Paper F7

Question 2 – Single Company Accounts Guide

Step 1: Read Requirements

- See if it is asking to prepare statements of Comprehensive Income, Financial Position, and/or
Changes in Equity.

Step 2: Check Additional Notes for:

Non-Current Assets Chap 4 Intangible Assets Chap 5
- Costs - Research and development costs
- Revaluations - Amortisation (depreciation of intangibles)
- Depreciation - Goodwill
- Government Grants
- Investment Property Impairment of Assets Chap 6
- Borrowing Costs - Accounting treatment
- Cash generating units
Reporting Financial Performance Chap 7
- Changes in accounting policies Inventories Chap 12
- Changes in estimates - Measurement
- Errors - Cost
- Non-current assets held for sale - Recognition of Expense
- Discontinued Operations
Construction Contracts Chap 12
Provisions, Contingent Liabilities, and - Revenue
Contingent Assets Chap 13 - Costs

Financial Assets and Liabilities Chap 14 Legal Vs Commercial View Chap 15

- Measurement - Consignment Inventory
- Amortised cost - Sale and Repurchase Agreements
- Compound Financial Instrument - Sale and Leaseback transactions
- Factoring Receivables
Leasing Chap 16 - Recognition of Revenue
- Operating Lease
- Finance Lease Accounting for Taxation Chap 17
- Current Tax
Limitations of Financial Statements Chap 20 - Deferred Tax
- Effect of Related parties p 327
- Events After Reporting Period p 328 Dividends
- if suggested (no calculation)
- Declared (calculation)
- "Charged" (no calculation, already included)
- Dividends reduce expenses allocated if
included.

Step 3: Start With Income Statement

- calculate Cost of Sales
- admin and distribution Expenses
- Other Income
- Taxation
- Other Comprehensive income

Step 4: Statement of Changes in Equity

Step 5: Statement of Financial Position

- Calculation of non-current assets
Step 3: Statement of Comprehensive Income Statement

$'000
Revenue X
Cost of Sales calculation below (X)
Gross Profit X
Administration Expenses calculation below (X)
Distribution Expenses calculation below (X)
Finance Cost (interest on preference shares and loans etc) (X)
Finance Income X
Other Income (like rental, grant income etc) X
Profit Before Tax X
Income Tax Expense (X)
Profit for the Year from continuing Operations X

Profit from Discontinued Operations X

Other Comprehensive Income X

Gains on Revaluation X/(X)
Other income/ losses X
Total Comprehensive Income for the Year

Cost of Sales
Opening Inventory X
Purchases X
Less: Closing Inventory (X)
Direct Costs for Manufacturing X
Depreciation relating to P,P,E X
Other Expenses allocated X
Cost of Sales X

Administration Expenses Distribution Costs

Legal Fees X Motor Vehicles Expense X
Amortisation Expense X Motor Vehicles depreciation X
Other Expenses Allocated X Other Expenses Allocated X

Step 4: Statement of Changes in Equity

Share Share Retained General Revaluation Total
Capital Premium Earnings Reserve Reserve
Opening Balance X X X X X X
Change in Acc. Policy - - X
Transfer to RE X (X) X
Errors - X
Issue of Capital X X
Dividends (X) X
Comprehensive income _____ _____ _____ ______ X X
Closing Balance X X X X X X
Step 4: Statement of Financial Position

$'000
Assets
Non-Current Assets
Property, Plant and Equipment see below X
Intangible Assets (goodwill, patents etc) chap 5 X
Investment Properties Chap 7 X
Other Assets (motor vehicles etc) X

Current Assets
Inventories X
Trade Receivables X
Other Current Assets X
Assets held for sale X
Cash and Equivalents ___X___
X
Total Assets

Equity and Liabilities

Equity X
Share Capital X
General Reserve X
Revaluation Reserve X
Retained Earnings

Non-Current Liabilities X
Long-term Borrowings (debentures, preference shares etc) X
Deferred Tax X
Long-term Provisions chap 13

Current Liabilities X
Trade Payables X
Other Payables (interest payable on loans and preference shares) X
Liabilities for assets held for sale X
Current Portion of Long-term Borrowings X
Short-term Borrowings X
Current Tax Payable __X__
Short-term Provisions chap 13 X

Total Equity and Liabilities

P, P, and E Freehold Leasehold P,P, and E Fixtures and Motor Total

land Property Furniture Vehicles
Cost (per trial bal) X X X X X
Accumulated Depre. ____ (X) (X) (X) (X)
NBV
Fee's adding to cost X X X X X
Disposals (X) (X) (X) (X) (X)
Additions X X X X X
Depreciation (X) (X) (X) (X) (X)
Impairment (X) (X) (X) (X) (X)
Change in Policy - - - - -
Revaluation Gain X X X X X
Closing X X X X X
Non Current Assets Chapter 4

Initially measured at cost: Cost is made up of:

- Purchase price less trade discount or rebate
- Import duties and non-refundable purchase taxes
- Directly attributable costs of bringing asset to working condition for intended use.
- Unavoidable costs of dismantling

Not part of P, P, and E

- administration and other general overheads
- start-up and pre-production costs
- Initial operating losses before asset reaches planned performance

When asset is exchanged it is valued at fair value for both assets.

Revaluation
Gain on revaluation after asset was reduced in value
Dr. Asset Value 7,000 B/S
Cr. Income Statement 2,000 P/L
Cr. Revaluation surplus 5,000 B/S
Decrease in valuation after asset increased in value
Dr. Revaluation surplus 5,000 B/S
Dr. Income Statement 2,000 P/L
Cr. Asset Value 7,000 B/S
Revalued higher and depreciation
Dr. Depreciation 4,000 P/L
Dr. Asset Value 2,000 B/S
Cr. Revaluation surplus 6,000 B/S

Depreciation methods
- straight line
- Reducing balance
- Machine hour
- Sum-of-digits

Depreciation for Complex Assets – assets made up of separate components are each depreciated over
their useful life.
Overhauls – treated as additional component and depreciated over the period to next overhaul. If
overhaul not qualified, then reverse all old overhauls and charge a new depreciation for the asset
overhauls were associated with.

Government Grants
- method 1 – Reduce cost of asset by grant to get carrying value
- Set-up as deferred income. Reducing it every year by its life.
Grant income = grant accrued during year plus grant current liability – grant repaid

Investment Property –property, land, or building held to earn rentals or for capital appreciation or
both. Measured at Fair Value or Cost Model. Increase in investment FV is an investment income.
Except if it is stated to be part of comprehensive income.

Borrowing Costs – interest and other costs incurred by an entity in connection with borrowing of
funds. This increases the cost of asset by funds borrowed for making the asset (capitalization).

Specific loan = Loan utilized X (loan rate %) X (# of months / 12)

For General loan = amount utilized X (weigthed average rate) (X # of months / 12)
Intangible Assets Chapter 5
Research – written off as an expense as they are incurred. P. 92 for examples
Development Costs – may qualify for recognition as intangible asset thus making one. P. 92 for
criteria.
Amortisation – "depreciated" over its expected life

Impairment of Assets Chapter 6

Treatment – Asset is measured at Lower of:
Carrying Amount (NBV = Cost – Accumulated Depreciation), or
Recoverable Amount (if lower there is an impairment), which is higher of
- Fair Value (market value at arm's length)
- Value in use. Which is present value of all future cash flows.

Allocating loss for Impairment of Cash Generating Unit

- First, reduce to any assets that are obviously damaged or destroyed
- Next, to goodwill
- Then all other assets on a pro-rated basis

Reporting Financial Performance Chapter 7

Changes in Accounting Policy – applied retrospectively, to events and transactions as though it had
always been in use.

Changes in Accounting Estimates – not applied retrospectively. Effect of change should be included
in the determination of net profit or loss in one of:
- Period of Change (if only that period is affected)
- Period of Change and future periods

Errors – corrected retrospectively. Most of the time, can be corrected through net profit or loss for the
current period.

Assets held for sale – measured lower of Carrying Amount or Recoverable Amount.

Discontinued Operations – present and disclose separately in the Income statement.

Inventories Chapter 12
Measurement – lower of cost or Net Realizable Value.

Inventories include:
- Goods purchases and held for sale
- Finished goods
- Work in Progress
- Raw materials

Cost consists of purchase price, costs of conversion, and other costs bringing them to present location
and condition.

Recognition of expense
- Carrying amount is recognized as an expense in the period which the related revenue is
recognized.
- The amount of any write-down of inventories to NRV and all losses of inventories are recognized
as an expense in the period the write down or loss occurs
- The amount of any reversal of any write down of inventories, arising from an increase in NRV, is
recognized as a reduction in the amount of inventories recognized as an expense in the period in
which the reversal occurs.
Construction Contracts Chapter 12
Extract of Balance Sheet step 4 $'000
Receivables
Gross Amounts due from customers X
Trade Receivables -

Current Liabilities
Gross Amounts due to customers X

Extract of Income Statement $'000

Revenue step 3 X
Expenses step 3 (X)
Expected Losses step 2 (X)
Profit/(loss) step 2 X

$'000
Step 1: Compare Contract Value and Total Costs
Contract Value (Total Revenue) X
Total Costs: Costs Incurred to date X
Estimated Costs to Completion X
Other Costs Associated with construction X (X)
Total Expected Profit/ (loss) X

Step 2: Expected Profit/ (loss) for the period

Total Expected Profit / (loss) X
Times % completed to date (sometimes needs calculation) %
Profit / (loss) X

Step 3: Revenue, Expenses, and Profit and loss for the period
Total Revenue X % completed less revenue previously recognized X
Total Costs X % Completed less Costs previously recognized (X)
Add: Foreseeable losses (100% - % completed) X
Profit/ (loss) recognized in period X

Step 4: Calculate amounts due to/ from customers

Contract costs to date X
Recognized Profit/ (loss) to date step 2 X
Progress Billings to Date (X)
Amounts due from/ (to) customers X/(X)
Provisions, Contingent Liabilities, and Contingent Assets Chapter 13

Provision – a probable outflow of resources embodying economic benefits/ liabilities. Calculated on

the present value of future outflow of resources.
Future Operating Losses – not recognized as provision.
Onerous contracts – should be measured and recognized as a provision.

Restructuring costs – sale or termination of line of business, closure of business locations, relocation,
changes in management structure, and changes on nature and focus of operations.
Includes direct expenditures, necessary to restructuring and not associated with ongoing activities.
The following are not restructuring:
- Retraining
- Marketing
- Investment in new systems and distribution networks

Treatment of Contingent Liabilities – should not be recognized in financial statements but they
should be disclosed. If outflow is virtually certain, then it will be a provision.

Treatment of contingent Asset – same as contingent liability but if virtually certain an inflow will
occur it will become an asset.

Financial Assets and Liabilities Chapter 14

Measurement
Initial – Fair value plus transaction costs directly attributable
Subsequent – amortised cost or fair value

Compound Financial Instrument – for convertible debt

$'000
Step 1: Calculate Present Value of Principal amount
(Principal) X 1/(1+r^n) X
Step 2:Present Value of Interest
Principal X (interest rate) X 1/(1+r^1) X
Principal X (interest rate) X 1/(1+r^2) X
Principal X (interest rate) X 1/(1+r^3) X
(add more of interest if needed) ___
Total Liability Component X
Equity Component (Principal – Total liability component) X
Principal Amount X
N= total years n^1= 1 year r= discount rate

Liability Component for when acquired = Present Value of Principal amount

Finance Cost for year 1 = Principal X Interest rate X 1/ (1+r^1). This adds to Liability component
Dr. Finance Cost X
Cr. Liability Component X

Amortised Cost

For purchased debt instrument $'000

Cost at beginning (Cost less issue cost less discount) X
Interest Income @ effective rate % (above X effective rate) X
Less: Interest Received (Principal X interest rate) (X)
Amortised Cost at End of Year 1 X
Interest Income @ effective rate % (above X effective rate) X
Less: Interest Received (Principal X interest rate) (X)
Amortised Cost at End of Year 2 X
(may go on as needed)
If loan note issued: Same as above except instead of interest income it will be finance cost.
The Legal versus the Commercial View of Accounting Chapter 15

Consignment Inventory

Indications of asset status p. 245

Inventory in substance an asset of dealer
- Recognized in dealer's book with corresponding liability to manufacturer
- Any deposit should be deducted from liability and excess as a trade payable
Inventory not in substance an asset of dealer
- Not included in dealer's statement of financial position
- Any deposit should be included under "other receivables"

Sale and Repurchase Agreements

Indications of sale of asset p.247

If repurchase unlikely, it will be treated as a sale.
If it is likely to be repurchased, it will be treated as a secured loan. The seller should continue to
recognize the original asset and record proceeds received from buyer as a liability. Interest should be
accrued.

Sale and leaseback Transactions

If it results in a finance lease – it is in substance a loan from the lessor to lesse.
If it results in an operating lease –and was conducted at fair value, then it can be regarded as a normal
sale transaction. Operating lease installments are treated as lease payments, rather than repayments of
capital.

Factoring of Receivables/ debt

Indications of treatment p 249

If not an asset of seller – receivables should be removed from statement of financial position and no
liability shown in respect of the proceeds received from the factor. Profit and loss should be
recognized.

If it is an asset of seller – a gross asset should be shown in the statement of financial position of the
seller within assets and a corresponding liability in respect of proceeds received from factor should be
shown within liabilities. Interest element of the factor's charges should be recognized as it accrues and
included in profit or loss with other interest charges.

Recognition of Revenue Criteria

Generally recognized as earned at point at sale
- provided to the buyer
- buyer recognized his liability
- Buyer has indicated his willingness to hand over cash
- Monetary value has been established
Leasing Chapter 16
p. 260 for indications of whether it is operating lease or finance lease.

Operating Lease – a lease other than a finance lease.

Pose no accounting problem. The lessee pay amounts periodically to the lessor and these are charged to
the income statement. If a rent-free period or cash back incentive is given, this is effectively a discount.
It will be spread over the period of the operating lease in accordance with accruals principal.

Finance Lease – a lease that transfers substantially all the risks and rewards incident to ownership of
an asset. Title may or may not be eventually transferred.

Extract of Income Statement 20X1 20X2 20X3

Depreciation 12,500 12,500 12,500
Finance Costs step 2 Interest of the year 11,250 8,063 4,078

Extract of Financial Position Statement 20X1 20X2 20X3

Non-current Assets
Leasehold Assets (FV less acc. Depreciation) 41,500 29,000 16,500

Non-current Liabilities
Finance Lease liability step 2 Next year's balance 16,313 0 0

Current Liabilities
Finance Lease Liability step 3 15,937 16,313 0

$'000
Step 1: Calculate opening balance
FV less deposit or PV less deposit (54,000 – 9,000) 45,000
Step 2: Finance Costs and Finance non-current Lease Liability
Add: interest @ 25% (above X 25%) 11,250
Less: installment (24,000)
Balance 31 Dec 20X1 32,250
Add: interest @ 25% (above X 25%) 8,063
Less: installment (24,000)
Balance 31 Dec 20X2 16,313
Add: interest @ 25% (above X 25%) 4,078
Less: installment (20,391)
Balance 31 Dec 20X3 0

Step 3: Current Liabilities Finance Lease Liability

This year's balance less next year's balance
20X1 = 32,250 – 16,313 = 15,937
20X2 = 16,313 – 0 = 16,313
20X3 = 0 – 0 = 0
Accounting for Taxation Chapter 17

Current Tax – is the amount actually payable to the tax authorities in relation to the trading activities
of the entity during the period.

Any unpaid tax in respect of the current period to be recognized as a liability. Excess tax paid should
be recognized as an asset.

Deferred Tax – an accounting measure used to match the tax effects of transactions with their
accounting impact. Makes future tax payments higher or lower. IAS 12 requires companies to
recognize this as a deferred tax liability or asset.

Extract from Income Statement $'000

Profit before tax (Income Tax + Proceeds of sale) 1,260,000
Income Tax Expense (402,000)
Profit for the year 858,000

$'000
Tax on profits (income and gain) (AKA Provision) 378,000
Deferred Taxation transferred 20,000
Under Provision / (over provision) (Tax by tax authorities less estimated tax) 4,000
Charge for the year 402,000

Extract from Statement of Financial Position $'000

Current Liabilities
Tax payable next period (tax on profits) 378,000

Non-current Liabilities
Deferred Taxation (opening balance + transfer) 120,000