CIMA F2 Advanced Financial Reporting Passcards 1 2 PDF

CIMA Passcards New
Management Paper F2 syllabus

Advanced Financial Reporting 2015
Passcards for exams
in 2015
CMF2PC15.indd 1 14/07/2014 12:46

(000)CMF2PC14_FP.qxp 8/14/2014 18:13 Page i
Management Paper F2
Financial Management
(000)CMF2PC14_FP.qxp 8/14/2014 18:13 Page ii
First edition 2014 The contents of this book are intended as a guide and not
ISBN 9781 4727 1402 2 professional advice. Although every effort has been made to
e ISBN 9781 4727 2057 3 ensure that the contents of this book are correct at the time of
going to press, BPP Learning Media, the Editor and the
British Library Cataloguing-in-Publication Data Author make no warranty that the information in this book is
A catalogue record for this book is available from the accurate or complete and accept no liability for any loss or
British Library damage suffered by any person acting or refraining from
Published by Printed in the United acting as a result of the material in this book.
BPP Learning Media Ltd, Kingdom by Page Bros
BPP House, Aldine Place, Mile Cross Lane, ©
142-144 Uxbridge Road, Norwich BPP Learning Media Ltd
London W12 8AA NR6 6SA 2014
www.bpp.com/learningmedia
Your learning materials, published by BPP Learning

Media Ltd, are printed on paper obtained from traceable
sustainable sources.
All rights reserved. No part of this publication may be
reproduced, stored in a retrieval system or transmitted, in
any form or by any means, electronic, mechanical,
photocopying, recording or otherwise, without the prior
written permission of BPP Learning Media.
(000)CMF2PC14_FP.qxp 8/14/2014 18:13 Page iii
Preface Contents
Welcome to BPP Learning Media’s CIMA Passcards for Management Paper F2 Financial Management.
They focus on your exam and save you time.
They incorporate diagrams to kick start your memory.
They follow the overall structure of the BPP Study Texts, but BPP’s CIMA Passcards are not just a
condensed book. Each card has been separately designed for clear presentation. Topics are self contained
and can be grasped visually.
CIMA Passcards are just the right size for pockets, briefcases and bags.
Run through the Passcards as often as you can during your final revision period. The day before the exam, try
to go through the Passcards again! You will then be well on your way to passing your exams.
Good luck!
Page iii
(000)CMF2PC14_FP.qxp 8/14/2014 18:13 Page iv
Preface Contents
Page Page
1 Sources of long term finance 1 11 Changes in group structures 85
2 Cost of capital 7 12 Indirect control of subsidiaries 91
3 Financial instruments 13 13 Foreign subsidiaries 95
4 Leases 27 14 Consolidated statements of profit or
5 Provisions, contingent liabilities and loss and other comprehensive income
contingent assets 35 and statements changes in equity 101
6 Deferred taxation 39 15 Consolidated statements of cash flows 105
7 Share-based payments 45 16 Related parties 113
8 Revenue 49 17 Earnings per share 117
9 Basic groups 61 18 Ethics in financial reporting 123
10 Associates and joint arrangements 79 19 Analysis of financial performance

and position 129
(001)CMF2PC14_CH01.qxp 8/14/2014 18:26 Page 1
1: Sources of long term finance
Long-term finance
Long-term debt Operation of stock Role of advisors Shares

and bond markets
(001)CMF2PC14_CH01.qxp 8/14/2014 18:26 Page 2
Operation of stock Role of advisors Shares Long-term

and bond markets debt
Primary Markets: Enable organisations to raise new finance.

Secondary Markets: Enable existing investors to sell their investments.
(001)CMF2PC14_CH01.qxp 8/14/2014 18:26 Page 3

Sponsor
Coordinates the
overall IPO
process and
advises the
board
Other
advisors Bookrunner
Underwrites the
Registrars
transaction and
Financial printers
raises investment
Remuneration
capital
consultants
Company
Financial PR Lawyer
Develops Performs legal
communication due diligence,
strategy pre- and drafts prospectus
post-IPO and provides
legal opinions
Reporting
accountant
Performs financial
due diligence and
provides tax
advice
Page 3 1: Sources of long term finance

(001)CMF2PC14_CH01.qxp 8/14/2014 18:26 Page 4

Ways to raise equity finance:

1 IPO
2 Placing
3 Introduction
Advantages Disadvantages
Access to a wide pool of finance Greater regulation and scrutiny
Growth by acquisition Demanding investors
Improved marketability Additional costs
Public image
Exit / funds for other projects
(001)CMF2PC14_CH01.qxp 8/14/2014 18:26 Page 5

Types of long-term debt:

Consider:
1 Terms loans – Fixed amount for a fixed period,
Availability
lower interest than overdrafts.
Credit rating
2 Bonds:
Conventional – Fixed rate, redeemable Amount
Deep-discount – Issue price < nominal value, Term

redeemable at par (or above par) Fixed / floating rate?
Zero coupon – Issue price < redemption value, Security & convenants
no interest
Convertible – Right to convert to other securities
(ordinary share) at predetemined price /
rate / time
Page 5 1: Sources of long term finance

(001)CMF2PC14_CH01.qxp 8/14/2014 18:26 Page 6
Notes
(002)CMF2PC14_CH02.qxp 8/14/2014 18:25 Page 7
2: Cost of capital
Cost of capital
Cost of debt 1 Cost of debt 2 Cost of debt 3 Cost of debt 4

bank loan irredeemable bonds redeemable bonds convertible bonds
Cost of equity - dividend Weighted average cost of

growth model capital
(002)CMF2PC14_CH02.qxp 8/14/2014 18:25 Page 8
The cost Dividend growth Cost of debt WACC

of capital model
The cost of capital

is the rate of return that the enterprise must pay to satisfy the providers of funds and it reflects the riskiness of
providing funds.
Risk free rate of return +

Creditor hierarchy
Premium for business risk +
Premium for financial risk Increasing risk 1 Creditors with a fixed charge
COST OF CAPITAL 2 Creditors with a floating charge
3 Unsecured creditors
4 Preference shareholders
5 Ordinary shareholders
(002)CMF2PC14_CH02.qxp 8/14/2014 18:25 Page 9

of capital model
Cost of capital if constant dividends paid Estimating growth rate

D Use formula (Gordon’s growth model):
k = Formula to learn
e P
0 g = br Exam formula
where P0 is price at time 0
D is dividend where r is accounting return on capital employed
ke is cost of equity or preference capital b is proportion of earnings retained
The growth model

D (1 + g) D
k = 0 +g = 1 +g
e Exam formula
P P
0 0
where D0 is dividend at time 0

D1 is dividend at time 1
g is dividend growth rate
Page 9 2: Cost of capital
(002)CMF2PC14_CH02.qxp 8/14/2014 18:25 Page 10

of capital model
After tax cost of irredeemable debt capital Cost of redeemable debt

i (1 – T ) Year Cash flow DFa PVa DFb PVb
kdnet = Formula to learn
P 0 Market value 1 (X) 1 (X)
0
1 – n Interest less tax X X X X
where kdnet is the after-tax cost of the debt capital n Redemption value X X X X
i is the annual interest payment Kd = a + NPVa (b – a)
P0 is the current market price of the debt NPVa – NPVb
capital ex-interest
T is the rate of tax P0 is current ex-dividend ordinary share price
g is the expected annual growth of the ordinary
Cost of convertible debt share price
Use the IRR method as for cost of redeemable debt, n is the number of years to conversion
but redemption value = conversion value. R is the number of shares received on conversion
Conversion value = P0 (1+ g)n R Formula to learn

(002)CMF2PC14_CH02.qxp 8/14/2014 18:25 Page 11

of capital model
[ ] [ ]
Exam formula
Ve Vd
WACC = ke + kd (1 – T)
Ve + Vd Ve + Vd
ke is cost of equity Ve is market value of equity

kd is cost of debt Vd is market value of debt
Use market values rather than book values unless market values unavailable (unquoted company)
Assumptions of WACC Problems with WACC

Project small relative to company and has same New investments may have different business
business risk as company risk
WACC reflects company’s long-term future New finance may change capital structure and
capital structure and costs perceived financial risk
New investments financed by new funds Cost of floating rate capital not easy to calculate
Cost of capital reflects marginal cost
Page 11 2: Cost of capital

(002)CMF2PC14_CH02.qxp 8/14/2014 18:25 Page 12
Notes
(003)CMF2PC14_CH03.qxp 8/14/2014 18:25 Page 13
3: Financial instruments
Financial instruments
Definition Classification Conceptual Framework Recognition

(IAS 32) (IAS 39)
Impairment Measurement
(IAS 39) (IAS 39)
Financial assets
Financial
liabilities
(003)CMF2PC14_CH03.qxp 8/14/2014 18:25 Page 14
Conceptual IAS 32 IAS 39

Framework and IFRS 7
The IASB’s Conceptual Framework
Two fundamental qualitative characteristics Four enhancing qualitative characteristics

1 Relevance: having 1 Comparability
(i) Predictive value or 2 Verifiability
(ii) Confirmatory value
3 Timeliness
2 Faithful representation:
4 Understandability
(i) Complete
(ii) Neutral
(iii) Free from error
To recognise or not to recognise?

1 Does it meet the definition of an element in the FS? Probable future economic benefit will flow
to/from the entity
2 Does it meet the recognition criteria?
Can be measured reliably
(003)CMF2PC14_CH03.qxp 8/14/2014 18:25 Page 15

Because of the inherent difficulties in this complex area, it is

hard for users to assess the nature, amount and cost of an
Definitions
enterprise’s debt and equity resources. Financial instrument: any contract that gives
rise to a financial asset of one entity and a
Before IAS 32 and IAS 39 many financial instruments were financial liability or equity instrument of
treated as off balance sheet finance and invisible to the user of another.
accounts. Because of their significance, the IASB tackled the
project in 3 phases:
IAS 32: Presentation ensured the user was aware of the Financial asset: cash; equity instrument of
instruments and risks another entity; contractual right to receive
cash/other financial assets; contract that can
IAS 39: Recognition and Measurement prescribed specific be settled in the entity’s own equity
accounting treatment as an interim measure instruments and may be either a derivative or
IFRS 7: Disclosures effective from 1 January 2007 a non-derivative.
specifies disclosures required for financial instruments
Page 15 3: Financial instruments

(003)CMF2PC14_CH03.qxp 8/14/2014 18:25 Page 16

IAS 32 presentation Definitions

Financial liability: contractual obligation to
Financial instruments should be classified as either deliver cash/other financial asset; contractual
– Liability (debt) or obligation to exchange financial instruments
– Equity under potentially unfavourable conditions.
Compound instruments (exhibiting characteristics of both)
must be split into their debt and equity components
Substance rather than legal form applies (eg
redeemable preference shares are a financial liability) Equity instrument: contract that evidences a
residual interest in the assets of an entity
Interest, dividends, loss or gains relating to a financial
instrument classified as a liability are reported in P/L, after deducting all its liabilities.
while distributions to holders of equity instruments are
debited directly to equity (in the SOCIE)
Offset of a financial asset and liability is only allowed
where there is a legally enforceable right and the
enterprise intends to settle net or simultaneously
(003)CMF2PC14_CH03.qxp 8/14/2014 18:25 Page 17
Disclosure
Disclosures are covered in IFRS 7.
IFRS 7 applies to all risks, arising from nearly all financial instruments. The extent of disclosure varies, depending on
the entity’s use of financial instruments and its exposure to risk. Disclosure is required of the following:
Exposure to risk
Qualitative disclosures
– Management’s objectives, policies and processes for managing those risks
Quantitative disclosures
– The extent of exposure to risk
– Credit risk
– Liquidity risk
– Market risk

(003)CMF2PC14_CH03.qxp 8/14/2014 18:25 Page 18

Significance of financial instruments for position and performance
Statement of financial position

– Categories of financial assets and financial liabilities
– FA or FL at fair value through profit or loss
– Reclassification or derecognition
– Collateral
– Allowance for credit losses
– Defaults
SPLOCI and equity
– Items of income, expense, gains or losses recognised in P/L or as other comprehensive income
– Total effective interest income/expense (items not held as FV through profit or loss only)
– Impairment losses by class of financial asset
Other
– Accounting policies
– Hedge accounting
(003)CMF2PC14_CH03.qxp 8/14/2014 18:25 Page 19

IAS 39 Recognition and measurement

Recognition and derecognition
Financial instruments should be recognised Financial assets are divided into four types for subsequent
when the entity becomes a party to the measurement:
contractual provisions of the instrument – Loans and receivables originated by the entity (and not held for
Derecognition trading)
– Financial assets: where the contractual – Held-to-maturity investments
rights to the cash flows expire or the – Financial assets at fair value through profit or loss*
financial asset is transferred – Available-for-sale financial assets (any other financial assets)
– Financial liabilities: when obligations * This means either an asset that is held for trading (ie a derivative
expire/are discharged/cancelled or a financial asset acquired principally for selling in the near term)
or any financial asset that the entity decides upon initial recognition
to designate as held at fair value through profit or loss.

(003)CMF2PC14_CH03.qxp 8/14/2014 18:25 Page 20

Initial measurement: Initial measurement:

financial assets (FA) financial liabilities (FL)
Fair value Fair value

+ transaction costs Fair value Fair value – transaction costs
Available for sale Fair value through Fair value through All others
Held to maturity profit or loss profit or loss
Loans and
receivables
(003)CMF2PC14_CH03.qxp 8/14/2014 18:25 Page 21
Subsequent measurement: Subsequent measurement:

financial assets (FA) financial liabilities (FL)
Amortised cost Fair value Fair value Amortised cost
Held-to-maturity Financial assets Financial liabilities All others

Loans and at fair value at fair value
receivables not through profit or through profit or
held for trading loss loss
Available-for-sale
financial assets
(any other)

(003)CMF2PC14_CH03.qxp 8/14/2014 18:25 Page 22

Calculations – amortised cost

The method used in the following example applies to deep discount bonds and other similar instruments
(including zero coupon bonds).
Debt issued for $400,000 (nominal) on $

1.1.20X1 for proceeds of $315,526;
Annual interest payments
redeemed for $400,000 (ie par) on
(4% × $400,000 × 5) 80,000
31.12.20X5
Deep discount $(400,000 – 315,526) 84,474
______
Interest rate = 4%
164,474
______
______
IRR = 9.5%
At inception DEBIT Cash $315,526
CREDIT Liability $315,526
(003)CMF2PC14_CH03.qxp 8/14/2014 18:25 Page 23
Rolled up
P/L Actual interest interest charged Liability in
Year charge payable to P/L closing SOFP
*$ $ $ $
20X1 29,975 16,000 13,975 329,501
20X2 31,303 16,000 15,303 344,804
20X3 32,756 16,000 16,756 361,560
20X4 34,348 16,000 18,348 379,908
20X5 36,092
______ 16,000
______ 20,092
______ 400,000
164,474
______
______ 80,000
______
______ 84,474
______
______
*9.5% × opening liability in SOFP ($315,526)

(003)CMF2PC14_CH03.qxp 8/14/2014 18:25 Page 24

Gains and losses (on Impairment Hedging

remeasurement to
fair value) Impairment review where evidence
Hedge accounting is
of financial asset being impaired
mandatory where a
Held at fair value: P/L Original effective interest rate transaction qualifies as a
should be used when discounting hedge (all 3 criteria met):
Available-for-sale future cash flows to calculate the
financial assets: impairment Designated at inception
recognised as other as a hedge
Impairment loss is charged to P/L
comprehensive income
Where available-for-sale financial ‘Highly effective’
and reclassified to P/L on
disposal asset suffers impairment loss, Hedge effectiveness can
cumulative losses on fair value be reliably measured
Hedging: as cash flow adjustments previously recognised
hedge in other comprehensive income and
accumulated in equity are
reclassified to P/L
Reversals: P/L
(003)CMF2PC14_CH03.qxp 8/14/2014 18:25 Page 25
IAS 39 identifies three types of hedges which determines their accounting treatment.
TYPE HEDGES AGAINST ACCOUNTING TREATMENT
Fair value hedge Changes in fair value of a recognised asset or Gain or loss on instrument is recognised in the P/L
liability or an unrecognised firm commitment* Gain or loss on hedged item also recognised in P/L
(or portion of either) that could affect profit or (and adjusts the carrying value of hedged item)
loss
Cash flow hedge Exposure to variability in cash flows Gain or loss on effective portion of instrument is
attributable to a risk associated with a recognised in other comprehensive income (and
recognised asset or liability that could affect reclassified in P/L when asset or liability affects
profit or loss profit or loss, eg by interest income)
Gain or loss on ineffective portion is recognised in
P/L
Hedge of net Variability in value of the net investment in a As for cash flow hedge (but gains or losses on the
investment in a foreign foreign operation or monetary items hedge are not transferred to profit or loss, until the
operation accounted for as part of that net investment disposal of the foreign operation).
* IAS 39 allows the hedge of a foreign currency firm commitment to be accounted for as a cash flow hedge

(003)CMF2PC14_CH03.qxp 8/14/2014 18:25 Page 26
Notes
(004)CMF2PC14_CH04.qxp 8/14/2014 18:24 Page 27
4: Leases
Leases
Finance leases Sale and leaseback Operating leases Definitions

(004)CMF2PC14_CH04.qxp 8/14/2014 18:24 Page 28
Types of Accounting Disclosures:

lease treatment lessees
IAS 17
IAS 17 Leases standardises the accounting treatment and disclosure of assets held under lease. It follows the
substance over form principle.
Finance lease: a lease that Lease: an agreement Operating lease: a lease

transfers substantially all the whereby the lessor conveys other than a finance lease
risks and rewards of to the lessee in return for
ownership of an asset rent the right to use an asset
for an agreed period of time
(004)CMF2PC14_CH04.qxp 8/14/2014 18:24 Page 29
Characteristics of a finance lease

A finance lease transfers substantially all the risks and rewards of ownership of an asset.
IAS 17 gives examples that normally lead to finance lease classification:

PV of minimum lease payments = substantially all of FV of asset
Lease term for major part of economic life
Lease transfers ownership to lessee at the end of lease
Lease includes option to purchase asset for price much less than FV and it is reasonably certain option
will be exercised at start of lease
Leased assets so specialised only lessee can use without major modifications.
Page 29 4: Leases
(004)CMF2PC14_CH04.qxp 8/14/2014 18:24 Page 30

Accounting treatment
Finance lease Operating lease
Capitalise asset Charge rentals on a systematic basis over lease

period
Set up finance lease liability
Statement of financial position – Only
Repayments split between finance charge and
accruals/prepayments for rentals
capital
Statement of financial position Statement of profit or loss and other
comprehensive income – Rental expense
– Net book value
– Finance lease liability
Statement of profit or loss and other
comprehensive income
– Depreciation
– Finance charge
(004)CMF2PC14_CH04.qxp 8/14/2014 18:24 Page 31
Finance leases – calculating the finance charge

Actuarial method Sum of the digits method
When implicit rate of interest is unavailable
Uses effective interest rate
1 Each instalment is allocated a number of digits. For
Finance change for the period = Interest rate
instance 4 instalments gives a total of 10 digits
implicit in the lease × capital outstanding
(1 + 2 + 3 + 4).
[Remember to note whether instalments are n (n + 1)
2 Add the digits =
paid in advance or in arrears.] 2
when n = number of interest - bearing instalments
3 Finance change included in each
instalment = sum of digits fraction Formula
× total finance change to learn
Page 31 4: Leases
(004)CMF2PC14_CH04.qxp 8/14/2014 18:24 Page 32

Statement of financial position

Non-current liabilities
1 Non-current assets 2 Finance lease liabilities (note 4) X
Included in the net book value of plant and
equipment is $X in respect of assets held Current liabilities
under finance leases 3 Finance lease liabilities (note 4) X
Accruals (note 4) X
Finance lease liabilities: reconciliation of minimum lease payments and present value
4 Within one year X (gross)
Later than one year and not later than five years X (gross)
Later than five years X (gross)
Less future finance charges (X)
___
Present value of finance lease liabilities X
___
___
(004)CMF2PC14_CH04.qxp 8/14/2014 18:24 Page 33
Present value of finance lease liabilities Operating leases

5 6 The future minimum lease payments under
Within one year X (net)
Later than one year and non-controllable operating leases are as
not later than five years X (net) follows:
Later than five years X (net)
__ Within one year X
X
__
__ Later than one year and
not later than five years X
Note. The minimum lease payments include Later than five years X
__
the finance charge element. The present
X
__
__
value is the capital element only of the lease
liability.
Page 33 4: Leases
(004)CMF2PC14_CH04.qxp 8/14/2014 18:24 Page 34
Notes
(005)CMF2PC14_CH05.qxp 8/14/2014 18:23 Page 35
5: Provisions, contingent liabilities and

contingent assets
Provisions, contingent liabilities
and contingent assets
Provisions Contingent liabilities Contingent assets
Application of the
recognition and
measurement rules
Future operating Onerous contracts Restructuring Decommissioning &

losses environmental costs
(005)CMF2PC14_CH05.qxp 8/14/2014 18:23 Page 36
IAS 37
IAS 37
IAS 37 Provisions, contingent liabilities and contingent assets was brought in to remedy some abuses of
provisions.
(a) Entities should not provide for costs that need to be incurred to
operate in the future, if those costs could be avoided by the
Provision: a liability of uncertain
entity’s future actions.
timing or amount. Liabilities are
(b) Costs of restructuring are to be recognised as a provision only obligations to transfer economic
when the entity has an obligation to carry out the restructuring. benefits as a result of past
transactions or events.
(c) The full amount of any decommissioning costs or environmental
liabilities should be recognised from the date on which they arise.
Contingent liability Contingent asset

Should be disclosed unless the possibility of any Should be disclosed where an inflow of economic
outflow of economic benefits to settle it is remote. benefits is probable.
5: Provisions, contingent liabilities and contingent assets
Start
Present
obligation as a No Possible No
result of an obligation?
obligating
event?
Yes Yes
Page 37
Probable No Yes
Remote?
outflow?
Yes No
18:23
No (rare)
8/14/2014
Reliable
estimate?
Yes
(005)CMF2PC14_CH05.qxp
Disclose
Provide contingent Do nothing
liability
Page 37
(005)CMF2PC14_CH05.qxp 8/14/2014 18:23 Page 38
Notes
(006)CMF2PC14_CH06.qxp 8/14/2014 18:23 Page 39
6: Deferred taxation
IAS 12: Deferred tax
Concept Deferred tax Deferred tax Measurement

liabilities assets
(006)CMF2PC14_CH06.qxp 8/14/2014 18:23 Page 40
Deferred Taxable and deductible Disclosure

tax temporary differnces
The tax charge in the statement of profit or loss and other comprehensive income often bears little relationship
to the profit before tax figure because of the differences which exist between tax rules and financial accounting
principles.
Accounting for deferred tax

Is recognition of the item different No No deferred tax implications
for tax and accounts purposes?
Yes
Is the difference potentially No deferred tax implications
No (permanent difference)
only temporary in nature?
Liability method
Yes
Recognise a deferred tax asset or liability using the rate of income tax enacted at the end of the reporting
period that is expected to apply to the period when the asset is realised or the liability settled.
(006)CMF2PC14_CH06.qxp 8/14/2014 18:23 Page 41

1 Temporary differences:
Differences between the carrying amount of an asset / liability in the SoFP and its tax base.
Taxable temporary differences result in taxable amounts in future periods Deferred tax liabilities
Deductible temporary differences result in deductible amounts in future periods Deferred tax
assets
2 Taxable temporary differences – accelerated capital allowances
When tax (or ‘capital’) allowances/tax depreciation rates are
available at a rate higher than the accounting depreciation On a cumulative basis calculated as:
rates applied to the same assets. Net book value (NBV) X
This means that less tax is being paid now and Less tax written down value (TWDV) (X)
___
correspondingly more will be paid in the future. X
___
___
A deferred tax provision allows for this.
Page 41 6: Deferred taxation

(006)CMF2PC14_CH06.qxp 8/14/2014 18:23 Page 42

3 Deductible temporary differences – Unutilised tax losses

Losses that can be carried forward to reduce the current tax on future profits represent a future tax
saving. A defered tax asset is recognised to the extent that it is probable the losses can be used before
they expire.
(006)CMF2PC14_CH06.qxp 8/14/2014 18:23 Page 43

Disclosure
Statement of financial position Measurement
Deferred tax liability Deferred tax = (Carrying amount of asset/liability
in SoFP – tax base) × tax rate %
Balance brought forward X
Amount charged/(credited)
to profit or loss X/(X)
Amount charged/(credited) to equity X/(X)
_____
Balance carried forward X
_____
_____
Page 43 6: Deferred taxation

(006)CMF2PC14_CH06.qxp 8/14/2014 18:23 Page 44
Notes
(007)CMF2PC14_CH07.qxp 8/14/2014 18:22 Page 45
7: Share-based payments
Share-based
payment
Types of share-based Measurement Recognition

payment
Equity-settled Cash-settled
(007)CMF2PC14_CH07.qxp 8/14/2014 18:22 Page 46
The Types of
issue transaction
Share-based payments
Share-based payments are transactions whereby entities purchase goods and service from other parties, such
as suppliers and employees, by issuing shares or share options.
The issue
This is a good example of substance over form. In the past when a limited liability company gave employees
share options as remuneration, no expense was recognised in P/L.
This led to an anomaly: if a company paid its employees in cash, an expense would be recognised in profit or
loss, but if the payment took the form of share options, no expense would be recognised. The omission also
gave rise to corporate governance concerns.
(007)CMF2PC14_CH07.qxp 8/14/2014 18:22 Page 47
The Types of
issue transaction
IFRS 2 deals with three types of share-based payment transactions. Recognition

Equity settled share-based payment transactions: the entity
receives goods or services in exchange for equity instruments of DEBIT Staff costs (P/L)
the entity (including shares or share options)
CREDIT Other reserves [within
Cash-settled share-based payment transactions: the entity equity] (if equity-settled) OR
acquires goods or services in exchange for amounts of cash that CREDIT Liability (if cash-settled)
are based on the price (or value) of the entity’s shares or other
equity instruments
Choice of equity/cash settled: entity or supplier can choose whether to settle the transaction in cash or
equity instruments
Page 47 7: Share-based payments

(007)CMF2PC14_CH07.qxp 8/14/2014 18:22 Page 48
The Types of
issue transaction
Measurement
Equity-settled Cash-settled
Use the fair value of goods received OR Eg share appreciation rights. Employees become entitled to
a future cash payment based on the increase in the
If these cannot be measured reliably, measure entity’s share price.
indirectly by reference to the fair value of the equity
Company must recognise services received, and related
instruments granted. liability as services are rendered. Liability must be
The fair value of equity instruments should be recognised at fair value using an option pricing model.
measured at their market value at the grant date. Similar to equity-settled options, the value of the options
should be measured at the fair value of the goods or
The fair value of the equity instruments is not services received if this can be reliably measured. If the
adjusted in subsequent years. value of the goods or services cannot be measured reliably,
the options are valued by reference to the fair value of the
equity instruments granted.
Unlike the equity-settled options, the fair value of the liability
must be remeasured at each reporting date.
(008)CMF2PC14_CH08.qxp 8/14/2014 18:22 Page 49
8: Revenue
Revenue
Measurement Accounting entries Recognition Definitions

(008)CMF2PC14_CH08.qxp 8/14/2014 18:22 Page 50
Off balance Substance Conceptual Revenue Constraction

sheet finance over form Framework recognition contracts
Off balance sheet finance

The funding or refinancing of an entity's operations in such a way that, under legal requirements and existing
accounting conventions, some or all of the finance may not be shown on its statement of financial position
Perceived benefits The problem

A situation is created where users of accounts do
Stock market advantages: lower gearing ratio not have a clear view on the state of the entity's
Keep a company within loan covenants affairs. Insufficient disclosure creates problems.
Exclude highly geared subsidiary from
consolidation for reasons of dissimilar activities
and thereby reduce gearing
Expectation of rights issue (to reduce gearing)
decreased, thereby maintaining share price
(008)CMF2PC14_CH08.qxp 8/14/2014 18:22 Page 51
Off balance Substance Conceptual Revenue Construction

Substance over form

Transactions and other events should be accounted for and presented in accordance with their substance and
financial reality and not merely with their legal form (IAS 1).
Examples
IAS 17 Leases: if risks and rewards of ownership transferred lease is an asset of the lessee even though
title has not passed
IAS 11Construction contracts: taking attributable profits
IAS 24: related party transactions
IFRS 3: definition of subsidiary based on control
Learn these – they may well come up!
Page 51 8: Revenue
(008)CMF2PC14_CH08.qxp 8/14/2014 18:22 Page 52

Conceptual Framework
Faithful representation implies that items are accounted for according to their substance and economic reality.
Majority of transactions: no difference, so no issue
Other transactions: substance and form diverge; choice of treatment can give different results due to non-
recognition of an asset/liability even though benefits/obligations result
Determining the substance of transactions

Does the transaction change the existing assets/liabilities of the entity, either by creating new ones, or altering
the existing ones?
Assets Liabilities
Resources controlled by the entity as a result of Present obligations of the entity arising from past
past events and from which future economic events, the settlement of which is expected to result in
benefits are expected to flow to the entity an outflow from the entity of economic benefits
(008)CMF2PC14_CH08.qxp 8/14/2014 18:22 Page 53
Recognition
The process of incorporating an item into the primary financial statements with appropriate headings. It involves
depiction of the item in words and by monetary amount and the inclusion of that amount in the statement totals.
Recognise asset and liability Do not recognise

Where significantly all the risks and benefits will Where significantly all the risks and benefits have
flow to the entity been transferred
Sufficient evidence that benefits exist
Able to measure in monetary terms with sufficient
reliability
Page 53 8: Revenue
(008)CMF2PC14_CH08.qxp 8/14/2014 18:22 Page 54

IAS 18
Revenue is that which arises in the course of ordinary activities such as that from sales, services provided,
interest, royalties and dividends.
Measurement Includes only those amounts receivable by the entity

on its own account. Not sales, goods and sales tax
(eg VAT) collected by agent to be passed to the
Fair value of consideration received/receivable. principal.
Deferred amounts discounted
In a sale financed by the seller, any difference
between the fair value of the item and the nominal
sales value should be accounted for as interest
revenue
(008)CMF2PC14_CH08.qxp 8/14/2014 18:22 Page 55
Recognition
Goods Services
When the following conditions are met: Conditions 3 to 5 as for goods

1. Transfer of significant risks and rewards of The stage of completion of the transaction at
ownership (usually legal title) the balance sheet date can be measured
reliably and a proportion applied to the revenue
2. No more control over goods sold
Interest – time proportion basis (effective yield)
3. Amount of revenue can be reliably measured
Royalties – accruals basis
4. Probable that debt will be repaid
Dividends – when the right to the dividend is
5. Transaction costs can be reliably measured established
Disclosure
Accounting policy for each recognition; the amount of each significant category of revenue; amount of revenue
from exchange of goods or services
Page 55 8: Revenue
(008)CMF2PC14_CH08.qxp 8/14/2014 18:22 Page 56

Journal entries
Cash sales Revenue received in advance
DR Cash DR Cash
CR Revenue CR Deferred income
Credit sales then when sale transaction occurs:

DR Trade receivables DR Deferred income
CR Revenue CR Revenue
Revenue accrued
DR Accrued income
CR Revenue
(008)CMF2PC14_CH08.qxp 8/14/2014 18:22 Page 57
Off balance Substance Conceptual Revenue Construction

Construction contracts
Outcome can be A contract specifically negotiated for Outcome cannot be

estimated reliably. the construction of an asset or a estimated reliably.
combination of assets that are
closely interrelated or
Recognise contract interdependent in terms of their Recognise revenue
revenue and contract design, technology and function or only to extent of
costs by reference to their ultimate use. contract costs incurred
stage of completion of that it is probable will
contract. be recovered.
Recognise as expense
Any expected loss should be in period incurred.
recognised as an expense
immediately.
Page 57 8: Revenue
(008)CMF2PC14_CH08.qxp 8/14/2014 18:22 Page 58

Where the outcome of a contract can be estimated reliably, a proportion of contract revenue and costs should
be recognised in profit or loss by reference to the stage of completion (ie a proportion that fairly reflects the
amount of work done).
The stage of completion can be calculated in various ways including:
Proportion of contract costs Surveys of work performed:

incurred: Physical proportion
Work certified
___________
Costs to date
__________________ completed
Contract price
Total estimated costs
(008)CMF2PC14_CH08.qxp 8/14/2014 18:22 Page 59
Disclosure
Statement of profit or loss and other Statement of financial position
comprehensive income Gross amount due from/to customers
Contract costs incurred X
Revenue (x% × total contract revenue) X
Recognised profits less recognised losses X
___
Expenses (x% × total contract cost) (X)
___
Recognised profit/loss X X
___
___ Less progress billings to date (X)
___
X/(X)
_____
_____
The whole of an expected loss on a contract Trade receivables
should be recognised as soon as it is anticipated.
Progress billings to date X
Less cash received (X)
___
X
___
___
Page 59 8: Revenue
(008)CMF2PC14_CH08.qxp 8/14/2014 18:22 Page 60

The following, not covered above, must also be disclosed under IAS 11 (revised).
Methods used to determine contract revenue
Methods used to determine stage of completion of contracts in progress
Any contingent gains and losses, eg due to warranty costs, claims, penalties or possible losses, in
accordance with IAS 37
Amount of advances received
Amount of any retentions (progress billings not paid until the satisfaction of certain conditions)
(009)CMF2PC14_CH09.qxp 8/14/2014 18:22 Page 61
9: Basic groups
Revision of basic groups
Definition of Consolidated statement Key consolidation Fair values

subsidiary of financial position adjustments
Types of Consolidated statement of profit or

investment loss and other comprehensive income
(009)CMF2PC14_CH09.qxp 8/14/2014 18:22 Page 62
Group IFRS 10 Consolidated statement Consolidated Non-controlling Method

accounts of financial position SPLOCI interests
Subsidiary
Control: an investor controls an investee when the
An entity that is controlled by another entity known investor is exposed, or has rights, to variable
as the parent returns from its involvement with the investee and
has the ability to affect those returns through
power over the investee
Associate
Significant influence: the power to participate in
An entity in which an investor has significant the financial and operating policy decisions of an
influence economic activity but not control over those policies
Joint arrangement
Easy marks can be gained for reproducing
An arrangement of which two or more parties
have joint control these definitions. But make sure you
understand them!
(009)CMF2PC14_CH09.qxp 8/14/2014 18:22 Page 63
Summary of classification and treatment

Investment Criteria Required treatment in group accounts
Subsidiary Control (>50% rule) Full consolidation (IFRS 10)
Associate Significant Equity accounting (IAS 28)

influence(20% + rule)
Joint arrangement Joint control Either: proportionate consolidation

or: equity accounting (IAS 28)
Investment which is none of Assets held for As for single entity accounts (IAS 39)
the above accretion of wealth
Page 63 9: Basic groups

(009)CMF2PC14_CH09.qxp 8/14/2014 18:22 Page 64

Other provisions of IFRS 10

Consolidated financial statements Exclusion
The financial statements of a group presented as those Where a parent controls one or more subsidiaries,
of a single economic entity IFRS 10 requires that consolidated financial statements
are prepared to include all subsidiaries, both foreign
and domestic other than:
Exemption
Those held for sale in accordance with IFRS 5
A parent need not prepare consolidated financial
statements if: Non-current assets held for sale and discontinued
operations
– It is itself a wholly owned subsidiary;
If it is partially owned and the other owners do not
object; Other
Its securities are not publicly traded; AND Different reporting dates – adjustments should be
The ultimate or intermediate parent publishes IFRS – made
compliant consolidated accounts Uniform accounting policies – if not, disclose why.
Disclosures apply Adjustments should be made on consolidation
(009)CMF2PC14_CH09.qxp 8/14/2014 18:22 Page 65

Purpose: To show the assets and liabilities which it controls and the ownership of those assets and liabilities
Assets and liabilities: Always add P and 100% of S line by line providing P controls S
Goodwill: Consideration transferred X
Non-controlling interests (see Ch 7) X
Less: Net fair value of identifiable assets
acquired and liabilities assumed:
Share capital X
Share premium X
Retained earnings at acquisition X
Other reserves at acquisition X
Fair value adjustments at acquisition X
(X)
X
Less: Impairment losses on goodwill to date (X)
X
Reason: Shows excess paid for reputation etc of company acquired at acquisition date

(009)CMF2PC14_CH09.qxp 8/14/2014 18:22 Page 66

Share capital: P only

Reason: Simply reporting to the parent's shareholders in another form
Reserves: P plus group share of post acquisition retained earnings of S, plus/ less consolidation adjustments
Reason: To show the extent to which the group actually owns assets and liabilities included in the
consolidated statement of financial position
(009)CMF2PC14_CH09.qxp 8/14/2014 18:22 Page 67
Fair value adjustment calculations

Goodwill is the difference between the cost of the acquisition and the acquirer’s interest in the fair value of the
identifiable assets and liabilities. IFRS 3 states that we should use fair value. Therefore revaluations may be
necessary on consolidation to reflect fair values.
Subsidiary Parent
Revalues assets and liabilities as a

Revalues assets and liabilities to fair value OR consolidation adjustment
Subsidiary’s books unchanged
Exam focus point

In exam questions fair value adjustments normally
have to be made. The subsidiary will not have
changed its books.

(009)CMF2PC14_CH09.qxp 8/14/2014 18:22 Page 68

Workings for common adjustments

Calculation of provision for unrealised profit
Unrealised profit on intragroup sales X
% held @ y/e %
= Provision for unrealised profit (PUP) X DR Retained earnings
(adjust in company selling goods) CR Group inventories
Calculation of fair value adjustments

Acq’n date Movement Year end
Inventories X (X) X
Depreciable non-current assets X (X) X Adjust
Non-depreciable non-current assets X (X) X figures
Other fair value adjustments X/(X) X/(X) X/(X) in SOFP
X X X
Goodwill Ret’d earnings

(009)CMF2PC14_CH09.qxp 8/14/2014 18:22 Page 69

Method
1 Draw up the group structure
2 Draw up pro forma
3 Transfer figures to pro forma/workings:
– Add P+ 100% S’s income/expenses line by line
– Exclude dividends receivable from S
– S’s profit and TCI in brackets on the pro forma/workings
– Associate’s profit and TCI
4 Calculate adjustments: intra-group trading fair value adjustments
5 Calculate ‘Share of profit of associate/joint venture’ and ‘Share of OCI of associate/joint venture’
6 Complete NCI in S’s profit the year and TCI

(009)CMF2PC14_CH09.qxp 8/14/2014 18:22 Page 70

Intra-group sales Strip out intra-group activity from both sales revenue and cost of sales
Unrealised profit on (a) Goods sold by P: increase cost of sales by unrealised profit
intra-group sales
(b) Goods sold by S: increase cost of sales by full amount of unrealised profit and
decrease non-controlling interest by their share of unrealised profit
Depreciation If the value of S’s non-current assets have been subjected to a fair value uplift then
any additional depreciation must be charged in the consolidated income statement.
This will also affect the non-controlling interest.
Transfer of non- Expenses must be increased by any profit on the transfer and reduced by any
current assets additional depreciation arising from the increased carrying value of the asset
The net unrealised profit (ie the total profit on the sale less cumulative ‘excess’ depreciation charges) should
be eliminated from the carrying amount of the asset and from the profit of the company that made the profit.
For instance, P transfers an asset with a carrying value of $1,000 to S for $1,100. Depreciation is 10% p.a. The
net unrealised profit is $90. This is debited to P’s income statement and to the carrying value of the asset.
If the subsidiary made the sale, the adjustment will also affect the non-controlling interest.
(009)CMF2PC14_CH09.qxp 8/14/2014 18:22 Page 71

Non-controlling interest and fair value

Two alternative ways to calculate NCI in the group statement of financial position:
(a) Value at proportionate share of fair value of the subsidiary’s net assets (partial goodwill); or
(b) Value at fair value (usually MV of shares held by NCI) (fair value goodwill)
Partial goodwill method Fair value goodwill method

$m $m $m $m
Consideration transferred X Consideration transferred X
NCI (@% FV of net assets) NCI (@ full FV)
FV of net assets at aquisition X FV of net assets at aquisition X
Share capital X Share capital X
Retained earnings X Retained earnings X
(X) (X)
X X

(009)CMF2PC14_CH09.qxp 8/14/2014 18:22 Page 72

Fair value options

If you are required to account for NCI at fair value there are two options:
(1) You may be told what fair value of the NCI is
(2) You may be given the share price at the date of acquisition
Goodwill and impairments

If the NCI at acquisition is measured at its proportionate share of the subsidiary’s net assets, then:
(1) No goodwill is recognised relating to the NCI
(2) Any subsequent impairment is charged only to the parent
(009)CMF2PC14_CH09.qxp 8/14/2014 18:22 Page 73
Non-controlling interest at end of reporting period

The option to value the non-contolling interest at fair value applies to non-controlling interest at acquisiton. However,
it will affect the valuation of non-controlling interest at the year end.
Under the two options above, this will be as follows (post-acquisition reserves $200,000):
Fair value goodwill Partial goodwill
method method
$'000 $'000
NCI at acquisition 480 400
NCI share of post- acquisition reserves 568 568
(Post acq’n reserves x NCI %)
NCI share of impairment losses (Impairment losses x NCI %) (8) (-)
1,040 968

(009)CMF2PC14_CH09.qxp 8/14/2014 18:22 Page 74

The % owned
1 Read the question and draw up the group
Acquisition date
structure, highlighting
Pre-acquisition reserves
Leave out cost of investment
Put in a line for goodwill
2 Prepare necessary proforma required by Put in a line for investment in associate
question Include a line for non-controlling interests
Leave spaces for any extra items
100% of all assets/liabilities in brackets on face of
proforma, ready for adjustments
3 Work methodically down the SOFP, transferring
Cost of subsidiary/associate and reserves to workings
figures to proforma or workings
Search capital & share premium (parent only) to face
of proforma answer
Open up a (blank) working for NCI
Read through additional notes and attempt Cancel any intragroup items eg current a/c balances,
adjustments (show workings)
4 loans
Do the double entry for the adjustments onto your Adjust for unrealised profits
proforma answer and onto your group workings Make fair value adjustments
(009)CMF2PC14_CH09.qxp 8/14/2014 18:22 Page 75
Complete goodwill calculation:

5 Consideration transferred X The NCI at acquisition
Non-controlling interest X will be either at % FV
FV of net assets at acquisition of net assets or at full
Share capital X FV
Share premium X
Other reserves at acquisition X
Retained earnings at acquisition X
Fair value adjustments X
____
(X)
Less: impairment losses to date (X)
X

(009)CMF2PC14_CH09.qxp 8/14/2014 18:22 Page 76

6 Complete retained earnings calculation:

P S A Note – A similar
Per question X X X working is used for
Fair value adjustments X/(X)
______ X/(X)
______ X/(X)
_____ any other reserves
X Y
______ Z
_____
Share of subsidiary post acquisition reserves (Y × %) X
Share of associate post acquisition reserves (Z × %) X
______
X
Less: impairment loss on goodwill (X)
______
X
______
(009)CMF2PC14_CH09.qxp 8/14/2014 18:22 Page 77
Complete ‘Investment in associate’ (if appropriate):

7 Cost of associate X
Share of post-acquisition retained reserves (from reserves working) X
Less: group impairment losses on associate to date (X)
______
X
______
______
Complete non-controlling interest calculation:

8 NCI at acquisition X
NCI share of post acq’n reserves X
NCI share of impairment losses
(only if NCI at full FV at acq’n) (X)
______
X
______
______

(009)CMF2PC14_CH09.qxp 8/14/2014 18:22 Page 78

Acquisition during the accounting period

If a subsidiary is acquired mid-way through the Example
accounting year, there may be no statement of P Co acquired 80% of S Co on 1 September 20X1. S Co’s
financial position as at the acquisition date. retained earnings brought forward at 1 January 20X1 were
To identify the pre-acquisition reserves, an $600,000 and its profit for the year ended 31 December
extra calculation may be required. It can 20X1 was $180,000.
normally be assumed that profits accrue S Co’s retained earnings on 1 September 20X1 were:
evenly over a year. $
B/fwd 1.1.20X1 600,000
Profit to 1.9.20X1 ($180,000 × 8/12) 120,000
Retained earnings at 1.9.20X1 720,000
This figure is the pre-acq’n

retained earnings figure to
use in the goodwill and
retained earnings workings
(010)CMF2PC14_CH10.qxp 8/14/2014 18:26 Page 79
10: Associates and joint arrangements
Group accounts: associates

and joint arrangements
Associates Joint arrangements IFRS 12: Disclosure of

interests in other entities
Definition Accounting for Definition Accounting for joint

associates arragements
(010)CMF2PC14_CH10.qxp 8/14/2014 18:26 Page 80
IAS 28 Joint IFRS 12

arrangements
IAS 28: Associates

An associate exists, according to IAS 28, when an investor exercises significant influence.
Significant influence Presumptions
The power to participate in the If ≥ 20% of voting power, presumption

financial and operating policy of significant influence
decisions of an economic
activity, but not control or joint If < 20% of voting power, presumption
control over those policies of no significant influence
(010)CMF2PC14_CH10.qxp 8/14/2014 18:26 Page 81
Consolidated statement of financial position Consolidated statement of profit

– equity method or loss and other comprehensive
Investment in associate $ income
Cost of investment X Share of profit after tax
Add: share of post-acquisition retained earnings X
Share of other comprehensive
Add: share of post-acquisition other reserves income
X
Less: impairment losses on associate to date X
_____
X
_____
_____
Exceptions: Use IFRS 5 if investment acquired and held for sale.
Page 81 10: Associates and joint arrangements

(010)CMF2PC14_CH10.qxp 8/14/2014 18:26 Page 82

arrangements
IFRS 11 Joint arrangements

Joint control
The contractually agreed sharing of control which exists when decisions about relevant activities require
unanimous consent of the parties sharing control.
Joint arrangement
An arrangement in which 2 or more parties have joint control.
Joint operations Joint ventures

Parties with joint control have rights to the assets and Parties with joint control have rights to the net assets
obligations for the liabilities of the joint arrangement. of the arrangement.
Includes all joint arrangements not structured through a
separate entity.
(010)CMF2PC14_CH10.qxp 8/14/2014 18:26 Page 83
Accounting for joint arrangements

Joint operation Joint venture
Joint operator should recognise: A joint venturer should recognise its interest in a joint
venture as an investment and account for that
Its assets including its share of jointly-held
investment using the equity method (IAS 28).
assets
Its liabilities including its share of jointly-incurred
liabilities
Revenue from the sale of its share of output from
the joint operation
Its share of revenue from the sale of output by
the joint operation
Its expenses including its share of expenses
incurred jointly
Page 83 10: Associates and joint arrangements

(010)CMF2PC14_CH10.qxp 8/14/2014 18:26 Page 84

arrangements
IFRS 12 Disclosure of interests in other entities

Disclose:
Significant judgements and assumptions made in determining the nature of an interest in another entity
Information about subsidiaries, associates, joint arrangements and structured entities that are not controlled
by an investor
Disclosure of subsidiaries Disclosure of associates / joint arrangements

Interests of NCI in group activities and cash flows The nature, extent and financial effects of an
The nature and extent of restrictions of investor’s entity’s interests in associates or joint arrangements
ability to use group assets and liabilities Risks associated with an interest in an associate or
The nature of risks associated with interests in joint arrangement
consolidated structured entities Summarised financial information (more detail for
Consequences of changes in ownership interest joint ventures than for associates)
(011)CMF2PC14_CH11.qxp 8/14/2014 18:21 Page 85
11: Changes in group structures
Changes in group
structures
Acquisitions and disposals Acquisitions where control is Disposals where control is

where control is retained achieved lost
(011)CMF2PC14_CH11.qxp 8/14/2014 18:21 Page 86
Disposals Business combinations

in stages
Transactions that require remeasurement of an retained interest
IAS 39 IAS 28/ IFRS 11 IFRS 10

Loss of control but
retaining financial assets
10% Loss of control but

retaining an associate or
40% a joint venture
Loss of significant
10% influence or joint control
but retaining a financial asset
0% 20% 50% 100%

Passive Significant Control
influence/joint
control
(011)CMF2PC14_CH11.qxp 8/14/2014 18:21 Page 87
Gain or loss on disposal is calculated as follows.

In group accounts where control is lost
In parent company $ $
$ FV of consideration received X
FV of consideration received X FV of investment retained X
Less carrying value of investment (X)
____ Less: share of consolidated
Carrying amount at date control is lost
Gain/(loss) X/(X)
____ Net assets X
____
Goodwill X
Less NCI (X)
____
(X)
Group profit/(loss) X/(X)
____
The treatment ____
in the group
No gain or loss is
accounts depends
on whether control
recognised. This total In group accounts (control retained)
is shown as an $
is lost (ie whether adjustment to the FV of consideration received X
the 50% boundary equity owned by the Increase in NCI in net assets at disposal (X)
___
is crossed). parent. Adjustment to parent's equity X
______
Page 87 11: Changes in group structures

(011)CMF2PC14_CH11.qxp 8/14/2014 18:21 Page 88

in stages
Full disposal Subsidiary to subsidiary

In SPLOCI
SPLOCI: NCI will be based on % before and after
– Consolidated results to date of disposal disposal, ie time apportion
– Show group gain or loss separately before
No group gain or loss as control retained
interest
SOFP: NCI based on year end %
In SOFP: no subsidiary therefore no consolidation
or NCI Adjustment to parent’s equity will be made
between NCI and retained earnings in SOFP
Goodwill on acquisition unchanged
Subsidiary to associate Subsidiary to trade investment

SPLOCI: treat as subsidiary to date of disposal, SPLOCI: treat as subsidiary to date of disposal.
consolidate for correct no. of months and show NCI Show dividend income only thereafter
in that amount. Treat as associate thereafter SOFP: Fair value of remaining investment at date
SOFP: Fair value at date of disposal; equity account of disposal; available for sale investment (IAS 39)
thereafter thereafter
(011)CMF2PC14_CH11.qxp 8/14/2014 18:21 Page 89
Disclosure
The gain or loss should be disclosed separately where significant in accordance with IAS 1
IFRS 5 may require additional disclosure if the sale is classed as a discontinued operation
Page 89 11: Changes in group structures

(011)CMF2PC14_CH11.qxp 8/14/2014 18:21 Page 90

in stages
A controlling interest in a subsidiary may be built up over a period of time. The important point is when
control is obtained, which is usually when the 50% threshold is crossed.
Associate becomes subsidiary Increase in control eg 60% sub to 80% sub

The previously held investment is re-measured to fair Fair value of consideration paid (X)
value, with any gain being reported in profit and loss, and Decrease in NCI
the goodwill calculated as follows: at date of transaction X
____
Consideration transferred X Adjustment to parent’s equity (X)
____
____
Non-controlling interest
(at %FV of new assets or 'full' FV) X
Fair value of acquirer's
previously held equity interest X
Less net fair value of identifiable assets
acquired and liabilities assumed (X)
__
X
__
__
(012)CMF2PC14_CH12.qxp 8/14/2014 18:20 Page 91
12: Indirect control of subsidiaries
Indirect control of
subsidiaries
Issues Calculations D shaped groups

(012)CMF2PC14_CH12.qxp 8/14/2014 18:20 Page 92
Sub-subsidiaries ‘D’ shaped groups
P controls S P P P controls S
80% 60%
S controls SS S S S controls SS
80% 60%
Therefore P controls SS SS SS Therefore P controls SS
P effectively owns (80% × 80%) 64% of SS P effectvely owns (60% × 60%) 36% of SS
Consolidation method: Date of effective control:
Net assets: show what group controls. SS comes under P’s control:
Capital and reserves: based on effective holdings eg Date S acquired, if S already holds shares in SS
80% × 80% = 64% therefore NCI = 100% – 64% = 36%. If S acquired SS later, that later date
Exam focus point

You must identify subsidiaries based on control. Then most of the consolidation is the same as for a simple group.
(012)CMF2PC14_CH12.qxp 8/14/2014 18:20 Page 93
A complex group structure has an impact on two of the basic workings you need for a consolidated statement of financial position.
Let’s assume here that P owns 80% S1 and S1 owns 60% of S2.
Calculation of goodwill
Goodwill in S1 Goodwill in S2
Consideration transferred X X × 80%
Non-controlling interests (at % FVNA or at ‘full’ FV) X X × 52%
Less: Net FV of identifiable assets acquired
& liabilities assumed:
Share capital X X
Retained earnings (post-acquisition) X X
X X
(X) (X)
X X
Total X
Calculation of non-controlling interests Notice the

S1
treatment of cost
NCI at acquisition X X
of the subsidiary’s
NCI share of post acq’n retained earnings X/(X) X/(X)
investment in the
Less: NCI share (52%) of S1’s investment in S2 (X) sub subsidiary
Less: NCI share of impairment losses (if NCI at ‘full’ FV) (X) (X)
Effective interest in
X X
S2 = 80% × 60%
Total NCI = 48%
Page 93 12: Indirect control of subsidiaries
(012)CMF2PC14_CH12.qxp 8/14/2014 18:21 Page 94
Sub-subsidiaries ‘D’ shaped

groups
P
80% Having ascertained the structure and worked
10% S NCI (direct) 20% out the non-controlling interests, proceed as for
75% a typical sub-subsidiary situation.
SS NCI (direct) 15%
You can check that you have worked out the

correct NCI by assuming a dividend
distribution of $100 from SS.
In this structure there is
S will receive $75
A direct NCI in S of 20%
__
__ P will receive 80% × $75 60
A direct NCI in SS of 15% P will receive 10% × $100 10
___
An indirect NCI in SS of 20% × 75% 15%
__ 70
___
___
30%
__ Leaving for NCI in SS 30
___
__ ___
(013)CMF2PC14_CH13.qxp 8/14/2014 18:20 Page 95
13: Foreign subsidiaries
Foreign subsidiaries
Consolidated financial
Foreign currency translation Individual company stage
statements stage
(013)CMF2PC14_CH13.qxp 8/14/2014 18:20 Page 96
Introduction Individual entity Consolidated FS

stage stage
Two currency concepts
Functional currency Presentation currency
Currency of the primary economic environment The currency in which the financial statements
in which an entity operates are presented
The currency used for measurement in the Can be any currency
financial statements Special rules apply to translation from functional
Other currencies treated as a foreign currency currency to presentation currency
Same rules used for translating foreign
operations
(013)CMF2PC14_CH13.qxp 8/14/2014 18:20 Page 97

stage stage
Translating foreign currency transactions into the entity’s functional currency:

During the period At the reporting date
Translate each Non-monetary assets held at historic cost (non-current assets, inventory):
transaction at exchange remain at historical rate (HR)
rate on date of
transaction (average rate Non-monetary assets held at fair value (eg investments): exchange rate
(AR) for a period may be when fair value was determined
used as an Monetary assets and liabilities: restate at closing rate
approximation, if rates do
not fluctuate significantly) Remeasurement of transactions settled in later accounting periods
Where the transaction is
settled during the period Monetary assets/liabilities: Exchange gains/losses taken to statement of
the exchange difference profit or loss
arising is a realised gain Non-monetary items at fair value: Exchange gains/losses recognised in
or loss and is reported in the same place as the revaluation gain/loss. (ie if revaluation gain/loss
profit or loss for the year recognised in OCI, exchange component also goes to OCI; if revaluation
gain/loss recognised in P/L, exchange component goes to P/L)
Page 97 13: Foreign subsidiaries

(013)CMF2PC14_CH13.qxp 8/14/2014 18:20 Page 98

stage stage
Foreign operation shares functional currency of parent Foreign operation’s

An operation carries on its business as if it were an extension of the reporting functional currency is
entity, its results being more dependent on the economic environment of the different from parent
investing entity’s currency than its own reporting currency.
The activities of the foreign
Consider:
operation are not an integral
Whether the activities of the foreign operation are carried out as an part of those of the reporting
extension of the parent or with a significant degree of autonomy entity and its own economic
Whether transactions with the parent are a high or low proportion of environment and currency
the foreign operation’s activities have most effect on its
Whether cash flows from the activities of the foreign operation directly results.
affect the cash flows of the parent
Whether the activities are financed from the foreign operation’s own cash
flows or by borrowing from the parent Foreign operation’s FS will
need to be translated to
Translate using same functional currency rules as for single entity, then parent’s currency on
consolidate. (No need to translate on consolidation) consolidation
(013)CMF2PC14_CH13.qxp 8/14/2014 18:20 Page 99
Translating foreign operation’s FS into parent’s functional currency

Steps Method
1 Translate the closing statement of financial Assets and liabilities – at closing rate
position (net assets/shareholders’ funds) and use Share capital and pre-acq’n reserves – at historical
this for preparing the consolidated position rate (at acq’n date)
statement in the normal way
Post acq’n reserves – calculate as balancing figure
2 Translate the SPLOCI SPLOCI items: Use average rate. These figures can
(Dividends should be translated at rate ruling be used for the consolidated SPLOCI
when the dividend was paid)
Page 99 13: Foreign subsidiaries

(013)CMF2PC14_CH13.qxp 8/14/2014 18:20 Page 100

stage stage
Steps Method
3 Translate net assets (equity) at the beginning of the Calculate opening net assets (equity) in the foreign currency as:
year Closing net assets (equity) X
(Only do this if you are preparing a consolidated Less total comprehensive income for yr (X)
statement of profit or loss and other comprehensive Opening net assets (equity) X
income and need to find exchange differences for the
year) Then divide opening net assets by the opening rate (ie the
exchange rate as at the previous year end)
4 Calculate the total exchange difference for the year as follows This stage will be unnecessary if you are only required to
$ prepare the statement of financial position. If you are asked to
Closing net assets at closing rate (Step 1) X state the total exchange differences or are asked to prepare a
Less opening net assets at opening rate (Step 3) (X) statement of profit or loss and other comprehensive income,
X where the exchange difference will be shown.
Less retained profit as translated
For exam purposes you can translate the closing
(Step 2 less any dividends) (X)
shareholders' funds as follows.
Exchange differences on net assets X
(a) Share capital + pre-acquisition reserves at historical rate
It may be necessary to adjust for any profits or losses taken
direct to reserves during the year. (b) Post-acquisition reserves as a balancing figure
You will also need to add on any exchange differences
arising on goodwill in the year.
(014)CMF2PC14_CH14.qxp 8/14/2014 18:20 Page 101
14: Consolidated statements of profit or loss

and other comprehensive income and
statements changes in equity
Consolidated statement of profit or

loss and other comprehensive
income and the statement of
changes in equity
Consolidated SPLOCI Consolidated changes in equity

(014)CMF2PC14_CH14.qxp 8/14/2014 18:20 Page 102
Consolidated Consolidated statement

SPLOCI of changes in equity
Consolidated statement of profit or loss and other comprehensive income

1 Read the question and draw up the group structure
and where subsidiaries/associates are acquired in
the year identify the proportion to consolidate
2 Draw up a proforma Remember the non-controlling interests

reconciliation at the foot of the statement
3 Work methodically down the statement of profit 100% of all income/expenses (time approtioned ×
or loss and other comprehensive income, x/ if appropriate) in brackets on face of proforma,
12
transferring figures to proforma or workings ready for adjustments
Exclude dividends receivable from subsidiary
Subsidiary’s PFY and TCI (for NCI) to face of
proforma in brackets (or to a working if many
adjustments)
Associate’s PFY and OCI to face of proforma in
brackets
(014)CMF2PC14_CH14.qxp 8/14/2014 18:20 Page 103
4 Go through question, making necessary Eliminate intragroup sales and purchases

adjustments (show workings), transfer the Eliminate unrealised profit on intragroup
numbers to your proforma and make the purchases still in inventories at year end
adjustments in the non-controlling interests Charge extra depreciation on fair value
working where the subsidiary’s profit is affected adjustments
Both the associate’s PFY and OCI are calculated
5 Calculate ‘Share of profit of associate’ and
based on after tax figures
‘Share of other comprehensive income of
associate’ (where applicable)
6 Complete non-controlling interests in

subsidiary’s PFY and TCI calculation
Take these figures to the reconciliations at
the end of the statement and calculate the
profit/TCI attributable to the owners of the
parent as balancing figures
Page 103 14: Consolidated statements of profit or loss and other comprehensive
income and statements changes in equity
(014)CMF2PC14_CH14.qxp 8/14/2014 18:20 Page 104
Consolidated Consolidated statement

SPLOCI of changes in equity
Consolidated statement of changes in equity (layout for exam purposes)

Equity attributable to Non-controlling
owners of the parent interest Total
$'000 $'000 $'000
Balance at 31/12X1 X X X (P SC/SP + Group reserves)/ NCI
Share issue X - X Given in question *
Total comprehensive X X X From SPLOCI
income for the year
Dividends (X) (X) (X) P/(S ? NCI%)
Adjustment to equity X/(X) X/(X) X/(X) See later in Ch 11
Balance at 31/12/X2 X X X (P SC/SP + Group reserves)/ NCI
* no balance in NCI column as share issue by subsidiary in the year not examinable in F2
Equity attributable to owners of parent = Group retained earnings (worked out as for Consolidated SOFP) + share
capital (of parent)
Dividends – parent’s (in equity attributable to owners of parent) + NCI% subsidiary’s (in non-controlling interests)
Total comprehensive income – figures for parent and NCI taken from reconciliation at end of SPLOCI
(015)CMF2PC14_CH15.qxp 8/14/2014 18:20 Page 105
15: Consolidated statements of cash flows
Consolidated statement of cash flows
Single company statement of cash flows Consolidated statement of cash flows Foreign exchange
(015)CMF2PC14_CH15.qxp 8/14/2014 18:20 Page 106
IAS 7 Consolidated cash Foreign exchange

flows
IAS 7 format Definitions

Inflows and outflows of cash of an entity are classified between Cash: cash on hand and demand deposits
3 major economic activities.
Cash equivalents: short-term highly liquid investments that
Operating activities are readily convertible to known amounts of cash and
Investing activities which are subject to an insignificant risk of changes in
Financing activities
value
2 methods for reporting cash flows from operating activities:
Direct method: discloses major classes of gross cash What is a statement of cash flows for?
receipts and cross cash payments
Information on cash flows assists the user in assessing
Indirect method: Adjust for entity’s viability.
(i) Changes during the period in inventories and operating
Shows entity’s cash generating ability
payables and receivables
Shows entity’s cash utilisation needs
(ii) Non-cash items (such as depreciation, provisions, deferred
taxes, unrealised foreign exchanges gains and losses, and The statement required by IAS 7 is based on movement in
undistributed profits of associates) cash and cash equivalents and can be criticised for not
(iii) All other items for which the cash effects are investing or focusing on ‘pure’ cash.
financing cash flows
(015)CMF2PC14_CH15.qxp 8/14/2014 18:20 Page 107
1 Read the question and set up a proforma statement of cash flows.

2 Transfer the statement of financial position figures to the face of the statement of cash flows or workings.
Work methodically, line by line down the statement of financial position.
3 Transfer the statement of profit or loss and other comprehensive income figures to the face of the statement
of cash flows or workings.
4 Deal with additional information.
5 Finish off workings and transfer figures to answer.
6 Do additional workings for the direct method (if required).
7 Finish off statement of cash flows.
Page 107 15: Consolidated statements of cash flows

(015)CMF2PC14_CH15.qxp 8/14/2014 18:20 Page 108
IAS 7 Consolidated Foreign exchange

cash flows
Consolidated cash flows

Extra issues to adjust for:
Payments to acquire subsidiaries
Receipt from sales of subsidiaries
Cash paid non-controlling interests
Cash received from associates
Non-controlling interest $000

Non-controlling interest B/d – SOFP X
Only the actual payment of cash, eg SPLOCI (TCI attributable to NCI) X
dividends, to non-controlling shareholders
X
should be reflected in the statement of
cash flows. Include under ‘cash flows from Dividends paid to NCI (balancing figure) (X)
financing’. C/d – SOFP X
(015)CMF2PC14_CH15.qxp 8/14/2014 18:20 Page 109
Associates/Joint Ventures
Only the actual cash flows from sales or
purchases between the group and the
entity, and investment in and dividends
from the entity should be included.
Investment in associates/JV $000
Dividends received should be B/d – SOFP X
included as a separate item in ‘cash
flows from investing activities’. SPLOCI – share of profit X
SPLOCI – share of OCI X
Separate disclosure of cash flows
relating to acquisitions and Acquisition/(disposal) of associate/JV X/(X)
investments. Exchange gain/(loss) on associate/JV X/(X)
X
Dividends received from associate (balancing figure) (X)
C/d X

(015)CMF2PC14_CH15.qxp 8/14/2014 18:20 Page 110
IAS 7 Consolidated Foreign exchange

cash flows
Acquisition or disposal of a subsidiary

Present as a single item of cash inflow or outflow
Cash paid/received as consideration should be shown net of any cash transferred as investing activities
Must adjust other workings for
– Each asset/liability acquired or disposed of with the subsidiary
– Non-cash elements of consideration, eg shares issued as part of the consideration
(015)CMF2PC14_CH15.qxp 8/14/2014 18:20 Page 111
IAS 7 Consolidated cash Foreign exchange

flows
Individual entity Consolidated cash flows

Translate receipts and payments into the reporting Foreign subsidiaries’ cash flows should also be
currency at the rate ruling at the date on which the translated at the exchange rates between the
receipt or payment is made. functional currency and the foreign currency at the
date of the cash flows.
Exchange differences do not themselves give rise to
cash flows so they would not be reflected in the 1 Produce a statement of cash flows for each
statement of cash flows. subsidiary
2 Translate each into the functional currency using
the average rate
3 Consolidate into the group statement of cash
flows (after eliminating intra-group items)

(015)CMF2PC14_CH15.qxp 8/14/2014 18:20 Page 112
Notes
(016)cmf2pc14_ch16.qxp 8/14/2014 18:19 Page 113
16: Related parties
Related party transactions
Definition Disclosures
(016)cmf2pc14_ch16.qxp 8/14/2014 18:19 Page 114
Related party
disclosures
Key elements: control, joint control, significant influence

A person is related to an entity if: An entity is related to another entity if:
(1) They control or jointly control the entity (Mr A & B) (1) They are members of the same group (Z & Y)
(2) They have significant influence over the entity (Mr (2) One is an associate or JV of the other (Z & X)
A & C)
(3) Both are JVs of a third party (W & U)
(3) They are key management personnel of the entity
(4) One is an associate and the other a JV of a third
or its parent
party (X & W)
(4) They are a close family member of any individual
(5) One is a pension plan for employees of the other
in (1)-(3) Mr A Z V T
40% 50% 50%
80% 40%
50% 50%
C 80%
B
X Y W U
PLUS where an individual controls/jointly controls/has
significant influence over two entities, they are related KEY FACTOR: SUBSTANCE OF RELATIONSHIP
(016)cmf2pc14_ch16.qxp 8/14/2014 18:19 Page 115
Not necessarily related parties Disclosure
Two entities simply because they have a director in Always

common (1) Name of parent + ultimate controlling party
Two venturers simply because they share joint (2) Key management personnel compensation
control of a joint venture The following related party transactions should be disclosed:
Providers of finance, trade unions, public utilities, – Purchases/sales of goods
government departments and agencies in the – Purchases/sales of property/other assets
course of their normal dealings with an entity by – Rendering/receiving of services
virtue only of those dealings – Transfer of R&D
A single customer, supplier, franchisor, distributor – Transfer under license agreements
or general agent with whom an entity transacts a – Provision of finance
significant volume of business merely by virtue of – Provision of guarantees/collateral security
the resulting economic dependence – Settlement of liabilities on behalf of the entity/by the
entity on behalf of another party.
Page 115 16: Related parties

(016)cmf2pc14_ch16.qxp 8/14/2014 18:19 Page 116
Notes
(017)cmf2pc14_ch17.qxp 8/14/2014 18:18 Page 117
17: Earnings per share
Earnings per share
Requirement and scope Basic EPS Diluted EPS

(017)cmf2pc14_ch17.qxp 8/14/2014 18:18 Page 118
IAS 33
IAS 33
EPS is a stock market indicator, so it is important that EPS is calculated on a comparable basis, year to year
and company to company. Drawback: EPS relies on reported earnings; creative accounting can make a
mockery of this.
IAS 33 applies to all entities whose ordinary shares or potential ordinary shares are publicly traded.
Basic calculation
The net profit or loss used is after interest, tax
Net_____________________________________
profit/loss attributable to ordinary shareholders and deductions in respect of non-equity shares,
Weighted average no. of shares outstanding during and in group accounts, after
the period non-controlling interests.
(017)cmf2pc14_ch17.qxp 8/14/2014 18:18 Page 119
Changes in capital structure

It is necessary to match the earnings for the year against the capital base giving rise to those earnings.
Bonus issue Issue at full market Rights issue

The earnings of the company will
not rise (no new funds injected)
price For purposes of calculating the
number of shares, treat this as an
New capital is introduced issue at full market price followed
Treat bonus shares as if in issue therefore earnings would be by a bonus issue
for the full year expected to rise from date of new
issue Use weighted average number of
Apply retrospectively, reducing the shares in issue for the period
reported EPS for the previous Use time weighted average modified by the retrospective effect
year by the reciprocal of the number of shares for period of the bonus element
bonus fraction
No retrospective effect Bonus element
FV per share immediately before
the exercise of rights
______________________
Theoretical ex–rights price
Page 119 17: Earnings per share

(017)cmf2pc14_ch17.qxp 8/14/2014 18:18 Page 120
IAS 33
Diluted EPS
Required where a listed company has outstanding convertible loan stock, preferred shares, debentures, options or warrants.
1 Number of shares: add the additional shares that would be issued on conversion of the loan stock to the weighted
average number used in the basic EPS calculation.
No of shares
Basic weighted average 100,000
Add: additional shares on conversion 32,000
Diluted number 132,000
2 Earnings: Farrah Co will save effective interest on the liability component of $3,000 ($50,000 × 6%) but this increase
in profits will be taxed at 30%. Hence the earnings figure may be recalculated:
Earnings $
Basic earnings 105,000
Add back loan stock interest net of tax 'saved' ($3,000 × 70%) 2,100
107,100
3 Calculation: Diluted EPS
$107,100/132,000 = 81.1 c
(017)cmf2pc14_ch17.qxp 8/14/2014 18:18 Page 121
Options or warrants
Earnings
*Calculated as:
Diluted earnings = basic earnings X
Shares under option X
Number of shares
Less shares that would have been
Basic weighted average X issued at average market price** (X)
___
Add additional shares on exercise Shares deemed issued for no
deemed issued for no consideration* X
___ consideration X
___
___
Diluted number X
___
___ **(no. of options × exercise price)
____________
average market price
Page 121 17: Earnings per share

(017)cmf2pc14_ch17.qxp 8/14/2014 18:18 Page 122
Notes
(018)CMF2PC14_CH18.qxp 8/14/2014 18:17 Page 123
18: Ethics in financial reporting
Ethics
Ethical dilemmas facing

Approaches Ethical framework
professional accountants
(018)CMF2PC14_CH18.qxp 8/14/2014 18:17 Page 124
Approaches Professional Ethical Ethical dilemmas for

ethics framework professional accountants
Compliance-based approach: Integrity-based approach:

Designed to ensure company acts within the letter of Combines concerns for the law with an emphasis on
the law. managerial responsibility for ethical behaviour.
Compliance processes Focuses on the development of a system of a
Audits of contracts system of values within an organisation
Disciplinary procedures Encourages a sense of shared accountability
(018)CMF2PC14_CH18.qxp 8/14/2014 18:17 Page 125

Code of ethics and conduct This lays out CIMA’s rules stating the ethics and behaviour required by all members
and students of the CIMA. Guidance is in the form of fundamental principles
(see below), specific guidance statements and explanatory notes.
Integrity Members should be straightforward and honest in all business and professional relationships.
Objectivity Members should not allow bias, conflicts of interest or undue influence of others to override
professional or business judgements.
Professional Members have a continuing duty to maintain professional knowledge and skill at a level required to
competence ensure that a client or employer receives competent professional service based on current
and due care developments in practice, legislation and techniques. Members should act diligently and in accordance
with applicable technical and professional standards when providing professional services.
Confidentiality Members should respect the confidentiality of information acquired as a result of professional and
business relationships and should not disclose any such information to third parties without proper or
specific authority or unless there is a legal or professional right or duty to disclose. Confidential
information acquired as a result of professional and business relationships should not be used for the
personal advantage of members or third parties.
Professional Members should comply with relevant laws and regulations and should avoid any action that
behaviour discredits the profession.
Page 125 18: Ethics in financial reporting

(018)CMF2PC14_CH18.qxp 8/14/2014 18:17 Page 126

Threats
1 Self-interest threat
2 Self-review threat Seek to reduce threats to an acceptable level using
safeguards.
3 Advocacy threat
If threats cannot be reduced to an acceptable level,
4 Familiarity threat decline/discontinue the specific professional service.
5 Intimidation threat
Safeguards
Safeguards created by the profession, legislation or regulation:
– Professional qualifications & experience
– CPD requirements
– Professional standards
– Corporate governance regulations
Safeguards in the work environment:
– Recruitment procedures – Disciplinary processes
– Internal controls – Communication and reporting channels
(018)CMF2PC14_CH18.qxp 8/14/2014 18:17 Page 127

Accountants must NOT be associated with information that:

– Contains a materially false or misleading statement;
– Is furnished recklessly; or
– Omits or obscures information in a misleading way.
Dilemmas:
1 Professional competence & due care
– Insufficient time to properly perform duties
– Inadequate information available Important to know IFRSs!
– Lack of training/experience
– Lack of resources
2 Objectivity and integrity
– Financial interests
– Inducements
Page 127 18: Ethics in financial reporting

(018)CMF2PC14_CH18.qxp 8/14/2014 18:17 Page 128
Notes
(019)CMF2PC14_CH19.qxp 8/14/2014 18:21 Page 129
19: Analysis of financial performance and

position
Financial analysis
Types of analysis Ratios Problems with analysis

(019)CMF2PC14_CH19.qxp 8/14/2014 18:21 Page 130
Information and Ratios you should Limitations

regulation know
Information Stock Exchange/Efficient Market

User groups demand financial analysis
Efficient market is one in which:
Prices of shares reflect all relevant
information available to buyers and
Sources: Trend analysis (same business over time): sellers
need to consider changes in business,
Published accounts/
currency values and accounting policies) No individual dominates
interim statements
Cross-sectional analysis (different Transaction costs do not
Documents in companies): different degrees of discourage trading
Companies Register diversification, supply chain policies, UK and US research suggests
Government statistics financing and accounting policies stockmarkets have semi-strong
Other published Social and political considerations: efficiency. Analysis carried out in the
sources, eg Extel, environmental and social reporting City helps create an efficient stock
internet Comparing multinational companies: market. But what about the 2008 crash?
different legislation and requirements
apply
(019)CMF2PC14_CH19.qxp 8/14/2014 18:21 Page 131
Information and Ratios you Limitations

regulation should know
Profitability When interpreting look for Problems: comparability

the following:
Return on capital employed
How risky is the Revaluation reserves
PBIT
ROCE = _______________ business? Policies, eg depreciation
Capital employed How capital intensive? Bank overdraft: short/
Capital employed = Shareholders' equity + non- What ROCE do similar long-term liability
current liabilities – investments in associates business have? Investments and related
Return on equity income: exclude
Profit after tax and pref div %
ROE = __________________________
Ordinary share capital and other equity Profit margin Asset turnover
More restricted view of capital than ROCE, but
same principles
Exclude profit or loss from investments in
associate when calculating PBIT! You should know these!
Page 131 19: Analysis of financial performance and position

(019)CMF2PC14_CH19.qxp 8/14/2014 18:21 Page 132

Gross profit margin, operating profit margin and net profit margin
Gross profit × 100%
Gross profit margin = _______________
Revenue
How well a company is running its core operations
Profit before interest and tax × 100%
Operating profit margin = _______________
Revenue
Profit before interest and taxation (PBIT) is used because it avoids distortion when comparisons are made
between two different companies where one is heavily financed by means of loans, and the other is financed
entirely by ordinary share capital
The extra consideration for the operating margin over the gross margin is how well the company is controlling
its overheads
Profit for year × 100%
Net profit margin = _______________
Revenue
Cost control? Financing costs?
(019)CMF2PC14_CH19.qxp 8/14/2014 18:21 Page 133
Liquidity Need to know if able to meet short term debts.
Interest Current Quick Receivables Inventory Payables Cash

cover ratio ratio days days days cycle
You must know these by now!

Gearing
This is an extension of liquidity – deals with long-term liquidity. No definitive answer; elements included are
Interest bearing net debts subjective. Following could have an impact.
Debt/equity ratio = _____________________ % (>100% = high)
Shareholders’ funds Convertible loan notes
Or Interest bearing net debt
_____________________ Preferred shares
% (> 50% = high)
Shareholders’ funds Deferred tax
Long-term debt × 100% Goodwill
Gearing ratio = _________________
Equity Revaluation reserve

(019)CMF2PC14_CH19.qxp 8/14/2014 18:21 Page 134

Investors’ ratios
Used by someone contemplating investment. Consider a company’s shares as a source of income (dividends)
and/or source of capital growth (share price).
Dividend yield Dividend cover P/E ratio

Dividend ______________
Div per share % Dividend ___________
EPS Current market value
yield = Current market value cover = Div per share P/E ratio = of_______________
the share (ex-div)
of the share (ex-div) or EPS
Low yield: retains a large Profit after tax and pref div
______________________ Higher the better; reflects
proportion of profits to Div on ordinary shares confidence of market; rise in EPS
reinvest Shows how safe the dividend is, will cause rise in P/E ratio, but
High yield: risky company or or extent of profit retention. maybe not to same extent
Variations due to maintaining
slow-growing dividend vs declining profits
(019)CMF2PC14_CH19.qxp 8/14/2014 18:21 Page 135
Information and Ratios you should Limitations

regulation know
Limitations
Here is a summary of the limitations of ratio analysis.
Seasonal fluctuations Availability of comparable information
Only identifies symptoms, not causes Use of historical/out-of-date information
Effect of price changes Ratios are not definitive - they are only a guide
Potential effects of changes in accounting Needs careful analysis; do not consider in
policies isolation
What's a normal base for comparison? It is a subjective exercise
Multinational companies: different legislations, It can be subject to manipulation

taxation, regulation, economies and currencies Ratios are not defined in standard form

(019)CMF2PC14_CH19.qxp 8/14/2014 18:21 Page 136
Notes

CIMA F2 Advanced Financial Reporting Passcards 1 2 PDF

Uploaded by

Copyright:

Available Formats

You might also like

CIMA F2 Advanced Financial Reporting Passcards 1 2 PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

CIMA F2 Advanced Financial Reporting Passcards 1 2 PDF

Uploaded by

Copyright:

Available Formats

CIMA Passcards New

Management Paper F2 syllabus

CMF2PC15.indd 1 14/07/2014 12:46

Your learning materials, published by BPP Learning

6 Deferred taxation 39 15 Consolidated statements of cash flows 105

7 Share-based payments 45 16 Related parties 113

8 Revenue 49 17 Earnings per share 117

9 Basic groups 61 18 Ethics in financial reporting 123

10 Associates and joint arrangements 79 19 Analysis of financial performance

1: Sources of long term finance

Long-term debt Operation of stock Role of advisors Shares

Operation of stock Role of advisors Shares Long-term

Primary Markets: Enable organisations to raise new finance.

Operation of stock Role of advisors Shares Long-term

Page 3 1: Sources of long term finance

Operation of stock Role of advisors Shares Long-term

Ways to raise equity finance:

Operation of stock Role of advisors Shares Long-term

Types of long-term debt:

Deep-discount – Issue price < nominal value, Term

Page 5 1: Sources of long term finance

Cost of debt 1 Cost of debt 2 Cost of debt 3 Cost of debt 4

Cost of equity - dividend Weighted average cost of

The cost Dividend growth Cost of debt WACC

The cost of capital

Risk free rate of return +

COST OF CAPITAL 2 Creditors with a floating charge

The cost Dividend growth Cost of debt WACC

Cost of capital if constant dividends paid Estimating growth rate

The growth model

where D0 is dividend at time 0

The cost Dividend growth Cost of debt WACC

After tax cost of irredeemable debt capital Cost of redeemable debt

Conversion value = P0 (1+ g)n R Formula to learn

The cost Dividend growth Cost of debt WACC

ke is cost of equity Ve is market value of equity

Assumptions of WACC Problems with WACC

Page 11 2: Cost of capital

Definition Classification Conceptual Framework Recognition

Conceptual IAS 32 IAS 39

The IASB’s Conceptual Framework

Two fundamental qualitative characteristics Four enhancing qualitative characteristics

To recognise or not to recognise?

Conceptual IAS 32 IAS 39

Because of the inherent difficulties in this complex area, it is

Page 15 3: Financial instruments

Conceptual IAS 32 IAS 39

IAS 32 presentation Definitions

Page 17 3: Financial instruments

Conceptual IAS 32 IAS 39

Significance of financial instruments for position and performance

Statement of financial position

Conceptual IAS 32 IAS 39

IAS 39 Recognition and measurement

Page 19 3: Financial instruments

Conceptual IAS 32 IAS 39

Initial measurement: Initial measurement:

Fair value Fair value