Free ACCA Paper F7 Course notes

218 Pages·2011·1.13 MB·English

FinAnciAl reporting
(INTERNATIONAL)

Paper
F7

ACCA QuAlifiCAtion
Course notes

June 2011 examinations

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F1 Accountant in Business

F2 Management Accounting

F3 Finanticial Accounting

F4 Corporate & Business Law

F5 Performance Management

F6 Taxation (UK)

F7 Financial Reporting

F8 Audit and Assurance

F9 Financial Management

P1 Governance, Risk & Ethics

P2 Corporate Reporting

P3 Business Analysis

P4 Advanced Financial Management

P5 Advanced Performance Management

P6 Advanced Taxation (UK)

P7 Advanced Audit & Assurance

Paper F7

June 2011 Examinations

Paper F7

Contents

1
Financial Reporting – basic concepts
1

2
The regulatory framework
5

3
Published Financial Statements
9

4
IFRS5 – Discontinued operations and assets held for sale
19

5
IAS 8
23

6
Group Accounts: An Introduction
27

7
Preparation of the Consolidated Statement of Financial Position
33

8
Group Accounts: Inter-entity Transactions
47

9
Group Accounts: Comprehensive Example
55

10
Preparation of the Consolidated Statement of Comprehensive Income
57

11
Accounting for Investments in Associates (IFRS3 Revised)
63

12
IAS 2 Inventories
67

13
IAS 11 Construction Contracts
69

14
IAS 36 Impairment of Assets
77

15
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
81

16
IAS 17 Leases
87

17
IAS 23 Borrowing Costs
93

18
IAS 12 Income Taxes
95

19
IAS 7 (Revised): Statements of Cash Flows
101

20
Interpretation of Accounts – Ratio Analysis
111

21
IAS 33 Earnings Per Share
117

22
Theoretical matters
125

23
IAS 16 Property, Plant and Equipment
129

24
IAS 18 Revenue
131

25
IAS 20 Government Grants
133

26
IAS 38 Intangible Assets
135

27
IAS 40 Investment Properties
137

28
IAS 32 IAS 39
139

Answers to Examples
149

Mini Exercises – Questions
191

Mini Exercises – Answers
203

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1
Paper F7

June 2011 Examinations

Chapter 1

FinanCial RepoRting – basiC ConCepts

Underlying assumptions
•
accruals

•
going concern

•
consistency

•
materiality

•
off-setting

example 1

Laima has recently bought a shop called Sweet for $1 million and included the full amount in her cost of sales account.

How does each of the five concepts affect the way Laima should treat the cost of $1 million?

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Chapter 1
Paper F7
Financial Reporting – basic concepts
June 2011 Examinations

2

Advantages and disadvantages of standardisation of accounting practices
•
provide a focal point for debate

•
require disclosure of policies adopted

•
encourage global discussion

•
flexible

•
enable meaningful comparison

•
reduce penumbral areas of divergent possibilities

•
pressure groups may succeed in asking for amendments

•
allowed alternative treatments – standardisation?

•
inappropriate treatment could result from following a standard

•
rules take away use of skill and judgement

A conceptual framework
•
framework has been developed

defined as “a constitution, a coherent system of interrelated objectives and fundamentals which can lead to consistent standards
and which prescribe the nature, function and limits of financial accounting and financial statements”

•
generally accepted accounting practice ( gaap )

•
a combination of:

•
each country’s own law

•
international financial reporting standards

•
stock exchange requirements

•
but gaap does not have any statutory authority

•
changes and evolves with changing circumstances

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3
Chapter 1
Paper F7
Financial Reporting – basic concepts
June 2011 Examinations

The framework
•
provides a set of principles

•
purpose defined as assisting:-

•
IASC in development of new standards

•
review of existing standards

•
harmonisation of standards and procedures

•
reduction of penumbral areas of divergent possibilities

•
development of new standards by national accounting bodies

•
preparers of financial statements

•
auditors in forming audit opinions

•
users in their interpretation of financial statements

Framework contents
•
objectives of financial statements

•
underlying assumptions ( accruals and going concern )

•
qualitative characteristics ( see next )

•
elements of financial statements (assets, liabilities, equity, income, expenses and capital maintenance)

•
recognition of the elements

•
measurement

•
concept of capital and capital maintenance

•
as a set of principles, it requires entities to follow the spirit of the framework

•
it’s not a standard, so does not override any existing standard requirements

•
nor does it define any standard for measurement or disclosure of any particular issue

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Chapter 1
Paper F7
Financial Reporting – basic concepts
June 2011 Examinations

4

Framework – qualitative characteristics
•
understandable

•
comparable

•
relevant

•
faithful representation

•
complete

•
material

•
substance over form

•
reliable

•
neutral

•
prudent

(you can remember framework contents. Mike says remember nine principles!)

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5
Paper F7

June 2011 Examinations

Chapter 2

The regulaTory framework

•
IFRS produced by the profession ( IASC )

•
identify required accounting treatment for items within financial statements

•
sometimes with allowed alternatives

•
reduce penumbral areas of divergent possibilities

•
apply whenever financial statements intend showing a true and fair view

•
non-compliance must be explained

•
IASC has three formal objectives

•
to develop, in the public interest, a single set of high quality, understandable and enforceable global financial reporting
standards that require high quality, transparent and comparable information in financial statements and other financial
reporting to help global investors and other users make informed and meaningful economic decisions.

•
to promote the use and strict application of those standards; and

•
to bring about consistency of national and international financial reporting standards.

example 1

What are the advantages and disadvantages of international harmonisation of financial reporting standards?

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Chapter 2
Paper F7
The regulatory framework
June 2011 Examinations

6

The structure of the IASB

Monitoring Board
Approve and Oversee Trustees

IFRS FOUNDATION
22 TRUSTEES Appoint, Oversee, Raise Funds

BOARD 16 (maximum 3 part-time
Set technical agenda. Approve Standards,
Exposure Drafts and Interpretations

IFRS ADVISORY COUNCIL
Approx: 40 members

IFRS INTERPRETATIONS COMMITTEE
14 members

Working Groups For Major
Agenda Projects

Appoints
Reports to
Advises

Key

•
standard setting process

Statement of principles

Exposure draft

¾ Board approval

IFRS

Consultative group

Steering committee

Board

Steering committee

(views)

(discuss)

(accept)

Comments from 3rd parties

(issued)

(issued)

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7
Chapter 2
Paper F7
The regulatory framework
June 2011 Examinations

IFAC
•
international federation of accountants

•
mission:
The mission of IFAC is “the development and enhancement of the profession to enable it to provide services of
consistently high quality in the public interest”

•
it is a non-profit, non-governmental and non-political international organisation of accountancy bodies.

•
over 3 million members world-wide

•
one representative from each member body on the assembly

•
the assembly elects a council for two terms of 6 months

•
council supervises the IFAC work programme

•
work programme includes technical sub-committees on

•
international audit practices

•
ethics

•
education and training

•
financial accounting

•
management accounting

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Chapter 2
Paper F7
The regulatory framework
June 2011 Examinations

8

Financial statements comprise:
•
Statement of financial position

•
Statement of comprehensive income

•
Statement of changes in equity

•
Statement of cash flows

•
Notes ( accounting policy and explanations )

•
some elements of the report of the executives are also auditable

•
remuneration committee’s report

•
report on the appropriateness of the system of internal control

•
purpose of IAS 1 ( revised ) is to ensure greater clarity and understandability of financial statements

•
within the financial statements there should be disclosed

•
name of the entity

•
date of the end of the accounting period

•
period covered by the financial statements

•
reporting currency

•
degree of precision used

•
country of incorporation and address of registered office

•
description of the nature of operations

•
name of parent entity and ultimate holding entity

•
number of employees at end of period ( or average during the period )

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9
Paper F7

June 2011 Examinations

Chapter 3

Published FinanCial statements

•
proforma financial statements following IAS1 (revised)

XYZ GROUP
Statement of Comprehensive Income for the year ended 31 December, 2009
(classification of expenses by function)
2009
2008
$’000
$’000
Revenue
X
X
Cost of sales
(X)
(X)

Gross profit
X
X
Other operating income
X
X

Distribution costs
(X)
(X)
Administrative expenses
(X)
(X)
Other operating expenses
(X)
(X)

Profit from operations
X
X
Finance cost
(X)
(X)
Income from associates
X
X

Profit before tax
X
X
Income tax expense
(X)
(X)
Profit after tax
X
X

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Chapter 3
Paper F7
Published Financial Statements
June 2011 Examinations

10

XYZ GROUP
Statement of Financial Position as at 31 December, 2009
2009
2009
2008
2008
2007
2007
$’000
$’000
$’000
$’000
$’000
$’000
ASSETS
Non-current assets
Goodwill
X
X
X
Property, plant and equipment
X
X
X
Other financial assets
X
X
X
X
X
X
Current assets
Inventories
X
X
X
Trade and other receivables
X
X
X
Prepayments
X
X
X
Cash and cash equivalents
X
X
X
X
X
X
Total assets
X
X
X

EQUITY AND LIABILITIES
Equity
Issued capital
X
X
X
Reserves
X
X
X
Retained earnings
X
X
X
Non-controlling interest
X
X
X
X
X
X

Non-current liabilities
Interest bearing borrowings
X
X
X
Deferred tax
X
X
X
X
X
X
Current liabilities
Trade and other payables
X
X
X
Short term borrowings
X
X
X
Current portion of interest bearing borrowings
X
X
X
X
X
X
Total equity and liabilities
X
X
X

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11
Chapter 3
Paper F7
Published Financial Statements
June 2011 Examinations

Statement of Changes in Equity
•
IAS 1 (revised) requires an entity to disclose the information in the Statement of Changes in Equity as a separate component of its
financial statements.

XYZ GROUP
Statement of Comprehensive Income for the year ended 31 December, 2009

2009
2008
$’000
$’000
Surplus/(deficit) on revaluation of properties
(X)
X
Surplus/(deficit) on revaluation of investments
X
(X)
Net gains not recognised in the Statement of Income
X
X
Net profit for the period
X
X
Total recognised Income and Expense
X
X

XYZ GROUP
Statement of Changes in Equity for the year ended 31 December, 2009

Share
capital
Share
premium
Revaluation
reserve
Retained
earnings
Non-controlling
Interest
Total

$000
$000
$000
$000
$000
$000

Balance at 31 December, 2007
X
X
X
X
X
X
Changes in accounting policies
(X)
(X)
Restated balance
X
X
X
X
X
X
Surplus on revaluation of properties
X
X
X
Deficit on revaluation of investments
(X)
(X)
Net Income and Expense not recognised in the
Statement of Comprehensive Income
X
X
X

X
X
X
X
X
X
Net profit for the period
X
X
Dividends
(X)
(X)
(X)
Non-controlling interest
(X)
X
Issue of share capital
X
X
X
Balance at 31 December, 2008
X
X
X
X
X
X
Deficit on revaluation of properties
(X)
(X)
(X)
Surplus on revaluation of investments

X
(X)
Net income and expense not recognised in the
Statement of Comprehensive Income
(X)
(X)
(X)

X
X
X
X
X
X
Net profit for the period
X
X
Non-controlling interest
(X)
X
Dividends
(X)
(X)
(X)
Issue of share capital
X
X

X
Balance at 31 December, 2009
X
X
X
X
X
X