X / (X) X / (X) X / (X)

Share premium X X X X

Other reserves (e.g. revaluation) X X X X

Unrealised profit – when subsidiary sales to parent - (X) - -

Fair value adjustments X / (X) X / (X) X / (X) X / (X)

FV adj. – Post-acquisition depreciation (cumulative effect from acq. to y/e)

- (X) / X - (X) / X

Total X X X X

Post-acquisition reserve (difference between Acq. & Y/end) X X

3) COST OF INVESTMENT:


$ $

Cash consideration X X

Acquisition date fair value of other consideration (e.g. acquisition date market value of shares given by parent to subsidiary)

X X

Contingent and deferred consideration (converted into PV applying ‘(1+r)

– n’ )

X X

X X

- Do not include costs like professional fees, legal fees in the cost of investment; these must be

recognised in the Profit or Loss account as expense as incurred. Also, in cost of investment do not include loan issued to subsidiary.

- Any contingent consideration payable must be included even at the date of acquisition if it is not deemed probable that it will be paid

- It is possible that the FV of the contingent consideration may change after the acquisition date. If it is due to additional information obtained that affects the position at acquisition date, goodwill should be remeasured (one year qualifying period applies). If the change is due to events after the acquisition date (such as earnings target met) then the goodwill will not be remeasured (gain/loss from remeasurement will be recognised in I/S)

4) GOODWILL: i) New method: When examiner will require to use the new method, he will mention ‘full’, ‘gross’, ‘new’, or ‘calculate NCI at fair value’. In this case FV of NCI (value of shares not acquired) at acquisition date will be given. ii) Old method: Where an exam question requires use of the old method, it will state that ‘it is group policy to value the non-controlling interest at its proportionate share of the fair value of the subsidiary’s identifiable net assets.’



New method Subsidiary

$ $

Cost of investment (W-3) X

FV of NCI at acquisition (value of share not purchased)(given in question) X

Less: FV of net assets of subsidiary at acquisition date (W-2) (X)

Goodwill at acquisition X

Impairment of goodwill to year end (acquisition date to year-end) (X)

Goodwill at year end in SFP X

Old method Subsidiary

$ $

Cost of investment (W-3) X

Non-controlling share of net asset at aqc. (NCI% X NA @ FV @ Acq.) (W-2) X

Less: Total net assets of subsidiary at acquisition date (W-2) (X)

Goodwill at acquisition X

Impairment of goodwill to year end (acquisition date to year-end) (X)

Goodwill at year end in SFP X

5) NON-CONTROLLING INTEREST (NCI) IN SUBSIDIARY:

New method Subsidiary

$

FV of NCI at acquisition (value of share not purchased) (given in question) X

NC% X Post-acquisition reserve (W-2) X

NC% of Goodwill impairment to date (X)

NCI at Y/end in SFP X

Old method Subsidiary

$

Non-controlling share of net asset at aqc. (NCI% X NA @ FV @ Acq.) (W-2) X

NC% X Post-acquisition reserve (W-2) X

NCI at Y/end in SFP X

- NCI is not applicable for associates.

6) CONSOLIDATED RESERVE:

$

Parent’s reserves (Share premium, Retained earnings, Revaluation reserve) at reporting date (100%)

X / (X)

Group share of post-acquisition reserve of: Subsidiary: Acquisition % X Post-acquisition reserve (W2) Associate: Acquisition % X Post-acquisition reserve (W2)

X / (X) X / (X)

Unrealised profit - when parent sales to subsidiary (X)

Unrealised profit – when there is a transaction with associate (Group % X Unrealised profit)

(X)

Unwinding of discounting of deferred/ contingent consideration (W-3)

(X)

Goodwill impairment to date (Acq. to Y/end): Subsidiary: take only the G% of impairment if goodwill is calculated applying new method

Associate

(X) (X)

Reserve in SFP X



7) INVESTMENT IN ASSOCIATE:

$

Cost of investment in Associate (W-3) X

Group share of post-acquisition reserve of Associate (G% X Post-acquisition reserve) (W2)

X / (X)

Unrealised profit - when Parent or Subsidiary sales to Associate (G% X Unrealised profit)

(X)

Impairment of Associate to date (X)

Investment in Associate in SFP X

P Group

Consolidated statement of financial position as at 31.XX.XXXX

$ $

ASSETS

Non-current assets

Property, plant and equipments (Parent + Sub +/- FV adj. (W-2))

X

Intangible assets (Parent + Sub +/-FV adj. (W-2)

X

Goodwill (W-4)

X

Investment in Associate (W-7)

X

Other investments (excluding investment in Sub & Asso)

X

X

Current assets

Cash & bank (Parent + Sub) X

Receivables (Parent + Sub - Inter-company receivables) X

Closing inventory (Parent + Sub - Unrealised profit from transaction with Sub - G% of Unrealised profit if Associate sales to Parent/Sub) (W-2/W-6)

X

X

Total assets

X

EQUITY AND LIABILITIES

Equity

Share capital (only parent's)

X

Reserves (W-6)

X

Non-controlling interest (W-5)

X

X

Non-current liabilities (Parent + Sub - Inter-company loan)

X

Current liabilities

Bank overdraft (Parent + Sub) X

Payables (Parent + Sub - Inter-company payables) X

Deferred/contingent consideration after unwinding (W-3) X

X

Total equity and liabilities X



Consolidated statement of comprehensive income

P Group

Consolidated statement of comprehensive income for the year ending 31.XX.XX

Parent Subsidiary

Associate

Adj. Total

$ $ $ $ $

Revenue

X X

(X) 1 X

Cost of sales (X) (X)

X 1 (X)

Unrealised profit in closing inventory (X)2 (X)

2

(X)

Gross profit

X

Operating expenses (X) (X)

(X)

Dep. from FV adj.

(X)/X

(X)/X

Goodwill impairment during the year (sub) (X) Old

(X) New

(X)

Investment income X X

(X)3 X

Dividend from subsidiary (parent's portion) (X)

(X)

Profit before interest & tax

X

Finance cost (e.g. Interest expense) (X) (X)

X3 (X)

Profit before tax

X

Tax (X) (X)

(X)

X

Group share of Associate's profit after tax

X

X

Impairment of Associate during the year

(X)

(X)

Consolidated net profit

X

X4

Other comprehensive income

X X X

Group share

X

Total comprehensive income

X

X5

Net profit attributable to:

Non-controlling interests (Total of sub's column X NC%) (X4) X

Parent (balancing figure)

X

Net profit

X

Total comprehensive income attributable to:

Non-controlling interests (Total of sub's column X NC%) (X5) X

Parent (balancing figure)

X

Total comprehensive income

X

* If subsidiary is acquired part way through the year then all income and expenses of subsidiary shall

be time apportioned

X1: Transaction value of inter-company trading (i.e. the total selling price in inter-company trading)

X2: Who is the seller? (only deduct the unrealised profit)

X3: Interest on inter-company loan



Our greatest weakness lies in giving up. The most certain way

to succeed is always to try just one more time. - Thomas A.

Edison (Inventor)



IAS 7 Statement of cash flows

XYZ Co.

Statement of cash flows for the year ending 31.XX.XXXX

$ $

NET CASH FLOW FROM OPERATING ACTIVITIES

Indirect method

Profit before tax (after interest) X

Adjustments for:

Finance cost (Interest expense) for the year (amount charged in I/S ) X

Depreciation and amortisation for the year (amount charged in I/S) (W-4/5) X

(Gain)/loss on disposal of non-current asset (amount recognised in I/S) (W-7) (X)/X

(Gain)/loss on revaluation of investment properties (IAS 40) (amount recognised in I/S) (X)/X

Income from investment properties (amount recognised in I/S) (X)

Investment income (e.g. interest/ dividend income) (amount recognised in I/S) (X)

Operating cash flow before working capital changes X

(Increase)/decrease in receivables (from last year to current year's SFP balance) (X)/X

(Increase)/decrease in inventories (from last year to current year's SFP balance) (X)/X

Increase/(decrease) in payables (from last year to current year's SFP balance) X/(X)

Cash generated from operations X

Interest paid (W-1) (X)

Income tax paid (W-2) (X)

Dividend paid* (W-11) (X)

Net cash generated/ (used) from / (for) operating activities X/(X)

Direct method

Cash receipts from customers (W-13) X

Operating cash outflows (e.g. payment to suppliers & employees) (W-14) (X)

Cash generated from operations X

Interest paid (W-1) (X)

Income tax paid (W-2) (X)

Net cash generated/ (used) from / (for) operating activities X/(X)

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of Non-current assets (W-3/5) (X)

Development expenditure during the year (W-8) (X)

Proceeds from sale of Non-current assets (W-7) X

Income from investment properties (excluding revaluation gain & non-cash income) X

Interest received X

Divided received X

Net cash generated/ (used) from/ (in) investing activities

X/(X)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from issue of shares (W-12) X

Proceeds from issue of loan-notes (increase from last year to current year’s SFP balance)

X

Repayment of loan-notes (decrease from last year to current year’s SFP balance) (X)

Payment of finance lease liabilities (W-9) (X)

Dividend paid* (W-11) (X)



Net cash generated/ (used) from/ (in) financing activities

X/(X)

Net increase/ (decrease) in cash and cash equivalents

X/(X)

**Cash and cash equivalents at beginning of the period (from last year's SFP)

X/(X)

(including bank overdraft & short-term investments)

**Cash and cash equivalents at end of the period (agrees with current year's SFP)

X/(X)

(including bank overdraft & short-term investments)

*Dividend payment can be either in Operating Activities or in Financing Activities.

**Cash and cash equivalents includes Bank’s asset balance and overdraft balance and short-term deposits

(short-term deposits are normally for less than 3 months).

Workings-1

Interest payable

Payment during the year (balancing figure) X B/f (from last year's SFP) X

C/f (from current year's SFP) X Charge for the year (I/S) X

X X

Workings-2

Tax payable

B/f - Asset (from last year's SFP): B/f - Liability (from last year's SFP):

Current X Current X

Deferred X Deferred X

Credit (similar to income) for the year (I/S): Charge for the year (I/S):

Current X Current X


Payment during the year (balancing figure) X

Received during the year

(balancing figure) X

C/f - Liability (from current year's SFP): C/f - Asset (from current year's SFP):

Current X Current X


X X

Workings-3

Property, plant and equipment: Cost

B/f (from last year's SFP or other information)

X Disposal X

Revaluation gain during the year X Revaluation loss during the year

X

Finance lease: Asset X Accumulated dep. with revalued NCA on revaluation

X

Purchase (i.e. addition during the year) X C/f (from current year's SFP or other information)

X

X

X



Workings-4

Property, plant and equipment: Accumulated depreciation

Acc. Dep. with disposed NCA on disposal X b/f (from last year’s SFP or other information)

X

Acc. Dep. with revalued NCA on revaluation X

c/f (from current year's SFP or other information)

X Depreciation charge for the year

X

X

X

Workings-5

Property, plant and equipment: Net book value

B/f (from last year's SFP) X Disposal (NBV at disposal date)

X

Revaluation gain during the year X Revaluation loss during the year

X

Finance lease: Asset X Depreciation charge (I/S)

Purchase (i.e. addition during the year) X C/f (from current year's SFP) X

X

X

Workings-7

Profit/ (loss) on disposal of PPE = Disposal proceed – Carrying value at disposal date

Carrying value at disposal date = Cost – Accumulated depreciation at disposal date

Workings-8

Development expenditure: NBV

B/f (from last year's SFP) X Amortisation charge for the year (I/S)

X

Expenditure incurred during the year X C/f (from current year's SFP) X

X X

Workings-9

Finance lease: Liability

Payment during the year (balancing figure) X

B/f - Liability (from last year's SFP):

Current X

Non-current X

C/f - Liability (from current year's SFP):

New finance lease X Current X

Non-current X

X X



Workings-10

Government grant

Grant released during the year (I/S) X

B/f - Liability (from last year's SFP):

Current X

Non-current X

C/f - Liability (from current year's SFP):

New grant in the year X Current X

Non-current X

X X

Workings-11

Retained earnings

Bonus share issue from retained earnings X B/f (from last year's SFP) X

Profit for the year (I/S) X

Dividend paid X Extra depreciation transfer from revaluation reserve (IAS 16)

C/f (from current year's SFP) X C/f (from current year's SFP) X

X

X

Opening retained earnings X

Profit for the year X

Extra depreciation transfer from revaluation reserve (IAS 16) X

Bonus share issue from retained earnings (X)

Dividend payment (balancing figure) (X)

Closing retained earnings (X)

Workings-12

Share capital and share premium account

Bonus share issue from share premium

X

B/f (from last year's SFP):

Share capital X

Share premium X

C/f (from current year's SFP): Bonus issue X

Share capital X

Share premium X Share issue for cash X

X X



Workings-13

Receivables

B/f (from last year's SFP) X Cash received from customers

X

Sales revenue for the year X C/f (from current year's SFP) X

X

X

Workings-14

Payables

Cash payment during the year X B/f (from last year's SFP) X

Purchase during the year (W-15)

X

C/f (from current year's SFP) X

Other operating expenses for the year excluding depreciation, profit/loss on disposal, investment income, interest expense & tax

X

X

X

Workings-15

Inventory

B/f (from last year's SFP) X Cost of sales: Inventory X

Purchase during the year X C/f (from current year's SFP) X

X

X

****The formats are not comprehensive. All information in the formats may not be required in every

situation. It is very important to understand the underlying concept than mere memorising the

format.



‘The keys to life are running and reading. When you're

running, there's a little person that talks to you and says, ‘Oh

I'm tired. My lung's about to pop. I'm so hurt. There's no way I

can possibly continue.’ You want to quit. If you learn how to

defeat that person when you're running, you will know how to

not quit when things get hard in your life. For reading: there

have been gazillions of people that have lived before all of us.

There's no new problem you could have . . . There's no new

problem that someone hasn't already had and written about it

in a book.’

– Will Smith



Ratio analysis

LIQUIDITY RATIOS: Liquidity ratio measures a company's ability to pay short-term obligations

1. Current ratio = Current Asset

Current Lia ilities X : 1

o Current ratio is mainly used to give an idea of the company's ability to pay back its short-term

liabilities (debt and payables) with its short-term assets (cash, inventory, receivables).

o The higher the current ratio, the more capable the company is of paying its obligations.

o A current ratio of 1.5:1 to 2:1 can mean sufficient current asset to cover its current liabilities.

o A current ratio of above 2:1 may mean over investment in working capital (i.e. in current assets).

Surplus assets can be used to

- to expand the business operation or to increase capacity which will earn additional profit,

- to repay debt which will save interest expenses,

- distribute to shareholders as dividend.

o A current ratio below 1 suggests that the company would be unable to pay off all of its current

liabilities if they came due at that point.

o Current ratio can be improved by

- selling of unused non-current assets,

- taking long-term loan,

- speeding up the receivables collection,

- slowing payables payment

o A weak current ratio shows that the company is not in good financial health, but it does not

necessarily mean that it will go bankrupt as there are many ways to access financing; but it is

definitely not a good sign.

o Companies that have trouble getting paid by its receivables or have long inventory turnover can run

into liquidity problems

Income Statement for the year ending X.X.X:

Sales/Revenue/Turnover X

Less: Cost of Sales (X)

Gross profit X

Less: Expenses (X)

Operating profit X

Less: Finance cost/Interest expense (X)

Profit before tax (PBT) X

Less: Tax (X)

Profit after tax (PAT)/Profit for the year/Net profit X

Less: Preference (irredeemable) dividend (X)

Profit attributable to ordinary shareholders X

Less: Ordinary dividend (X)

Retained profit for the year X

Balance Sheet/Statement of Financial Position as at X.X.X: Assets:

Non-current assets X Current assets: Cash X Receivables X Closing Inventory X X

Total assets X Shareholders capital:

Ordinary share capital X Reserves X X

Preference share capital* X Long-term liabilities X Current liabilities X X In

S

tate

ment

of

Chan

ges in E

qu

ity

*Redeemable preference share capital will be treated as a long-term liability. In that case its dividend will be treated as interest (Finance cost in Income Statement).



2. Quick or Quick asset or Acid test ratio = Current Asset-Closing Inventory

Current Lia ilities = X : 1

o The quick ratio measures a company's ability to meet its short-term obligations with its most liquid

assets (as it excludes inventory).

o Inventory is excluded because some companies (specially manufacturing companies with high

inventory holding period) have difficulty turning their inventory into cash.

o The higher the quick ratio, the better the position of the company.

o A quick ratio of 1:1 is normally most appropriate. For companies with a high inventory turnover ratio

(i.e. short inventory holding period) can have a less than 1 quick ratio without suggesting that the

company could be cash flow trouble.

o If quick ratio is too low than the current ratio; this could mean that high amount of working capital is

tied up in inventory. High amount of inventory means high inventory holding costs.

PROFITIBALITY RATIOS:

1. Return on capital employed (ROCE) = Profit EFORE Interest and Tax

Capital Employed X 100% = X%

o ROCE is the prime measure of operating performance. This ratio indicates how efficiently a business

(i.e. managers) is using the funds invested (equity and long-term debt).

o It is the ratio over which operations management has most control.

o ROCE increase from previous year or above industry average means a good sign and reflects the

fact that the company (by managers) has managed to increase the sales without a proportionate

increase in costs.

o ROCE decrease from previous year or below industry average shows problem with controlling of

costs. Level of dividend may also fall as a consequence.

o The value of capital employed is lower where company mainly uses rented assets (i.e. thorough

operating lease) rather owning or finance lease. This is also possible where assets’ carrying value is

lot less than the cost (remember in that case assets will need replacement). These may result a

higher ROCE.

o Asset revaluation (especially land) will result a higher amount of Capital employed, which will give a

lower ROCE without indicating company performance became poorer.

o ROCE should always be higher than the rate at which the company borrows; otherwise any increase

in borrowing will reduce shareholders' earnings.

o Capital employed = Total asset – Current liabilities = Share capital + Reserves +

Long-term liabilities

o Deferred Tax Liability or Asset normally excluded from Capital Employed. In that case,

Capital employed = Total asset – Current liabilities – Deferred tax liability or asset =

Share capital + Reserves + Long-term liabilities – Deferred tax liability or asset

o Current Liability portion of Long-term liabilities; and a constant amount of Overdraft

normally also considered as Non-current liability for Capital employed calculation

o Better to use average Capital Employed (Opening + Closing

2 where possible.

- If you are required to compare ratios between two different years and cannot

calculate average for both of the years, then take only the SFP value of the

year (i.e. do not average). This is for comparability purpose.

o If market value of equity is taken then do not include ‘Reserves’.

There is a lot other contexts to define capital employed. This is basically the capital

required for a business to function.



2. Return on equity (ROE), or Return on Shareholders’ Capital (ROSC) Profit AFTER Tax and Preference Dividend

Ordinary Share Capital and Reserve X 100% = X%

o Return on equity (ROE) indicates to ordinary shareholders how well their investments have

performed measuring how much profit the company has generated for them with their money.

o A good figure results in a high share price and makes it easy to attract new funds.

o With a similar level of ROCE, a fall in ROE may mean increased finance cost because of new loans.

o An improved ROE with a similar ROCE may mean some of the loans are repaid which resulted a

lower finance cost and, so, improved profit attributable to ordinary shareholders.

o If new share issued sometime at period end, this may result a declined ROE without indicating poor

performance of the company because company really did not get time to utilise the new capital.

3. Gross profit margin = Gross Profit

Sales X 100% = X%

o High gross profit margin may indicate effective purchasing strategy which results a lower material &/

production cost (i.e. lower cost of sales). A high gross profit margin may also indicate concentration

on low volume-high margin sales.

o Low gross profit margin may be an indication of selling products cheaply (i.e. at discount) in order to

generate high volume of sales. This may also indicate increased production cost (including material

and labour cost) without a proportionate increase in selling price.

4. Operating profit margin = Profit efore Interest and Tax

Sales X 100% = X%

o Operating profit margin gives analysts an idea of how much profit (before interest and tax) the

company is making from each dollar of sales.

o Typically operational management has full control over operating costs (the amount of loan capital

and, so, interest expense normally depends on more higher level of management and the amount of

tax payable depends on government policy). So, operating profit margin effectively measures

performance of operational management.

o A poor or declining Operating profit margin may indicate business is struggling in controlling the

costs. This may also happen because of decrease in selling price.

o A healthy operating profit margin is required for a company to be able to pay interest on loans.

o Profit after tax and preference dividend is the ‘Profit attributable to ordinary shareholders’

o It is common to use book values rather market value of shares (if market value used then

remember to exclude Reserves)

o Better to use average of Shareholders’ Capital

(Opening + Closing Ordinary Share Capital and Reserves

2 where possible; specially,

when closing balance significantly differs from opening balance.

- If you are required to compare ratios between two different years and cannot calculate

average for both of the years, then take only the SFP value of the year (i.e. do not

average). This is for comparability purpose.



5. Net profit margin = Profit After Tax

Sales X 100% = X%

o A higher percentage than last year or industry average indicates costs are being controlled better.

This may also indicate products are sold at higher price.

o A weaken Net profit margin may indicate management is struggling in controlling the costs.

o Company can sell at a discount to retain market share during economic downturn (and/or because of

intense competition). If costs remain at similar level this will result a lower Net Profit Margin.

Companies trading cheaper products can gain during economic downturn when customers generally

stop buying luxury products and turn to cheaper ones.

o In large companies, where higher level of economies of scale can be achieved (i.e. lower level of per

unit cost) the net profit margin can be higher as a result.

o Multinational companies can gain or loss from favourable or adverse exchange rate movements.

6. Asset turnover or Asset utilisation ratio = Sales

Capital Employed = X:1

o This shows the sales that is generated from each $1 worth of Capital (or asset) employed. The

higher the sales per $1 invested the more efficient use of the capital was.

o If business is selling luxury products or products with higher profit margin that may result a lower

Asset turnover ratio without a weaken ROCE or Net profit margin ratio.

EFFICIENCY RATIOS:

1. Average receivables collection period = Average Trade Receiva les

Credit Sales X 365 = X days

o Receivables collection period is an approximate measure of the length of time customers take to pay

what they owe.

o A Receivables Collection Period similar to Payables Payment Period may be an indication of good

credit control policy.

o Collection Period of less than 30 days may seem normal. Significantly in excess of 30 days

might be representative of poor management of funds of the business. However, some

businesses such as export oriented businesses normally needs to allow generous credit terms

o Use of ‘Non-current assets’ instead of ‘Capital employed’ is also correct. Check question for

indication. If question says nothing, then use ‘Capital employed’.

o Use only CREDIT SALES. If question gives us only a Sales figure (i.e. does not split

between credit and cash sales) then use the given Sales figure.

o We need only TRADE RECEIVABLES (i.e. receivables derived from credit sales). Non-

trade receivables (e.g. advance, damage claim, receivables of government grant) shall not

be included. If question gives us only a Receivables figure, and does not give any other

indication about its components then assume that is the Trade receivables figure.

o Better to use average trade receivables (Opening + Closing

2 where possible; specially,

when closing balance significantly differs from opening balance.

o An alternative of using Average Receivables is using year-end receivables figure where

amount of receivables did not change significantly from year-beginning to year-end.

- If you are required to compare ratios between two different years and cannot

calculate average for both of the years, then take only the SFP value of the year

(i.e. do not average). This is for comparability purpose.

o Irrecoverable debts and provision for doubtful debts normally not deducted from Trade

o Net profit margin sometimes calculated based on ‘Profit before tax (after interest). Check

question for indication.



(may be 60 days) to win customers; whereas retailer may sell only or mainly on cash (may be

collection period of not more than 10 days).

o A high or increasing collection period may mean poorly managed credit control function, and

increased risk of bad debts. This also may mean over investment in receivables.

o However, increase in collection period might be a deliberate policy to increase sales by

offering better credit terms than competitors.

o Decreasing or low collection period may mean tighten credit control policy; which may cause

declining customer numbers (i.e. reduction of sales).

o Receivables collection days can be improved by offering discount to customers for early payment.

2. Average payables payment period = Average Trade Paya les

Credit Purchase X 365 = X days

o Increasing or long payment period may indicate liquidity problem; and also may indicate loosing

opportunity of prompt payment discounts.

o A longer payment period may also mean company has succeeded in obtaining very favourable credit

terms from its suppliers; contradictorily, this may also mean unethical business practice.

o Long credit term from suppliers is a source of interest free financing. But, some suppliers may

charge interest if payment period exceeds a certain duration.

o Declining or short payment period may indicate business has sufficient cash to meet payables. A

short payment period may put company’s credit ratings in higher position.

o If receivables collection period is longer than the payables payment period then it can cause cash

flow difficulties.

3. Inventory turnover/ holding period = Average Inventory

Cost of Sales X 365 days = X days

or, Cost of Sales

Average Inventory = X Times

o This ratio is an estimate of the average time that inventory is held before it is used or sold. If average

inventory holding period is 30 days, this means that the inventory is ‘turned over’ (i.e. sold) on

average 12.16 times (= 365/30) in a year

o A low turnover (i.e. high holding period) implies slow sales and, therefore, excess inventory and/ or

high level of inventory holding costs.

o High inventory levels are unhealthy because they represent an investment with a zero rate of return.

It may also put company at a great loss if prices start to decline (think about technological products).

o If Credit purchase or purchase amount cannot be identified from the question, use Cost of

sales as it serves as an approximation.

o Use only Trade payables; i.e. payables generated from credit purchase.

o Better to use Average Inventory figure to take into account the variation between Opening

inventory and Closing inventory. But, instead of Average Inventory the closing inventory

figure can be used where opening inventory level cannot be determined; in that case

comparable figure has to derive from same approach.



4. Working capital cycle, or, Cash operating cycle (in days) =

Inventory holding period (days) + Receivables collection period – Payables payment period

o This cycle is the length of time between cash payment to suppliers and cash received form

customers. This measured how long a firm will be deprived of cash.

o A company could even achieve a negative cycle by collecting from customers before paying

suppliers. This policy of strict collections and delay payments is not always sustainable or

appreciable by customers (because they have to pay early) and suppliers (because they are being

paid late).

INVESTMENT RATIOS:

1. Earnings per share (EPS) = Earnings (i e Profit) Attri uta le to Ordinary Shareholders

eighted Avg Num er of Ordinary Shares = $X

or, ar et Price per Share

Price Earnings Ratio = $X

o EPS is generally considered to be the single most important variable in determining a share’s price.

This is a key measure of company performance from ordinary shareholders’ point of view.

o EPS shows the amount of profit attributable to each ordinary share. But, it does not represent actual

income of the ordinary shareholders.

o Increase in EPS generally indicates success; whereas a decrease is not welcomed by shareholders.

o A constant growth in EPS may result in favourable movements (i.e. increase) in share price.

o Both right issue and bonus issue of shares result in a fall of EPS. So, care must be taken while

interpreting.

o EPS often ignores the amount of capital employed to generate the earnings. Two companies could

generate the same EPS, but one could do so with less investment; this could mean that this

company was more efficient at using its capital.

In F9:

1. Finished goods inventory turnover period = Average FG Inventory


2. Raw materials inventory turnover period = Average R Inventory

Annul Purchases X 365 days = X days

3. Average production (WIP) period = Average IP


In F9:

Days

Finished goods inventory turnover period X

Raw materials inventory turnover period X

Average production (WIP) period X

Average receivables collection period X

Average payables payment period (X)

Operating cycle X/(X)



2. Dividend per share (DPS) = Ordinary Dividend Declared and Paid for The ear

eighted Avg Num er of Ordinary Shares = X$

o DPS is the actual portion of income received by the ordinary shareholders from EPS.

o DPS is important for shareholders who are seeking income from shares rather capital gain.

o Growth in dividend per share used in share price valuation. So, companies may have a policy of

achieving steady growth in dividend pay-out per share. A steady growth normally creates

positive market reaction (i.e. increase in share price).

3. Dividend pay-out ratio = Dividend Per Share

Earnings Per Share X 100% = X%

or, Ordinary Dividend Declared and Paid for The ear

Earnings (i e Profit) Attri uta le to Ordinary Shareholders X 100% = X%

o Dividend pay-out ratio is the percentage of earnings paid to shareholders as dividends. This shows

how well earnings support the dividend payments.

o High dividend pay-out ratio may mean company confidence on future earnings. But, where majority

of shares are held by a small number of shareholders, it may also mean that shareholders are taking

out as much profit as they can; and this does not necessarily serve company’s long-term interest.

o Low dividend pay-out ratio may mean company is expecting difficulties in the future; so now

interested in retaining earnings. But, it can also mean expansion (by reinvesting the retained

earnings) of business in the future.

o Mature companies tend to have a higher pay-out ratio.

4. Dividend cover = Earnings Per Share

Dividend Per Share = X Times

or, Earnings (i e Profit) Attri uta le to Ordinary Shareholders

Ordinary Dividend for the ear = X Times

o Dividend cover represents how many times dividend could have paid from the profit attributable to

ordinary shareholders.

o Dividend cover is a measure of the ability of a company to maintain the level of dividend paid out.

The higher the cover, the better the ability to maintain dividend pay-out if profits drop.

o Typically, a ratio of 2 or higher is considered safe in the sense that the company can well afford the

dividend; but dividend cover below 1.5 may seem risky.

o If the dividend cover is below 1 then the company is using its retained earnings from previous years

to pay current year’s dividend

o A low level of dividend cover might be acceptable in a company with very stable profits, but the same

level of cover for a company with volatile profits would indicate that company may not able to

maintain the current level of dividend pay-out.



5. Price/Earning (P/E) ratio = ar et Price Per Share

Earnings Per Share = X Times

or, Company s ar et Capitalisation

Earnings (i e Profit) Attri uta le to Ordinary Shareholders = X Times

o P/E ratio is a measure of company performance from the market’s point of view.

o P/E ratio shows how much money investors are currently willing to pay for each dollar of earnings. It

gives an indication of the confidence that the investors have in the future success (i.e. earnings) of

the business.

o In a very basic term, a P/E ratio of 20 means investors are paying equivalent of 20 years’ earnings

(at current EPS level) to own a share in the company.

o A P/E ratio of 1 means market is currently willing to pay $1 for each dollar of earnings currently made

by the company; this shows very little confidence on the company’s future prosperity. Whereas, a

P/E ratio of 20 expresses a great deal of optimism about the future of the company since investors

are currently willing to pay $20 for each dollar of company’s earnings. Investors paying 20 times of

current earnings believe that company will do significantly better in coming years, and this will not

take long to get the $20 earnings.

o Market can over-value or under-value company shares depending of information available.

6. Dividend yield = Dividend Per Share

ar et Price Per Share X 100% = X%

o Dividend Yield is a financial ratio that shows how much a company pays out in dividends relative to

its share price.

o In the absence of any capital gains, the Dividend Yield is the return on investment for a share.

o Investors can secure a minimum stream of cash flow from their investment portfolio by investing in

shares which is paying relatively high and stable dividend yields.

o Mature and well-established companies tend to have higher dividend yields; while young and growth

oriented companies tend to have lower yield. Many fast growing companies do not have a dividend

yield at all because they do not pay-out any dividend.

LONG-TERM SOLVENCY RATIOS:

1. Debt ratio = Total De t

Total Assets X 100% = X%

o This ratio represents how much money company owes compared to its Total assets.

o If Debt ratio is greater than 50%, the business can be considered as a risky company. But, a high

Debt ratio may also mean company’s ability to raise debt finance which shows confidence of debt

holders on the company.

o Market capitalisation is the total market value of all the issued ordinary shares of the

company.

o P/E ratio also knows as ‘Price Multiple’ or ‘Earnings Multiple’ ratio

o Total assets consist of non-current and current assets.

o Debts consist of all current and non-current liabilities (Deferred tax liabilities can be

ignored).



2. Gearing ratios:

a. Debt to Equity ratio =

De t Capital

Equity Capital X100% =

Redeema le Preference Share Capital Long-term Lia ilities

Ordinary Share Capital Irredeema le Preference Share Capital Reserves X 100% = X%

b. Debt to Total capital ratio =

De t Capital

Total Capital X100% =

De t Capital

Equity Capital De t Capital X 100% = X%

3. Leverage ratio = Equity Capital

Equity Capital De t Capital X100%

o A gearing level of more than 50% (where Debt Capital to Total Capital used) or more than 100%

(where Debt Capital to Equity Capital used) or Leverage ratio of less than 50% means company is

highly geared (i.e. risky).

o Risk is high for investors in a high geared company because of obligation to pay the interest and

repaying capital on time.

o The standard level of gearing depends on industry sector.

o A relatively higher gearing may mean company adopted an aggressive strategy to expand its

operation. This has to be justified with sales and profit growth. A higher gearing may also mean

company is having financial difficulties; so may be a going concern issue.

o A low or declining gearing may mean company is getting stronger financially and confident on future

earnings.

o Where gearing is high, shareholders’ required rate of return will increase because of high level of risk

involve in the investment.

o To lend money in a highly geared company, lenders may impose some covenants on the company

(example: a maximum limit of gearing, a minimum level of interest cover, pledge on some assets)

4. Interest cover = Profit efore Interest and Tax

Interest Charge = X Times

o Interest cover is a measure of the adequacy of a company's profit relative to interest payment on its

debt.

o A high interest cover ratio means that the business is easily able to meet its interest obligations from

profits. Similarly, a low level of interest cover ratio means that the business is potentially in danger of

not being able to meet its interest obligations.

o Interest cover of more than 2 is normally considered reasonably safe. But, companies with very

volatile earnings may require an even higher level of Interest cover.

o Interest cover of less than 1 means the company did not earn sufficient earning (i.e. profit) to meet

its interest charge. This means company will have to pay some of its interest from retained profit

from previous years. This may also raise question about company’s going concern.

o Take current liability portion as well of long-term liabilities in Debt capital calculation.

o Normally do not include Deferred tax liability within Debt capital.

o In F9 Preference share considered as Debt capital not Equity capital.

o Also in F9, values for Gearing ratio can be either book values or market values. If using

market values remember market value of ordinary shares take account of reserves (i.e. do

not add reserve amount with total market value of ordinary shares)



Steve Jobs at Stanford Commencement Speech (2005): 'Stay

Hungry. Stay Foolish.'

' . . . Sometimes life hits you in the head with a brick. Don't lose

faith. I'm convinced that the only thing that kept me going was

that I loved what I did. You've got to find what you love. And

that is as true for your work as it is for your lovers. Your work is

going to fill a large part of your life, and the only way to be truly

satisfied is to do what you believe is great work. And the only

way to do great work is to love what you do. If you haven't

found it yet, keep looking. Don't settle. As with all matters of the

heart, you'll know when you find it. And, like any great

relationship, it just gets better and better as the years roll on. So

keep looking until you find it. Don't settle. . .

Your time is limited, so don't waste it living someone else's life.

Don't be trapped by dogma — which is living with the results of

other people's thinking. Don't let the noise of others' opinions

drown out your own inner voice. And most important, have the

courage to follow your heart and intuition. They somehow

already know what you truly want to become. Everything else is

secondary. . .'



IAS 33 Earnings per share

An entity is required to calculate and present a basic EPS and a diluted EPS amount based on the profit/

(loss) attributable to the ordinary shareholders (of the parent entity).

Basic and diluted EPS figures should be presented on the face of the statement of comprehensive

income with equal prominence.

Basic EPS = Net profit or (loss attri uta le to ordinary shareholders

eighted average num er of ordinary shares

o Weighted average number of shares can be calculated as:

o Basic EPS with bonus issue (scrip issue, capitalisation issue) and share split: increases number of shares without any consideration. As a result, this distorts the comparison of EPS in the current year with the EPS in the previous year. So, to ensure that the distortion does not occur:

- The EPS of the current year is calculated as if the bonus issue was in existence of the beginning took place at the start of the year; and,

- The corresponding previous year’s EPS also restated as that bonus issue was in existence throughout that previous year.

Simple example: Bonus issue At year beginning (01.01.2011), company A has a share capital of 400,000 ordinary shares, when it decides to make a bonus issue of 1 for 4 on 01

April 2011. Its profit for the year to 31 December 2010 and 2011 was

$60,000 and $65,000 respectively. Calculate the EPS for the year ending 2011 and for corresponding previous year. 2011 2010 Earnings $65,000 $60,000

Number of shares before bonus issue 400,000 400,000 Bonus issue 100,000 100,000 500,000 500,000 EPS $0.13, i.e. 13c $0.12, i.e. 12c (restated)

170,000 + (80,000 X 7/12) = 216,666

Example: Number of shares at year beginning (at 01.01.11) 170,000 New issue of shares at full market price (at 31.05.11) 80,000 Number of share at year end 250,000

Number of shares at year beginning X

Number of shares issued with full market price X (Number of months remaining after the issue / 12) X

Weighted average number of shares X

Number of shares at year beginning X (Number of months to new issue at full price / 12) X

Total number of shares after new issue at full Price X (Number of months remaining / 12) X

Weighted average number of shares X

(170,000 X 5/12) + (250,000 X 7/12) = 216,666

As shares were in existence at the beginning of both years!

$0.12 is the restated EPS of 2010 in 2011 financial statements for comparison. Originally, in 2010, the EPS was reported as ($60,000/400,000) = $0.15

Calculating corresponding previous year’s restated EPS using a formula =

Original EPS X Original num er of shares

Num er of shares after onus issue Original EPS X

Holding ratio to have the onus share(s

Share ratio with onus shares

= $0.15 X 400,000

500,000 = $0.12 = $0.15 X

4

4 + 1 = $0.12

Shares are usually included in the weighted average number of shares from the date consideration is receivable.



Complex example: Bonus issue after a full market price issue At year beginning (01.01.2011), company A has a share capital of 400,000 ordinary shares. It made a full market price issue on 01 March 2011 of 100,000 shares and a bonus issue of 1 for 4 on 01

April 2011. Its

profit for the year to 31 December 2010 and 2011 was $60,000 and $65,000 respectively. Calculate the EPS for the year ending 2011 and for corresponding previous year. Date Description N. of shares Month weight Weighted avg. N. of shares 01.01.11 Opening balance 400,000 X 12/12 = 400,000 01.03.11 Full market price issue 100,000 X 10/12 = 83,333 Total N. of shares 500,000 01.04.11 Bonus issue: 400,000/4 = 100,000 X 12/12 = 100,000 100,000/4 = 25,000 X 10/12 = 20,833 Total N. of shares 625,000 604,166 Alternative way:

Date Description Number of shares

Bonus issue effect

Month weight Weighted avg. number of shares

01.01.11 Opening balance 400,000 5/4 2/12 83,333

01.03.11 Full market price issue

100,000 - - -

Total N. of shares after full market price issue

500,000 5/4 1/12 52,083

01.04.11 Bonus issue (1 for 4 held) (500,000/4)

125,000 - - -

Total N. of shares after bonus issue

625,000 - 9/12 468,750

604,166

EPS for year ending 2011: $65,000/604,166 = $0.108, i.e. 10.8c

Corresponding previous year’s (2010) restated EPS: Original EPS X Holding ratio to have the onus share(s

Share ratio with onus shares

= $60,000

4 X

4

4 + 1 = $0.12, i.e. 12c

o Basic EPS with right issue:

- A rights issue offers existing shareholders the right to buy new shares in proportion of their existing holding at a price slightly below the market price.

- To calculate EPS when right issue is made we need to know: The cum right price: This is the market price of a share just before the right issue The ex-right price: This is the price of a share after the right issue. In theory the ex-right

price should be the weighted average of the cum right price of the shares and issue price of corresponding number of share. This price is called the ‘theoretical ex-right price’.

- In a right issue, shares are sold at a reduced price; so, we need to divide the total number of shares issued into ‘bonus shares’ and ‘fully paid shares’ and treat as such.

Example: A company has 10,000,000 shares in issue. It is now proposes to make a 1 for 4 rights issue at a price of $3 per share. The market value of existing shares on the final day before the issue is made is $3.50. What is the theoretical ex-rights price per share? Solution: $ Before right issue: 4 shares @ $3.50 14 Right issue: 1 share @ $3 3 Theoretical value of 5 shares 17 So, theoretical ex-rights price per share is ($17/5) = $3.40



- Steps to follow in a right issue: Step 1: Calculate the theoretical ex-rights price Step 2: Split the number of shares in the rights issue into bonus shares and full price shares.

Original shares plus bonus shares = Original number of shares X Cum right price

Theoretical ex right price

Deduct original number of shares from the result of the above formula to get the ‘bonus shares’

Step 3: Calculate current year’s EPS Step 4: Calculate corresponding previous year’s EPS taking the bonus share effect. We can use following formula: Re-stated EPS of the previous year = Original EPS of the previous year X

Holding ratio to have the onus share(s)

Share ratio with onus sharesX Theoretical ex right price

Cum right price

From above Theoretical ex-right price example: i. Number of rights share issued: 10,000,000/4 = 2,500,000 ii. Amount received from rights issue: 2,500,000 X $3 = $7,500,000 iii. $7,500,000 can be raised by issuing ($7,500,000/ $3.5) = 2,142,857 shares at full market price iv. So, we can say, 2,142,857 shares were issued at full market price and (2,500,000 – 2,142,857) =

357,143 shares were bonus issue

To verify the formula in Step 2: (Original shares + Bonus shares) X TERP = Original shares X Cum right price (10,000,000 + 357,143) X $3.4 = 10,000,000 X $3.5 $35,214,286 = $35,000,000 So, there is a mismatch of ($35,214,286 - $35,000,000) = $214,286 (0.6%) if we use above formula! But, we still need to use formula in Step-2 to identify bonus fraction in a rights issue, as it is required by IAS 33 (Para A2).

PROBLEM!! - when there will be multiple issues - check the example below

- Use this part of the formula only if there

is a bonus issue in the current year.

- Check the example below.

The resulted ‘Original shares plus bonus shares’ will be a higher number of shares as we are multiplying by a bigger figure and dividing by a smaller figure.

The resulted ‘Re-stated EPS’ will be a smaller figure as we are multiplying by a smaller figure and dividing by a greater figure.



o Diluted EPS:

- Diluted EPS warns existing shareholders that the EPS may fall in future years because of potential new ordinary shares that have been issued.

- The diluted EPS is calculated by revising the original earnings (e.g. cancelling interest and its tax effect in case of convertible bond) and weighted average number of shares as though the potential ordinary shares had already been issued.

Potential ordinary shares may be issued in the following forms: - Convertible bonds (bonds and debentures that can be converted into ordinary shares) - Convertible preference shares (Preference shares that can be converted into ordinary

shares) - Options and warrants (Option holders has right, but not obligation, to buy ordinary shares

in a future date at a predetermined price) - Contingently issuable shares (these are ordinary shares will be issued if certain conditions

are met)

When calculating the revised weighted average number of shares, the convertible instrument (e.g. convertible bond) is deemed to have been converted into ordinary shares at the beginning of the period or, if later, the date of the convertible instrument issued.

Basic EPS with right and bonus issue: Fenton had 5,000,000 ordinary shares in issue on 1 January 20X1. On 31 January 20X1, the company made a rights issue of 1 for 4 at $1.75. The cum rights price was $2 per share. On 30 June 20X1, the company made an issue at full market price of 125,000 shares. Finally, on 30 November 20X1, the company made a 1 for 10 bonus issue. Profit for the year was $2,900,000. The reported EPS for year ended 31 December 20X0 was 46.4c. Required: What was the earnings per share figure for year ended 31 December 20X1 and the restated EPS for year ended 31 December 20X0? Answer: (a quicker, smarter but complex way) Theoretical ex-right price: ((4X$2) + $1.75)/5 = $1.95 Date Narrative Shares Time weight Bonus in right Bonus issue Weighted avg.

1.1.X1 b/d 5,000,000 X 1

12 X

2

1.95 X

11

10 = 470,085

31.1.X1 Rights issue 1,250,000

6,250,000 X 5

12 X - X

11

10 = 2,864,583

30.6.X1 Full-market price125,000

6,375,000 X 5

12 X - X

11

10 = 2,921,875

30.11.X1 Bonus issue 637,500

7,012,500 X 1

12 X - X - = 584,375

6,840,918

EPS for y/e 31.12.X1 = $2,900,000

6,840,918 = $0.424, i.e. 42.4c

Restated EPS for y/e 31.12.X0 = 46.4c X 10

11 X

1.95

2 = 41.1c



- When more than one basis of conversion exists, the conversion assumes the most advantageous conversion rate or exercise price from the standpoint of the holder of the potential ordinary shares.

o Dilutive or antidilutive:

- Only diluted shares should be included in the diluted EPS calculation. - Potential new ordinary shares are not dilutive if EPS would have been higher if the potential shares

had been actual shares in the period.

Example: Ardent Co has 5,000,000 ordinary shares of 25 cents each in issue. The total earnings in 2010 were $1,750,000. The rate of income tax is 35%. Decide which one of the following will dilute the EPS and will be included in diluted EPS calculation:

(a) $1,000,000 of 14% convertible loan stock, convertible in three years’ time at the rate of 2 shares per $10of stock

(b) $2,000,000 of 10% convertible loan stock, convertible in one year’s time at the rate of 3 shares per $5 of stock

Solution: Basic EPS = $1,750,000/5,000,000 = 35 cents

(a) Earnings increased (i.e. interest expense saves): i X(1 – t) = $1,000,000 X 0.14 (1 – 0.35) = $91,000 Potential ordinary shares: ($1,000,000 X 2)/ $10 = 200,000 shares So, incremental EPS = $91,000/200,000 = 45.5c Incremental EPS is higher than basic EPS; so NOT diluted and do not include in the diluted EPS calculation.

(b) Earnings increased (i.e. interest expense saves): i X(1 – t) = $2,000,000 X 0.10 (1 – 0.35) =

$130,000 Potential ordinary shares: ($2,000,000 X 3)/ $5 = 1,200,000 shares So, incremental EPS = $130,000/1,200,000 = 10.8c Incremental EPS is lower than basic EPS; so diluted (i.e. weakened) and need to include in the diluted EPS calculation.

Example: Diluted EPS with convertible bond In 2010 Farrah Co had a basic EPS of 105c based on earnings of $105,000 and 100,000 ordinary $1 shares. It also had in issue $40,000 15% convertible bond which is convertible in two years’ time at the rate of 4 ordinary shares for every $5 of bond. Tax is 30% of ‘profit before tax’. In 2010 gross profit of $200,000 and expenses of $50,000 were recorded, including interest payable of $6,000. Calculate the diluted EPS. Solution: $ Gross profit 200,000 Expenses (50,000) Add-back: Interest (40,000X15%) 6,000 Profit before tax 156,000 Tax expense (30%) (46,800) Earnings attributable to ordinary shareholders 109,200

Number of shares issued 100,000 Additional shares from conversation ($40,000X4/$5) 32,000 132,000

Diluted EPS = ($109,000/132,000) = $0.82.6, i.e. 82.6c

Dilution (i.e. decrease) in earnings would be (105c – 82.6c) = 22.4c per share



o Diluted EPS with option:

- Options and warrants are dilutive when they would result in the issue of ordinary shares for less than the average market price of ordinary shares during the period (i.e. when they are ‘in the money’).

- The shares that would be issued if the options or warrants are exercised are divided into full priced shares and free shares. The free fraction is the dilutive.

o Contingently issuable shares:

- These are ordinary shares issued for little or no cash when another party satisfies performance related conditions (e.g. profit target is met) rather mere passing of time.

- These shares can be a part of consideration for acquisitions or issued to senior staffs. - Such shares need to be included in the diluted EPS calculation if and only if the conditions are met - If multiple performance related criteria exists then diluted effect exists when all performance related

criteria are met.

- This should be included from the beginning of the period, or, if later, from the date of the contingent agreement.

o If shares are partly paid (i.e. less than share’s market value is paid):

- The equivalent number of fully paid shares must be established to the extent that partly paid shares are entitled to participate in dividends during the period; and the equivalent full number is included in the basic EPS calculation.

- To the extent that partly paid shares are not entitled to participate in dividends during the period they are treated as the equivalent of warrants or options in the calculation of diluted EPS.

o Diluted losses: when loss per share would be higher if potential shares were in issue.

o Post reporting date issues:

- Bonus issue, share splits and share consolidations after the year end but before the financial statements are authorised for issue, the number of shares in the EPS calculation is adjusted for the period just ended and prior periods presented.

Example: Brand Co had net profit of $1,200,000 for the year ending 31 December 2010. Weighted average number of ordinary shares outstanding during the year was 500,000. Average fair value of one ordinary share during the year was $20. Brand Co issued share option of 100,000 shares with exercise price applicable of $15. Calculate both basic and diluted EPS. Solution: If the options are exercised, the company will raise cash of (100,000 shares X $15) = $1,500,000. That is ($1,500,000 / $20) = 75,000 shares if issued full price. So, the company is giving away (100,000 – 75,000) = 25,000 shares for free. These 25,000 shares will dilute the basic EPS. Number of shares Profit after tax Basic 500,000 $1,200,000 Dilutive effect 25,000 No effect 525,000 $1,200,000 Basic EPS in 2010 = $1,200,000 / 500,000 = $2.40 Diluted EPS in 2010 = $1,200,000 / 525,000 = $2.29

- Adequate to use a simple average of weekly or monthly prices; or, - Average of closing market prices; or, - Average of high and low prices when prices fluctuate widely. - Whichever method used, must be applied consistently

Employee share option

Vesting conditions: Stay with the company Performance related Dilutive effect exists from: Grant date When performance criteria are met



‘The value of a man should be seen in what he gives and not in

what he is able to receive.’

- Albert Einstein



Receivables factoring

(Relevant accounting standard: IFRS 9 Financial instruments, para 3.2.3-3.2.9)

Receivables factoring: Companies sometimes need cash before customers pay their account

balances. In such situations, the company may choose to sell accounts receivable to another company

that specializes in collections. This process is called factoring, and the company that purchases

accounts receivable is often called a ‘factor’.

Factoring with recourse:

- The seller retains the risk of any under-collection of receivables by the ‘factor’. If the ‘factor’ fails to

collect any amount of receivables then the seller reimburses that uncollected amount to the factor.

- Accounting:

i. When the seller receives money from factor, the double entry is: DR SFP: Bank, CR SFP:

Liability

ii. Interest charged by ‘factor’ to the seller: DR I/S: Finance cost, CR SFP: Bank

iii. Amount received by ‘factor’ from ‘Receivables’: DR SFP: Liability, CR: SFP: Receivables

iv. Any remaining receivables amount reimbursed by the seller: DR SFP: Liability, CR: SFP:

Bank

Factoring without recourse:

- The seller transfers risk associated with collection of receivables to the ‘factor’. If the ‘factor’ fails to

collect any amount of receivables, the seller does NOT reimburse that amount.

- Accounting:

i. Amount received by the seller from ‘factor’: DR SFP: Bank, CR: Receivables

ii. Any cash commission charged by the ‘factor’: DR I/S: Finance cost, CR SFP: Bank

iii. If ‘factor’ charge commission by paying a lower amount of Receivables the seller: DR SFP:

Bank, DR I/S: Finance cost: amount under-received by seller, CR SFP: Receivables



Exercise question:

On 1 October 20X0, Jedders signed a receivables factoring agreement with a company Fab Factors.

Jedders’ trade receivables are to be split into three groups, as follows.

Group A receivables will not be factored or administered by Fab Factors under the agreement, but instead

will be collected as usual by Jedders.

Group B receivables are to be factored and collected by Fab Factors on a ‘with recourse’ basis. Fab Factors

will charge a 1% per month finance charge on the balance outstanding at the beginning of the month.

Jedders will reimburse in full any individual balance outstanding after three months.

Group C receivables will be factored and collected by Fab Factors ‘without recourse’; Fab Factors will pay

Jedders 95% of the book value of the debtors.

Jedders has a policy of making a receivables allowance of 20% of a trade receivables balance when it

becomes three months old.

The receivables groups have been analysed as follows:

% of 1 October 20X0 balance collected in:

Balance @ 1 October 20X0 October November December

$’000 $’000 $’000 $’000

Group A 1,250 30% 30% 20%

Group B 1,500 40% 30% 20%

Group C 2,000 50% 25% 22%

Required: For the accounts of Jedders, calculate the finance costs and receivables allowance for each

group of trade receivables for the period 1 October – 31 December 20X0 and show the financial position

values for those trade receivables as at 31 December 20X0.

Solution:

Group A: No factoring

By 31 December 20X0, 80% (30%+30%+20%) of the receivables collected by Jedders. So, Receivables

allowance of 20% to be recognised on remaining 20% receivables balance.

@ 31 October 20X0:

DR SFP: Bank ($1,250,000 X 30%) $375,000

CR SFP: Receivables $375,000

(30% of receivables collected by Jedders. So, decrease in receivables)

@ 30 November 20X0:

DR SFP: Bank ($1,250,000 X 30%) $375,000


(Further 30% of receivables collected by Jedders. So, decrease in receivables)



@ 31 December 20X0:

DR SFP: Bank ($1,250,000 X 20%) $250,000


(Further 20% of receivables collected by Jedders. So, decrease in receivables)

DR I/S: Expense: Increase in receivables allowance

(($1,250,000 X 20%) X 20%) $50,000

CR SFP: Receivables: Allowance for receivables $50,000

(Receivables allowance of 20% recognised on remaining 20% receivables balance. This is provision

for doubtful debts and presented as decrease in receivables in SFP.)

So, Group A receivables balance to be presented in SFP as at 31 December 20X0: (($1,250,000 - $375,000

- $375,000 - $250,000) - $50,000) = $200,000.

Group B: Factoring with recourse

Risk associated with any under-collection of receivables is retained with Jedders. So, the amount received

by Jedders from Fab Factors in advance shall be treated as a loan in Jedders account.

@ 1 October 20X0:

DR SFP: Bank $1,500,000

CR SFP: Liability $1,500,000

($1,500,000 received from Fab Factors by Jedders; so, increase in liability)

@ 31 October 20X0:

DR I/S: Finance cost ($1,500,000 X 1%) $15,000

CR SFP: Bank $15,000

(Interest charged by Fab Factors on outstanding balance at month beginning)

DR SFP: Liability ($1,500,000 X 40%) $600,000


(40% of receivables collected by Fab Factors. So, decrease in receivables and liability)

@ 30 November 20X0:

DR I/S: Finance cost ($1,500,000-$600,000) X 1%) $9,000

CR SFP: Bank $9,000




(Further 30% of receivables collected by Fab Factors. So, decrease in receivables and liability)



@ 31 December 20X0:

DR I/S: Finance cost ($1,500,000-$600,000-$450,000) X 1%) $4,500

CR SFP: Bank $4,500




(Further 20% of receivables collected by Fab Factors. So, decrease in receivables and liability)

DR SFP: Liability

($1,500,000-$600,000-$450,000-$300,000) $150,000

DR SFP: Bank $150,000

(Receivables balance uncollected by Fab Factors reimbursed by Jedders to Fab Factors. So,

decrease in liability. Now, Jedders is responsible in collecting the remaining receivables balance, not

Fab Factors.)

DR I/S: Expense: Increase in receivables allowance

(($150,000 X 20%) $30,000

CR SFP: Receivables: Allowance for receivables $30,000

(Receivables allowance of 20% recognised on remaining $150,000 receivables balance. This is

provision for doubtful debts and presented as decrease in receivables in SFP.)

So, Group B receivables balance to be presented in SFP as at 31 December 20X0: (($1,500,000 - $600,000

- $450,000 - $300,000) - $30,000) = $120,000. And, finance cost charged in I/S: (15,000 + $9,000 + $4,500

= $28,500.

Group B: Factoring without recourse

Risk associated with any under-collection of receivables is transferred to Fab Factors. So, receivables

balance shall be derecognised (i.e. removed from SFP) at the point of cash received from Fab Factors. Any

commission charged by Fab Factors (may be by under-payment of receivables balance to Jedders or cash)

shall be recognised as Finance cost.

@ 1 October 20X0:

DR SFP: Bank ($2,000,000 X 95%) $1,900,000

DR I/S: Finance cost: Factor’s commission ($2,000,000 X 5%) $100,000

CR SFP: Receivables (decrease in receivables) $2,000,000

There is no need for recognising any allowance for receivables on 31 December 20X0, since all the

receivables balance derecognised on 1 October 20X0. Jedders transferred the risk of any under-collection to

Fab Factors; that is, Jedders has no more right on receivables balance.

(Shortcut answer is in the book! Check Q-55-Jedders of BPP question bank.)



‘Most of the important things in the world have been

accomplished by people who have kept on trying when there

seemed to be no hope at all.’

- Dale Carnegie



IAS 10 Events after reporting period

Events after the reporting period are split into:

The cut-off date for the consideration of events after the reporting period is the date on which the

financial statements are authorised for issue.

- Normally the financial statements are authorised by the directors before being issued to the

shareholders for approval.

- Where a supervisory board is made up wholly of non-executive directors, the financial statements

will first be authorised by the executive directors for issue to that supervisory board for its approval.

The relevant cut-off date is the date on which the financial statements are authorised for issue to the

supervisory board.

- The date on which the financial statements were authorised for issue should be disclosed.

If a significant event occurs after the authorisation of the financial statements but before the annual

report is published, then the entity is not required to apply the requirements of IAS 10.

- However, if the event was so material that it affects the entity’s business and operations in the future,

the entity may wish to discuss the event in the narrative section at the front of the Annual Review but

outside of the financial statements themselves.

Equity dividend (i.e. dividend to ordinary and irredeemable non-cumulative preference shares) should

only be recognised as a liability where they have been declared before the reporting date, as this is the

date on which the entity has an obligation.

- Where equity dividends are declared after the reporting date, this fact should be disclosed but no

liability recognised at the reporting date.

Where the going-concern basis is clearly not appropriate, ‘break-up’ basis should be adopted.

- The ‘break-up’ measures the assets at their recoverable amount in a non trading environment, and a

provision is recognised for future costs that will be incurred to ‘break-up’ the business.

Adjusting events: are events that provide

evidence of conditions that existed at the reporting

date, and the financial statements should be

adjusted to reflect them. Examples include:

- Settlement of a court case that confirms that

the entity had an obligation at the reporting

date.

- Evidence that an asset was impaired at the

reporting date (e.g. bankruptcy of a

customer).

- Finalisations of prices for assets sold or

purchased before year end.

- The discovery of fraud or errors that show that

the financial statements are misstated

- An adjustment to the disclosed EPS (as par

IAS 33) for transactions where the number of

shares altered without an increase in

resources (e.g. bonus issue, share split or

share consolidation).

Non-adjusting events: are events that are

indicative of conditions that arose after the

reporting date. Disclosure should be made in the

financial statements where the outcome of a non-

adjusting event would influence the economic

decisions made by users of the financial

statements.

- A major business combination after the

reporting date (IFRS 3 or the disposing of a

major subsidiary).

- Announcement of plan to discontinue an

operation

- Major purchases and disposals of assets

- Classification of assets as held for sale

- Destruction of assets, for example by fire or

flood

- Major ordinary share transactions (unless

capitalisation or bonus issue)

- Decline in market value of investments



'Whatever you do will be insignificant, but it is very important

that you do it'. - Mohandas Karamchand Gandhi



Important definitions

Asset: A resource controlled by an entity as a result of past events and from which future economic

benefits are expected to flow to the entity. [Conceptual Framework: 4.4a]

Liability: A present obligation of the entity arising from past events, the settlement of which is expected

to result in an outflow from the entity of resources embodying economic benefits. [Conceptual

Framework: 4.4b]

Equity: The residual interest in the assets of the entity after deducting all its liabilities. [Conceptual

Framework: 4.4c]

Income: Increases in economic benefits during the accounting period in the form of inflows or

enhancements of assets or decrease of liabilities that result in increases in equity, other than those

relating to contributions from equity participants. [Conceptual Framework: 4.25a]

Expenses: Decrease in economic benefits during the accounting period in the form of outflow or

depletions of assets or incurrences of liabilities that result in decrease in equity, other than those relating

to distributions to equity participants. [Conceptual Framework: 4.25b]

Liquidity: The availability of sufficient funds to meet deposit withdrawals and other short-term financial

commitments as they fall due.

Solvency: The availability of cash over the longer term to meet financial commitments as they fall due.

Underlying assumptions in preparing financial statements:

- Accruals basis: The effects of transactions and other events are recognised when they occur (and

not as cash or its equivalent is received or paid) and they are recorded in the accounting records and

reported in the financial statements of the periods to which they relate. [Conceptual Framework:

OB17]

- Going concern: The entity is normally viewed as a going concern, that is, as continuing in operation

for the foreseeable future. It is assumed that the entity has neither the intention nor the necessity of

liquidation or of curtailing materially the scale of its operations. [Conceptual Framework: 4.1]

Materiality: Information is material if its omissions or misstatements could influence the economic

decisions of users taken on the basis of the financial statements. [Conceptual Framework: QC11]

Substance over form: The principle that transactions and other events are accounted for and presented

in accordance with their substance and economic reality and not merely their legal form.

Qualitative characteristics: The attributes which make the information provided in financial statements

useful to the users. [Conceptual Framework: QC19]

- Comparability

- Verifiability (Reliability)

- Timeliness (Relevance)

- Understandability



'As is a tale, so is life: not how long it is, but how good it is, is

what matters.' - J. K. Rowling Speaks at Harvard

Commencement ‘08



* * * End * * *

This document is prepared

based on experience as a

student and as a lecturer.

Most of the lines in this

document copied from

relevant IASs/IFRSs or

ACCA books. It took more

than 100 hours in planning,

writing, rewriting, organising

and reorganising this

26,000 word document.

Wish you the very best with

your study. – Mezbah