Notesale: Turn your study into money

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

---

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]

ACCA
Financial Reporting (F7)
(International)

Revision Notes
By: Arif Javed (FCCA)

1

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
Table of contents
Contents
Conceptual framework
Regulatory framework
IAS-2
IAS-7
IAS-8
IAS-10
IAS-12
IAS-16
IAS-17
IAS-20
IAS-23
IAS-33
IAS-36
IAS-37
IAS-38
IAS-40
IAS-41
Accounting for inflation
IFRS-3
IFRS-5
IFRS-15
Consolidation
Consolidated statement of financial position
Consolidated statement of profit or loss

2

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

Page number
3
8
10
13
18
20
22
24
28
33
36
38
40
43
45
48
49
51
55
56
58
60
64
70

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
Conceptual framework
Introduction
Introduction of IASB framework is based on the fundamental reason:
Question:
Why financial statements are produced worldwide?
Answer:
To satisfy the requirements of external users/stakeholders
...
This caused difficulties in
comparing financial statements worldwide
...

Generally financial statements are produced for following economic decisions by its users:
 Decision to buy, held or sell equity investments
 Assessment of management accountability and stewardship
 Assessment of entity’s ability to pay its employees
 Assessment of security of amounts lent to entity
 Determination of taxation policies
 Determination of distributable profits and dividends
 Inclusion in national income statistics
 Regulations of the activities of the entities
Any additional requirements imposed by national regulators should not affect the financial
statements produced for the benefits of other users
...
Underlying assumptions
2
...
Recognition of the elements of financial statements
4
...
Concepts of capital and capital maintenance
Chapter 1: Objective of general purpose financial reporting
The objective of general purpose financial reporting is to provide information about the
reporting entity that is useful for its existing and potential investors, lenders and other creditors
in making decisions about providing resources to the entity
...


4

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
Chapter 3: Qualitative characteristics of useful financial information
There are two fundamental qualitative characteristics of financial information
Relevance
Relevant information is capable of
making a difference in the decisions
made by the users
...


Relevance if affected by its
1
...
Materiality

Faithful representation
Financial reports represent
economic phenomena in words and
numbers
...


To be a faithful representation, information
must be
1
...
Neutral
3
...
Substance over form

Chapter 4: Other areas
1
...

Accrual basis
The effects of transactions and other events are recognized when they occur and reported in
the period to which they relate
...
It is assumed that entity has neither the intention
nor the need to cut down or reduce its operation
...
Elements of financial statements
Related to financial position (SFP)
1
...
Liabilities
Related to financial performance (SPL)
1
...
Expenses
Asset
Asset is an economic resource in control of the entity
...

Income
Income is an increase in economic resources resulting from increase in assets or decrease in
liabilities
...

3
...
Cost of the asset can be measured reliably
2
...
There is present obligation
2
...
Amount of the liability can be measured reliably

6

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
Income
An income is recognized when an increase in economic benefits from increase in assets or
decrease in liabilities has arisen
...

4
...

Following measurement basis are used to measure elements of financial statements
...

Need for regulations in accountancy profession
Every profession including accountancy is defined by the knowledge, skills, attitudes and code
of ethics in the profession
...
The nature of
such regulations depends upon the specific profession and environment in which it operates
...
It was founded in 1977 and is responsible for development,
adoption and implementation of international standards for accounting, ethics and audit and
assurance
...
IASC has issued 41 IASs and 15 IFRSs so far
...
IASs are converted into IFRSs with time
...
Consultation between advisory committee and IFRS advisory council occurs throughout
the project
...

Step-3
After receiving and reviewing comments from public, IASB develops and publishes an Exposure
Draft (ED) for public comment
...

Difference between IASs and IFRSs
Most of the IASs allow two accounting treatments, one as benchmark (preferred one) and other
as alternative
...
But IFRSs
only allow one accounting treatment which makes financial statements across the entities more
comparable
...


It includes raw materials, work in progress and finished goods
...
Work in progress is that inventory which is in process of
manufacture
...

Recognition criteria for inventory
Inventory should be recognized if
1
...
Future economic benefits are probable from use or sale of the inventory
Measurement of inventory
Initial measurement (at the time of recognition)
Inventory is initially measured at cost in financial statements
...
Cost and
2
...
Legal fee
2
...
Valuation fee
4
...
Agency commission

10

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
Net realizable value (NRV)
It is the net value which can be recovered from selling the inventory
...

Its double entry will be
Dr
SPL
x
Cr
Inventory
x
For example a business has inventory at cost of $36,000 at the year end
...
It means that value of the inventory has fallen by $4,000
...
FIFO
2
...
AVCO
a
...
Periodic average
FIFO – First In First Out
Inventory which was bought first is issued first
...

LIFO – Last In First Out (Not permitted by IAS-2)
Inventory which was bought in the last is issued first
...


11

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
AVCO – Average Cost Method
1
...

2
...

Complete double entries related to inventory (Periodic inventory system)
Purchase of inventory
Dr
Purchases
Cr
Cash / Creditors

x
x

Transfer to COS
Dr
COS
Cr
Purchases

x
x

Closing inventory at year end
Dr
Inventory
Cr
COS

x
x

Opening inventory at the start of next year
Dr
COS
x
Cr
Inventory
x

12

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
IAS-7
Scope of IAS-7
All the entities preparing financial statements under IFRSs are required to present a
statement of cash flows
...
Short term securities
redeemable within 3 months are classified as cash equivalents
...


Cash flows from investing
activities
Investing activities are
those related to sale or
purchase of non-current
assets
...


Cash flows from operating activities
Cash generated from operations
Interest paid
Tax paid
Cash flows from operating activities

$
x
(x)
(x)
X

Cash generated from operations
Cash generated from operations can be calculated using direct method and indirect
method
...

Indirect method is used when information is provided in financial statements
...


13

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]

Cash flows from operations using direct method
Cash sales
Cash purchases
Receipts form trade receivables
Payments to trade payables
Payments to employees
Payment of other expenses
Cash flows from operations

$
x
(x)
x
(x)
(x)
(x)
X

Cash flows from operations using indirect method
$
Profit before tax
x
Interest expense
x
Interest income
(x)
Operating profit
x
Depreciation/amortization
x
(Gain)/loss of disposal of NCAs
(x)/x
(Increase)/decrease in trade receivables
(x)/x
(Increase)/decrease in inventory
(x)/x
(Inc)/dec in other CAs excl cash equivalents
(x)/x
Increase/(decrease) in trade payables
x/(x)
Increase/(decrease) in other CLs excl bank overdraft x/(x)
Cash flows from operations
X

14

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
Statement of cash flow format
ABC Company
Statement of cash flows
As at 31 December 2016
$
Cash flows from operating activities:
Profit before tax
x
Interest expense
x
Interest income
(x)
Operating profit
x
Depreciation/amortization
x
(Gain)/loss of disposal of NCAs
(x)/x
(Increase)/decrease in trade receivables
(x)/x
(Increase)/decrease in inventory
(x)/x
(Inc)/dec in other CAs excl cash equivalents
(x)/x
Increase/(decrease) in trade payables
x/(x)
Increase/(decrease) in other CLs excl bank overdraft x/(x)
Cash flows from operations
x
Interest paid
(x)
Tax paid
(x)
Cash flows from operating activities
Cash flows from investing activities:
Proceeds from sales of NCAs
x
Payment for purchase of NCAs
(x)
Interest received
x
Dividends received
x
Cash flows from investing activities
Cash flows from financing activities:
Proceeds from issue of share capital
x
Proceeds from issue of loan notes
x
Finance lease payments
(x)
Repayment of loan notes
(x)
Dividends paid
(x)
Cash flows from financing activities
Net cash flows
Opening cash and cash equivalents
Closing cash and cash equivalents

15

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

$

x/(x)

x/(x)

x/(x)
x/(x)
x/(x)
x/(x)

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
Workings
Non-current assets cost account
Details
b/f balance
Disposal during the year
Revaluation
Finance lease acquisition
Cash acquisition (balancing figure)
c/d balance
Total

Dr
X
-x
x
x
-X

Cr
-x
x
--x
X

Non-current assets accumulated depreciation account
Details
b/f balance
Depreciation of disposed asset
SPL charge
c/d balance
Total

Dr
-x
-X
X

Cr
X
-x
-X

Note: If cost and accumulated depreciation values are not given, then NBV account is
prepared and all the entries related to cost and accumulated depreciation
account are made in NBV account
...
Accounting
errors require retrospective adjustment in accounts
...

 If it is not practicable/possible to adjust the error up to the year in which it
occurred then it should be adjusted up to the year backward which is possible
...

Accounting policy
Broad basic principles, rules, procedures and assumptions used by an entity to present
its financial statement
...

However IAS-8 allows changes in accounting policies in following circumstances:
1
...
If it is required by an accounting standard (new standard or change in existing
standard)
...
If it results in improved presentation of financial statement
...

Accounting policy requires retrospective adjustment in financial accounts of the entity
...
For example estimate about useful life of non-current assets, estimate about
residual value of non-current assets and estimate about doubtful debts
...





Change in accounting estimates requires prospective adjustment in financial
statements of the entity
...

Some accounting estimate changes affect current and future years like change in
estimated useful life of the assets or change in estimated residual value of the
assets
...

Reporting period
Reporting date

Authorization date

Issue date

Period covered by IAS-10
Events after reporting period

Adjusting events

Non-adjusting events

Events which provide further evidence of
condition existed at
The conditions existed at reporting date
Required adjustment in Financial
Financial
Statements at reporting date

Events for which no
reporting date
Require no adjustments in
statements at reporting date
(Only disclosed in notes to
accounts)

Examples of adjusting events
 Sale of inventory for less than cost which was measured at cost at reporting date
 Bankruptcy of a customer after reporting period
 Identification of a prior period error after reporting period
 Change of accounting policy after reporting period
 Determination of sale price of an asset after reporting period which was sold
before reporting date
 Determination of purchase price of an asset after reporting date which was
bought before reporting date
 An indication after reporting period that entity is not going concern
 Sale of an investment property at less than its fair value after reporting period
 Payments of dividends proposed before reporting date

20

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
Examples of non adjusting events
 Change of accounting estimates after reporting period
 Fall in fair value of an assets after reporting period
 Destruction or damage of an asset after reporting period
 Revaluation of an asset after reporting period
 Sale or purchase of subsidiary after reporting period
 Major business reorganization after reporting period
 Payment of dividends proposed after reporting period
 Increase or decrease in value of an asset after reporting period

21

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
IAS-12
Taxation
Current tax

Defer tax

Tax on current year profits

Tax on c/y profits which has not been
accounted for in current years
Or
Tax has been charged in excess of
actual amount of tax on c/y profits

= c/y profits x tax rate
When accounted for
Dr
Tax expense
Cr
Tax payable
When paid
Dr
Tax payable
Cr
Cash/bank

x
x

It arises due to differences in
accounting and tax profits

x
x

Adjustment for b/f under or over provision
Over provision (credit balance in TB)
Dr
TB
x
Cr
Tax expense
x
Under provision (debit balance in TB)
Dr
tax expense
x
Cr
TB
x

Accounting profit

Tax profit
Differences

Temporary difference

Permanent difference

An income/(expense) has been
added/(deducted) from accounting
profit in current year but will be
added/(deducted) from tax profit in
future years and vice versa
Gives rise to defer tax adjustment

22

An income/(expense) has been
added/(deducted) from accounting
profit in current year but will not be
added/(deducted) from tax profits
and vice versa
Do not give rise to defer tax
adjustment

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
Temporary difference

Taxable
x
Tax rate
=
DT liability (c/d)
SFP

Deductible
x
Tax rate
=
DT asset (c/d)
SFP

Defer tax treatment in SPL
In SPL only increase/decrease in defer tax asset/liability during the accounting period is
recorded
...
It can be calculated as: Cost – accumulated tax depreciation
...
It is same as NBV of the asset: Cost – accumulated
acc dep
...

 Accounting base is the value of liability which will be added in accounting profit in
future (in the form of amortization)
...

IAS-16 covers
 Definitions
 Recognition
 Measurement
 De-recognition
 Disclosures
Definitions
Property, plant and equipment (PPE) are non-current assets which held for use in trade,
manufacture or administration purposes
...

Fair value
It is the value at which an asset can be exchanged between two knowledgeable willing
market participants
...

Carrying amount
It is the cost less accumulated depreciation
...
Cost can be measured reliably and
2
...


24

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
Subsequent measurement (at reporting date)
At each reporting date property plant and equipment can be measured using cost model
or revaluation model
...
Legal fee
2
...
Professional fee
4
...
Advertisement
Procurement cost
It is the cost incurred in bringing the PPE in present condition and location
...

Depreciation
Depreciation is the systematic allocation of depreciable amount of a NCA to SPL over
its useful life
...
It is the allocation
of its depreciable amount to SPL over the life of the asset so that it can be
matched against revenue generated by that asset
...

Accumulated deprecation
It is the total depreciation from date of purchase of asset to measurement date
...


26

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
Transfer from revaluation reserves to retained earnings
If revaluation has increased the value of PPE, it will result in higher depreciation in SPL
...

Dr
Cr

Revaluation reserves
Retained earnings

x
x

This will offset the effect of additional depreciation charged due to revaluation and avoid
temporary mismatch of incomes and expenses
...

De-recognition
PPE is de-recognized from SFP when it ceases to meet recognition criteria
...

Dr
Revaluation reserves
x
Cr
Retained earnings
x

27

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
IAS-17
Lease
Lease is a contract under which one entity (lessor) having ownership rights of an asset
transfers the right of economic benefits from that asset to another entity (lessee) for
some consideration (rent)
...
Operating lease
2
...

Its characteristics are
 It is a short term lease
...

 PV of minimum lease payments is not more than 90% of FV of the asset
...

 Ownership of the asset does not pass to the lessee at the end of lease term
...

Accounting treatments for operating lease
Right to receive economic benefits
Lessor

Lessee

Rent payment

Rent receivable is treated as an
income on accrual basis
...

x

x
x

Dr
Cr

Lease rent expense x
Lease rent payable x

When paid
Dr
Lease rent payable x
Cr
Cash
x

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
Finance lease
A lease contract where lessor transfers the right of economic benefits from an asset to
the lessee along with risks and rewards related to ownership of the asset
...

 Lease term is more than 90% of useful life of the asset
...

 Risks and rewards related to ownership of the asset are transferred to the
lessee
...

 Asset can be leased out for one time only during its useful life
...
Fair value of the asset and
2
...


29

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
Interest calculation
Interest is calculated on outstanding balance at the start of year using interest rate
implicit in the lease
...

Note: In F7 exam interest rate implicit in the lease will be given in question
...

For example under initial contract asset has been leased for three years but lessee has
option to continue the lease for further two years after this period
...

Depreciation of the leased asset

Ownership will transfer at end of lease term
of lease

Ownership will not transfer at end

Depreciate over the useful life of the asset

Depreciate over the lower of:
1
...
Lease term

30

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
Sale and lease back
Sale and lease back is an agreement under which an entity sells an asset and
immediately leases it back (under operating or finance lease)
...
It will remain recognized in Lessee’s
books
...

Lessee will now also recognize finance lease liability
...

Any gain or loss arising on sale of the asset is deferred and amortized over the
lease term
...

Above treatment will not be affected by amount of sale proceeds, whether these
are above or below the FV of the asset
...
Now it will be recognized in Lessor’s
books
...

Operating lease rentals payable by the lessee are treated as an expense
...

Artificial gain or loss will be deferred in SFP and amortized over the lease term
...


Actual gain =
recognize

All
gain/(loss) is
actual

All loss =
defer

Recognize it
immediately

All
gain/(loss) is
actual

Artificial gain
= defer

Recognize it
immediately

All gain =
recognize

All loss =
recognize

Actual gain
Artificial gain
Defer
Artificial loss

= FV – NBV
= SP – FV
= It is the gain which can be avoided by selling asset at FV
...


Actual gain/(loss) is recognized in SPL in the year of disposal and artificial gain/(loss) is
deferred in SFP and amortized over the lease term
...


32

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
IAS-20
Government grant
Transfer of financial resources from government to an entity against some conditions
...

Government assistance
An indirect financial support (non involving direct transfer of economic resources) from
government to an entity
Government assistance is only disclosed in notes to accounts
...

Classification of government grant
1
...
Income related government grant (other than asset related grant)
Asset related government grant

Grant received is treated as deferred
income and is amortized over the
period of useful life of the asset
(depreciating asset) or over the period
of conditions to be met (nondepreciating asset) to match with
related expense
...
Then reduced cost of
recognized in SFP and depreciated
over its useful life
...

Example
An entity received $40,000 grant from
government for development of an
asset
...

Receipt
Dr
cash
40,000
Cr
deferred income
40,000
Amortization
Dr
deferred income
8,000
Cr
SPL
8,000
Y-1
CLs
Deferred income
NCLs
Deferred income
Y-2
CLs
Deferred income
NCLs
Deferred income

8,000

Example
An entity received $40,000 grant
from government for development
of an asset
...
Asset has useful life of
5 years after which it will have nil
residual value
...

Repayment
Dr
deferred income
16,000
Dr
SPL
24,000
Cr
cash
40,000

34

16,000
24,000
40,000

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
Income related government grant

Grant received is treated as deferred
income and is amortized over the
period of conditions to be met to match
with related expense
...
It is against no conditions
2
...
To compensate past losses
4
...

Calculation of borrowing cost
Interest
Incidental cost
Discount on issue
Premium of redemption
Total borrowing cost

$
x
x
x
x
X

Accounting treatment of borrowing cost
Borrowing

Qualifying borrowing

General borrowing

To finance a qualifying asset

Other than qualifying
borrowing

Capitalized in SFP and added
in cost of the asset

Expensed out in SPL

Qualifying asset
An asset under development which requires substantial period of time to get ready for
intended use or sale
...
Borrowing cost has started to incur and
2
...


36

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
When to cease the capitalization of borrowing cost
Capitalization of borrowing cost is ceased on earlier of:
1
...
When borrowing cost had ceased to incur
Note: Borrowing cost related to the period when there is no development activity on
qualifying asset is expensed out in SPL
...
Period when borrowing cost has started to incur but development activities on
qualifying asset have not yet started
...
Period when development of qualifying asset has suspended
...
Period when development of qualifying asset had stopped (asset has become
available for use) and borrowing cost is still incurring
...
Borrowing cost will be:
$
Amount payable on original borrowing
x
Amount receivable from temporary re-investment
(x)
Borrowing cost
X
Financing options for a qualifying asset
Qualifying asset can be financed through

Qualifying borrowing
Whole borrowing cost is capitalized

Qualifying borrowings are not used
in calculation of capitalization rate

General borrowing
Borrowing cost is capitalized
using capitalization rate
Weighted average rate for all the
general borrowings
If amount of a borrowing changes
during the year, average amount
outstanding during the year is
used

37

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
IAS-33
Scope of IAS-33
An entity whose securities are publically traded or in process of public issuance, must
present basic and diluted EPS on the face of statement of comprehensive income
Basic EPS
It is calculated as
Distributable profits
=
---------------------------------------------------------Weighted average number of ordinary shares
Distributable profits
Distributable profits are profits after interest, tax and preference dividends
...

If number of shares change during the year then weighted number of shares need to be
calculated
...
Issue of new shares during the year
2
...
Rights issue during the year
Diluted EPS
It is calculated as
Distributable profits + potential saving
=
------------------------------------------------------------Weighted av
...
of shares + potential shares



Potential saving means after tax interest saved on conversion of loan notes into
ordinary shares
...

It can arise from
1
...
Exercise of share options

38

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
Dilutive event
An event which causes the dilution in EPS is called dilutive event
...

Non dilutive event
An event which causes no dilution in EPS is called non dilutive event
...

Convertible bonds or loan notes
When convertible bonds are converted, they affect both earnings and shares
...
Convertible bonds may or may not cause dilution in
EPS
...
Options only increase number of shares and do not affect earnings
...

Number of shares are adjusted as follows:
Current number of shares
Free shares resulting from exercise of options
Total number of shares

39

x
x
X

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
IAS-36
Impairment:
Impairment is the unsystematic decline in value of an asset
...

Impairment is calculated as:
Carrying amount (NBV)

x

Recoverable amount

(x)
---

Impairment loss

X

Accounting entry of impairment loss is
Dr

SPL (impairment loss)

x

Cr

NCA

x

Recoverable amount

Higher of

NRV

Value in use

Estimated selling price

x

Estimated selling cost

(x)

Estimated cost of completion

(x)

NRV

Present value (PV) of future net
cash flows from use of the asset

X

Performing impairment test
Impairment test means calculating recoverable amount of an asset and comparing it
with carrying amount
...


40

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
When to perform impairment test
Non-current assets

Tangible non-current assets

Tested for impairment if
there is an internal or

Intangible non-current assets

With identifiable
useful life

With unidentifiable
useful life

external evidence of
impairment

Tested for impairment
annually

Internal evidences of impairment






Physical damage or obsolescence of the asset
Reduction in use of the asset
Reduction in production levels in which asset is being used
Discontinuance of an operation where asset is being used
Poor performance of the asset

External evidences of impairment





Decline in market value of the asset
Changes in economic, legal or technical factors adversely affecting the asset
Ban on products produced by the asset
Fall in demand of the products which are produced using the asset

General notes




Each non-current asset should be tested for impairment separately
...

An asset cannot be tested for impairment separately if it is not generating cash
flows independently (in this case its value in use cannot be calculated
separately)
...

Once impairment loss of a CGU is calculated, it is allocated to individual assets in that
CGU as follows:
1
...
Then charge to goodwill
3
...

In the ratio of market values of the NCAs
If market values are not available, book values
can be used
Reversal of impairment loss
If in subsequent period recoverable amount of previously impaired assets increases, it
may result in reversal of some impairment loss as follows:
1
...

2
...

3
...


42

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
IAS-37
Provision
A provision is a liability of uncertain timing or amount
Liability
A present obligation resulting from a past event which has reliable measurement and
requires probable outflow of economic resources on settlement
Obligation
An obligation may be legal or constructive
Legal obligation
An obligation which is imposed by law
Constructive obligation
An obligation arising as a result of past practice or conduct of the entity
Accounting treatment of provision
If a provision meets recognition criteria, it is recognized as a liability in SFP
...

Recognition criteria for provision
 There is a present obligation
 It is reliability measurable
 It required probable outflow of economic resources to settle
Contingent liability
Contingent liability is a possible liability which will be confirmed by the occurrence of an
uncontrollable future event
...
Court decision is future event which is not in control
of the entity
...

Contingent asset
Contingent asset is a possible asset which will be confirmed by the occurrence of an
uncontrollable future event
...
Decision of insurance company is the future event
which is not in control of the entity
...


43

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
Quantitative thresholds for recognizing contingent assets and liabilities
Probability of future economic flows
Virtually certain (more than 95% chances)
Probable (more than 50% chances)
Possible (more than 5% chances)
Remote (less than 5% chances)

Asset
recognize
disclose
do nothing
do nothing

Liability
recognize
recognize
disclose
do nothing

Above guidelines are used to decide whether an asset or liability should be recognized
or disclosed in financial statements
...

Recognition criteria
Intangible non-current asset should be recognized in SFP if it meets following criteria
1
...
Future economic benefits are probable from use or sale of the asset and
3
...

Subsequent measurement (at reporting date)
At each reporting date intangible non-current asset can be measured as:

Intangible NCA with identifiable
useful life
$
Cost
x
Accumulated amortization (x)
NBV
X

Intangible NCA with un-identifiable
useful life
$
Cost
x
Impairment loss
(x)
NBV
X

Amortization
Amortization is the systematic allocation of cost of an intangible NCA to SPL over its
useful life (just like depreciation)
...
Residual value of
intangible NCA is always nil
...


45

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
Impairment
It is covered in IAS-36
Research and development
Research: Expenditure on research is always treated as an expense in SPL
...
Management has
committed plan to complete
the asset
2
...
Economic benefits are
probable from the asset
once completed
4
...

De-recognition

Expired

Dr
Cr

x
x

Sold at profit
Dr
Cash/receivables
Cr
NCA
Cr
SPL

x
x
x

Sold at loss
Dr
Cash/receivables
Dr
SPL
Cr
NCA

47

SPL
NCA

Sold

x
x
x

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
IAS-40
Investment property
Investment property is a property (land or building) held by the entity (by owner or by
lessee under finance lease) to earn rentals or for capital appreciation
...
Cost can be measured reliably and
2
...

Subsequent measurement (at reporting date)
At each reporting date investment property is measured at fair value (FV)
...

Increase in FV
Dr
Investment property
x
Cr
SLP
x
Decrease in FV
Dr
SPL
x
Cr
Investment property
x
If fair value cannot be measured reliably, then it should be measured at cost model of
IAS-16
...
Changing from FV model to cost model will never improve the
presentation
...
As soon as FV can be measured reliably measurement should be changed
from cost model to FV model
...

Biological asset
Biological asset is a living plant or animal
...

Agricultural activity
Agricultural activity is the management of, biological transformation of biological assets
into agricultural produce or additional biological assets for sale
...

Harvest
Harvest is the detachment of biological produce from biological asset or cessation of a
biological asset’s life processes
...

 A loss can arise because estimated selling costs are deducted from the asset
...

Subsequent measurement (at reporting date)
Biological asset is subsequently measured at fair value less cost to sell (same as initial
measurement)
...

Fair value can change due to physical changes in the asset (like age) or due to
changes in market prices
...


50

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
Accounting for inflation
Historical cost versus current cost
Advantages of historical cost accounting
 Amounts are objective and free from bias
 Amounts are reliable, they can be verified, they exist on invoices and documents
 Amounts in statement of financial position can be matched perfectly with the amounts
in statements of cash flows
 Opportunities for creative accounting are less than under systems which allow the
management to apply their judgment to valuation of assets
 It has been used for centuries and is easily understood
Disadvantages of historical cost accounting
Most of the disadvantages of historical cost accounting are due to inflation
...
This concept is adopted by most of the entities
...

Profit
Profit is the residue amount after deducting expenses from incomes
...

The main difference in two concepts of capital maintenance is the treatment of the effects of
changes in the prices of assets and liabilities
...
This is concept used in current
purchasing power (CPP) and used historical cost accounting
...
This is concept used in current
cost accounting (CCA)
...
So in any year some increase in capital will be
needed to cover effect of inflation and any increase over this is the profit for the entity
...
Profits are
therefore stated after allowing for declining purchasing power of money due to price inflation
...

Monetary versus non-monetary items
Value of money declines with time
...
Similarly customers with outstanding balances will get benefit in this
way
...

At the end of period
 Monetary items are not restated
...

Advantages of CPP
 Restatement of asset value in terms of a stable monetary value provides a more
meaningful basis for comparison with other companies
...

 It provides a stable monetary unit to value profits and capital
...


52

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
Disadvantages of CPP
 Concept of stable monetary unit is confusing
...

 The value of assets in CPP SFP is less meaningful than current value SFP
...
Profit is recognized after operating
capacity of the business has been maintained
...

Loss suffered by the business if it is deprived off the use of the asset
...

Cost of sale adjustment:
To take account of increase in inventory prices and remove any
element of profit based on this
...


53

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
Advantages of CCA
 It can be used to indicate whether the dividends paid will reduce the operating
capability of the business
...
It therefore provides useful guide whether the assets should be held or sold
...

Disadvantages of CCA
 It uses judgments in valuation of NRV and value in use
...

 Some assets will be valued at current replacement cost and some at NRV or value in use
...

 It can be argued that deprival value is an unrealistic concept because the business entity
has not been deprived off the use of the assets
...

Conditions for held for sale classification
An asset or disposal group can be classified as held for sale if following conditions are
met:
 Asset is available for immediate sale
 Management has a committed plan to sell the asset
 Sale is highly probable
o An active program to locate a buyer has started
o The asset is being marketed at reasonable price for sale
o Sale is expected within 12 months from its classification
Measurement of NCA held for sale
NCA held for sale is measured at lower of
1
...
FV less cost to sell
 If FV less cost to sell of a NCA held for sale falls below its cost, it is treated like
impairment loss and is charged to SPL
...

 When as asset is classified as held for sale which was previously used in the
business (treated under IAS-16), it should be revalued to FV (this revaluation is
treated under IAS-16) and then measure at FV less cost to sell (under IFRS-5)
...

 If after writing down, subsequently FV less cost to sell increases, a gain is
recognized but not in excess of impairment loss previously recognized (under
IFRS-5 and IAS-36)
...

 Assets and liabilities held for sale are not offset
...


56

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
NCA held for sale is not sold in one year

Due to controllable factors

Due to uncontrollable factors
Conditions for held for sale are still met

It should be transferred to IAS-16

No

Yes

Assets is depreciated for current year Keep it classified as NCA held for sale
And measured at lower of
1
...
And recoverable amount

57

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
IFRS-15
Revenue
Revenue is the income arising in course of ordinary activities of the business
...
Contract may be in written or verbal form or established through
customary business practices
...

 Contract has commercial substance
...

 Payments terms can be identified
...

Step-2
Performance obligations are promises to transfer distinct goods or services to a
customer
...
Amount collected on behalf of
third parties are excluded
...

 The existence of a significant financing component in the contract
Financing component exists if there is significant difference between timing of
considerations received and delivery of goods or services to the customer
...

 Non cash considerations
Any non cash considerations are measured at fair value
...

 Consideration payable to a customer
Considerations paid to a customer in exchange for distinct good or services are
treated in the same way as good or services purchased from suppliers
...

Step-4
Total transaction price of the contract should be allocated to each performance
obligation in the ratio of its stand alone selling prices
...
If stand alone price is not
available, it should be estimated
...

Step-5
Revenue is recognized when entity satisfies a performance obligation by transferring
promised goods or services
...
Over the time or
2
...

If performance obligation is satisfied over the time, its revenue is also recognized over
the time along with progress of that performance obligation
...

If performance obligation is satisfied at a point in time, the revenue is recognized at that
time
...
Control means ability to get benefits from the asset and preventing others from
obtaining benefits from that asset
...

 Cost of fulfilling the contract if they do not fall under scope of any other
standard and entity expects t recover them
...

Presentation on statement of financial position
If entity has recognized the revenue before considerations are received, it should be
recognized
 Either as receivables (if right to receive considerations is unconditional)
 Or as a contract asset
If entity has received considerations before recognition of the revenue, it should be
recognized as a contract liability
...

Group
A parent company and all of its subsidiary companies form a group
...

Subsidiary company
Subsidiary company is a company which is controlled by another company
...

Non controlling interest (NCI)
NCI is the percentage of ordinary shares of subsidiary which are not controlled by the parent
...
By acquiring more 50% ordinary shares of the subsidiary company
2
...
By having control over operating and financing policies of the subsidiary by virtue of law
or agreement
4
...
By having power to cast majority of the votes at meeting of board of directors
Different degree of voting rights over other company
More than 50%
Equal to 50%
21% to 49%
Up to 20%

61

Control
Joint control
Significant influence
financial investment

Subsidiary
Joint venture
Associate

Full consolidation
Equity accounting method
Equity accounting method
Treated under IFRS-9

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
Exemption from preparing consolidated accounts
A company is not required to prepare consolidated accounts if
1
...
It is not listed on stock exchange and also is not in the process of listing
3
...
A subsidiary which has dissimilar operating activities from the parent
2
...
A subsidiary over which parent has temporary control
Different accounting periods of parent and subsidiary
If parent and subsidiary have different accounting dates and difference between the two is up
to 4 months then existing accounts of the subsidiary are adjusted for that period and are then
consolidated
...

Different accounting policies of the parent and subsidiary
If parent and subsidiary have used different accounting policies in its financial statements, then
financial statements of the subsidiary are changed according to accounting policies used by the
parent and then consolidated
...


62

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
Accounting for investment in associates
Investment in associates is accounted for using equity accounting method
Equity accounting method
This method is used to account for associates in statement of profit or loss and in statements of
financial position
...

Statement of financial position treatment
In statements of financial position investment in associate is measured at reporting date and
shown in intangible non-current assets
...
For this investment whatever the parent will get is the fair value of subsidiary’s
net assets
...

We will take investment in subsidiary from parent’s statement of financial position and equity
capital (which is equal to book value of net assets) from subsidiary’s statements of financial
position for workings
...


Pre-acquisition

Acquisition date

CI

Post-acquisition

NCI

COI account

CI

NCI account

Consolidated reserve
Account

Calculation of goodwill

Proportionate method

Fair Value/full goodwill method

Goodwill is calculated for CI only

Goodwill is calculated for CI & NCI

One working for goodwill only
(COI a/c)

Two workings for goodwill
(COI a/c & COI (NCI) a/c)

64

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
Workings
Cost of investment (COI) account
Investment in subsidiary
Share capital
Share premium
Pre acquisition reserves
Pre acquisition adjustments
Goodwill

$
x
---x
--X

(CI %age)
$
-x
x
x
x
x (balance)
-X

Note: Goodwill is calculated at the time of acquisition, therefore all the pre-acquisition
adjustments (CI %age) are made in this account
...

Consolidated reserves (retained earnings) account

Parent reserves (100%)
Subsidiary post acquisition reserves (CI %age)
Post acquisition adjustments (CI %age)
Impairment of GW (CI %age)
Decrease/increase in investment in A
Balance c/d

65

$
--x
x
x
x
X

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

$
x
x
x
-x
-X

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
Note: It contains only post-acquisition elements therefore only post acquisition adjustments
(CI %age) are made in this account
...
COI (NCI) account
is a sub working
...

If it shows positive goodwill
Dr
Goodwill
Cr
NCI
If it shows negative goodwill
Dr
NCI
Cr
Goodwill

x
x
x
x

Fair value adjustments
If fair value of net assets of subsidiary is different from its book value at the time of acquisition,
then it is adjusted at the time of acquisition
...

Increase in FV
Dr
Asset
x
total
Cr
COI
x
controlling interest
Cr
NCI
x
non controlling interest
Decrease in FV
Dr
COI
x
controlling interest
Dr
NCI
x
non controlling interest
Cr
Asset
x
total

66

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
Depreciation on FV adjustments
If FV of a depreciating asset increases at the time acquisition it will result in additional
depreciation in post acquisition period and vice versa
...
It is post
acquisition adjustment and will be adjusted as
Increase in valuation
Dr
NCA
x
Total
Cr
Revaluation reserves
x
CI
Cr
NCI
x
NCI
Decrease in valuation
Dr
Revaluation reserves
x
CI
Dr
NCI
x
NCI
Cr
NCA
x
Total

Recording an asset at acquisition date which is not recognized by subsidiary
Dr
Asset
x
Cr
COI
x (CI %age)
Cr
NCI
x (NCI %age)
Derecognizing an asset at acquisition date which is wrongly recognized by subsidiary
Dr
COI
x (CI %age)
Dr
NCI
x (NCI %age)
Cr
Asset
x
Recording a liability at acquisition date which is not recognized by subsidiary
Dr
COI
x (CI %age)

67

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
Dr
Cr

NCI
Liability

x (NCI %age)
x

Derecognizing a liability at acquisition date which is wrongly recognized by subsidiary
Dr
Liability
x
Cr
COI
x (CI %age)
Cr
NCI
x (NCI %age)
Intra group sales
When there are intra group sales, selling entity recognizes profit or loss on the transaction
...

Parent sold good to subsidiary
Dr
Consolidated reserves
Cr
Inventory

x (total URP)
x

Subsidiary sold goods to parent
Dr
Consolidated reserves
Dr
NCI
Cr
Inventory

x (CI %age)
x (NCI %age)
x (Total URP)

Intra group sale of NCA
When non-current asset is sold within a group, selling entity recognizes gain or loss on disposal
and buying entity charges depreciation
...

Parent sold asset to subsidiary
Dr
Consolidated reserves
Cr
NCA

x
x

URP

Dr
Cr
Cr

x
x
x

Depreciation on URP

NCA
Consolidated reserves
NCI

68

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
Subsidiary sold asset to parent
Dr
Consolidated reserves
Dr
NCI
Cr
NCA

x
x
x

Dr
Cr

x
x

NCA
Consolidated reserves

Dividend proposed by the subsidiary
Dr
Dividend proposed
Cr
Consolidated reserves
Cr
Dividend payable to NCI

URP
Depreciation on URP

x (In SFP)
x
x (In current liabilities in consolidated SFP)

Mid-year acquisition
If a subsidiary is acquired during the current year, current year profit of subsidiary should be
divided into pre-acquisition and post-acquisition
...


69

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA F7 Rev Notes [FINANCIAL REPORTING (INT)]
Consolidated statement of profit or loss (SPL)
Note: Only post acquisition SPL of subsidiary is consolidated
...

Simple consolidation procedure
1
...
This will give group profit
after tax
...
Calculate profit attributable to NCI which is calculated as:
(PAT of S x NCI %age)
3
...

Group profit after tax
Attributable to NCI
Attributable to parent
Total PAT

x
x
x
x

Intra group sales/trading
1
...

2
...

3
...
This will give group profit
after tax
...
Calculate profit attributable to NCI which is calculated as:
(PAT of S – URP) x NCI %age
Only if S sold goods to P (profit is recognized in S reserves)
5
...

Intra group sale of NCA
1
...

2
...
This will give group profit
after tax
...
Calculate profit attributable to NCI which is calculated as:
(PAT of S – URP + Depreciation on URP) x NCI %age
(S sold to P)
(P sold to S)
4
...


70

Prepared by: Arif Javed (FCCA), 0321- 66 96 281



---