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ACCA AC CA – APPL APPLIED IED SKILLS FINANCIAL REPORTING BISC TRAINING CENTER Mr. Ha Long Giang, FCCA, CPA
[email protected] www.bisc.edu.vn 085 8822 168
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BISC.EDU.VN
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OVE VER RVI VIEW EW – F7 A - The The conceptual and Regulatory framework f o orr Financial Reporting
B - Accounting Accounting for for transactions in Financial Statements
C - Preparation of Financial Statements
D - Analyzing and Interpreting Financial Statements
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Examination Format
3 hours exam+ 10 minutes OT = Objective Test Question A short question, capable of a discrete response (Multiple choice/ Multiple Response/ Number Entry)
15 MCQ x 2 marks
30% 40% 15 Objective Questions x 2 marks (3 scenarios)
2 constructed questions x 20 marks
30%
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GLOBAL PASSRATE
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Examinable Documents PRACTICE QUESTION (3 types of examination question for each part)
SPECIMEN ON ACCA WEBSITE
PAST EXAM
REVISION KIT (BPP + KAPLAN)
Hockiemtoanonline.edu.vn
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Chapter CONCEPTUAL FRAMEWORK
GIANG HA, FCCA, CPA
[email protected] 091 266 1988
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Advantages & Disadvantages ADVANTAGES
Standardizing Standardizing accounting accounting practice
Less open to criticism
Report
Concentrate
on pr prof ofit it or loss loss aluation ion of net net asset asset or V or Valuat
Single conceptual nceptual framew can be co devised for framework varietyork of users. produced for a different purpose. purpose.
Not clear Not clear that apply apply conceptual conceptual fra framewo mework rk will be easier
DISADVANTAGES GIANG HA ACCA
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IASB’s Conceptual Framework • Development of future future IFRSs IFRSs • Promoting harmonization
PURPOSE
• Assist national standard-setting bodies • Preparers Preparers of of financial statements • Assist auditors • Assist in interpreting interpreting the the information in F/S objective of financial statements statements • The objective
• Qualitative characteristics • Definition, recognition and measurement of the elements from F/S
SCOPE
• Concepts of Capital and capital capital maintenance maintenance
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Going concern
Accrual basis
ACCOUNTING ASSUMPTIONS
Economic entity
Monetary unit GIANG HA ACCA
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Going Concern Assumption Concept assumes: the business will continue
A normal
to oper operat ate e in ap appr prox oxim imat atel elyy th the e same
set of accounts
manner for the fore foreseea seeable ble future future (at least next 12 mon month thss). the next UNLESS: The
BREAK - UP BREAK Basis
entity
is
being
liq liquidated or
has cease ceased d trading trading,, or The
directors either directors intend to either intend to liquidate the
entity or to cease trading GIANG HA ACCA
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Going Concern Assumption Nett book book valu value e Assets: Ne
No provi provisio sions ns for for future operating loss
BREAK - UP BREAK Basis
A normal set of accounts
Assets: Scr Scrap ap Value
Provisions for Provisions for future operating loss
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Accrual Basis Assumption Items are recognized as assets, liabilities, equity, income and expenses (the (th e eleme element ntss of fin financ ancial ial st stat ateme ement nts) s) WHEN they satisfy the definitions and reco recogn gnit itio ion n cr crit iter eria ia for for th thos ose e elem elemen ents ts in th the e Framework. Framewor k. (IAS 1) Record when: Rev even enue uess
Pr Prof ofit it / Re Reve venu nue e ea earn rned ed must must
or ex expe pens nses es are are
earned or incurred in the account acc ounting ing period period , to which hich
be
matched agai agains nstt
expenditure
th the e
incurred in
earning it.
they relate, NOT NOT as as the cash cash is is
MATCHING CONVENTION
paid or or received
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Economic Entity Assumption Assumption Kee eep p
the
sol ole e
pr pro opri riet etor or''s
business transactions separate from the the
owne owner' r'ss
personal
transactions even though a sole prop pr oprie rieto tors rshi hip p is no nott legal legally ly separate from the owner.
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Monetary Unit Assumption Only
record business
transactions transac tions that can be expressed in terms of a currency
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QUALITATIVE CHARACTERISTICS Fundamental
Enhancing Comparability
Relevance
Faithful Representation
Verifiability
Timeliness
Understandability GIANG HA ACCA
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QUALITATIVE CHARACTERISTICS Fundamental
Relevance
The ability to influence decisions - Predictive value Input for predictions - Confirmatory value Feedback about previous evaluations
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QUALITATIVE CHARACTERISTICS Fundamental
Materiality
Relevance
Omission or misstatement misstatement could could influence decisions - Entity specific - Based on Magnitude Nature; or Both - Subjective – no specific values, professional judgement
The ability to influence decisions - Predictive value Input for predictions - Confirmatory value Feedback about previous evaluations
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Materiality The accountant should strive for complete accuracy in financial reporting.
All errors that are discovered should be corrected.
The business will not pass an audit if material error are found.
The general rule for materiality is 5% of Net Net Inco Income me..
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QUALITATIVE CHARACTERISTICS Fundamental
Materiality
Relevance
Faithful Representation
Information faithfully represen represents ts what it purports to represent - Completeness Substance over form - Neutrality - Reliability (Free from material error)
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QUALITATIVE CHARACTERISTICS Information is more useful if it can be compared - Similar information Other entities
Enhancing Comparability
Same entities for
different date
NOT the same as: - Con Consis siste tency ncy - Un Unif ifor ormi mity ty
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QUALITATIVE CHARACTERISTICS Enhancing Co Cons nsen ensu suss co coul uld d be rea each ched ed amongst different, knowledgeable, independent observers - Does not mean complete agreement - Direct Observation - Indirect Check as asssum umpt ptio ions ns of Che models
Comparability
Verifiability
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QUALITATIVE CHARACTERISTICS Enhancing Comparability
Verifiability Information avai aillable in tim ime e
to influence decisions Newer infor informa mati tion on
is mo more re
useful Balance between timelines an and d the the provision of reli reliable able information
Timeliness
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QUALITATIVE CHARACTERISTICS Enhancing Comparability
Verifiability
Classifying,, characterizing characterizing and and Classifying presenting information clearly and concisely Reasonable knowled knowledge ge and diligence assumed
Timeliness
Understandability GIANG HA ACCA
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Cost constraint
Costs mus Cos must be jus usttif ifie ied d by the benefits of reporting
Not possible to satisfy every user
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ELEMENT of of Financial Financial Statements Measurement of Financial Position
Assets
Liabilities
Equity
Income
Expensces
Measurement of Performance
RECOGNISE ? GIANG HA ACCA
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ELEMENT of of Financial Financial Statements
RECOGNISE ? Probability of future economic benefits
Reliability of measurement
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RECOGNITION of the Element of of FSs FSs ITEM
Recognised in
ASSET
The statement of Financial Position
LIABILITY
The statement of Financial Position
When It
is probable
that
the
economic econom ic ben benefi efits ts will flow to the entity and the asset has a cost or value that value that can be measur measured ed relia reliably bly..
It is prob probabl able e that that an outflow of reso resour urce cess embo embodyi dying ng ec econ onom omic ic bene benefi fits ts will will result from the settlement of a pre settlement presen sentt obl oblig igati ation on and the amount at which ich the se settl ttleme ement nt will will take take place place can be measured measur ed relia reliably bly..
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RECOGNITION of the Element of of FSs FSs ITEM
Recognised in
When
INCOME
The statement of profit or loss and other comprehensive income
An increase increase in future future economi economicc benefits related benefits related to an to an inc incre rease ase in an asset or a decrease of a liability has arisen arisen that that ca can n be measured mea sured reliably reliably
EXPENSE
The statement of profit or loss and other comprehensive income
A decrease in future future economic economic benefits related to a to a decr decrea ease se in an asset or or an increase of a liability has arisen arisen that that ca can n be measured mea sured reliably reliably
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MEASUREMENT of the Element of of FSs FSs
History cost
Realisable (settlement) value
Present value of future cash flow
Current cost
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Fair presentation & Compliance with IFRS
IAS 1 state requirement for a fair presentation
Selection and Selection and application application of accounting policies policies
Presentation
of information which relevant relevant,, reliable reliable,, comparable
and understandable understandable information. information.
Additional disclosures where required
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Chapter THE REGULATORY FRAMEWORK
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[email protected] 091 266 1988
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The need for a regulatory framework ENSURE
RELEVANT
Financial Reporting
e nforce To enforce compliance with GAAP there GAAP there need to be
RELIABLE
A body overall overall responsible for producing financial
reporting standards (the IASB), and IASB), and general principles within within which A frame work of general reporting standards can be produced
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PRINCIPLES-based versus RULES-based systems Principles-based System
Rules-based System
Work within a laid down principles
Regulates for issue as they arise
• Framework provi ovides with back backgr grou ound nd of prin princi cipl ples es within which standards can be developed
• Used in the absence of reporting framework
• This ensure that that st stan anda dard rdss produced should not not be be in conflict with each other
development lopment of • Leads to the deve the large number of regulations for every eventuality
• Any departure from st standards andards can be judged whether / not it is in keeping with principles set out in framework
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Problems of a principles-based systems Out of date • Produced in 1989 by IASC & ad adopted opted by IASB in 2001 • Is in danger of out of dat date e due to constant changes taking pl place ace in Financial Reporting • e.g. FV concept is not referr referred ed in this framework • IFRS are running ahead of framew framework ork
Continuous process of review • Som Some e mac machin hinery ery should be set setup up for revie review w & upda updatin ting g of framework & and to deal with issues which arise between reviews
IASB and FASB are now working to produce a joint framework which should combine the best of both approaches GIANG HA ACCA
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Setting of IFRSs
Establish Advisory Committee
Step 1
Exposure Draft
Step 2
Discussion Papers
Step 3
Step 4
Final IFRS
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Criticism of the IASB
Accounting standards and choice
Political problems
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The need for a regulatory framework ADVANTAGES
Present F/S on the same basic
Cr Cross oss-bo -bord rder er lis listin ting g will will be facilita facilitated ted
Gr Group oup compa company ny ha have ve a common,, compan common company-wid y-wide e accounting accoun ting language language
Cost of Cost of implementing implementing IFRS
The lower lower level level of detail in IFRS
DISADVANTAGES GIANG HA ACCA
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IASB IFRS Foundation (22 Trustees)
Key Appoint Reports to Membership links Advises
National standard setters and other interested parties
International Accounting Standard Board (15 Board members) IFRS Advisory Council Advisory Committees Director of Operations And non-technical staff
IFRS Interpretations Committee (12 members) Director of Technical Activities And technical staff
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PRACTICE QUESTIONS
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Chapter IAS 1 – PRESENT PRESENTA ATION OF FINANCIAL STA STATEMENT TEMENT
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[email protected] 091 266 1988
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1. IFRS statement Scope IAS 1 Presentation of Financial Statements applies to the preparation and presentation present ation of general- purpose financial statements in accordance with IFRS Standards. Financial statements A complete set of Financial Statements comprises: A Statement of Financial position at the end of the period A Statement of Comprehensive income for the period A Statement of changes in equity for the period A Statement of cash flows for the period Notes GIANG HA ACCA
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2. Statement of Financial Position Format
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2. Statement of Financial Position The current/non-current distinction Exam focus point You should appreciate the distinction between current and non-current assets and liabilities and the affect this has on the wag they are recorded in the financial Statements. OT questions will frequently ask candidates to calculate, for example, the current portion of a lease liability or the noncurrent portion Of a provision. It is important that you read the question requirement requireme nt carefully to ensure that you understand whether it is the current or non-current portion of an asset, or more commonly, a liability you are being asked to calculate
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2. Statement of Financial Position The current/non-current distinction
ASSET
Current asset: An asset should be classified as a current asset when it:
• Is expected expected to be realized in, or is held for sale or consumption consumption in, the normal course of the entity's operating cycle; or • Is held primarily for trading trading purposes or for for the short-term and expected expected to be realized within 12 months of the end of the reporting period; or equivalent asset which is not restricted restricted in its use. • Is cash or a cash equivalent All Other assets should be classified as non-current assets. (IAS 1: Para. 66) Non-current assets include tangible, intangible, operating and financial assets of a long-term nature. Other terms terms with the same meaning can be used (e.g. “fixed”, “long-term”). (IAS l: Para. 67) Operating cycle: The time between the acquisition of assets for processing and their realisation in cash Or cash equivalents. (IAS 1: Para. 68) GIANG HA ACCA
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2. Statement of Financial Position The current/non-current distinction
LIABILITY
Current liabilities: A liability should be classified as a current liability when it: Is expected expected to be settled in the normal normal course of the entity's entity's operating • cycle; or • Is held primarily primarily for the purpose purpose of trading; trading; or • Is due to be settled settled within 12 months months after the end Of the reporting reporting period; or when have the right at the end of the reporting reporting period to • The entity does not have defer settlement settlement of the liability for at least 12 months after the end Of the reporting period. All Other liabilities should be classified as non-current liabilities. liabilities. (IAS 1: para. 69)
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3. Statement of Comprehensive income Format
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3. Statement of Comprehensive income Exam focus point In the exam, if a ‘statement of profit or loss and other comprehensive income’ is referred to, this will always relate to the single statement format. If a ‘statement of profit or loss’ is is referred to, this relates to the statement from ‘revenue’ to ‘profit for the year’. Exams may refer to 'other comprehensive income' which which relates to the ‘other comprehensive income’ section of the statement. In practice, the item of ‘other comprehensive comprehensive income’ you are most likely to meet is a revaluation surplus. Where the phrase ‘statement ‘statement of profit or loss’ is used in this Workbook, this can be taken to refer to the profit or loss section of the full statement or the separate statement of profit or loss
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4. Statement of Change in Equity Format
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5. Chapter Summary
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Chapter NON – CURRENT ASSETS
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[email protected] 091 266 1988
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CONTENT IAS 16:
Property, Plant and Equipment IAS 40
Investmentt property Investmen IAS 23:
Borrowing costs
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IAS 16 SCOPE • IAS 16 covers all aspects of accounting for property, plant and equipmen equipment. t. This represents represents items called called “tan “tangible gible”” non-curre non-current nt assets. assets.
• IAS 16 does NOT ap appl ply y to: to: assets ts clas classi sifi fied ed as held held fo forr sale sale in in accordance with IFRS 5 asse ex explo plorat ration ion and ev evalu aluati ation on asset assetss (IFRS 6) bi biol olog ogic ical al
asse assets ts rela related ted to agricu agricultu ltura rall act activi ivity ty (se (see e
IAS 41) or 41) or minera rall mine
ri righ ghts ts and min minera erall reserv reserves es such such as oil, natural gas and similar non-regenerative non-regenerative resources
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IAS 16
KEY DEFINITION
Property, plant and equipment Are tangible assets that: the e pr prod oduc ucti tion on or supply of for ren rental tal • Are hel held d for use in th or supply of goods or services, for to others, or for administrative administrative purposes purposes AND AND;; expected ed to be used during mo more re th than an on one e peri period od • Are expect
Cost is the amo amount unt of of cash or cash equivalents paid OR the OR the fair value of the other co cons nsid ider erat atio ion n give given n to ac acqu quir ire e an as asse sets ts at at the time of its acquisition or construction
Residual Value is the estim estimated ated amoun amountt that an entity would currently obt obtain ain from from dispos disposal al of the the as asse sett, after deducting the estimated costs of disposal , IF the IF the asset were already of the age and in the conditions expe expect cted ed at the the en end d of it itss usef useful ul li life fe.. Other er wor words: ds: es esti tima mate ted d ne nett amoun amountt re recei ceipt pt wh when en ass asset etss di disp spos osed ed at th the e Oth en end d of us usef eful ul life life GIANG HA ACCA
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IAS 16
KEY DEFINITION Fair Value
is the amoun ount fo forr wh whic ich h an asse assett could be exchanged between knowledgeable, willing parties in an arm’ arm’ss length length trans transactio action. n.
Carrying amount is the amoun ount at which which an ass asset et is reco recogn gniz ized ed af aftter deducting any accumulate accumu lated d depreciati depreciation on and impairment ment losses losses (Net and impair (Net book value)
Recoverable amount is th the e amou amount nt which which the entity ex expe pect cted ed to reco recov ver fr from om the the fu futu ture re use use of an asset, including its residual value on disposal. This is the HIGHER of net se sell llin ing g price price or va valu lue e in us use. e. (Value in use: Net present value of Discounted Cash flows earned from using assets in the remaining periods).
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IAS 16
MEASUREMENT of of PPE PPE
Initial measurement • Measurement subsequent to initial recognition
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IAS 16
MEASUREMENT of of PPE PPE
Initial measurement • Measurement subsequent to initial recognition
At Cost The cost of an item of property, plant and equipment comprises: Purchase price, price, less any trade discount or rebate dismantling and Initial estima estimate te of the costs of dismantling and removing the item and restoring restoring the the site on which it is located. Directly attributable costs of bringing the asset to working condition for its intended use, eg: Cost of site preparation Initial delivery and handling handling costs costs Installation Installation costs costs fees (architects, engineers) Professional fees (architects, GIANG HA ACCA
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IAS 16
MEASUREMENT of of PPE PPE
Initial measurement • Measurement subsequent to initial recognition
At Cost The cost of an item of property, plant and equipment comprises: Purchase price, price, less any trade discount or rebate If ex exch chan ange ge or pa part rt excha chang nge e of as asse setts occurs frequently for items of property, plant and equipment IAS 16 states that the cost cost of of an an ite item m obtain obtained ed through through (part) exchange exchange is is the FAIR VALU ALUE of the asset set rece eceive ived UNLESS this CANNOT be measured reliably.
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IAS 16
MEASUREMENT of of PPE PPE
Initial measurement • Measurement subsequent to initial recognition
At Cost Costs are NOT part of the cost of property, plant or equipment: Expenses of operations that are incidental to the construction or development of the item Administration and other general overhead costs Start-up and similar pre-production similar pre-production costs costs Initial operating losses before the asset reaches planned performance
EXPENSES GIANG HA ACCA
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IAS 16
MEASUREMENT of of PPE PPE
Initial measurement • Measurement subsequent to initial recognition
At Cost Subsequent Expenditure Added to the carrying amount of the asset but on only ly subsequent expendi expe nditur ture e which which im impr prov oves es co cond ndit itio ion n of as asse sett beyo beyond nd th the e previous performance (probable future economic benefits) should be rec recogni ognize zed d as asset assetss. Some examples of such improvements: MODIFICATION MODIFICATION of of an item of plant to extend its usef seful life, including increased capacity UPGRADE UPGRADE of of machine parts to impr improv ove e th the e qual qualit ity y of output Other subsequent expenditures (repair, maintenances…) EXPENSES GIANG HA ACCA
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IAS 16
MEASUREMENT of of PPE PPE
Initial measurement • Measureme Measurement nt subsequent to initial recognition
2 options Cost model
Revaluation Model
Carry the asset at its cost cost less less accumulated depreciation and any accumulate accumulated d impai impairment rment losses
Carry the asset at a revalue amount: fair value less less an anyy su subs bsequ equen ent t accumulated depreciation and any any accumulated impairment losses. This model should be used only if the item can be measured regularly and reliably.
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IAS 16
DEPRECIATION
Depreciation
is the allocation allocation of of the depreciable amount of an asset over its estimated useful life
charge to net profit and and loss for the period WHEN ?
HOW LONG ?
Depreciation beg begins ins when when the asset is ava availa ilable ble for for
use and continues unti use and untill the the asse assett is dere dereco cogn gniz ized ed,, even even if it is idle. dle. USEFUL LIFE USEFUL LIFE is either: expected to Period over which depreciable asset is expected be used, or Numbers of production or similar units expected expected to be obtained from the asset Consider the physical wear and tear, obsolescence, obsolescence, other legal or limits on the use of the assets. GIANG HA ACCA
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IAS 16
DEPRECIATION
Depreciation
allocation of is the allocation of the depreciable amount of an asset over its estimated useful life
charge to net profit and and loss for the period HOW MUCH? Depreciation charged in the period
COST – RESIDUAL RESIDUAL VALUE VALUE USEFUL LIFE
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IAS 16
DEPRECIATION
Depreciation
is the allocation allocation of of the depreciable amount of an asset over its estimated useful life
charge to net profit and and loss for the period HOW MUCH? Depreciation charged in the period
Depreciable Amount
COST – RESIDUAL RESIDUAL VALUE VALUE USEFUL LIFE
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IAS 16
DEPRECIATION METHOD
REQUIREMENTS: basic sic ov over er its its use useful ful life Depreciation: systematic ba The depreciable method should reflect reflect the the pattern in which the asset’s economic benefits are consumed by the entity. asset’s entity. revi re vie ew of the the us usef eful ul lif life of property, plant and equipment should annually.. be carried out at least annually depreciation method should should also be rev reviewed iewed periodica periodically lly and and The depreciation if there has been a significant change in the expected economic benefits from those assets, the method should be changed to suit this this chan change ged d patt patter ern n an and d tak taken into into ac acco coun untt as chan change ge in accounting estimate. A
Straight line Method
The reducing balance Method
Sum of digit Method
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IAS 16 Straight line Method
DEPRECIATION METHOD The reducing balance Method
Sum of digit Method
The
total depreciable amount is charged in equa equall instalme instalments nts to each each accoun accountin ting g period over expected useful life of asset
Annual Depreciation charge
Cost of asset asset – Residual Value Value Expected useful life of asset
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IAS 16 Straight line Method
DEPRECIATION METHOD The reducing balance Method
Sum of digit Method
The
reducing balance method of depreciation calculates the annual depreciation charge as a fixed percentage of Net book value of the asset. Depreciation of this year
% x NBV of last period
Accumulated end of this year
Accumulated of past period + Depr. charge in this year
Example: Non-current asset cost is $10,000. Its expected useful life is 3 years and its es estim timate ated d res residu idual al value value is $2, $2,160. 160. Compan Companyy wis wishes hes to use red reduci ucing ng balance of 40%. What is NBV of asset at the end of year 1, year 2, year 3? GIANG HA ACCA
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IAS 16 Straight line Method
DEPRECIATION METHOD The reducing balance Method
Sum of digit Method
Example: Non-current asset cost is $10,000. Its expected useful life is 3 years and its es estim timate ated d res residu idual al value value is $2, $2,160. 160. Compan Companyy wis wishes hes to use red reduci ucing ng balance of 40%. What is NBV of asset at the end of year 1, year 2, year 3? Acc dep Asset at cost
10,000
Depr end y1 (10,000*40%) NBV at end of year 1 Depr end y2 (6,000*40%) NBV at end of year 2 Depr end y3 (3,600 *40%)
-4,000 6,000 -2,400 3,600 -1,440
N BV at end of year 3
4, 0 0 0 6, 4 0 0 ( = 4 , 00 0 + 2 , 4 00 ) 7, 8 4 0 ( = 6 , 40 0 + 1 , 4 40 )
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IAS 16 Straight line Method
DEPRECIATION METHOD The reducing balance Method
Sum of digit Method
NOTE for NOTE for reducing balance method
DO NOT DEDUCT the residual value from the cost before deprecia depre ciating. ting. Instead, Instead, we deprecia depreciate te the asset asset using the percentage given, until we reach the residual value, and then the n we stop stop depre deprecia ciatin ting. g.
There
are different ways to apply the reducing balance method when the asset has a residual value. However, the method mentioned above is the one preferred by the examiner.
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IAS 16 Straight line Method
DEPRECIATION METHOD The reducing balance Method
Sum of digit Method
Example: Same Example: Same example above but resi residu dual al va valu lue e = 3, 3,00 000 0 Acc dep Asset at cost
Depr end y1 (10,000*40%)
10,000
NBV at end of year 1 Depr end y2 (6,000*40%)
(4 ,000) (4
4,000
6,000 (2 ,400)
NBV at end of year 2
3,600
De Depr pr end y3 = lowe ower [(3, [(3,60 600 0 *40 40%) %) and (NBV - Residual Value)]
(6 0 0 )
NBV at end of year 3
3 , 00 0
6,400 (= (= 4,0 00 + 2 ,40 0)
7 , 0 0 0 ( = 6, 4 00 + 6 0 0 )
Depreciate until NBV = Residual value Normally, at the the end end of usef useful ul li life fe we will depreciate with the amount = NBV – residual value GIANG HA ACCA
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IAS 16
DEPRECIATION METHOD
Straight line Method
The reducing balance Method
Sum of digit Method
This method is sim similar ilar to Reduc Reducing ing balance method, only only dif differ feren entt is the percen percentag tage. e.
Example: : ABC Co purchases a non-current asset for $10,000 on 1 Jan Example: : 2006. Useful life is 5 years, years, residual value is $1,000. What is depr depreciat eciation ion charge for each year? SOLUTION: The sum of digit = 5 year + 4yr +3yr +2yr+1yr = 15. SOLUTION: The Year
C a l c u l at at i o n
D e p . c h a r ge ge
ccum. Depr
2001
5/15*(=10,000-1,000)
3,000
3,000
2002
4/15* 9,000
2,400
5,400
2003
3/15 *9,000
1,800
7,200
2004
2/15 *9,000
1,200
8,400
2005
1/ 1 5* 9 ,00 0
600
9 ,0 0 0
Sum of digi digitt = numb number er of ALL ALL year yearss sum sum toge togeth ther er NOTE: Sum There is always same NBV to use when calculate the allocation of depreciation (i.e. 9,000) GIANG HA ACCA
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70
IAS 16
DEPRECIATION METHOD
NOTE Depreciation
method should apply consi consiste stency ncy from from year to year Change in in depreciation method: Change Change useful life Change accounting estimation the remaining life will be used for remaining NBV.
Example: If ABC Co has asset cost $12,000, useful life is 4 yrs, after 2 year and now want to move to useful life 7 yrs SOLUTION: Af Afte terr 2 ye year arss: NBV = 12,000 – ((12,000/4)*2) = 6,000 If move to 7 years: more 5 year to come, new depreciation is = 6,000/5 = $1,200 (DO NOT DIVIDE TO 7 because no Retrospe Retrospectiv ctive e permitt permitted ed))
GIANG HA ACCA
|
36 71
IAS 16
DEPRECIATION
Accounting entries for depreciation expense charge
DR
I&E account (depreciation expense)
CR
Accumulated depreciation depreciation (balance (balance sheet) Shown as negative figures in the BS
Depreciation for Depreciation for current year charge as expense, Income Statement
Accumulated Accumulate d depreciation up depreciation up to current period presents presents in Balan Balance ce sheet sheet GIANG HA ACCA
|
72
IAS 16
DEPRECIATION
Comple plexx Asse Assets ts Com There are assets which are made up of separate components. Ea Each ch compon componen ents ts is separa separatel tely y deprec depreciat iated ed ov over er the their ir useful useful lif life e. Example: An aircraft could be have the following components: Cost Fuselage Undercarriage Engines
Useful l ife
$'000 20,000 5,000 8,000
20 years 500 landings 1,600 flying hours
Depreciation at the end of the first year, in which 150 flights totaling 400 hours were made would then be: Fuselage Undercarriage (5,000 x 150/500) En Eng g nes nes (8, (8,000 000 x 400 1,600) 1,600)
$'000 1,000 1,500 2,000
4,500 GIANG HA ACCA
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37 73
IAS 16
DEPRECIATION
Overhauls Where an asset requires regul regular ar overh overhauls auls in in order to continue to operate, th the e co cost st of the the ov over erha haul ul is tre reat ated ed as an addi addittio iona nall comp compo onen nent and depreciated over the period to the next overhaul. Example: In the case of the aircraft above, an overhaul was required at the Example: In end of year 3 and every third year thereafter at a cost of $1.2m this would be capitalized as a separate component. $1.2m would be added to the cost and the depreciation (assuming 150 flights againg) would therefore therefore be: Fuselage Undercarriage (5,000 x 150/500) Engines (8,000 x 400/1,600) Overhaul($1,200,000/3)
$'000 1,000 1 , 50 0 2, 000 400
4,900
GIANG HA ACCA
|
74
IAS 16
Carrying value (NBV)
IMPAIRMENT IMP AIRMENT – Fall in value Recoverable amount
HIGHER: Fair value – cost to sell NRV = Fair Value in use (the present value of the future cash flows expected to be derived from an asset) IMPAIRMENT IMPAIRMENT:: Write down Carrying value to Rec Recoverable overable amount (impairment loss charge to PL) (Prudence concept) GIANG HA ACCA
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38 75
IAS 16 L E D O M
REVALUATION REVALUA TION of NCA Selection of Revaluation model
Revaluations should be carried out regularly regularly,, so that the carrying amount of an asset does not differ materially from its fair value at the balance sheet date
If an item is revalued, the en enti tire re cl clas asss of as asse sets ts to to which that asset belongs N O I sho should uld be rev revalu alued ed T A When a non-cu non-curren rrentt asset is reva revalued, lued, depreciation depreciation is charged on the U L revalued amount A V compre prehen hensiv sive e inc income ome and and other com E Revaluation increase in value credit to other R accumulated accumulated in in equity under the heading "revaluation surplus" F Unless it it represents the reversal of a revaluation decrease of the same asset O Unless S previously recognised as an expense, expense, in which case it sh shou ould ld be reco recogn gnis ised ed in PL E L Revaluation Decrease in value Recognize as an expense to th the e exte extent nt th that at P I exce ceeds eds any amou amount nt pre previou viously sly cre credit dited ed to the rev revalu aluati ation on sur surplu pluss relating to C it ex N I the same asset. asset. R P When a revalued asset is disposed disposed of, of, any any revaluation surplus may be transferred Y directly to retained earnings, earnings , or it may be left in equity under the heading E K revalua revaluation tion surplus surplus.. The transf transfer er to retained retained earnings sh shou ould ld not not be made through profit or loss. GIANG HA ACCA
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76
IAS 16
REVALUATION REVALUA TION of NCA
Example: Premises cost $30,000, land cost $20,000. Useful life is 30 years. After the end of 5 years, ABC Co decided to revalue assets as follow: Premises is $75,000, land is $75,000. How such such rev revalu aluati ation on wa wass tre treat ated? ed? SOLUTION: Before revaluation: Premises $30,000 depr over 30 yrs depreciation per annum = $1,000 Land $20,000 No depreciation End of 5 years Premises + land = (30,000 – (30,000/30)*5yrs) + 20,000 = $45,000
After revaluation: Premises + land = $75,000+75,000 = NBV before revalue Incr ncreas ease reval evalu uat atio ion n amou amoun nt
Dr Cr
Double entry: Non-current asset Reval evalua uati tion on rese reserv rve e
150,000 45,000 105 105,000 ,000 105,000 105, 105,00 000 0
The The gain on re reva valu luat ation ion is recogniz reco gnized ed in the Statement of Comprehensive Income (under oth other er com compr prehe ehensi nsive ve income)), but not in the income Income Income St Stat atem ement ent as it has not been realized. GIANG HA ACCA
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39 77
IAS 16
REVALUATION REVALUA TION of NCA
Example: Premises cost $30,000, land cost $20,000. Useful life is 30 years. After the end of 5 years, ABC Co decided to revalue assets as follow: Premises is $75,000, land is $75,000. How such such rev revalu aluati ation on wa wass tre treat ated? ed? SOLUTION: If asset are sold at carrying amount of $150’000, the profit would be realized but The transfer of Revaluation Surplus to retained earnings should not be made through profit or loss.
Accounting Entries: Dr Cash Cr Non-current asset Dr Revaluat Revaluation ion reserv reserve e Cr RE
150,000 150,000 105,0 105,000 00 105,000
After the revaluation, depreciation of the building will be charged at the new rate: $75,000/25 years = $3,000 per year. GIANG HA ACCA
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78
IAS 16
REVALUATION REVALUA TION of NCA
Example: Premises cost $30,000, land cost $20,000. Useful life is 30 years. After the end of 5 years, ABC Co decided to revalue assets as follow: Premises is $75,000, land is $75,000. How such such rev revalu aluati ation on wa wass tre treat ated? ed? Excess depreciation The difference between the new depreciation charge based on the revalued carrying amount and the old depreciation charge based on the original cost of the asset is known as the excess depreciatio depreciation n. IAS 16 allows entities to transfer an amount equal to the excess depreciation from the rev revalua aluation tion surp surplus lus to to ret retained ained earni earnings ngs in in the equity section of the SOFP, if th the ey wi wishto shto do so. Dr Depreciation expense (IS) Cr Acc. Acc. Depr Deprec ecia iati tion on acco accoun untt (BS) (BS)
$3’000 $3 $3’0 ’000 00
To record new annual dep.
Dr Revaluation Surplus Cr Retained Earning
$2’000 $2’000
To record transfer of excess dep. GIANG HA ACCA
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40 79
IAS 16
REVALUATION REVALUA TION of NCA
Example: Premises cost $30,000, land cost $20,000. Useful life is 30 years. After the end of 5 years, ABC Co decided to revalue assets as follow: Premises is $75,000, land is $75,000. How such such rev revalu aluati ation on wa wass tre treat ated? ed? Revaluation downwar Revaluation downwards ds Exampl Exa mple e as abo above. ve. The car carryi rying ng amo amount unt of the building building five yea years rs aft after er the revaluation is $60’000 (75’000 - 3’000 x 5). The market value of the building has fallen fal len to $40 $40’00 ’000. 0. We assume assume tha thatt the ent entity ity doe doess not tr trans ansfer fer the ex exces cesss depreciation from revaluation surplus to REs. Dr Revaluation surplus
$20’000
Dr Buil Buildi ding ng – acc. acc. Depr Deprec ecia iati tion on
$15’ $15’00 000 0
Cr
Building - cost
Less than Reserve surplus: $105’000
$35’000
In case: the decrease amount = 110’000 > 105’000 Dr Revaluation reserve: maximum =105’000 Dr Expense Expense = 110’000 – 1 105’000 05’000 = 5’0 5’000 00 (the excess amount of Revaluation Surplus) GIANG HA ACCA
|
80
IAS 16 Derecognit Dereco gnition ion of PPE
On disposal
No futureexpected economic benefits GAIN / LOSS
Net Disposal Proceeds
Carrying Amount
Gain or loss are included in Profit or Loss, but not as Revenue GIANG HA ACCA
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41 81
CONTENT IAS 16:
Property, Plant and Equipment IAS 40
Investmentt property Investmen IAS 23:
Borrowing costs
GIANG HA ACCA
| 82
82
IAS 40
DEFINITIONS
Investment Property is property (land or a building—or part of a building—or both) held (by the owner or by the lessee under a finance lease) to earn ren rental talss or for capital capit al appreciatio appreciation n or both, rather than for: use e in the pro produ duct ctio ion n or su supp pply ly of good goodss or se serv rvice icess or fo forr a. us administrative administrat ive purposes; or b. sale in the ordinary cour course se of bus business. iness.
Owner – occupied occupied Property Property is property held (by the owner or by the lessee under a finance lease) fo forr use use in the prod produc ucti tion on or supp supply ly of go good odss or se servi rvices ces or fo forr administrative administrativ e purposes.
GIANG HA ACCA
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42 83
DEFINITIONS
IAS 40
Not Meets definition of
Property description
investment property
Owned by the company and leased out under an operating lease
O
Held under a finance lease and leased out under an operating lease
O
Held under a finance lease and to be leased out in the future under an operating lease
O
Held under a finance lease and leased out under a finance lease
P
Owned by the company and leased out under a finance lease
P
Owner-occupied property used in the production or supply of goods, services or for administrative purposes
Held for sale in the ordinary course of business Held under operating lease A property comprising a piece of land and a building constructed on it leased out to a third party Property partly owner-occupied and partly leased out under an operating lease
P P P operating lease, unless expected to pass to lessee at end of lease the 2 portions accounted for separately if they can be sold separately; if not, to be treated as PPE, unless the owneroccupied portion is insignificant.
GIANG HA ACCA
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84
IAS 40
RECOGNITION
• In Inve vest stme ment nt pr prop oper erty ty sh shal alll be reco recogn gnis ised ed as an asse assett when wh en,, an and d only only when when:: futur ure e econo economi micc benef benefits its that a. it is probable probable that the fut that are associated with the investment property will flow to the entity; and investment property property can be measured b. the cost of the investment reliably.
GIANG HA ACCA
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43 85
IAS 40
RECOGNITION
Initial measurement • An investment property shall be measured initially at its cost. Transaction costs shall shall be included in the initial measurement. • The initial cost of a property interest held under a lease an and d clas classi sifie fied d as an in inve vest stme ment nt pr prop oper erty ty sh shal alll be as prescribed for a finance lease, i.e. i.e. th the e asse assett shall hall be recognised at the lower of the fair value of the property and the present present value of the the minimum lease payments. payments. An equivalent amount shall be recognised as a liability. liability.
GIANG HA ACCA
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86
IAS 40
MEASUREMENT
Subsequent measurement Fair Value Model • A gain or loss loss arising from a change in
Cost Model If an entity chooses the
the fair value of investment property shall be recognized in profit or loss for the period in which it arises. property operty • The fair value of investment pr
cost
model,
measure
a ll
it
shall
of
i ts
inv invest estmen mentt pro prope perty rty in
shall reflect market conditions at the balance sheet date depreciation if apply FV model. • No depreciation
accordance with IAS 16’s requirements.
GIANG HA ACCA
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44 87
IAS 40
MEASUREMENT
Subsequent measurement Special case interest hel When a property eld d by a less lesse ee unde underr an oper perating ting lease is cla lease is classif ssified ied as an in inve vestm stment ent proper property ty,, treatment is NOT ELECTIVE.. The fa ELECTIVE fair ir va value lue mod model el is is to be applied. Property ty hel held d und under er an oper operat ating ing lea lease se.. A property interest that is • Proper held by a lessee under an operating lease MAY BE BE classified classified and accounted for as investment investment property provided that: [IAS 40.6]
• The rest of the definition of investment property is met • The operating lease is accounted accounted for as if it were a finance lease in accordance with IAS 17 Leases • The lessee uses the fair value model set out in this Standard for the asset recognised GIANG HA ACCA
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88
IAS 40
MEASUREMENT
Subsequent measurement • If an entity has previously measured an investment property at fair value, it shall co cont ntin inue ue to meas measur ure e th the e pr prop oper erty ty at fair fair va valu lue e unti untill disp dispos osal al (or (or until the property becomes owneroc occu cupi pied ed pr prop opert ertyy or th the e enti entity ty be begi gins ns to de deve velo lop p th the e property for subsequent sale in the ordinary course of business) even if comparable market transactions become business) less frequent or market prices become less readily available.
GIANG HA ACCA
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45 89
TRANSFERS
IAS 40
Tra rans nsfe fers rs to to,, or from, from, in inves vestme tment nt pr prope operty rty shall shall be made made when wh en,, and and only only when when,, there is a change in use, evidenced by: a. commencement of owner-occupation, owner-occupation, for a transfer from investment property to owner-occupied property; b. commencement of development with a view to sale, for a transfer transf er from f rom investment property to inventories; owner-occ occupa upatio tion, n, for a tr trans ansfe ferr fr from om ownerownerc. end of owneroccupied property to investment property; d. commencement of an operating operating lease to another party, party, for a transfer from inventories to investment property; or e. end of constru constructio ction n or developmen development, t, for a transfer transfer from pr prope operty rty in the cour course se of const construc ructio tion n or develo developme pment nt (covered by IAS 16) to investment property. GIANG HA ACCA
|
90
TRANSFERS
IAS 40 Co st mo d el
F rom
To
T reatm en t
PPE I n v e n to ry IP IP
IP IP PPE In v vee n tto o rry y
No No No No
change change change cha n ng ge
in in in in
co st co st co st c o sstt
GIANG HA ACCA
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46 91
TRANSFERS
IAS 40 IP at fair value
From
PPE at cost Inventory IP IP
To
Treatment
IP IP PPE Inve Invent ntor ory y
Value IP at date of transfer in accordance in IAS16 (revaluation) Change to P&L No change in value No ch chan ange ge in valu valuee
GIANG HA ACCA
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92
IAS 40
DISPOSALS
• An investment property shall be derecognised (eliminated fr from om th the e bala balanc nce e shee sheet) t) on disposal OR when the investme inve stment nt property property is pe perm rman anen entl tly y with withdr dra awn from from us use e and no future economic benefits are are ex expec pected ted fr from om its disposal.
• Gains or losse sses arising from the retirement or disposal of investment property shall be determined as the difference between the net disposal proceeds and the carrying amount of the asset and shall be recognised in profit or loss in the period of the retirement or disposal. • Comp Compen ensa sati tion on fr from om th thir ird d pa part rtie iess for inve investm stment ent pr prope operty rty that was impaired, lo losst or given up shall be reco recogn gnise ised d in prof profit it or lo loss ss when when the compensation compensation becomes receivable receivable GIANG HA ACCA
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47 93
IAS 40
DISPOSALS
Fair Value Model
Cost Model
An entity shall disclose: a. whether it applies applies the fai airr va valu lue e mode modell or th the e co cost st mode modell. b. if it applies the fair value model, whether, and in what circumstances,, pr circumstances prope opert rtyy intere interest stss he held ld unde underr oper operat atin ing g leases are classi classified fied and and accoun accounted ted for for as in inve vest stme ment nt property. clas assi sifi fica cati tion on is di diff ffic icul ultt, the criteria it us uses es to c. when cl distin dis tingui guish sh in inves vestme tment nt pr prope operty rty from from ow owner ner-oc -occup cupied ied property and from property held for sale in the ordinary course of business.
GIANG HA ACCA
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94
IAS 40
DISPOSALS
Fair Value Model
Cost Model
An entity shall disclose: significant assu ssumptions appli applied ed in d. the methods and sig de dete termi rminin ning g the fa fair ir va value lue of of investment property. to which the fair value value of investment investment property is e. the extent to based on a valuation by an inde independ pendent ent valuer valuer.. If th ther ere e has been no such valuation, that fact shall be disclosed. f. the the amou amount ntss re reco cogn gnise ised d in prof profit it or loss loss
GIANG HA ACCA
95
|
48
PRACTICE QUESTIONS
GIANG HA, FCCA, CPA
[email protected] 091 266 1988
96
CONTENT IAS 16:
Property, Plant and Equipment IAS 40
Investmentt property Investmen IAS 23:
Borrowing costs
97
GIANG HA ACCA
97
|
49
IAS 23 BORROWING COSTS
Qualifying Assets
Other B Bo orrowing Costs
GIANG HA ACCA
|
98
IAS 23
KEY DEFINITION Borrowing Costs
Interest and other cost incurred for the borrowing of funds Bor Borrow rowing ing cos costt ma may y inc includ lude: e:
• Interest on bank overdraft, and short term and long term Borrowings. related to Finance Lease. • Finance charges related
• Ex Exch chan ange ge Diff Differ eren ence ce aris arisin ing g fr from om Forei oreign gn curr curren ency cy borrowings to the extent that they are regarded as an adjust adj ustmen mentt to inter interest est costs. costs.
GIANG HA ACCA
99
|
50
IAS 23
KEY DEFINITION Qualifying Assets
The asset which take substantial period of time to get ready for its intended use or sale.
• Constructions to be used for operations; • Inventories that that need substantial time to bring them to their saleable condition; Manufacturing ing Plants; Plants; • Manufactur
• Power generation generation facilities
GIANG HA ACCA
|
100
IAS 23
KEY DEFINITION Qualifying Assets
NOT NO T A QU QUAL ALIF IFYI YING NG AS ASSE SET T
• Inventories that are normally manufactured or produced in large quantities on a repetitive basis and over a short period of time; • Assets which are ready ready for use or sale when acquired.
GIANG HA ACCA
101
|
51
IAS 23
RECOGNITION
• Borr Borrow owin ing g cos ostt th that at are are di dire rect ctly ly attr attrib ibut utab able le to to the acquisition, construction or production of a qual qualify ifyin ing g asse assett shall be CAPITALIZED CAPITALIZED as as a part of the cost of the asset;
• Such borrowing cost can be capitalized when: futur ure e econo economic mic benefi benefitt • It is probable that they will result in fut to the entity; and
• These costs can be measu measured red reliably reliably.. • Entity shall recognize OTHER bo borr rrowi owing ng costs costs as as an expense in the period it incurs them. GIANG HA ACCA
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102
IAS 23
RECOGNITION
Elig Eligibili ibility ty for capi capitali talizati zation on • Bo Borr rro owin wing cos cost that that woul would d have have been been avoided if f the expenditure on quali ualify fyiing as asse sett had had not not been been mad ade e should be capitalized.
• The amount OF cost eligible for capitalization shall be of borrowing determined as:
• Borrowing Cost Eligible for Capitalization = Actual Borrowing Cosst Incu Co ncurred – Investm Investment ent income on the temporary investment of investment of those borrowings GIANG HA ACCA
103
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52
IAS 23 QUALIFYING ASSET
Specific Borrowing cost to be Capitalised
General Borrowing cost to be Capitalised
Borrowing Cost less Income from Investment
Capitalisa Capit alisation tion Rate x Expenditure Incurred
GIANG HA ACCA
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104
IAS 23
RECOGNITION
Capit Capitaliza alization tion Rate • In so some me insta instance nce,, amount amount of borro borrowin wing g cost cost eligib eligible le for for capitalization capitaliza tion shall be determined by applying a capitalization capitalization rate to the expenditure on that asset. Capitalization Rate = Weighted Average of the borrowing Cost
• The amount of borrowing cost capitalized during the period shall not exceed the amount of borrowing cost it incurred during the period.
GIANG HA ACCA
105
|
53
IAS 23
RECOGNITION
Capit Capitaliza alization tion Rate
GIANG HA ACCA
|
106
IAS 23
RECOGNITION
Comm Commencem encement ent of Capit Capitaliz alizatio ation n The capi capitaliz talization ation process process shall shall beg begin in when when: asset are being incurred; • Expenditure for asset
• Borrowing costs costs are being incurred; • A Acti ctivit vities ies that that are necess necessary ary to prepar prepare e the asset asset for for its intended use or sale are in progress.
• Capitalisation should be suspended suspended during during periods in which activ act ive e develo developme pment nt is inter interrup rupte ted d
GIANG HA ACCA
107
|
54
IAS 23
RECOGNITION
Cessati ation on of Capi Capital taliza izatio tion n Cess • Capi Capita tali liza zati tion on of bo borr rrow owin ing g
co cost stss
sh shal alll
CEASE when
substantially all the activities necessary to prepare the qualifying quali fying asset for asset for its intended use or sale are complete.
• When the construction of a qualifying asset is completed in pa parrts and and ea eacch pa parrt is capab apable le of be bein ing g us used ed while hile const construc ructio tion n conti continue nuess on other other parts, parts, capit capitali aliza zatio tion n of bo borr rrow owin ing g co cossts sh shal alll ce ceas ase e when when su subs bsta tant ntia iall llyy all all th the e activities necessary to prepare that part for its intended use or sale are completed. GIANG HA ACCA
|
108
IAS 23
DISCLOSURE
Fo Follo llowin wing g shall shall be disclo disclosed sed:: The amount of borrowing cost capitalized during the period; The
capital capitaliza ization tion rate used to determine determine the amount amount of
borrowing cost eligible for capitalization.
GIANG HA ACCA
109
|
55
PRACTICE QUESTIONS
GIANG HA, FCCA, CPA
[email protected] 091 266 1988 110
110
On 1/1/20X6 stream co. borrowed 1.5m to finance the production of two assets, both of which were expected to take a year to build. Work started during 20X6. The loan loan facil acilit ityy was dr draw awn n do down wn and and incu incurr rred ed on 1/1/20X6, and was utilized as follows: Asset A
Asset B
1/1/20X6
₤250,000
₤500,000
1/7/20X6
₤250,000
₤500,000
The loan rate was 9% and steam co. can invest surplus fund at 7% Required: a. Cal Calcul culate ate borr borrowi owing ng cost cost,, whi which ch ma mayy be capitali capitalize zed d for each asse assett 31/12/20X6 b. Total cos costt of each asset at 31/12/20 31/12/20X6 X6
GIANG HA ACCA
111
| 111
56
ANSWER • Borrowing cost to be capitalized Asset A
1/1/20X6 to 31/12/20X6 (₤500,000 x 9%)
Asset B
₤45,000
(₤1,000,000 x 9%)
₤90,000
Less: Investment Income 1/1/20X6 to 30/6/20X6 (₤ (₤2 250,000 x 7% x 6/1 /12 2)
₤(8 (8,,750)
-
1/ 1/1/ 1/20 20X6 X6 to 30/ 0/6/ 6/20 20X6 X6 (₤ (₤50 500, 0,00 000 0 x 7% x 6/12) /12)
-
₤( ₤(1 17, 7,50 500 0)
₤36,250
₤72,500
Net borrowing cost Cost of power generation facilities: Total expenditure
₤500,000 ₤1,000,000
Total cost
₤536,250 ₤1,072,500
GIANG HA ACCA
|
112
05
Chapter IAS 38 - INTANGIBLE INTANGIBLE ASSETS
GIANG HA, FCCA, CPA
[email protected] 091 266 1988
57 113
Definition An intangible asset asset is an “identifiable “identifiable”” non-monetary ASSET
without physical substance
3 CRITICAL ATTRIBUTES of an intangible assets:
IDENTIFIABILITY
FUTURE ECONOMIC BENEFITS
CONTROL
(These criteria's applies to both both internally internally generated and and purchased intangible intangible assets)
GIANG HA ACCA
|
114
Definition 3 CRITICAL ATTRIBUTES of an intangible assets: is separable from from th the e enti entity ty an and d so sold ld,,
IDENTIFIABILITY
tr tran ansf sfer erre red, d, lice licenc nced ed or individually or combined
rent rented ed
eith either er
arises from contractual contractual or or other legal rights
GIANG HA ACCA
115
|
58
Definition 3 CRITICAL ATTRIBUTES of an intangible assets: If the entity has the power power to obtain the the future futur e economic economic benefits benefits flowing flowing from from the asset and to restrict the access of others to those benefits. This can stem from legal rights. In the absence of legal rights, it is more difficult to demonstrate control. However er,, le lega gall enfo enforc rceab eabili ility ty is not a Howev necessary condition for control because an enti entity ty ma mayy be ab able le to cont contrrol th the e future economic benefits in some other way.
CONTROL
GIANG HA ACCA
|
116
Definition 3 CRITICAL ATTRIBUTES of an intangible assets:
FUTURE ECONOMIC BENEFITS
Revenues
Reduce future costs
GIANG HA ACCA
117
|
59
Recognition An intangible asset, whether purchased or self-created, self-created,
is recognised if and only if: it is probable that the future economic benefits that are
attributable to the asset will flow to the enterprise; and the cost of the asset can can be measured reliably
GIANG HA ACCA
|
118
Initial Measurement
Internally-generated goo goodw dwil ill, l,
AT COST br bran ands ds,,
mas masth thea eads ds,,
publis pub lishin hing g titles titles,, cust custom omer er lis lists, ts, star start-u t-up p cost costs, s, train training ing costs costs,, adverti advertisin sing g cost costss and reloc relocat ation ion cost costss are never re recog cognis nised ed as assets. assets. If
an intangible item do doe es not not mee meet both both th the e de defi fini niti tion on and and
the recogniti recognition on criteria: criteria: recognised recognised as an expense when it is incurred,
Except if the cost is incurred as part of a business combination,, in which case it forms part of the amount combination recognised as goodwill at the acquisition date. GIANG HA ACCA
119
|
60
Initial Measurement
AT COST
cost st - ex expen pense se Expenditures NOT part NOT part of the co Costs of introducing a new product or service (including
costs of advertising and promotional activities); Costs of conducting business in a new location or with a
new class of customer (including costs of staff training); and Administration and and other general overhead costs.
GIANG HA ACCA
|
120
Separate Acquisition Cost of a separately acquired intangible asset comprises: Its
purcha chase pric price e, in incl clud udin ing g im impo port rt du duti ties es an and d nonnon-
refundable purchase taxes, after deducting trade discounts and rebates; and Any
direct dir ectly ly attri attribut butabl able e cost cost of preparing the asset for its
intended use. Employment
costs arising directly from bringing the asset to its working condition; professional fees arising directly from bringing the asset to its working condition; and whether ther the asset is functioning properly costs of testing whe GIANG HA ACCA
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Capitalisation Criterias for capitalisation: Development expenditure The
technical techni cal fe feasi asibil bility ity of completing the intangible asset so that it will be available for use or sale Its int inten entio tion n to comple complete te the the intangible asset and use or sell it Its abil abilit ity y to us use e or sell sell the the intangible asset how the the intang intangibl ible e asset asset will will gen ener era ate probab able le fut future ure economic econo mic benefits benefits the avail ila abili bility ty of ad ade equat uate techn chnica ical, finan inanci cia al and othe otherr re resou source rcess to comple complete te the the development and to use or sell the intangible asset; its ab abil ilit ity y to meas measur ure e the the exp xpe endit nditu ure attributable to the intangible asset asset during its development reliably
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Capitalisation Costs that may be included: Only those costs that have been incurred after the date that the capitalisation criteria were first met can be included. The
cost comprises all directly attributable costs necessary to crea create te,, pr prod oduc uce, e, an and d pr prep epar are e th the e asset asset to be capa capabl ble e of operating in the manner intended by management. Examples are: costs of materials and and services used or consumed costs of employee benefits arising from the generation of the intangible asset other direct costs such as fees to register register a legal right; and amortisation of patents and licences that are used to generate the intangible asset. Borr Borrow owin ing g cost costs, s, if capi capita tali lise sed d under under IA IAS S 23 (IF (IF incur incurre red d on QA) QA) earlier expense written off may not be reinstated GIANG HA ACCA
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Recognition of an Expense Expenditu Expend iture re on an intang intangib ible le it item em shall shall be recogn recognise ised d as an expense when it is incurred unless: It forms part of the cost of an int intangib angible le asset that meet meetss the recognition criteria or The item is acquired in a business combination and cannot cannot be reco recogn gnis ised ed as an in inta tang ngib ible le asse asset. t. If this this is the the case case,, this this expenditure (included in the cost of the business combination) shall form part of the amount attributed to goodwill at the acquisition date.
IAS 38 also expressly requires requires the following to be expensed: start up costs training costs advertising and promotional costs relocation and reorganisation reorganisation costs GIANG HA ACCA
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Measurement MODEL: carried at its co cost st le less ss any any accu accumu mula late ted d amor amorti tiza zati tion on and an any y accumu accumula late ted d impair impairmen mentt losses losses.. If Ac Acti tive ve ma mark rket et exi xist stss (ver (very y rare): rare): Carried at a reva revalued lued amount amount being being its fair value at the date of the revaluation less any subsequent accumulated amortization and any subsequent accumulated impairment losses Such ac acti tiv ve mark marke ets are are ex expe pect cted ed to be unco uncomm mmon on for for intangible intang ible assets. Examples where they might exist: • Milk quotas. • Stock exchange exchange seats. • Taxi medallions/licences medallions /licences GIANG HA ACCA
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ACTIVE MARKET Active market has the following CHARACTERISTICES Product is There
homogenous homogenous
are willing willing buyers and suppliers
Generally,, intangible assets (e.g. brand), are UNIQUE in nature Generally and therefore active market market does not exist…. So, rev revalua aluation tion model model is NOT applicable.
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ACTIVE MARKET nly pe perm rmis issi sib ble if th the e con ond ditio ition ns REVALUA REVALU ATION MODEL MODEL is only belo below w are are met: met: 1. Fair value value should be determined by refe refere renc nce e to an acti active ve market suffic ficien ientt regul regulari arity ty 2. Revaluations should be made with suf such that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date 3. If an intangible asset asset is revalued, all the other asse assets ts in its class should class should also be revalued. revaluations are carried out regularly. (unless there is no active market for a particular asset).
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ACTIVE MARKET nly pe perm rmis issi sib ble if th the e con ond ditio ition ns REVALUA REVALU ATION MODEL MODEL is only belo below w are are met: met: 4. R evalu lua ation tionsivein inc creas ase e are ar e umulat reclated oged nisin edequity comprehen compr ehensive income incom es and accumu acc equin ity.. other 5. Reva Revalu luat atio ion n decr decrea ease sess are are ch char arge ged d firs firstt ag agai ains nstt th the e revalua rev aluation tion surplus surplus in in equity related to the specific asset, and any exces xcesss ag agai ains nstt prof profit it or loss loss.. revalued asset asset is disposed disposed of, of, the revaluation 6. When the revalued surplus remains in equity and is NOT reclassified to profit or loss.
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Amortisation USEFUL LIFE
FINITE (limited)
INDEFINITE (unpredictable)
AMORTISE, normally SL method
NO AMORTISA A MORTISATION TION (But, checked for impairment)
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Amortisation In Inta tang ngib ible le
asse assets ts wi with th in inde defi fini nite te usef useful ul lives lives are are not not
amortised but are tested for impairment on an annual basis. If recoverable amount is lower than the carrying amount, an
impair imp airmen mentt loss loss is recog recognis nised. ed. The en entit tityy also also consi consider derss whether the intangible continues continues to have an indefinite life. life. Normally, Normally,
subsequen subsequentt expendit expenditure ure on an intang intangible ible asset asset
afte afterr it itss pu purc rcha hase se or co comp mple leti tion on is reco recogn gnis ised ed as an expense. Only rarely are the asset recognition criteria met.
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GOODWILL The
difference between difference between the cost cost of of the acquisition and the
fa fair ir va value luess of the net assets acquired INTERNALLY GENERATED
PURCHASED GOODWILL
NO recognition
CAPITALISED and CHECKED FOR IMPAIRMENT NO amortisation
(b (bec ecau ause se it has has inde indefi fini nite te useful life)
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Computer Software Purchased: CAPITALISE Operating
system for hardware: include in hardware cost
Internally developed whe heth ther er
for us use e or sale) ale):: cha harrge to expe pens nse e until til technological feasibility, feasibility, probable future benefits, intent and ability to use or sell the software, resources to complete the software, and ability to measure cost.
Internally developed over
useful life, based on pattern of benefits (straigh (straight-line t-line is the default
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PRACTICE QUESTIONS
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06
Chapter IAS 36 – IMPAIRMEN IMPAIRMENT T OF ASSETS
GIANG HA, FCCA, CPA
[email protected] 091 266 1988
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IAS 36
OBJECTIVE
• En Ensu sure re th tha at asse assets ts are are carr carrie ied d at no mor more th than an th thei eirr recoverable recovera ble amount • Define how the recoverable amount is determined
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IAS 36
DEFINITION
Carrying amount (Acc Accounting reco ecords)
Recoverable amount Higher (NRV=FV=FV-ccost to sell and Value in use)
CA- RA
Impairment Loss
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Impairment: What to do? Intangibles with indefinite Intangibles indefinite useful life Intangibles not yet available for use
Annual Test
Goodwill
Annual Test
Other assets: @ reporting date
Test when Indicators exist
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Indications of impairment External sources
Internal sources
Decline in market value
Obsolescence/physical
Significant changes
(market, technology, legal, economic) Increase in interest
damage
Significant changes
(restructuring, discontinuing) Internal reporting
rates
evidence
CA > market
capitalization
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IAS 36 – Impairment Impairment of Assets Assets Recoverable amount
Higher of asset’s/CGU’s NRV = Fair value - co c ost to sell
Value in use
- If RA> CA
No impairment
- If I f NRV impossible to set
Use value in use
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IAS 36 – Impairment Impairment of Assets Assets Value in use calculation 1. Future CF Year
2. Discounting
Future cash flow
3. Present value
Discount factor at 10%
Present value
1
3,000
0.909
2,727
2
2,800
0.826
2,314
3
2,500
0.751
1,878
4
2,000
0.683
1,366
5
1,200
0.621
745
∑
11,500
9,031
Discount factor: Market rate (if no market rate: weighted average averag e cost of capital/ other borrowing rate
Value in use
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IAS 36 – Impairment Impairment of Assets Assets Impairment loss
Carrying C arrying amount amount
Cost Model
Debit: P/L-Impairment loss
Credit: Asset (adjustment)
Recoverable Recoverable aamount mount
Revaluation Model
Debit: OCI-Revaluation surplus Debit: P/L-impairment loss
Credit: Asset (adjustment)
Adjust depreciation for future periods to new CA! GIANG HA ACCA
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IAS 36 – Impairment Impairment of Assets Assets Impairment loss
• Specific Specific asset asset • CGU: • To any GW GW allocated allocated to CGU • The remaining should pro-rate pro-rate to to remaining assets
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IAS 36 – Impairment Impairment of Assets Assets CGU
Definition: Smallest identifiable group of assets that generates cash inflows largely independent from other assets
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IAS 36 – Impairment Impairment of Assets Assets Business combinations Testing of CGU with goodwill: = test annually or whenever there is an indication indication of impairment impairment GOODWILL Allocated to CGUs
CA of CGU+GW
RA of CGU
Impairment loss
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IAS 36 – Impairment Impairment of Assets Assets CGU with goodwill: impairment loss
1. Reduce CA of any goodwill allocated to CGU
2. Reduce CA of other assets of CGU pro-rata pro-rata BUT Do not reduce CA of an asset below the highest of:
Recoverable amount
Zero GIANG HA ACCA
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IAS 36 – Impairment Impairment of Assets Assets Reversal of impairment loss
Is there any indication that impairment loss no longer exists? External sources
Internal sources
- Increase Increase in market market value - Significan Significantt changes changes (market, (market, technology,, legal, e technology economic) conomic) - Decrease Decrease in interest interest rates rates
- Significan Significantt changes changes (restructuring, enhancement) - Intern Internal al rep report orting ing evidenc evidence e
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IAS 36 – Impairment Impairment of Assets Assets Reversal of impairment loss Only when change in estimates to determine Recoverable amt Sequence 1st: Individual asset
-
Increased Increased CA ≤ origin original al CA P/L, or reva revaluat luation ion incr increase ease Adjustm Adjustment ent depreciat depreciation ion
2nd: Cash generating unit
3rd: Goodwill
-
-
-
Alloc Allocatio ation n tto o asset assetss pro pro rat rata a NO goo goodwill dwill) ( ) CA of asset – not incre increase ase RA
No reversal
Original CA
Lower of GIANG HA ACCA
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PRACTICE QUESTIONS
GIANG HA, FCCA, CPA
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07
Chapter REPORTING FINANCIAL PERFORMANCE
GIANG HA, FCCA, CPA
[email protected] 091 266 1988
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IAS 08
OBJECTIVE
It pres prescr crib ibes es the the cr crit iter eria ia fo for: r:
Selection of accounting policies;
Changes in accounting policies;
Accounting treatment;
Disclosure of changes in accounting policies;
Changes in accounting estimates; estimates;
Correction of errors;
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IAS 08 IAS IAS 8 - En Enha hanc ncem emen entt of of::
Relevance and reliability of financial statements;
Compar Com parabi abilit lityy of financ financial ial stat stateme ements nts with with the financ financial ial statements of other entities and of prior periods of the same entity.
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IAS 08
KEY CONCEPTS
Retrospective
Retr Retros ospe pect ctiv ive e ap appl plic ica ati tion on is ap appl plyi ying ng a new policy to transactions, other events & Conditions as if that that policy had alway alw ayss been been applicable.
Retrospective Restatement
It is basically the after effect of Retrospective application on the Prio Priorr Periods Periods presented presented along the current year’s Financial Statement.
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IAS 08
KEY CONCEPTS
Prospective Application
Prosp Prospect ective ive Applic Applicati ation on means means apply applying ing the changes on
current curre nt and futur future e periods only. In the past what’s done is done no such alteration is required in the books of the accounts.
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IAS 08
KEY CONCEPTS
Impracticable Applying Impracticable
Applying Applyin g a requir requireme ement nt is impra impracti ctica cable ble when when the en entit tityy cannot can not apply apply it it after after making making ev every ery possibl possible e effo effort rt..
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IAS 08
Basis;
Rules;
ACCOUNTING POLICIES
Conventions; Practices;
Specific Speci fic Principles; Principles;
That That
are are applie applied d in prepar preparing ing and pr prese esenti nting ng financi financial al Statements
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IAS 08
ACCOUNTING POLICIES
Reasons for Change in Accounting Policies Policies
Change in International Financial Reporting Standard
Change in Local Legislation
For More True & Fair View
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IAS 08
ACCOUNTING POLICIES
Accounting Treatment of Change in Accounting Policy
• Retrospective
• Impracticable
When a cha chang nge e in acco accoun unti ting ng • When policy is appli applied ed retrospect retrospectively ively,, the the enti entity ty sh shal alll adjust the opening balances o off each affected component of equity for the earliest prior p e r iod presented and the other comparati compa rative ve amoun amounts ts discl disclosed osed for each prior period presented as if the new accounting policy had always been applied.
• When hen it is impr imprac acti ticcable able to determine the cumulative effect, at the begin beginnin ning g of the current current period, of app applyin ying a new ac acco coun unti ting ng poli policy cy to all prio priorr period per iods, s, the ent entity ity shall shall adjust th the e co comp mpar arat ativ ive e in info forma rmati tion on to apply the new accounting policy prospectively from from the earl earlies iestt date practicable.
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IAS 08
ACCOUNTING POLICIES
requirements of change in accounting policy Disclosure requirements
Nature of Nature of change
Description Descriptio n of transitional provision if any
For the current period and each prior period peri od presented, to the extent practicable, the amo amoun untt of adjust adjustmen ment: t: For each financial statement statement line item affected; Earnings per share – revised
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IAS 08
ACCOUNTING ESTIMATES
Change in Accoun Change in Accounting ting Estimates Estimates is is an Adjustment Adjustment in: in: Carrying value of an Asset ;
or a liability; Or the amount of Periodic consumption consumption of an Asset;
As a Re Resul sultt of Presen Presentt Condit Condition ionss and Circumstances
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IAS 08
ACCOUNTING ESTIMATES
Reasons for Estimation When Whe n an ite m only of financ fin ial st stat ateme ement canno cannott of: be measur measured ed precisely precisely, , ititem can beancial estimated. Thisnts iss because
Uncertainties inherent Uncertainties inherent in the business;
Where judgments Where judgments are are involved;
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IAS 08
ACCOUNTING ESTIMATES
Where Estimation is Required? Estimates may be required of:
Bad Debts
Inventory obsolescence
Fair value of financial assets or financial liabilities
The useful lives of, or expected pattern of consumption of the future economic benefits embodied in, depreciable assets assets
Warranty Warra nty Obligations Obligations etc.
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IAS 08
ACCOUNTING ESTIMATES
When Change in Accounting Estimate Becomes Necessary? If changes occur in the circumstances circumstances on which the estimate was based:
As a result of a new informat information ion
As a result of new of new developme development nt
More Experience Experience
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IAS 08
ACCOUNTING ESTIMATES
What is the Recognition Criteria of Change in Accounting Estimate?
Adjusting the Adjusting the carrying amount of the related asset, liability or the peri perio od of chan chang ge recognizes a change in an equity item in the accounting estimate
Example: Management estimated that provision for doubtful debts Example: Management up to 5 percent of the total population of trade debts. However, upon identifying the age of the trade debts, it revealed that bad debts are about 6.5 percent of total population of trade debts. Management immediately recognizes the increase in bad debts expense in the books of accounts
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IAS 08
ACCOUNTING ESTIMATES
IAS 08 requires recognizing recognizing the effect of the change in the accounting estimate estimate in the:
Current; future periods;
affected affect ed by the change.
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IAS 08
ACCOUNTING ESTIMATES
Disclosur losures es Req Require uired d Disc
If the effect of a change in estimate is immaterial (as is usually the case for changes in reserves and allowances), we do not disclose the alteration.
However, we disclose the change in estimate if the amount is material. Also, if the change affects several future periods, e.g., the effect on income from continuing operations, net income, and per share amounts.
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ERRORS
IAS 08 Wha Whatt are Erro Errors? rs?
Errors are Mis Mista take kess by liter literal al meanin meanings gs.. They can be Classified as shown:
ERRORS Prior Period
Current Period
Errors Related T To o Prior Reporting Periods
Errors Related T To o Current Reporting Periods GIANG HA ACCA
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ERRORS
IAS 08 What are Prior Period Errors?
Fa Failu ilure re to use or misus misuse e of reliab reliable le inf inform ormat ation ion that that was was available when financial statements for those periods were authorized autho rized for issue.
Failure to use or misuse of reliable information that could reasonably be expected to have been obtained and taken into account in the preparation preparation and presentation of those financial statements
ERRORS Prior Period
Current Period
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IAS 08
ERRORS
What are the Examples of Prior Period Errors?
Effect of mathematical mistakes Mistakes in applying accounting policies
Oversight
Misinterpretation Misinterpretat ion of facts
Fraud
Change in accounting accounting estimates result from New informa information tion or or corre recti ctions ons of errors errors New developme developments nts are are NOT cor
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IAS 08
ERRORS
What is the Accounting Treatment for Rectification of Errors?? An entity shall correct material prior period errors retrospectively in retrospectively in the first set of financial statements authorized authorized for issue after their discovery by:
Resta Rest ating ting th the e co com mpa parrative tive amou amount ntss for the prior period(s) presented in which the error occurred; or
If th the e er errror occu occurr rred ed before the earliest prior period resta statin ting g the openin opening g balanc balances es of ass asset ets, s, liabil liabiliti ities es presented, re and eq equit uity y for the earliest prior period presented
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DISCLOSURE
IAS 08
What are the Disclosure Requirements of IAS-8?
Nature of the prior period error Nature of To the extent practicable, the am amou ount nt of th the e corr correc ecti tion on:: statement line item affected; and affected; and For each financial statement Revision in earnings per share (EPS)
The amount of the correction at the beginning of the earliest prior period presented; and If retrospec retrospective tive restat restatement ement is impractic impracticable able for a particula particularr prior period, the circumstances that led to the existence of that condition and a description of how and from when the error has been corrected. GIANG HA ACCA
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CONTENT
IAS 8:
Accounting Policies, Changes in Accounting Estimates & Errors IFRS 5
Non-current Assets Held for Sale and Discontinued Discontinued O Operation peration IAS 10
Events after the reporting period GIANG HA ACCA
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IFRS 5
OBJECTIVE & SCOPE
Standards for non-current assets with carrying values to be recovered thro throug ugh h sale sale rath rather er than than us use e
Coverss classific Cover classificatio ation, n, measureme measurement, nt, present presentatio ation n of asse assets ts held for sale, and reporting of discontinued operations
Assets held for sale: refe refers rs to all all su such ch reco recogn gniz ized ed nonnoncu curr rren entt asse assets ts,, and includes includes cash-gen cash-genera erating ting units called called dispos dis posal al gr grou oups ps that that may may include include current and non-current assets and liabilities
Discontin Discon tinued ued opera operatio tion: n: a component of an entity that either has been disposed disposed of of or or is cl clas assi sifi fied ed as he held ld for sale sale
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IFRS 5
CLASSIFICATION
Conditions: Available for for immed immediate iate sale in sale in existing condition 1. Available 2. Sale Sale must must be highly probable 3. Likely Likely that that significant ch chan ang ge wi will ll not not be made made to to the plan 4. Sale Sale tr trans ansac actio tion n will will take take place place within one year from classification as classification as held for sale
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IFRS 5
MEASUREMENT
On reclassification as held for sale:
Measure at LOWER Measure LOWER of carry carrying ing amoun amountt and fair value lue less less
co cost stss to sell sell Write-down is an impairment loss
Impairment loss is recognized in profit or loss
No deprecia depreciation tion is is taken while classified as held for sale
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IFRS 5
MEASUREMENT
Re-measure at Re-measure at each balance sheet date
Increase in fair value less costs to sell is recognized as a gain
in pr prof ofit it or lo loss ss Incre Inc rease ase limite limited d to cumula cumulativ tive e impair impairme ment nt losses losses previously previously recognized
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MEASUREMENT
IFRS 5 Cha Ch ange nges to a pla plan of sale sale::
Item is reclassified
Re-measured to LOWER LOWER of: of: Carr rryi ying ng amou amount nt befo before re classified classified as held for sale less a) Ca any deprecia depreciation tion that ould ha have ve be been en tak taken en if that would if it had not been held for sale, and b) Its re recov cover erabl able e amoun amountt (i.e., higher of fair value less costs to sell and value in use)
Difference is recogniz Difference recognized ed in profit or loss from continuing operations
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IFRS 5
PRESENTATION PRESENTA TION & DISCLOSURE
Objective of presentation presentation and disclosure on income sstatement: tatement:
To provide provide useful useful inf informa ormation tion separate separately ly abou aboutt continuin continuing g operations and discontinued operations so that users can assess the potential for future returns and operating cash flows
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IFRS 5
PRESENTATION PRESENTA TION & DISCLOSURE
Discontin Discon tinued ued opera operatio tion n must be a component of an entity that: a. Represents a sep separ arat ate e major major line line of business or geographic geographic area of operation b. Has clearly clearly distingu distinguishab ishable le operation operationss and cash cash flo flows ws from from the rest of the entity c. Is part part of a single single coordin coordinat ated ed plan to dispose of the component, or d. Is a subsidiary subsidiary acquired acquired exclusively with a view view to rese resell ll
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IFRS 5
PRESENTATION PRESENTA TION & DISCLOSURE
Income statement statement related disclosures: disclosures:
Revenues, Rev enues, expenses expenses,, pre-tax pre-tax profit/los profit/losss from operations operations,,
related income tax expense Gai Gain/l n/loss oss on dispos disposal al from from re remea measur sureme ement ntss and and relat related ed income tax
Total of after-tax amounts from above
Net cash flows from operations, investing, and financing re discontinued operations
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IFRS 5
PRESENTATION PRESENTA TION & DISCLOSURE
Other:
Restate to make prior period’s income statement comparable
Report adjustments to amounts reported as discontinued in prior periods
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IFRS 5
PRESENTATION PRESENTA TION & DISCLOSURE
Objective of presentation and disclosure on the statement of financial position:
To allow financial statement readers to assess the effects of items whose cash flows will come from their sale rather than their use
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PRESENTATION PRESENTA TION & DISCLOSURE
IFRS 5
Sta State temen mentt of fin financ ancial ial pos positi ition on::
Do no nott recl reclas assi sify fy asse assets ts an and d lia liabi bili liti ties es on co comp mpar arat ativ ive e financial statements statements of prior years years
Notes to the st Notes stat ateme ements nts::
Descriptive information about the assets and disposal groups, amounts amou nts of write-dow write-downs ns and remeasur remeasuremen ements ts and where where they are reported, information about removal of assets and groups from the held-for-sale category
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PRESENTATION PRESENTA TION & DISCLOSURE
IFRS 5
INCOME STATEMENT extract CONTINUING OPERATION Revenue
XX
Cost of sales
(XX)
Gross profit
XX
Distribution costs
(XX)
Administrative expenses
(XX)
Other expenses
XX
Finance costs
(XX)
Profit before tax
XX
Income tax expense
(XX)
Profit from continuing operation Loss from discontinued operation (NET OF TAX) Profit for the period
96
(30)
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CONTENT
IAS 8:
Accounting Policies, Changes in Accounting Estimates & Errors IFRS 5
Non-current Assets Held for Sale and Discontinued Discontinued O Operation peration IAS 10
Events after the reporting period GIANG HA ACCA
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DEFINITION
IAS 10 Reporting date (i.e 31.12.2018)
FS authorized (31.03.2019)
Events after reporting date
Example: Year end reporting 30 Sep 2008. FS were sent for audit Example: Year on 31 Oct 2008. Audit was finalised on 5th Nov 2008 and sent back to the company for authorisation. BOD signed the report on 20 Nov 2008
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IAS 10 Adjusted events jusst Adju
the
statements No
disclosures
Non-adjusting events fin ina ancial
Do
not adjust the financial statement But, provide disclosures if material event
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IAS 10 Adjusting events
provi ovide de furth further er eviden evidence ce of Those that pr of conditions that existed
at the balance sheet date”. They require changes in amounts to be included in financial statemen sta tements, ts, because because financial financial statemen statements ts should should reflect reflect all available evidence as to conditions existing at the balance sheet date
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IAS 10
EXAMPLES: Adjusting Events
1. Non curre current nt assets assets::
The subsequent determination of the purchase price or the proceeds of sale of assets purchased or sold before the year end.
2. Property:
A valua valuatio tion n which which pr provi ovides des eviden evidence ce of a perman permanen entt diminution diminu tion in value value
3. Investments:
The receipt of a copy of the financial statements or other inform inf ormat ation ion in respect respect of an unlisted unlisted compan companyy which which pr provi ovides des eviden evidence ce of a perma permanen nentt diminu diminutio tion n in the value of the long term investment
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IAS 10
EXAMPLES: Adjusting Events
Invent ntori ories es and work work in pr progr ogress ess:: 4. Inve
The receipt of proceeds of sales after the balance sheet da date te or other other eviden evidence ceinventories. concer concernin ning g the net realis realisabl able e value (if NRV is lower)of
The receipt of evidence that the previous estimate of accrued profit on a long-term construction contract was materially inaccurate. inaccurate.
5. Receivables:
The renegotiation of amounts owing by customers, customers, or the insolvency insolv ency of a custom customer er.. (write (write off the irrecover irrecoverable able amount as bad debts)
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EXAMPLES: Adjusting Events
IAS 10 6. Taxation: The
receipt of information regarding rates of taxation (only
change the current tax estimation, NOT the deferred tax)
7. Claims: Amounts receiv received ed or
receiva receivable ble in respect of insurance claims, which were in the course of negotiation at the balance sheet date.
8. Obligations: The
settlement after the balance sheet date of a court case that confirms that the entity had a present obligation at the balanc bal ance e sheet sheet da date te.. The de deter termin minat ation ion of an incen incentiv tive e or bonus payment after the balance sheet when an entity has a constructive construct ive obligation at the balance sheet date.
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IAS 10
EXAMPLES: Adjusting Events
deterioratio ation n in the financial financial position position (recurrin (recurring g losses) losses) 9. A deterior and operating results (working capital deficiencies) of an entity that has a bearing on the entity's continuance (going concern is affected) 10. Discoveries:
The discoveries of errors or frauds which show that the financial statements statements were incorrect incorrect.
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IAS 10 Non - Adjusting events
Those that are indicative of conditions that arose subsequent to the balance sheet date”.
Consequen Conseq uently tly,, they they do not result result in chang changes es in amoun amounts ts in financial statements. But rather should be disclosed by note, if material
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IAS 10
EXAMPLES: Non-Adjusting Events
1. Mergers and acquisitions 2. Reconstruction Reconstruction and proposed proposed reconstructions reconstructions 3. Issue of shares and loan notes 4. Purchases and sales of non current assets assets and investments 5. Losses Losses of fix fixed ed assets or inventories inventories as a result result of fire or flood. 6. Opening new trading trading activities or extending existing existing trading trading activities. 7. Closing a significant part part of the trading activities activities if this was not anticipated at the year-end.
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IAS 10
EXAMPLES: Non-Adjusting Events
8. (t (temp empor orar aryy) de deccli lin ne in th the e value alue of pr pro ope pert rtyy and in inve vest stme ment ntss held held as no nonn-cu curr rren entt asse assets ts,, if it can can be demonstrated that the decline occurred demonstrated occurred after the year end 9. changes in rates of foreign exchange 10. government action, such as nationalisation 10. government 11. strikes 11. strikes and other labour disputes 12. augmenta tion of pension benefits 12. augmentation
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IAS 10 Going Concern Issues Arising After Balance Sheet Date An entity shall not prepare its financial statements on a going concern basis if management determines after the balance sheet date either that it intends to liquidate the entity or to cease trad tr adin ing, g, or th tha at it ha hass no re real alis isti ticc alternative but to do so.
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IAS 10 Proposed dividends IAS 10 prevents proposed equity dividends being recognised as lia liabili bilities ties unless unless they they are are declar declared ed befor before e the balanc balance e sheet sheet da date te.( .(vver eryy rare) Dec Declar ared ed mea eans ns th tha at the divi divid den end d is appropriately authorised, and is no longer at the discretion of the enterprise.
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SUMMARY
IAS 10 Events after the balance sheet date
Adjusting events
Non adjusting events
a. mergers and acquisitions b. the subsequent determination of the purchase price or the sale proceeds of assets purchased or sold before the balance sheet date c. the valuation of a property which provides evidence of a permanent diminution in value before the year end d. reconstructions and reorganisat reorganisations ions e. issue of shares and debentures f. opening new trading activities g. the receipt of a copy of the financial statem statements ents in respect of a com compan panyy whi which ch pro provid vides es evi eviden dence ce of a per perman manent ent diminution in value before the year end h.The receipt of proceeds of sale after the balance sheet date concerning the NRV of closing c losing inventory(NRV inventory(NRV is lower) i.Extending existing trading activities GIANG HA ACCA
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SUMMARY
IAS 10
Non Adjusting adjusting events events
Events after the balance sheet date j.Closing part of the trading activities it this was not anticipated at the year end k. k.The The renegotiation of amounts owing by trade customers l.purchases or sale of fixed assets or investments m.Losses of fixed assets or stocks as a result of fire or flood n.Knowledge of insolvency of a debtor at the year end o.Amounts received in respect of insurance claims which were in the course of negotiation at the balance sheet date p.Disc p.Di scove overy ry of err error orss or fr frau auds ds whi which ch show show that that the financial statements were incorrect at the year end q.Decline in the value of property and inv investment estmentss after the year end r.Changes in foreign exchange rate s.Strikess and labour disputes s.Strike
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PRACTICE QUESTIONS
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Chapter Consolidated Financial Statement Statement
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Group & Consolidation
P
20%
A1
80%
S1
100%
S2
GROUP
80%
S2.1
IAS 27 – Consolid Consolidate ated d and separ separate ate FS
Subsidiary:: An entity that is controlled by another entity Subsidiary
(known as parent). [S1, S2] Sub – Subsidiary Subsidiary:: S2.1 GIANG HA ACCA
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Group & Consolidation
P
20%
A1
80%
S1
100%
S2
GROUP
80%
S2.1
IAS 27 – Consolid Consolidate ated d and separ separate ate FS
Parent: An Parent: An entity that has one or more subsidiaries
Group:: A Parent and all its subsidiaries Group
Non No n – con control trolli lin ng in intterest: est: The equity equity in sub subsid sidiar iaryy not attributable, directly or indirectly to a parent GIANG HA ACCA
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Group & Consolidation CONTROL
The power to govern the financial and operating policies of an entity so as to obtain benefits from its entity.
In general: A owns > 50% voting power of B A controls B A: Parent; B: Subsidiary Other Oth er cases: cases: By statue or an agreement Has
power to appoint or remove a majority of members of BOD Has power to cast a majority of votes at meetings of BOD Has power over 50% voting rights by agreement with other investors GIANG HA ACCA
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Group & Consolidation
P
20%
A1
80%
S1
100%
S2
GROUP
80%
S2.1
IAS 28 – Invest Investment ment in associate associate
As Asso soci cia ate : An entity in which an investor has significant influence [A1]
Trade Tr ade in inves vestme tment nt : is a simple investment in the shares of another entity, that is not an associate or a subsidiary. GIANG HA ACCA
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Group & Consolidation SIGNIFICANT INFLUENCE
The power to participate participate,, but NOT to contro controll
In general: Hold > 20% of voting rights Other cases: Other cases: Representation on on the BOD BOD of of the investee; Representation policy icy making making proces processs; Particip Participation ation on the pol Mat Material erial transactio transaction n between investor and investee; Interchange Interchange of mana of manageme gement nt personnel personnel;; Provision of essen of essential tial technica technicall informat information ion..
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Group & Consolidation
P
20%
A1
80%
S1
100%
S2
GROUP
80%
S2.1
CONSOLIDATION From
the legal point of view, view, the result sultss of the gr grou oup p must
be pres presen ente ted d as a whol whole e. Consolidation
means presenting the results of a group of
companies as if they they were a sin singl gle e comp compan any y. GIANG HA ACCA
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Group & Consolidation IAS 27: Consolidated and separate financial INTER statements NATIONAL ACCOUNTING IAS 28: 28: Investments in associates STANDARDS IFRS 3: Business combination & GROUP IFRS 10: Consolidated financial statements ACCOUNTS IFRS 11: Joint Arrangements IFRS3 defines a business combination as “a transaction … in which an acquirer obta acquirer obtains ins cont control rol of of one or more businesses. businesses.” ” The effect of business combinations is to bring bring to toget gether her separate separate entities or busin businesses esses into one one repor eporti ting ng ent entity ity , which produces consolidated financial statements for statements for the group of entities as a whole. GIANG HA ACCA
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Principles for Consolidation CONSOLIDATION means adding together CONSOLIDATION means cancellation of like items internal to the Group CONSOLIDATION as if you own ow n everything then show the extent to which you do not own. own .
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Principles for Consolidation Examp Example le 1: 1: basic basic principles of consolidation There are two companies, Pleasant and Sweet. Pleasant owns 80% of the shares in Sweet. Pleasant has a head office building wor orth th $1 $100 00,0 ,000 00.. Swee Sweett has has a fac factory tory worth orth $80, $80,00 000. 0. Remember that consolidation means presenting the results of two or more companies as if they were one Adding together Adding together You add together the values of the head office building and fa fact ctor oryy to get get an asse asset, t, land land an and d bu buil ildi ding ngs, s, in th the e gr grou oup p accounts of $100,000 + $80,000 = $180,000. So far so good; this is what you would would expect consolidation consolidation to mean
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Principles for Consolidation Ex Examp ample le 2: Intra 2: Intra – group debts Suppose Pleasant has receivables of $40,000 and Sweet has receivables r eceivables of $30,000. Included in the receivables of Pleasant is $5,000 owed by Sweet Sweet.. Re Remem member ber ag again ain tha thatt co conso nsolid lidati ation on means means presen presenti ting ng the results of the two companies as if they were one Do we then simply add together $40,000 and $30,000 to arrive at the figure for consolidated receivables? We cannot simply do this, because $5,000 of the receivables is owned within the group. This amount is irrelevant when we consider consider what the group as a whole is owed. owed. Suppose further that Pleasant has payables of $50,000 and Sweet has payables of $45,000. We already know that $5,000 of Sweet’s pay payables ables is a balance owed to Pleasant. If we just added the figures together together,, we would not reflect fairly the amount the group owes to the outside world. The outside world does not care what these companies owe to each other – that is an internal matter for the group.
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Principles for Consolidation Ex Examp ample le 2: Intra 2: Intra – group debts
Cancel Can cellat lation ion of like like items items To arrive at a fair picture we eliminate both the receivable of $5,0 $5,000 00 in Pl Plea easa sant’ nt’ss bo book okss an and d th the e paya payabl ble e of $5,0 $5,000 00 in Sweet’s book. Only then do we consolidate by adding together. Consol Con solida idate ted d receiv receivab ables les = $40,00 $40,000 0 + $30,00 $30,000 0 - $5, $5,000 000 = $65,000 Consolidated payables payables = $50,000 + $45,000 - $5,000 $5,0 00 = $90,000 So far we have established that consolidation means adding together any items that are not eliminated as internal to the gr group oup.. Going Going back back to the ex examp ample, le, howeve howeverr, we see that that Pleasant only owns 80% of Sweet. Should we not then add Pl Plea easa sant’ nt’ss asse assets ts an and d liab liabili iliti ties es to 80% 80% of Swee Sweet’ t’ss? GIANG HA ACCA
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Principles for Consolidation Ex Examp ample le 2: Intra 2: Intra – group debts
Consolida Consol idate te as if you own owned ed every everythi thing ng NO.. Pleas Pleasant ant con contro trols ls Sweet, Sweet, its subsidia subsidiary ry.. The The answ answer er is NO directors of Pleasant can visit all of Sweet’s factory, if they wish, not just 80% of it. So the figure for consolidated consolidated land and buildings is $100,000 plus $80,000 $80,000 as stated stated above Sh Show ow the the ex extten entt to wh whic ich h you you do no nott own own ev ever eryt ythi hing ng However, if we just add the figures together, we are not telling the whole story. story. There may well be one or more shareholders shareholders who own the remaining 20% of the shares in Sweet Ltd. These shareholders cannot visit 20% of the factory of tell 20% of the workforce what to do, but they do have an interest in 20% of the net assets of Sweet. The answer is to show this non-controlling interest separately in the equity section of the consolidated consolidated statement statement of financial financial position GIANG HA ACCA
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Question 1: Apple Co owns 60% of Pear Co. Apple has noncurrent assets of $80,000 and Pear has non-current assets of $50,000 Consolidated non-current assets is calculated as $ Apple
80,000
Pear 60% x $50,000
30,000 110,000
True or False? Explain your answer.
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Question 2: Appl Apple e Co owns owns 60 60% % of Pear ear Co. Co. Appl Apple e has has receivables of $60,000 and Pear has receivables of $40,000. Pear owes Apple $10,000. What are consolidated consolidated receivables?
A
$74,000
B
$84,000
C
$90,000
D
$100,000
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Question 3: Apple Co owns 60% of Pear Co. Pear has payables of $90, $90,00 000 0 of whic which h $10, $10,00 000 0 is ow owed ed to Ap Appl ple. e. Appl Apple e has has payables payab les of $120,000 Required: Cal Calcul culate ate the consol consolidat idated ed payabl payables es balance balance
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The effect of the parent/subsidiary relationship on the financial statements $10/unit
Market
Arm’s length transaction GROUP
Parent
$12/unit NOT NOT Arm’s Arm’s
Subsidiary
length transaction
TRANSFER PRICING !!! GIANG HA ACCA
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The effect of the parent/subsidiary relationship on the financial statements In all these situations, the financial performance and financial position reported by the separate financial statements of the subsidiary is affected, so that: the informa information tion could could be misleading to users users who not aware of the existence and effect of the rela relate ted d pa part rty y relationship;; and relationship NOT be be possible to make mean meaningfu ingfull comparison comparisonss it may NOT between the subsidiary’s financial statements and those of a similar entity that (for example) makes all its sales to third parties on normal commercial terms (at ‘arm’s ‘arm’s length’).
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The effect of the parent/subsidiary relationship on the financial statements The co conso nsolid lidat ated ed finan financia ciall st stat ateme ement ntss are also also aff affect ected. ed. Because they present the activities of the group as a single entity, transactions between the subsidiary and the parent are elimina elim inated ted (not (not includ included) ed).. Amoun Amounts ts owed owed by one entity entity to another are also eliminated.
To sum up: Intra Group transactions & balances
Eliminated
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Accounting treatment for consolidation Subsidiaries
Associate
Other Investment
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Accounting treatment for consolidation Subsidiaries
Associate
Other In Investment
FULL CONSOLIDA CONSOLIDATION TION IAS27 IAS27
requir requires es a paren parentt to presen presentt conso consolid lidat ated ed financ financial ial statements (also referred to as group account) in which the account of the parent and subsidiary(ies) are combined and presented as a single company
IAS IAS
27 re requ quir ires es th that at when when a pare parent nt issu issues es cons consol olid idat ated ed financial financ ial statemen statements, ts, it should should consolida consolidate te all subsidiar subsidiaries, ies, both foreign and domestic, except in certain circumstances circumstances
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Accounting treatment for consolidation Subsidiaries
Associate
Other Investment
EQUIT EQ UITY Y MET METHOD HOD The
basic principle of equity accounting is that the investing company (P Co) should take account of its share of earnings of the associate (A Co).
INCOME ST STA ATEMENT
SOFP
Show “ Group share of asso associ ciat ate’ e’ss Pr Prof ofit it af afte ter r tax ”: before Group profit before tax
Investment in associate Cost of investment Share of RE Investment (show Investment (show in BS) GIANG HA ACCA
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Accounting treatment for consolidation Subsidiaries
Associate
Other Investment
Tra rade de in inve vestm stmen entt is a simple investment in the shares of another entity, that is not an associate or a subsidiary.
Trade
investments are simp simply ly show shown n as in inve vest stme ment ntss unde underr Non-Curre Non-C urrent nt Assets Assets in the consolidated statement of financial position of the group.
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Question 4: Socket Co has 100,000 shares of $1 each. On 1 January 20X3, Power Co acquired 45,000 of these shares. In addition, Power Co is able to appoint four out of the five direct dir ector orss of Socke Sockett Co Co,, thus thus ex exerc ercisi ising ng cont contro roll ove overr their their activities. How should Socket Co be treated in the consoli con solida date ted d financ financial ial state statemen ments ts of Po Power wer Co?
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Question 5: P Co, acquires 25,000 of the 100,000 $1 ordinary shares in A Co for $60,000 on 1 January 20X8. In the year to 31 December 20X8, A Co earns profits after tax of $30,000, from which it pays a dividend of $6,000 How will A Co’s Co’s results be accounted for in the individual and consolidated accounts accounts of P Co for the year ended 31 December 20X8?
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TWO of Question 6: Which TWO of the following investments would be tr trea eate ted d as an asso associ ciat ate e in th the e cons consol olid idat ated ed fina financ ncia iall statemen sta tements ts of Smith Co?
A B
Smith Co owns 15% of the ordinary shares of Red Co and has significant influence over Red Co Smith Co owns 45% of the ordinary shares of Pink Co and can appoint 4 out of 5 directors to the Board of Directors of Pink Co
C
Smith Co owns 40% of the preference shares (non-voting) (non-voting) and 15% of the ordinary shares of Yellow Co
D
Smith Co owns 60% of the preference shares (non-voting) and 40% of the ordinary shares of Aquamarine Co GIANG HA ACCA
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Acquiring a subsidiary after incorporation Pre – acquisition acquisition
Postt – acquisition Pos acquisition
profit of Subsidiary
profit of subsidiary
NOT included as retained earnings in the the cons consol olid idat ated ed fina financ ncia iall statements – they are dealt with as pa part rt of the the pu purc rcha hase sed d go good odwi will ll calculation
Inc Includ luded ed in group group profi profits ts in the consolidate ated statement of comprehensive income, as a part of the profits of the entire group. They They are are also also incl includ uded ed in the the retai retaine ned d ear earnin nings gs of the group group,, and so are included in the consolidated statement statement of ffinancial inancial position.
Acquisition date GIANG HA ACCA
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Acquiring a subsidiary after incorporation Example: A parent P acquired 100% of the share capital of subsidiary S on 1 January Year Year 3. The net assets assets of S (total assets assets minus to tota tall li liab abil ilit ities ies)) were were va valu lued ed at $200 $200,0 ,000 00 at th the e date date of acquisition and P paid $200,000 to acquire the shares in S. (N (Not ote: e: Th This is mean meanss th tha at th ther ere e is no pu purc rcha hase sed d good goodwi will. ll. Goodwill is explained later). The summary statements of financial position of both entities at 1 January Year 3 and at 31 December Year 3 are as follows
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Acquiring a subsidiary after incorporation Example:
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Acquiring a subsidiary after incorporation Example: A parent P acquired 100% of the share capital of subsidiary S on 1 January Year Year 3. The net assets assets of S (total assets assets minus to tota tall li liab abil ilit ities ies)) were were va valu lued ed at $200 $200,0 ,000 00 at th the e date date of acquisition and P paid $200,000 to acquire the shares in S. (N (Not ote: e: Th This is mean meanss th tha at th ther ere e is no pu purc rcha hase sed d good goodwi will. ll. Goodwill is explained later). The summary statements of financial position of both entities at 1 January Year 3 and at 31 December Year 3 are as follows Required: Calculate consol consolidat idated ed Profit Profit, consol consolidat idated ed RE RE? ?
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Acquiring a subsidiary after incorporation
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Acquiring a subsidiary after incorporation
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Consolidat Consol idated ed Financial Financial Statement Statement Statements nts of the parent company • Financial Stateme
• Consolidated Stat Statement ement of Financial Position Consolidated ted Stat Statemen ementt of Compr Comprehens ehensive ive • Consolida Income Statement ement of Cash Flows • Consolidated Stat
Consolidated Package
Provide information to shareholders of pa pare rent nt on all all the the comp compan anie iess controlled by the parent
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The Consolidated Statement of Financial Position
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Basic Principles 1. Cancelling out items which appear as an Asset in one (lik like e company items items). ). and a Liability in another company 2. Adding togeth the er all the un-cancelled items assets and liabi liabilities lities on a lin line-b e-by-l y-line ine bas basis is 3. Consolida Consolidation tion as if yo you u own e everything verything tthen hen sho show w the extent to which you DO NOT OWN (NCI (NCI). ).
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Key Steps Step 1
Combine items of BSs (P&S) and add GW + NCI in the consolidated BS (To list down all items of consolidated BS)
Step 2
Lump-sum items on the line by line basis
Step 3
Step 4
Consolidated adjustments: Cancel like items (Investm (Investment ent vs Equity of Sub; internal AR-AP; inventory); Fair value adjustmen adjustmentt for net assets of subsidiaries Calculate RE of the Group; Calculate GW; Calculate NCI; …
Prepare consolidated FS (= Lump-sum + adjustment adjustment)) GIANG HA ACCA
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Key Steps Step S tep 1
Step 2
Step S tep 4
Step 3
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Items required to cancel INVESTMENT (Parent FS)
SHARE CAPITAL (Subsidiary FS)
Investment in subsidiary *
Share capital *
NOTE: This is the parent company’s share capital only. The subsidiary’s has been cancelled GIANG HA ACCA
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Items required to cancel AR/AP (Parent FS)
AR/AP (Subsidiary FS)
(Intra-Group trading)
NOTE: P Co bank balance is not netted off with S Co’s bank overdraft
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Goodwill
$
Consideration transferred transferred
$ XXX
Less value of identifiable assets acquired and liabilities liabilities assumes: assumes: - Ordinary shares capital - Share premium - Retained earnings at acquisition Goodwill
X X X (XX) X
Goodwill: The excess of considerations transferred over % of Net asset – Subsidiaries. Goodwill arising on consolidation is recognized as an INTANGIBLE asset in asset in the consolidated statement of financial position. GIANG HA ACCA
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Goodwill
$
Consideration transferred transferred
$ XXX
Less value of identifiable assets acquired and liabilities liabilities assumes: assumes: - Ordinary shares capital - Share premium - Retained earnings at acquisition Goodwill
X X X (XX) X
Goodwill: The excess of considerations transferred over % of Net asset – Subsidiaries.
Negative Goodwill: Negative Goodwill: recognised immediately in the income statement as a gain GIANG HA ACCA
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Goodwill Example 1: P Co purchased all of the share capital (40,000 $1 shares) of S Co for $60,000 in cash. The statements of financial position of P Co and S Co prior to the acquisition are as follows: P Co $’000
S Co $’000
100 60 160
40 40
160 160
40 40
Non-current assets Property, plant and equipment
Cash at bank Total assets
Equity and liabilities Share capital Total equity and liabilities
Required: (i) Prepare separate FS of P Co. after acquisition of S. (ii) Prepare consolidated FS of P Co. after acquisition of S. GIANG HA ACCA
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Goodwill Example 2: Sing Co acquired the ordinary shares of Wing Co on 31 March 20X1 when the draft draft state stateme ments nts of fina financi ncial al pos positio ition n of eac each h compan companyy we were re as follows: SING CO STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X1 $ Asset Non-current assets Inves Investme tment nt in 50,0 50,000 00 sha share ress of Win Wing g Co at cost cost Current assets Total Assets
80,0 80,000 00 40,000 120,000
Equity and Liabilities Equity Ordinary shares Retained earnings Total equity and liabilities
75,000 45,000 120,000 GIANG HA ACCA
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Goodwill Example 2: Sing Co acquired the ordinary shares of Wing Co on 31 March 20X1 when the draft draft state stateme ments nts of fina financi ncial al pos positio ition n of eac each h compan companyy we were re as follows: WING CO STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X1 Current assets
$ 60,000
Equity 50,000 ordinary shares of $1 each Retained earnings Total equity and liabilities
50,000 10,000 60,000
Required: Prepare the consolidated statement of financial position as at 31 March 20X1 GIANG HA ACCA
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Goodwill Example 3: A parent P acquired 100% of the share capital of entity S on 1 January Year 3. P paid $230,000 to acquire the shares in S. The summary statements of financial position of both companies at 31 December Year 3 are as follows: Assets:
Investment in S at cost
Other assets
Equity
P $ 230,000 570,000
S $ 240,000
800,000
240,000
740,000
195,000
Equity shares
200,000
50,000
Share premium
100,000
20,000
Retatined earnings at 1 January Year 3
400,000
100,000
Retained profit for year to 31 December Year 3
40,000
25,000
Currentt liabilities Curren
60,000
45,000
800,000
240,000
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Goodwill Example 3: At the date of acquisition, the fair value of the net assets of S were $170,000. Expenses directly related to the acquisition were $75,000 but these have not been included in the figures above for P P.. There has been no impairment of goodwill during Year 3. Required Prep Pr epar are e the the co cons nsol olid idat ated ed stat statem emen entt of fi finan nanci cial al posi positio tion n as at 31 December Year 3.
NOTE: Acquisition cost must be expensed!!!
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Goodwill Example 4: Goo Goodwi dwill ll and mid mid-y -year ear acquis acquisiti ition: on: Parent entity P acquired 100% of the equity of entity S on 1 May Year 2 at a cost of $500,000. $500,000. The statem statement ent of financial financial position of Entit Entityy S, which did not pay any dividend during the year, was as follows at the beginning and at the end of Year 2. The values of the assets and liabilities shown in the statement of financial position of Entity S are assumed to represent fair values. Requir Require: e: Calculat Calculate e Goodwill Goodwill At 1 Jan $ Non-current assets: Property, plant and equipment Current assets Equity Equity shares Share premium Retained earnings
Current liabilities
At 31 Dec $
370,000 100,000 470,000
400,000 145,000 545,000
450,000
510,000
100,000
100,000
50,000
50,000
300,000
360,000
20,000
35,000
470,000
545,000 GIANG HA ACCA
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Goodwill In some questions, Assets of Subs at acquisition has not been revalued at Fair Value adjust FS of sub at acquisition before calculating GW. $ Consideration transferred transferred Less net acquisition date FV of identifi fia able assets acquired and liabilities assumes: - Ordinary shares capital - Share premium - Retained earnings at acquisition - FV adjustments a att acquisition Goodwill
$ XXX
X X X X (XX) X
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124 12 4
247
Cost of Investment Cost of investment includes: includes: Cash
paid
Market value) of any other consideration consideration (e.g. Fair value (i.e. Market shares-for-share exchange, exchange, deferred or contingent consideration, considera tion, loan note)
Professional ffees ees & other acquisition – related costs costs The IFRIC has received requests to clarify the treatment of acquisition-relat acquisition-related ed costs that the Combinations (as revised in 2008) that acquirer incurred before it applies IFRS applies IFRS 3 Business 3 Business Combinations (as relate to a business combination that is accounted for according to the revised IFRS. In accordance with the revised IFRS 3, because acquisition-related acquisition-related costs are not part of the exchange transaction between the acquirer and the acquiree (or its former owners), they are not considered part o f the business combination. Therefore, Therefore, except for costs to issue debt or equity securities that are recognized in accordance with IAS 32 and IAS 39 39,, the revised IFRS 3 requires an entity to account for acquisition-rela acquisition-related ted costs as expenses in the periods in which the costs are incurred and the services are received.
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Cost of Investment Cost
of investment investment in Sub are accounted for at at cost which is the fair value of consideration consideration given Consideration given By Cash If paid NOW: DR investment in Sub CR Cash If paid LATER (in P’s book: DR investment in Sub CR Deferred Consideration Interest on Deferred Consideration DR Parent’s retained earnings CR Deferred Consideration
By Share Exchange (based on current market value on acquisition date) DR Investment Investment in Sub CR Share Capital CR Share Premium P issues loan note as part of purchase considerat consideration ion DR Investment CR Liabilities GIANG HA ACCA
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IFRS 3: Business Combinations (Revised) Contingen ngentt consid considerat eration ion Conti IFRS 3 define IFRS definess cont conting ingent ent consi consider derat ation ion as: as: “Usual “Usually ly,, an oblig obl igat ation ion of the acqui acquirer rer to tr trans ansfe ferr additi additiona onall ass asset etss or equity interests to the former owners of an acquiree as part of the exchange for control of the acquiree if specified future events eve nts occur occur or cond conditi itions ons are are met. met. Howeve Howeverr, cont conting ingen entt consideration considera tion also may give the acquirer the right to the return of previously transferred consideration if specified conditions are met”.
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IFRS 3: Business Combinations (Revised) Previous
IFRS 3: contingent consideration consideration is accounted for only if it i t was probable that it would become payable. Revis evise ed sta standa ndard requir quire es the the acq cqui uirrer to recogni ognise se th the e ac acqu quis isit itio ion-d n-dat ate e fa fair ir valu value e of co cont ntin inge gent nt cons consid ider erat atio ion n as part of the consideration for the acquiree. This ‘fair value’ approach approach is consisten consistentt with the way in which which other forms of consideration are valued, and Fair value is defined as: ‘the amount for which an asset could ould be excha changed nged,, or a li liab abil ilit ityy sett settle led, d, betw betwee een n know knowle ledg dgea eab ble le,, wil illi ling ng par arti ties es in an arm arm’s leng length th transaction
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IFRS 3: Business Combinations (Revised) Highly ly High
un unlik likely ely th that at th the e ac acqu quis isit itio ion n date date liab liabil ility ity for for
contingent consideration could be or would be settled by “willing parties in an arm’s length transaction”. Exam
question, the acquisition date fair value (or how to
calculate it) of any contingent consideration consideration would be given. The
pa payme yment nt of conti conting ngent ent consider considerat ation ion may may be in the
form of equity or a liability (issuing a debt instrument or cash) and should be recorded as such under the rules of IAS 32 or other applicable standard
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Acquired intangible assets Entity (S Co.) is not allowed to recognize ize intangible intangible assets internally generated i.e. “market-related”, “market-related”, “cus “customer-related” tomer-related”,, “artistic-related” “artistic-related” or “technology-related” intangible assets,…
If P acquired S and identify above intangible assets with reliable reli able measurem measurement ent.. These These asse assets ts sh shou ould ld be included in the conso sollidated statement of finan financi cial al po posi siti tion on as inta intang ngib ible le asse assets ts,, an and d accounted for as such. (They should be am amor orti tise sed d an and d mi migh ghtt al also so be su subj bjec ectt to impa impair irme ment nt.) .) GIANG HA ACCA
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Acquired intangible assets Example: Parent entity P acquired 100% of the equity of entity S on 14 July Year 6 at a price of $9 millio million. n. The fair value of the net assets of S at this date was $6.5 million, but in addition P recognizes a market-related intangible asset of S which it values at $900,000. This intangible asset should be included in the consolidated statement of fin financ ancial ial pos positio ition, n, initia initially lly at cos costt but the then n at cos costt less accumulat accumulated ed amortisation and impairment. Require: Requi re: Calcu Calculate late Goodw Goodwill ill SOLUTION: Fair value of net assets acquired Plus value of market-related intang angible as assset
6,500,000 900 00,0 ,000 00 7,400,000
Cost of acquisition
9,000,000
Goodwill
1,600,000 GIANG HA ACCA
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Acquired intangible assets The calculation of the goodwill must be based on the fair value valu e of the consider consideratio ation n transf transferred erred.. The fair value of shar shares es is th thei eirr mark marke et pr pric ice e on th the e da date te of acqu acquis isit itio ion n. Example: P Co has acquired all of the share capital of S Co (12,000 $1 shares) by issuing 5 of its own $1 shares for every 4 shares in S Co. The market value of P Co’s shares was $6 at the date of acquisition. The fair value of the net assets of S Co at the date of acquisition was $75,000 Require Req uire:: Calculat Calculate e Goodwill Goodwill
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Non – controlling controlling Interests Interests Principle Consolidation as if you own everything then show the extent to which you do not own. Definition A proportion of the net assets of the Sub. Co in fact bel belong ongss to investors from outside the group wh which we call Non-contr Non-c ontrolling olling Interests Interests (NCI) Recognition equi uity ty sect sectio ion n of the conso NCI is sh NCI show own n in the eq consolid lidat ated ed statement of financial financial position Measurement At it itss fair fair va valu lue e pl plus us th the e NCI’ NCI’ss sh shar are e of post post-a -acq cqui uisi siti tion on retained earnings and other reserves.
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Non – controlling controlling Interests Interests 2 methods allowed by IFRS 3 to calculate NCI Method NCI should1: beProportionate valued at a method proportionate share of the identifiable net assets of the subsidiary. Not recognise any go goodwill odwill for the NCI in NCI in the consolidated statement statement of financial position. Example: if the NCI in a subsidiary is Example: if 30% and the identifiable net assets of the subsidiary are $1,000,000, the NCI should be included in the consolidated statement statement of financial position at $300,000.
Method Metho d2 2:: FFair air value value metho method d
$ FV of NCI at acquisition X Plus NCI’s share of post-acquisition retained X earnings (& other reserves NCI at reporting date XX
Recognise the goodwi Recognise goodwill ll attributable attributable to the NCI in the consolidated statement statem ent of financial position, as at the date of acquisition. This goodwill cannot subsequently be re-valued, unless there is impairment and the goodwill should then be written down in value.
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Non – controlling controlling Interests Interests GW calculation when apply FV method Example: P Co acquired 90% of S Co for for $10,000,000. At this date the fair value of S Co’s net assets are $8,000,000 and the fair value of the NCI is $1,000,000. Calcul Calculate ate goodwill goodwill
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Intra – Group Trading A consolidation adjustments is required to remove unrealized-pr unrealized-profit ofit on intra-group trading. trading. When Parent Co sells goods to Sub. Co for profit, there are two matters arising: Parent Parent Co makes a profit b but ut the gro group does not make a sale sale or or achieve a profit un unti till an outs outsid ide e cus custome tomerr bu buy ys the the good goodss fr from om Sub. Sub. Co. purchases unsold unsold by by Sub Co at year end will be included in Any purchases Sub Co’s inventory, which is not the same as their cost to the group. Accounting treatm treatment: ent: Consolidation adjustment is required with the profit unrealized by the group. Dr Gr Grou oup p RE Cr Group Group inven invento tory ry (s (sta tate temen mentt of fin finan ancia ciall pos positi ition on)) GIANG HA ACCA
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Intra – Group Trading Example: Suppose that a holding company P Co buys goods for $ 1,600 and sells them to a wholly owned subsidiary S Co for $2,000. The goods are all still in S Co’s inventory at the year end and appear in S Co’s Co’s statement of financial position at $2,000. Require: • Inventory amount should be shown in Consolidated Consolidated FS? • Consolidated adjustment entry?
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Intra – Group Trading NCI and Int NCI Intra-gr -group trading ing (adjus justme men nt req requir uire when S sold prod pr oduc ucts ts to P) Where a subsidiary company which is not wholly owned is involved involved in intra-group trading within the group, remo remove ve the the whol whole e pr prof ofit it loading, charging the non-controlling interest with their proportion. Dr Group retained earnings Dr NCI Cr Group Inventory (statement of financial position) If P sold product to S just remove URP in the RE of Group (as Unrealized profit is include in RE of Parent that will not being shared attributed to NCI when calculation (URP in this case will not related to NCI)
Example: Same above example but in case P owned 80% of S Example: Same & S sold products to P GIANG HA ACCA
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Inter – company company Transa Transactions ctions Unrealised profit in non current asset transferred transferred within the group 1. If no non n cu curr rren entt as asse sett is so sold ld by pa pare rent nt to su subs bsid idia iary ry:: To elimin eliminate ate unrealise unrealised d profit: profit: Dr Group accumulated Profits (full (full amount of the profit) profit) Cr Consolidated Non current Asset(full Asset(full amount of the profit) To redu reduce ce the the exce excess ss depr deprec ecia iati tion on due due to th the e prof profit it load loadin ing: g: Dr Non current Asset (full amount of the excess depr depreciation) eciation) Cr Group Acc. Profits (parent’s (parent’s share of the excess deprecia depreciation) tion) Cr Non Controlling Interest (NCI share of the excess depreciation) Or just just ad adju just st the the ne nett URP URP by Dr Parent’s profit Cr Asset
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Inter – company company Transa Transactions ctions Unrealised profit in non current asset transferred transferred within the group
2. If th the e no non n cu curr rren entt as asse sett is so sold ld by su subs bsid idia iary ry to pa pare rent nt:: To elimin eliminate ate unrealise unrealised d profit: profit: Dr Group accumulated Profits (parent’ (parent’ss share of the profit) profit) Dr NCI Cr Consolidated Non current Asset Asset (full amount of the profit) To redu reduce ce the the exce excess ss depr deprec ecia iati tion on due due to th the e prof profit it load loadin ing: g: Dr Non current Asset (full amount of the excess depr depreciation) eciation) Cr Group Acc. Profits (full amount of the excess depreciation) depreciation)
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Inter – company company Transa Transactions ctions Illustration: Illustration: P, the holding company had acquired its 90% interest in S so some me ye year arss ag ago. o. Duri During ng th the e cu curr rren entt year year P so sold ld a moto motorr vehicle of book value $10,000 to S for $15,000. The remaining useful life of the asset is 5 years and the group depreciates fixed assets on a straight-line basis. P had made a profit of $5,000 on the sale. From the point of view of P as a separate entity, this $5,000 is realised profit. S, on the other hand would have debited the motor vehicle account at $15,000 and charged $3,000 as depreciation. The book value of the motor vehicle for S at the end of the current year will be $12,000. Howeve How everr, in the conso consolid lidat ated ed accoun accounts ts the deprec deprecia iatio tion n charge should be $10,000/5 years = $2,000 and the book value of the asset should be $8,000. GIANG HA ACCA
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Inter – company company Transa Transactions ctions Consolidation Adjustments Dr Group Res Reserve ervess $5,000 Cr Motor Ve Vehicle hicless $5,000 To eliminate transfer profits and reduce the motor vehicle to reflect its book value to the group i.e. as if there were no sale of the asset to S. The above entries will reduce the group's profit; and the motor vehicle will be entered entere d at book value to the group. Adjustmen Adju stmentt for overover-provi provision sion of deprec depreciati iation on Dr Accumulat Accumulated ed d depre epreciati ciation on $1,000 Cr Grou Group p reser reserves ves $900 Cr Non controlling interest $100 However, if the asset were purchased from P two years ago then the depre dep recia ciatio tion n adj adjust ustme ment nt would would be $10 $1000 00 x 2 = $2, $2,000, 000, acc accord ording ingly ly adjusted against group reserves and non controlling interest based on their respective shareholdings in subsidiary subsidiary.. After the fifth year year,, adjustments for unrealised profits and for depreciation will not be required, as the asset will be fully depreciated by then. Then reduce the seller's retained profits by $5,000 and increase the buyer's retained profits by $5,000.
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Acquisition of Sub Co part way through the year If a Pa Pare rent nt Co pu purc rcha hase sess a Su Sub. b. Co du durin ring g th the e year year,, for consolidation purpose, it will be necessary to distinguish:
• Profit earned before before acquisition --> calculation of goodwill goodwill • Profit Profit earned earned after after acquisiti acquisition on --> calculat calculation ion of retaine retained d earnings of group We al alwa ways ys ASSU ASSUME ME th tha at th the e Su Sub’ b’ss pr prof ofit itss accr accrue ue even evenly ly ov over er the year year.
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Consolidated Statement of Financial Position
SUMMARY of of KEY KEY LEARNING POINTS Purpose: To Purpose: To show the net assets which P controls and the ownership of those assets Net Asse setts, Share capital: Always 100% P plus 100% S providing P holds a majority of voting rights. Parent Co. only on ly (s (sim impl plyy rep epor orti tin ng to the par aren entt compa ompan ny’s y’s shareholders in another form) Re Reta taine ined d Earnin Earnings: gs: 100% Parent Co. plus group share of pos post-ac t-acqu quis isit itio ion n re reta tain ined ed re rese serv rves es of Sub. Sub. Co. Co. less less consolidation adjustments (show the extent to which the group actually owns total assets less liabilities) NCI: NCI NCI sh shar are e of Su Sub. b. Co Co’’s co cons nsol olid idat ated ed net net asse assets ts (inclu (includin ding g go goodw odwill) ill) (show (show the ex exten tentt to whic which h other other parties own net assets that are under the control of the parent company) GIANG HA ACCA
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The Consolidated Statement of Comprehensive Income
GIANG HA, FCCA, CPA
[email protected] 091 266 1988 268
268
Key Steps Combine items of PLs (P&S) in the consolidated PL Add 2 items: Profit attributable to:
Step 1
Owners of the parent Non-controlling interest
(T (To o list down all items of consolidated PL) Lump-sum items on the line by line basis
Step 2
Step 3 Consolidated adjustments: Cancel like items (Investment (Investment vs Equity of Sub; internal AR-AP; inventory); … Step 4
Prepare consolidated FS (= Lump-sum + adjustment adjustment)) GIANG HA ACCA
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Pre- and post-acqu post-acquisitio isition n profits profits When a parent acquires a subsidiary during a financial year, the the pr prof ofit itss of th the e su subs bsid idia iary ry have have to be divi divide ded d int into pre-acquis pre-a cquisition ition and post-acqu post-acquisitio isition n profits. profits.
• The pre-acquisition profit is used to calculate the goodwill. goodwill. • The pos post-a t-acqu cquisi isitio tion n pr profi ofitt (or (or loss loss)) is incl includ uded ed in th the e consolidat consol idated ed profit profit for the year
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Pre- and post-acqu post-acquisitio isition n profits profits Example: Entity P acquired 80% of the equity shares of Entity S at a cost of $750,000 on 1 October Year 2, when the net assets of En Enti tity ty S were were $600 $600,0 ,000 00.. En Enti tity ty P pr prep epar ares es its its finan financi cial al statements stat ements to 31 December each year. year. The income statement for each entity for the year to 31 December Year 2 was as follows. Require: Prepare a consolidated income statement for the year to 31 Dece De cemb mber er Year ear 2, assu assumi ming ng th ther ere e is no impa impair irme ment nt of goodwill during the year.
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Pre- and post-acqu post-acquisitio isition n profits profits P($)
S($)
400,000
260,000
Cost of sales
-200,000
-60,000
Gross profit
200,000
200,000
20,000
-
Distribution co costs
-50,000
-30,000
Administrative expenses
-60,000
-80,000
Other expenses
-20,000
-10,000
Finance costs
-10,000
-5,000
80,000
75,000
Income tax expense
-30,000
-15,000
Profit for the period
50,000
60,000
Revenue
Other income
Profit before tax
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Non-controlling interest in the consolidated income statement When there is a non-controlling interest (minority interest) in a subsidiary, the consolidated income statement should show:
• The post-acquis post-acquisition ition profit profit for the year for the group as a whole, who le, includ including ing all the post-a post-acqu cquisi isitio tion n pr profi ofitt of the subsidiary, and
• The amount amount of this total profit profit that that that is at attri tribut butabl able e to the par paren ent’ t’ss equity equity shareholders shareholders and the amount that is attr attrib ibut utab able le to th the e no nonn-co cont ntro roll llin ing g in inte tere rest st in in the subsidiary. GIANG HA ACCA
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Non-controlling interest in the consolidated income statement Example: Entity P acquired 300,000 shares in Entity S on 1 August Year 2. The total net assets of Entity S at 1 January Year 2 were $1,310,000. The statement of financial position of entity S at 31 December Year 2 was as follows. There has been no dividend payment by S in the year. The profit after tax of Entity P for the year was $250,000. There has been no impairment of goodwill. Required: Calculate Required: Calculate the consolidated profit for the year to 31 December Year 2, and the allocation of this profit between the equity equity ho holder lderss of the paren parentt and the non-c non-con ontro trollin lling g interest in S. GIANG HA ACCA
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Non-controlling interest in the consolidated income statement $000 Property, plant and machinery Current assets
1,200 550 1,750
Equity and liabilities Equity shares of $1 each
500
Share premium
300
Retained earnings
600 1,400
Liabilities
350 1,750 GIANG HA ACCA
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Intra – Group Trading Intra-group sale less and purchases are elim imiinated from the consolidat consol idated ed income stateme statement. nt. Example 1: A 1: A parent company and its subsidiary had the following revenue and cost of sales in the year just ended. The parent has owned the subsidiary for several years. Parent P Subsidiary S $000 $000 Revenue 500 300 Cost of sales 200 200 ––– ––– Gross profit 300 100 Included in these figures are sales of $50,000 by subsidiary S to parent P. The cost of these sales was $30,000. P has used all the items bought from S to make sales outside the group. Requir Req uire: e: Prepar Prepare e con consol solida idated ted IS GIANG HA ACCA
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Intra – Group Trading Intra-group sale less and purchases are elim imiinated from the consolidat consol idated ed income stateme statement. nt. Example 2: : 2: : Unrealised profit: 100%-owned subsidiary The revenue and cost of goods sold for a parent entity P and its 100%owned subsidiary S are a re shown below, below, for the year to 31 December Year 6. P S Revenue 750 500 Cost of goods sold 300 200 Gross profit 450 300 The subsidiary S made sales of $100,000 to P during the year. Of these sales, $30,000 is still held as inventory by P at the year-end. The mark-up on goods sold by S to P is 150% of cost. Required: Calcu Calcula late te the the reve revenu nue e and and cost cost of goo oods ds so sold ld fo forr the the consolidated income statement. GIANG HA ACCA
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Acquisition of part way through the year If a Sub. Co is acquired during the year, only the post-acquisition element of income statement balances are post-acquisition element inclu inc lude ded d on co cons nsol olid idat atio ion. n. Th The e REs REs in th the e cons consol olid idat ated ed statement of financial position comprise:
• 100% REs of the Parent Co • The group’s group’s share share of post-acquisition post-acquisition REs in the Sub. Co. It is necessary to split the entire income statement statement of the Sub. Co between pre-acquisition and post-acquisition proportions. Only the post-acquisition figures are included in the consolidat consol idated ed income stateme statement. nt. GIANG HA ACCA
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Acquisition of part way through the year Example: Prepare the consolidated income statement and movements Example: on retained earnings.
P Co
S Co
S Co (9/12)
$ 170,000 65,000 105,000 43,000 62,000 23,000 39,000
$ 80,000 36,000 44,000 12,000 3 32 2,000 8,000 24,000
$ 60,000 27,000 33,000 9,000 24,000 6,000 18,000
Revenue Cost of sales Gross profit Administrative expenses Profit before tax Income taxes Profit for the year Note: Re Retai tained ned earning earningss brough broughtt forw forward ard 81, 81,000 000 Re Retai tained ned earning earningss carrie carried d forwa forward rd 108,00 108,000 0
40,000 40,000 58, 58,000 000 GIANG HA ACCA
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Consolidat Consol idated ed Income Statement Statement SUMMARY of of KEY KEY LEARNING POINTS Purpose: Purpose: T To o show the result of the group for an accounting period as if it were a single entity. entity. Sales: 100 Parent Co + 100% Sub. Co excluding adjustment Sales: 100 for intra-group trading (to show the result of the group which were controlled by the Parent Co.) Intra – Group Sales: Strip out intra-g intra-grou roup p activity activity from from both sales revenue and cost of sales Un Un-r -rea eali lize zed d prof profit it on intr intraa-gr grou oup p tr trad adin ing: g: Goods Goods sold by Paren Parentt Co. increa increase se cost cost of sales sales by unreal unrealiz ized ed pr profi ofit. t. Goods sold by Sub. Co increase cost of sales by full amount of un-realized profit and decrease NCI by their share of unrealized profit NCI: NCI: (Sub. (Sub. Co’s profit after tax – unrealized profit) x NCI %
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Exemption from preparing consolidated FS
The parent is itse itself lf a whol holly ly-o -own wne ed subs subsiidia diary or ry or it is a partia par tially lly owned owned subsidiary subsidiary of another entity and its other
owner owners, s, including inclu ding those vot e, ha have ve been bee n informed about abonot ut,, otherwise an and d do not noentitled t ob obje ject ct toto, to,vote, th the e paren par entt not presen presentin ting g consol consolida idated ted financial financial statements statements Its securities are not publicl publicly y traded It is not in th the e pr proc oces esss of issu suiing securities in public securities markets; and The ultimate or intermediate parent parent publishes consolidated consolidated finan fin anci cial al st stat atem emen ents ts th that at co comp mply ly with with In Inte tern rnat atio iona nall Financial Reporting Standards
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Point Po int to note in preparing consolidated FS
In most cases, all group companies companies will prepare accounts accounts to
the sam same e re repor portin ting g date. date. if note the subsidiary may prepare additional statements for consolida consolidation tion purposes. purposes. If If this this is b, th the e su subs bsid idia iary ry provided prov ided the gap between between the reporting reporting dates is three mont mo nths hs or le less ss..
Consoli Consolidat dated ed financ financial ial st stat ateme ement ntss shoul should d be prepar prepared ed using the sam same e accoun accountin ting g polici policies es for for like transactions and other events in similar circumstances.
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Intra Group transactions (Associates) IAS 28 states that the investor's share of unrealized profits and losses on transactions between investor and associate should be eliminated in the same way as for transactions between a parent and its subsidiaries (para. 28). It is important to remember that only the group's share is eliminated. eliminated. Exam focus point The Financial Reporting syllabus was amended for exams from September 2022 to 2022 to make it clear that a distinction must be made between upstream and downstream transactions. You must pay attention to the direction of the transaction and ensure that you prepare the journal entries as will be shown bellow.
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Intra Group transactions (Associates) UPSTREAM DR Group share profit of Associates (SOPL) CR Inventory (SOFP)
Group % x URP
DOWNSTREAM DR Cost of sales (SOPL) CR Investment in Associate (SOFP)
Group % x URP
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Disposal 1. Pa Paren rent’ t’ss sepa separa rate te fin financ ancial ial sta statem temen ents ts This calculation is straightforwar straightforward: d: the proceeds proceeds are compared with the carrying amount of the investm investment ent sold. The investment investment will be held at cost or at FV if held as an investment in equity instruments: FV of considera of consideration tion received X Lesss carry Les carrying ing am amoun ountt of investment disposed of (X) Profit/Loss on disposal Profit/Loss X/(X)
Group up fin financ ancial ial sta statem temen ents ts 2. Gro (a) Statement Statement of profit/loss profit/loss and other comprehensive comprehensive income Consolidate results results and NCI to the date of disposal group up Profit Profit/Lo /Loss ss on dispo disposal sal Show the gro (b) Statement of Financial Position There will be no NCI and no consolida consolidation tion as as there is no subsidiary at the date the SOFP is being prepared GIANG HA ACCA
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Disposal 3. Gr Grou oup p Pr Prof ofit it/L /Los osss on di disp sposa osall The Profit/Loss disposal is the difference between This the salesgroup proceeds and theon group’s investment in the subsidiary. investment consists of the group’s share of the subsidiary’s net assets up to the date of disposal, plus any remaining goodwill in the subsidiary, minus any dividends received from the subsidiary during the period. The basis pro-forma pro-forma is as follows: follows: FV of consideration rre eceived X Less: Shar Share e of Net Net asse assetts at date of disp ispos osal al X Goodwill X Less NCI (X) (X) Profit/Loss in disposal X/(X) GIANG HA ACCA
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Disposal DISPOSAL OF SUBSIDIARIES
SEPARATE FS Gain/Loss on Disposal = Fair Value of Consideration received – Carrying amount of Invesment
CONSOLIDATED FS
CONSOLIDATED BS Remove GW, NCI & no consolidation
CONSOLIDATED PL (i) Conso Consoll for for tthe he period prior date of disposal (ii) Show Profit/ Loss on Disposal
Dr Cash Cash Cr Investment Cr Gain on Disposal
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Disposal CONSOLIDATED FS
Fair Value of Consideration received CONSOLIDATED PL Show Profit/ Loss on Disposal
(Net assets assets of Subsidi Subsidiary ary – NCI)
Goodwill
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Disposal Example: Hors Example: Horse e Co bo boug ught ht 80% of the the shar share e ca capi pita tall of Ho Hoof of Co fo forr $648,000 on 1 Oct 20X5. At the date Hoof Co’s retained earnings balance stoo stood d at $3 $360 60,00 ,000. 0. The SOFP at 30 Sep Sep 20X8 20X8 and and the summ summar ariz ized ed statement of profit or loss to that the date are given below (There is no other comprehensive income) Non - current assets Investment in Hoof Co Current assets Equity $1 ordinary shares Retained Earnings Current liabilities Profit before tax Tax Profit of the year
Horse Co $000 720 648 740 2,108
Hoof Co $000 540 740 1,280
1,080 828 200 2,108 306 (90) 216
360 720 200 1,280 252 (72) 180 GIANG HA ACCA
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Disposal Assume that profits accrue evenly throughout the year and no dividends have been paid. It is the group’s policy to value the NCI at its proportionate share of the FV of the subsidiary’s identifiable net asse assets ts Ignore taxation. Required: Calc Calcul ula ate Gain Gain/l /los osss on Disp Dispos osal al of Inv Inves estm tmen entt in Su Subs bsid idar ary y on Sepa Separa rate ted d FS an and d Co Cons nsol olid idat ated ed FS. FS. Assuming that Horse Co sells its entire holding in Hoof Co for $1,300,000 on 30 Sep 20X8 (Assume (Assume no impairment of GW)
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Chapter INVENTORY AND BIOLOGICAL ASSETS
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CONTENT
IAS 02:
Inventories
Agricultur ture e IAS 41: Agricul
IAS 20: Government Grant
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IAS 02 OBJECTIVE • T The he determination determination of cost of inventory inventory • Subsequent recognition as an expense • The cost formulas that are used to assign costs costs to inventories* inventories*
SCOPE Inventories include assets held for sale in the ordinary course of business:
• Wor orkk in pr prog ogre ress ss aris arisin ing g under construction contracts contracts
• Finished goods
• Financial instruments
• Work in process
• Bi Biol olog ogic ical al
• Raw materials
Inventories exclude:
asse assets ts
rela relatin ting g
agriculture GIANG HA ACCA
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IAS 02 Fundamentall Principle Fundamenta Inventories are required to be stated: Cost, or or • Cost,
• Net re reali alisab sable le va value lue Which ever is lower
• Quantity = physical count at reporting date
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IAS 02
COST
Co Cost stss of purc purcha hase se
- Less discounts/rebates discounts/rebates Cos Costs ts of conve conversi rsion on
Fixe xed d Pr Prod oduc ucti tion on co cost st should should be allocated at norm normal al NOTE: Fi capacity Oth Other er
cost cost incurr incurred ed in bringi bringing ng the inven inventor tories ies to their their present location and condition Cost EXCLUDES: EXCLUDES: • Abnormal waste waste
• Storage costs • Selling costs
• Administrative overheads unrelated to production • Foreign exchange differences arising directly
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COST METHODS
First In First Out Weighted average method GIANG HA ACCA
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IAS 02
DISCLOSURE
• Accounting policy for inventories inventories • Carrying amount of any inventories carried at fair value less costs to sell • Carr Carryin ying g amou amount nt of in inve vent ntor ories ies pled pledge ged d as se secu curi rity ty for liabilities • Cost of goods sold
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Inventoriess IAS 02: Inventorie
IAS 41:
Agriculture
Government Gra Grant nt IAS 20: Government
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IAS 41 SCOPE Agricultural activity:
• Management of biological biological transformation • Harvest of biological assets into agricultural agricultural produce
Excludes
• Land (IAS 16) • Intangible assets (e.g. quotas) (IAS 38) • Once harvested IAS 2 Inventories
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RECOGNITION
• Recognize Biological Biological assets if Probable future economic benefits Cost can be measured reliably Control
• Recognise at: at: Fai airr
val alue ue (“FV (“FV”) ”) minu minuss co cost stss to sell sell (N (NRV RV))
canno nott be det determi ermined ned,, us use e cos costt les lesss dep depreci reciati ation on/ / If FV can impairment
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IAS 41
MEASUREMENT
• Biolo Biologica gicall asset assetss within the scope of IAS 41 are measured on initial recognition and at subsequent reporting dates at fair value less ess es esti tima matted co cost stss to sell sell,, unless fair value cannot be reliably measured. [IAS 41.12]
• Agric Agricul ultu tura rall prod produc uce e is me meas asur ured ed at fair value less estimated costs to sell at the point of harvest. [IAS 41.13] Because harvested produce is a marketable comm commod odity ity,, ther there e is NO 'measurem 'measurement ent relia reliability bility'' exception for exception for produce.
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MEASUREMENT
• The gain on initial recognition of biological assets at fair value less costs to sell, and changes in fair value less costs costs to sel selll of bio biologi logica call ass assets ets dur during ing a per period iod,, are prof ofit it or loss loss.. [IAS 41.26] included in pr
• A gain ain on init initia iall re reco cogn gnit itio ion n (e (e.g .g.. as a result of harvesting)) of agri harvesting of agricultur cultural al prod produce uce at at fair value less costs to sell are included in profit or loss for the period in whic wh ich h it aris arises es.. [IAS 41.28] • All costs related to biological assets that are measured at fairr value fai value are re reco cogni gnised sed as expen expenses ses whe when n inc incurr urred, ed, other than costs to purchas purchase e biological assets. GIANG HA ACCA
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IAS 41
DISCLOSURE
• Diffe Differen rentt cla class ss of of asset: Neither Current asset Nor Noncurrent asset • Disclose Gain/loss on agricultural assets Description Methods and assumptions used in determining FV
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CONTENT
Inventoriess IAS 02: Inventorie
Agricultur ture e IAS 41: Agricul
IAS 20:
Government Grant
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IAS 20 • Governmen Governmentt gra grants nts are are ass assist istanc ance e by go gove vernm rnment ent in in the form of tr of tran ansf sfer erss of re reso sour urces ces to to an enterprise in return fo forr past past or fut futur ure e com compli plianc ance e wit with h cer certai tain n condi conditio tions ns relating to the operating activities of the enterprise • Grants related to assets are government grants whose primar pri maryy condi conditio tion n is tha thatt an ent enterp erpris rise e qua qualify lifying ing fo forr them should pur purchase chase,, con constru struct ct or othe otherwise rwise acquire long-t lon g-term erm ass assets. ets. Sub Subsid sidiar iaryy condi conditio tions ns ma mayy als also o be attached restricting the type or location of the assets or the periods during which they are to be acquired or held • Grants related to income are government grants other than those related to assets. GIANG HA ACCA
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IAS 20 Acco Ac coun unti ting ng Tre reat atme ment nt of Gr Gran ants ts Government grants, including non-monetary grants at fair reco cogn gnis ised ed un unti till th ther ere e is reas reason onab able le value, should NOT be re assurance that: assurance that: (a (a)) th the e en ente terp rpri rise se wil willl com ompl plyy wit ith h th the e co cond ndit itio ions ns attaching to them; and (b)
the gra grant ntss wil willl be re recei ceive ved. d.
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IAS 20 Gran Gr antt rel elat atin ing g to in inco come me Based on accruals concept Either treat as
As de defe ferr rred ed inco income me:: othe otherr inco income me
De Dedu duct ct fr from om rela relatted expe expens nse e
IF IT BECOMES REPAYABLE, treated as a change in estimate (IAS 8)
•
re repa paym ymen entt shou should ld be appli applied ed fi firs rstt agai agains nstt any any rela relate ted d un unam amort ortis ised ed deferred deferr ed credit credit (re (remai mainin ning g bal balance ance in def deferr erred ed income income a/ a/c), c),
• and any any ex excess cess should should be dealt with as an expense. GIANG HA ACCA
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IAS 20 Examp Example le 1: The fo follo llowi wing ng ex expen penses ses were were incurr incurred ed after after a natural disaster Year 2002 : 40,000 Year 2003: 50,000 Year 2004: 60,000 60,00 0 Government provided a grant of $75,000 to compensate the damages
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IAS 20 SOLUTION: Deferred Income Approach: recognise as other income (1st approach) 1. Record grant received: in 2002: (transfer ) of government grant (make a 2. Amortisation (transfer) transfer from Def Income to I/S every year) If de dedu duct cted ed from from th the e re rela late ted d expe expens nses es Approach Approach 1. Recor Record d grant received: Dr Cash 75,000 Cr Def income 75 2. Amortisat Amortisation ion = 75/3yrs 75/3yrs:: 25,000 DR Def income 25, CR I/S: expense GIANG HA ACCA
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IAS 20 SOLUTION: I/S extract Expense SOFP NCL CL
Y2002 (15,000)
25,000 25,000
Y2003 (25,000)
25,000
Y2004 (35,000)
-
Lets say, government requires a repayment of 30,000 in year 2, as the entity failed to comply with conditions. The repayment is first applied against the unamortised def income amounting to 25,000 and the excess of 5,000 is charged to P&L as an expense.
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IAS 20 Example 2: The 2: The entity bought a machinery for $300,000, with a useful life of 4 years. The govt provided a grant of $120,000 to compensate What if govt requires a repayment of 70,000 at the end of Y2?
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IAS 20
SUMMARY of of ACCOUNTING ACCOUNTING TREATMENT GRANT RELATED TO ASSET
as deferred income, DR Cash CR Deferred income/govt grant And amortised by: DR Deferred income CR I/S
by deducting the grant from the asset's carrying amount DR CASH CR ASSET results in reduced depreciation charge c harge
Income Statement extract Income: amortisation of govt grant Expense: depreciation Balance sheet extract Non current asset Cost Less: Accumulated depreciation NCL: Deferred Income/ GG CL: Deferred Income / GG
Income Statement extract Expenses: depreciation (reduced amt) Balance sheet extract Non current asset Cost Less: Accumulated depreciation
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IAS 20 Gran Gr antt re rela lati ting ng to AS ASSE SET T: If a gr gran antt be beccom omes es repa repay yab able le treated as a change in estimate grant related to an asset – if deferred
grant related to an asset – if deducted from asset
Dr Deferred income Dr Income statement Cr cash, No additional depreciation
Th The e re repa paym ymen entt sh shou ould ld be ttre reat ated ed as increasing the carrying amount of the asset. Dr Asset Cr Cash Cumul Cumulat ativ ive e dep depre recia ciati tion on wh whic ich h wou would ld have been charged had the grant not been received should be charged as an expense (DR I/s CR Asset GIANG HA ACCA
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Chapter PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS GIANG HA, FCCA, CPA
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IAS 37 OBJECTIVE To ensur ensure e that: that:
appropriate recognition criteria
and measurement bases are applied to:
• Provisions • contingent contingent liabilities and • contingent assets and that sufficient information is disclosed in the notes to
the financial statements
• to enable users to understand their nature, timing and amount.
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IAS 37 CONCEPT
a provision should be recognised only when there is a liability
planned future expenditure is excluded from recognition
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IAS 37 SCOPE EXCLUDE:: Obligatio Obligations ns and contingenc contingencies ies arising arising from: EXCLUDE • financial instruments instruments carried at at fair fair value
• non-onerous executory executory contracts contracts • insurance company company policy liabilities Items Ite ms cover covered ed by other other standa standards rds Contracts - IAS Construction Contracts Income Taxes - IAS 12 Leases - IAS 17 Employee Benefits – IAS 19
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IAS 37
DEFINITIONS
Provision • A liability of uncertain timing or amount.
Liability • Present obligation as as a result of past events • Settlement is expected to result in an outflow of resources (payment)
Contingent liability • a possible obligation depending on whether some uncertain future event occurs, or • a present obligation but payment is not probable or the amount cannot be measured reliably GIANG HA ACCA
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DEFINITIONS
Provision • A liability of uncertain timing or amount.
Liability • Present obligation as as a result of past events • Settlement is expected to result in an outflow of resources (payment)
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IAS 37
DEFINITIONS
Contingent liability • a possible obligation depending on whether some uncertain future event occurs, or • a present obligation but payment is not probable or the amount cannot be measured reliably
Contingent asset • a possible asset that arises from past events, and existence will be confirmed only by • whose existence the e th
occu occurr rren ence ce or no non-o n-occ ccur urre renc nce e of on one e or more more uncertain future events
not wholly within the control of the enterprise. GIANG HA ACCA
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DEFINITIONS
An obligating event is an event that: therefore, • creates a legal or constructive obligation and, therefore,
• results in an enterprise having no realistic alternative but to settle the obligation
A constructive obligation • arises if past practice creates a valid expectation expectation on the part of a third party
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IAS 37 RECOGNITION CONDITION PROVISION • a present obligation obligation (legal (leg al or constru constructiv ctive) e) has arisen • as a result of a past event (the obligating event), • payment is probable probable ('more likely than not'), and • the amount can be estimated reliably
CONTINGENT LIABILITY ILITY CONTINGENT LIAB • (A possible possible obliga obligation tion ) is • disclosed but not accrued accrued . • disclosure - not required if payment is remote CONTIN CONTINGENT GENT ASSET ASSETS S • not to be recognised recognised • be disclosed where an inflow of economic benefits is probable GIANG HA ACCA
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MEASUREMENT
PROVISION • the best estimate of the expenditure required • to settle the present obligation at the balance sheet date For on one e – of offf ev eve ents • measu measure red d at th the e most most likely amount Exam Exampl ple: e: re rest stru ruct ctur urin ing, g, en envir vironm onmen enta tall cleanclean-up, up, settlement of a lawsuit
For lar large ge pop popula ulatio tions ns of ev even ents ts • measu measure red d at a prob probab abil ilit ityyweighted expected value Example: Exam ple: warra warrantie nties, s, custome customer r refunds
• To be used for the purpose for which they were originally recognised • Review and adjust provisions at each balance sheet date
If outflow no longer probable, reverse the provision to income. GIANG HA ACCA
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IAS 37
ADJUSTMENTS
Best estimate • take into account the risks and uncertainties that surround the underlying events. • should be discounted to their present values, where the effect of the time value of money is material.
Reimbursem Reimbursement ent by another party • recognised as a reduction of the required provision if the reimbursement is virtually certain
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IAS 37
Future Events
Reasonable changes in applying existing technology
Possible gains on sale of assets
Changes in legislation
Forecast
Ignore
Consider only if virtually certain to be enacted
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IAS 37
Restructurings
Restructuring: A programme that is planned and is controlled by management and materially changes one of two things.
• The scope of a business undertaken undertaken by an entity business is conducted • The manner in which that business (IAS 37: para. 10) A restruc restructur turing ing is: termination of a line of business Sale or termination Closure of business business locations
structure Changes in management structure reorganization of company Fundamental reorganization
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Restructurings
Restructu tructuring ring Provi Provisions sions:: Res PROVISION TO BE MADE after a binding sale sale agreement agreement Sale of oper operation ation only after (If after B/S date, disclose but do not accrue)
Closure or Closure or Re-organisation
only after a detailed formal plan is ad adop opte ted d an and d an anno noun unce ced d pu publ blic icly ly-board decision -not enough
Should in incl clu ude only nly direct direct ex expen pendit diture uress caus caused ed by the restruct rest ructuring, uring, not costs costs that that associa associated ted with the ongoing ongoing activities of the enterprise
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IAS 37
Restructurings
Restructu Res tructuring ring Provi Provisions sions:: PROVISION TO BE MADE
Future operating losses
• should not be recognised for future operating losses, even in a restructuring
Restructuring provision on acquisition (merger)
• for terminating employees, cl clos osin ing g faci facili liti ties es,, and and elimi limina nati ting ng product prod uct lines • CONDITIONS announced at acquisition and, • a detailed formal formal plan is adopted adopted 3 monthss after month after acquisitio acquisition n GIANG HA ACCA
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IAS 37 Decommissioni Decommissioning ng or other environme environmental ntal costs These costs usually arise at the end of the useful life of an asset. A provision should only be recognized if there is a present obligation as a result of a past event, eg if the future decommissioning costs are legally required. If the provision relates relates to an a asset, sset, then it can be capitalized as part of the cast of the asset. The decommissioning or other environment environmental al costs often occur many years in the future, and so the future cost should be discounted to present value. For example, when an Oil Company initially purchases an oilfield it is put under a legal obligation to decommission the site at the end of its life. IAS 37 considers that a legal obligation exists on the initial expenditure on the field and therefore the provision should be recognized immediately. The view is taken that the cost of purchasing the field in the first place is not only the cost of the field itself but also the costs of putting it right again. Thus, the costs Of decommissioning decommissi oning mag be capitalized.
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IAS 37 Decommissioni Decommissioning ng or other environme environmental ntal costs Exam focus point Questions in Part B of your exam may ask multiple questions about a topic, and as we have already seen in earlier examples, the questions mag cover more than one area. The following activity tests both your understanding Of provisions (IAS 37) and also the effect on the non- current assets (IAS 16).
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IAS 37
Onerous contracts
An Onerous contract is a contract entered into with another party under which the unavoidable costs of fulfilling the terms Of the Contract exceed any revenues expected to be received received from the goods or services supplied or purchased directly or indirectly under the contract and where the entity would have to compensate the Other party if it did not fulfil the terms of the contract (IAS 37: para. 6B). An example might be a three-year contract to make and supply a service to a third party. The seller can no longer provide the service, so it becomes ‘onerous’, and the costs to the seller would be the costs of outsourcing the provision of the service or any penalties for nonprovision.
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IAS 37
Onerous contracts
If an entity has a contract that is onerous, the present obligation under the contract should be recognised as recognised as a provision (IAS 37: Para. 66). The obligation is measured as: Unavoidable costs of meeting an obligation are the lower of:
Cost of fulfilling the contract
Penalties from failure to fulfil the contract
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DISCLOSURES Reconciliation for each each class of provision:
Opening balance
xxx
Add: Additions
xxx
Less: Les s: Used Used (amoun (amounts ts charg charged ed again against st the pr provi ovisio sion) n)
xx xxxx
Released (reversed)
xxx
Add: Unwinding of the discount
xxx
Closing balance
xxx
Prior year reconciliation is not required
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IAS 37
DISCLOSURES
Fo Forr each each cl clas asss of prov provisi ision on,, a brie brieff desc descri ript ptio ion n of
• Nature • Timing • Uncertainties • Assumptions • Reimbursement
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Chapter
14 FINANCIAL INSTRUMENT GIANG HA, FCCA, CPA
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CONTENT
IAS 32: Financial Instrument
- Presentation
IFRS 7: Financial Instrument
- Disclosure IFRS 9: Financial Instrument
- Measurement, Recognition
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Financial Instrument Financial Asset (Entity A)
DEFINITIONS
Any contract
Financial Liability/ Equity (Entity B)
A finan financial cial asset asset is any asset that is: • Cash • A contractual contractual right to receive receive cash or another financial financial asset from another entity assets/liab ilities with • A contractual right to exchange financial assets/liabilities another entity under conditions that are potential favourable A finan financial cial liability liability is any liability that is a contractual obligation: • To deliver cash or another financial financia l asset to another entity, or • To exchange financial financial instruments with another entity entity under conditions that are are poten potentially tially unfavourable, unfavourable, or That at will will or ma mayy be set settl tled ed in th the e enti entity’ ty’ss ow own n equi equity ty • Th instruments GIANG HA ACCA
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Financial Assets Initial measurement
MEASUREMENT @ FV
• Transaction costs are excl exclud uded ed if the the asset is fair air va valu lue e th thrrough ough profi rofitt or lo loss ss and and incl includ uded ed if categorised categorised at fair value through other comprehensive income or amortised amor tised cost
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Financial Assets
MEASUREMENT
Equity Instruments
Default
May select
Fair value through profit or loss
Fair value through other comprehensive income
Transacti Transaction on costs costs associated with the purchase of these investments are expensed, not capitalised
Transact Transaction ion costs costs are are capitalized. The investments are revalued revalued to to fair value each year end, with with the gain gain/los /losss bei being ng taken take n to an investmen investmentt reser reserve ve in equity equity and shown in other comprehensiv comprehensive e income. similar to a revaluation of PPE. The main difference is that there can be a neg ega ative investmen inve stmentt reserv reserve e sold,, the investment FVOCI investme FVOCI investment nt is sold reserve is ta tak ken to PL 342
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Financial Assets Debt Instruments
Normally Fair value through profit or loss
MEASUREMENT
May select AMORTIZED COST If 2 test passed: (1) bus busine iness ss mod model el tes test: t: entity's business model is to hold the financial fina ncial asset to collect the contractual cash flows (rather than to sell (2) cont contrac ractual tual cash flow char characte acterist ristics ics test test:: contractual terms of the financial asset give rise on spec specif ified ied date datess to cash cash flow flowss that that ar are e solel solelyy payments of principle and interestt on the principle outstandin interes outstanding. g.
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Financial Assets Example 1: A 1: A company invests $5,000 in 10% loan notes. The loan notes are repayable at a premium after 3 years. The effective rate of interest inter est is 12%. The company company intends to collect the contractual contractual cash flows which consist solely of repayments of interest and capital and have therefore chosen to record the financial asset at amortised cost. Wha hatt amou amount ntss will will be sh show own n in the state tem men entt of pr prof ofit it or loss loss and and stat statem emen entt of fi fina nanc ncia iall posi positi tion on for for th the e fi fina nanc ncia iall asse assett fo forr year yearss 1–3? Example 2: A 2: A company invested in 10,000 shares of a listed company in November 20X7 at a cost of $4.20 per share. At 31 December 20X7 the shares have a market value of $4.90. Prep Prepare are extract extractss from the statement of profit or loss for the year ended 31 December 20 2007 07 and and a stat statem emen entt of finan financia ciall posi positi tion on as at th that at date date..
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Financial Assets Example 3: A 3: A company invested in 20,000 shares of a listed company in October 20X7 at a cost of $3.80 per share. At 31 December 20X7 the shares market valueinof not planning on have sellinga these shares the$3.40. short The termcompany and electare to hold them as fair value through other comprehensive income. Prepa epare extr tra acts cts fr fro om the statem emen entt of prof ofit it or los loss for the yea earr en ende ded d 31 De Dece cemb mber er 20X7 20X7 an and d a sta stateme tement nt of fi fina nanc ncia iall po posi siti tion on as at th tha at da date te..
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Financial Liabilities
Initial measurement
MEASUREMENT
@ FV
Subsequent • Should classify all financial liabilities (other than liabilities held for trading trading and derivativ derivatives es that that are liabilities) liabilities) at amortised amor tised cost The amort amortise ised d cost cost metho method d is the same as for debt debt • The instruments under fin finan ancia ciall assets assets,, but instead of having interest income and a year end asset there will be a finance cost and year end liability
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Financial Liabilities Example 1: A 1: A company issues 5% loan notes at their nominal value of $20,000 with an effective rate of 5%. The loan notes are repayable at par years. 1. after Wha hatt4amou am ount nt will will be re reco cord rded ed as a fi fina nanc ncia iall liab liabil ilit ity y when when the the loan loan note notess ar are e issu issued ed? ? 2. Wha hatt amou amount ntss will will be sh show own n in the the st sta atemen ementt of pr prof ofit it or loss loss an and d stat stateme ement nt of fin financ ancial ial positi position on for year yearss 1–4 1–4? ?
Example 2: A 2: A company issues 0% loan notes at their nominal value of $40,000. The loan notes are repayable at a premium of $11,800 after 3 years. The effective rate of interest is 9%. hatt amou amount nt will will be re reco cord rded ed as a fi fina nanc ncia iall liab liabil ilit ity y when when the the 1. Wha loan loan note notess ar are e issu issued ed? ? 2. Wha hatt amou amount ntss will will be sh show own n in the the st sta atemen ementt of pr prof ofit it or loss loss an and d stat stateme ement nt of fin financ ancial ial positi position on for year yearss 1–3 1–3? ?
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Preference Share IRREDEEMABLE classified classif ied as EQUITY (unles (unlesss the terms terms of the share carries carries a fix fixed ed di divi viden dend, d, in wh whic ich h case case they they are are considered to be a financial liability)
REDEEMABLE classified as FINANCIAL FINAN CIAL LIABILITIE LIABILITIES S DIVIDENDS P/L
Example: On 1 April 20X7, a company issued 40,000 $1 redeemabl Example: On redeemable e pref prefer eren ence ce share sharess wi with th a coupon coupon rat rate e of 8% at par. par. Th They ey are are redeemab rede emable le at a large large premiu premium m which which gives gives them an effect effective ive finance cost of 12% per annum. How Ho w wou would th thes ese e redee edeem mable pref referen erence ce shares res appear in the financial statements for the years ending 31 March 20X8 and 20X9? 348
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Compound Instrument
DEFINITION
• A co comp mpou ound nd inst instru rume ment nt is is a financial instrument that has chara cha ract cteris eristic ticss of both equity equity and liabilit liabilities ies,, suc such h as a convertible loan.
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Compound Instrument
SPLIT ACCOUNTING
LIABILITIES • Bas ase ed on pre prese sen nt valu lue e of futu futurre cash cash flo flows as assu sumi ming ng on co conv nver ersi sion on – Appl Apply y di disc scou ount nt rate rate equi equiva vale lent nt to in inte tere rest st on simi simila larr nonc noncon onve vert rtib ible le debt debt inst instru rume ment nt (i.e. (i.e. discount the cash flows at the market rate of interest).
EQUITY ELEMENT (OPTIONS) • Equit quity y = remai aind nder er (i.e. (i.e. deduct the present value of the debt from the proceeds of the issue).
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Compound Instrument Example: A company issues 2% convertible bonds at their nominal Example: A value of $36,000. The bonds are are for co conv nvert ertibl ible e atofany an y tim time e up to matur mathe turity ity into intowill 40 ordinary shares each $100 bond. Alternatively bonds be redeemed at par after 3 years. Similar nonconvertible nonconvertible bonds would carry an interest rate rate of 9%. The present value of $1 payable at the end of year, based on rates of 2% and 9% are as follows: End of year 2% 9% 1 0.98 0.92 2 0.96 0.84 3 0.94 0.77 1. What amounts will be shown as a financial liability and as equit equity y whe when n the con conver vertib tible le bonds bonds are are issued issued? ? 2. Wha hatt amou amount ntss will will be sh show own n in the the st sta atemen ementt of pr prof ofit it or loss loss an and d stat stateme ement nt of fin financ ancial ial positi position on for year yearss 1–3 1–3? ?
351
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Factoring of Receivable The transaction is in substance a genuine sale of the debts for less than market price, with the entity retaining no continuing interest interest in the debts
The transaction is in substance a secured loan if the risk of non-payment remains with the entity that sold the debts
Trade receivable is derecognized
Trade receivable is not derecognized derecogniz ed and a corresponding liability is also recognized
Factors that tend to indicate a secured loan: • The debt d ebt factoring company can claim back unpaid amounts. • Interest is charged on monies advanced by the debt factoring company. 352
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15
Chapter IFRS 15 - REVENUE FROM CONTRACTS CONTRACTS WITH CUSTOMERS GIANG HA, FCCA, CPA
[email protected]
091 266 1988
177 17 7 353
IFRS 15 • IFRS 15 has replaced the previous IFRS on revenue recognition, IAS 18 Revenue and IAS 11 Construction Construction Contracts. Contracts. • It uses a principles principles-ba -based sed 5-step 5-step app approach roach to to apply to contact with customers. Step 1
Identification of contracts
Step 2
Identification of performance obligations (goods, services or a bundle of goods and services)
Step 3
Determi Determinati nation on of transact transaction ion pri price ce
Step 4
Allocation of the price to performance performance obligati obligations ons
Re Recog cognit nition ion of re reven venue ue when/ when/as as perfo performa rmanc nce e obligations are satisfied
Step 5
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IFRS 15
DEFINITIONS
Contract An agreement between two or more parties that creates • enforceable rights and obligations.
Income • Increases in economic benefits during the accounting accounting period in the form of increasing assets or decreasing liabilities
Performance obligation • A promise in a contract to transfer transfer to the customer either: o o
a good or service that is distinct; or a serie iess of distinct goods or serv rviices that are substantially the same and that have the same pattern of transfer to the customer
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IFRS 15
DEFINITIONS
Revenue • In Inccome ome aris arisin ing g in th the e cou ourrse of an enti entity’ ty’ss ordi ordina nary ry activities.
Transaction price • The amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer.
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IFRS 15 Identification of contracts The contract does not have to be a written one, it can be verbal or implied. In order for IFRS 15 to apply the following must mu st all be met met: The contract is approved approved by all parties The rights and payment terms can be identified The contract has commercial substance substance It is probable that revenue will be collected
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IFRS 15 Identification of contracts If the goods or services that have agreed to be exchanged under the contract are distinct (i.e. distinct (i.e. could be sold alone) then alone) then they should be accounted accounted for separately. separately. If a series of goods or services are substantially the same they are treated as a single performance obligation.
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IFRS 15 Identification of contracts Illustration Illustra tion – Performan Performance ce obligatio obligations ns LiverTech is a computer business that primarily sells computer hardware. As well as selling computers, it also supplies and installs the software to its customers and provides a technical su supp ppor ortt pack packag age e over over a nu numb mber er of year years. s. Th The e bu busi sine ness ss commo commonly nly sells sells the suppl supplyy and and instal installa latio tion, n, and techni technica call suppor sup portt in a combi combined ned go goods ods and servic services es con contr trac act. t. The combi combined ned goods goods and and service servicess contr contrac actt has tw two o separ separat ate e performance obligations, which would need to be separated out and recogniz recognized ed separatel separatelyy. The installa installation tion of softwar software e would wo uld be recogn recogniz ized ed once once co compl mplete ete and and the pr provi ovisio sion n of technical services over the period of the support service.
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IFRS 15 Determination of transaction price Th The e amou amoun nt th the e sell sellin ing g pa part rtyy expe expect ctss to re rece ceiv ive e is th the e transaction price. This should consider the following: • Significant financing components • Variable consideration considerati on • Refunds ad rebates (paid to the customer!) Ex Exam ampl ple e 1 – Trans ransac acti tion on pric price e Luckers Co. sells a car to a customer for $10,000, offering interest-free interest -free credit for a three-year period. The car is delivered to the custom customer er immedi immediat ately ely.. The annual annual marke markett rate rate of inte intere rest st on th the e pr prov ovis isio ion n of co cons nsum umer er cr cred edit it to simi simila larr customers is 5%. What is the transaction price? GIANG HA ACCA
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IFRS 15 Determination of transaction price Ex Exam ampl ple e 1 – Trans ransac acti tion on pric price e - SOLU SOLUTI TION ON The three-year interest-free credit period suggests that the $1 $10, 0,00 000 0 sell sellin ing g pr pric ice e in incl clud udes es a sign signif ific ican antt fina financ ncin ing g component. The selling price is therefore discounted discounted to present value based on a discount rate that reflects the credit characteristics of the party (customer) receiving the financing i.e. 5%. Therefore the transaction price is $10,000/(1.05)3 = $10,000 x 0.8638 = $8,638.
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IFRS 15 Allocation of the price Th The e pr pric ice e is allo alloccated ted pr prop opor orti tion ona ately tely to th the e sepa separrate performance obligations based upon the stand-alone selling price. Ex Exam ampl ple e 2 – Allo Alloca cati tion on of pr pric ice e Richer Co. sells home entertainment systems including a twoyear repair and maintenance package for $10,000. The price of a home home ente entert rtai ainm nmen entt sys yste tem m with withou outt th the e re repa pair ir an and d maintenance contract is $9,000 and the price to renew a twoyear maintenance package package is $2,000. How is the the $1 $10, 0,0 000 con contra tract pri rice ce allo alloccated ted to th the e sepa separrate performance obligations? Note: Ignore any discounting and time value of money GIANG HA ACCA
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IFRS 15 Allocation of the price Th The e pr pric ice e is allo alloccated ted pr prop opor orti tion ona ately tely to th the e sepa separrate performance obligations based upon the stand-alone selling price. Ex Exam ampl ple e 2 – Allo Alloca cati tion on of pr pric ice e - SOL SOLUTIO UTION N The performance obligations and allocation of total price are as follows: Provision of home cinema system system (9,000/11,000 × $10,000) = $8,182 Provision of maintenance maintenance contract contract (2,000/11,000 × $10,000) = $1,818
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IFRS 15 Recognition of revenue • Once co cont ntro roll of good goodss or se serv rvic ices es tr tran ansf sfer erss to the customer, the perfo performa rmance nce oblig obligati ation on is satis satisfied fied and and revenu revenue e is recognized. This may occur at a sing single le poin pointt in time time,, or over a pe peri riod od of time time.. • If a performa performance nce obligation obligation is satisfied satisfied at a sing singlle poin oint in time,, we should time should co consi nsider der the follo followin wing g in assess assessing ing the transfer of control: right ht to pa payme yment nt for for the asset o Present rig legal al title title to to the asset o Transferred leg physical sical possession possession of of the asset o Transferred phy risk skss and and re rewa warrds ds of of ownership to the o Transferred the ri customer o
Customer has accepted accepted the the asset. GIANG HA ACCA
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IFRS 15 Recognition of revenue Exa Example mple 3 – IF IFR RS 15 (1 (1)) Telephonica sells mobile phones, selling them for “free” when a customer signs up for a 12 month contract. The contract costs the customer $45 per month. Explain how the revenue should be recognized in Telephonica’s elephonica’s financial statements statements Note: Not e: Vodapho odaphone ne sells sells mobile mobile ph phone oness witho without ut a monthl monthlyy contract, selling the handset for $480. Call and data charges are $20 per month. Ignore discounting and the time value of money
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IFRS 15 Recognition of revenue Exa Example mple 3 – IF IFR RS 15 (1 (1)) - SOL SOLUTIO UTION N 1. Identify the contract: contract: Signed agreement 2. Identify the separate separate performance performance obligations: obligations: Sale of handset Provision of calls calls and data service 3. Determi Determine ne the transaction price: $540 = $45 x 12 months months 4. Allocate transaction price to performance performance obligations: obligations: Standalone prices (using Vodaphone): $720 (= $480 + (12 months x $20) Handset Handset = 480/720 480/720 x 540 = $360 Calls and data = 240/720 x 540 = $180 5. Recognise revenue revenue as each each performance performance obligation obligation is satisfied Handset (goods) = at Calls and data (services) = over 12 months GIANG HA ACCA
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IFRS 15 Recognition of revenue Exa Example mple 4 – IF IFR RS 15 (2 (2)) LiverTech is a computer business that primarily sells computer hardware. As well as selling computers, it also supplies and installs the software to its customers and provides a technical support package over two years. The business commonly sells the the su supp pply ly an and d in inst stal alla latio tion, n, an and d te tech chni nica call su supp ppor ortt in a combined goods and services contract. contract. The combined goods and services contract sells for $1,600, but if sold separately the supply and installation is sold for $1,500 and the technical support for $500. If LiverTech sold a combined contract on 1 July 20X7, de demo mons nstr trat ate e how how th the e tran transa sact ctio ion n would ould be pr pres esen ente ted d in th the e
fina financ ncia iall stat statem emen ents ts fo forr the the year year ende ended d 31 Dece Decemb mber er 20X7 20X7.. GIANG HA ACCA
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IFRS 15 Recognition of revenue Exa Example mple 4 – IF IFR RS 15 (2 (2)) - SOL SOLUTIO UTION N 1. Identify the contract: Signed agreement 2. Identify the separate performance obligatio obligations: ns: - Suppl Supplyy and installa installation tion servic service e - Technical echnical support support 3. Determine the transaction price: Combined contract price = $1,600 4. Allocate transaction price to performance obligations: - Standalone price(supply and installation) installation) = $1,500 - Standalone price (technical support) = $500 - Suppl Supplyy an and d inst installa allation tion = 1,500/2,000 1,500/2,000 x 1,600 1,600 = $1,200 $1,200 - Technical echnical support support = 500/2,000 500/2,000 x 1600 = $400 5. Recognise revenue as each performance obligation is satisfied - Supply and installation installation = on installation installation (1 July 20 20X7) X7) - Technical support support = over tw two o years years (1 July 20X7 to 30 June 20X9) GIANG HA ACCA
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IFRS 15 Recognition of revenue Exa Example mple 4 – IF IFR RS 15 (2 (2)) - SOL SOLUTIO UTION N SFP (ex (extra tract) ct) Non-curren Non-c urrentt liabilities liabilities Deferred income: 100 Current liabilities Deferred income: 200 (=12/24 x 400) SPL (ex (extra tract) ct) Revenue (=1,200 + (6/24 x 400)
1,300
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IFRS 15 Performance obligations over time If a perfo performa rmance nce oblig obligati ation on is tr trans ansfe ferr rred ed over over time, time, the completion of the performance obligation is measured using either of the following methods:
Output Outp ut meth method od – revenue is recognized based upon the value to the customer, customer, i.e. work certified.
Output method =
Work certified to date Total contract revenue
In Inpu putt meth method od – revenu revenue e is recogn recogniz ized ed based based upon upon the amounts the entity has used, i.e. costs incurred or labor hours. Costs to date
Input method (cost based) =
Total estimated costs GIANG HA ACCA
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IFRS 15 Performance obligations over time Calculate contract assets or contract liabilities: $ Revenue recognized to date Less: Amount invoiced to date Contract asset/ (liabilities)
X (X) X/(X)
If the entity cannot cannot reasonably reasonably measure the outcome of a performance obligation (e.g. at the early stage of a contract) but the entity expe expect ctss to recover the recover the costs incurred Recog Recognize nize revenue revenue only only to the ex exten tentt of cos costs ts incurred
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IFRS 15 Performance obligations over time Example 5 – Performance obligations over time and the st stat atem emen entt of prof profit it or lo loss ss (1 (1)) Alex commenced a three year building contract during the year-ended 31 December 20X4 and continued the contract during 20X5. The details of the contract are as follows: $m Total contract value Costs incurred to date @ 20X5 Estimated costs to completion Work certified as completed in 20X5 Stage of completion @ 20X5 Profit recognized to date @ 20X4 Amount invoiced
45 20 12 15 70% 3.3
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IFRS 15 Performance obligations over time Example 5 – Performance obligations over time and the st stat atem emen entt of prof profit it or lo loss ss (1 (1)) Show how this contract would be dealt with in the statement of profit or loss for the year ended 31 December 20X5. Where not profit can be calculated if contracts spanning more than one accounting period, i.e. it is loss making, then the revenue is limited to the recoverable recoverable costs.
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IFRS 15 Performance obligations over time Example 5 – Performance obligations over time and the st stat atem emen entt of pr prof ofit it or lo loss ss (1 (1)) – SOL SOLUTIO UTION N $m Revenue (= work certified in year) 15.0 Cost (Balancing) (9.2) Profit (9.1 (W) – 3.3) 5.8 Working: Total revenue Total costs (20.0 + 12.0) Profit
$m 45 32 13
x 70% (Stage of completion @ 20X5) 20 X5)
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IFRS 15 Performance obligations over time Example 5 – Performance obligations over time and the st stat atem emen entt of pr prof ofit it or lo loss ss (1 (1)) – SOL SOLUTIO UTION N $m Revenue (Recognized (Recognized to date: 70% * 45) 31.5 Amount billed(AR) (20) Contract asset 11.5
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IFRS 15 Specifics 1. Principal vs agent When a third party is involved in providing goods or services to a customer, the seller is required to determine whether the nature of its promise is a performance obligation to: specified goods goods or servic services es itself (principal) or • Provide the specified • Arrange for a third party to provide those goods or services (agent)
2. Repurchase agreements When a vendor sells an asset to a customer and is either required, or has an option, to repurchase the asset. The legal form here is always a sale sale follo ollowe wed d by a purc purcha hase se at a late laterr date date.. The The econ econom omic ic su subs bsta tanc nce e is more more lik likely ely to be a loan loan se secu curred ed against against an asset asset that that is never actually being sold. GIANG HA ACCA
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IFRS 15 Specifics 3. Bill and hold arrangements An en entit tityy bills bills a cus custo tome merr for a produ product ct but the entity entity reta retains ins ph physi ysica call posses possessi sion on of th the e prod product uct un unti till it is trans transfe ferr rred ed to the customer at a point in time in the future
4. Consignments Arises where a vendor delivers a product to another party, such as a dealer dea ler or re retai tailer ler,, for sale sale to end custo customer mers. s. Th The e inven invento tory ry is recognized in the books of the entity that bears the significant risk and reward of ownership (e.g. risk of damage, obsolescence, lack of demand for vehicles, no opportunity to return them, the showroomowner must buy within a specified time if not sold to public)
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IFRS 15 Specifics 5. Sales with a right of return In some contracts, a company sells goods to customers customers and transfe transfers rs control of that product to the customer and also grants the customer the right to return the product. The right to return may be in respect of, for example. dissatisfaction dissatisfaction with the products or expected levels of sales being below expectations. expectations. When goods are sold With a right of return. IFRS 15 requires an entity to recognise all of the following: (a) Revenue for the transferred transferred products in the amount Of consideration to which the entity expects to be entitled (i.e. revenue is not recognised for products expected to be returned); (b) A refund liability (in respect of the-products that are expected to be returned); and (c) An asset (and corresponding adjustment to cost of sales) for the right to recover products from Customers on settling the refund liability. (IFRS 15: para. 821) GIANG HA ACCA
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IFRS 15 Specifics 6. Warranties
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IFRS 15 Specifics Exam Exampl ple e 1 - Age Agent or not? not? An entity negotiates with major airlines to purchase tickets at reduced rates. It agrees to buy a specific number of tickets and must pay even if unable to resell them. The entity then sets the price for these ticket for its own customers and receives cash immediately on purchase. The entity also assists the customers in resolving complaints with the service provided by airlines. However, each airline is responsible for fulfilling obligations associated with the ticket, including remedies to a customer for dissatisfaction with the service. How Ho w woul would d th this is be de deal altt with with unde underr IFR IFRS 15 15? ? GIANG HA ACCA
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IFRS 15 Specifics Exam Exampl ple e 1 the - Age Agcontract: nt or not? no t? - the Answ Answe er is pur 1. Identify ce ontract: when ticket ticket purchased chased 2. Identify the separate performance obligation obligations: s: - Look at the risks involved: If the flight iiss cancelled the airline pays to reimburse, If the ticket doesn't get sold - the entity loses out - Look Look at the rewards rewards - the entity entity can set its own price and thus thus rewards On balance therefore the entity takes most of the risks and rewards here and thus controls the ticket - thus they have the obligation to provide the right to fly ticket 3. Determine the transaction price: set by the entity 4. Allocate transaction price to performance obligations: The price here is the GROSS amount of the ticket price (they sell it for) 5. Recogni Recognize: ze: revenue revenue as each performanc performance e obligatio obligation n is sat satisfi isfied: ed:
Recognise the revenue once the flight has occurred GIANG HA ACCA
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IFRS 15 Specifics Example 2 - Loyalty discounts An entity entity has a custo customer mer loyalt loyaltyy progr program am th that at rewar rewards ds a customer with one customer loyalty point for every $10 of purchases. Each point is redeemable for a $1 discount on any future purchases Customers purchase products for $100,000 and earn 10,000 points The entity expects 9,500 points to be redeemed, so they have a stand-alone selling price $9,500 How Ho w woul would d th this is be de deal altt with with unde underr IFR IFRS 15 15? ? GIANG HA ACCA
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IFRS 15 Specifics Ex Exam ampl ple e the 2 - contract: Lo Loya yalt lty y when di disc scou ount nts s - Answ Anare swer er 1. Identify the goods purchased 2. Identify the separate performance obligations: The promise to provide points to the customer is a performance obligation along with, of course, the obligation to provide the goods initially purchased 3. Determine the transaction price: $100,000 4. Allocate transaction price to performance obligations: Stand alone selling price: 100,000 + 9,500 = 109,500 109 ,500 Product $91,324 [100,000 x (100,000 / 109,500] Points $8,676 [100,000 x 9,500 /109,500] 5. Recognize: - Produ Product: ct: on purchase purchase - Points: Let’s say at the end of the first rreporting eporting pe period, riod, 4,500 p points oints (out of the 9,500) have been redeemed + Revenue of $4,110 [(4,500 points ÷ 9,500 points) × $8,676] $8, 676]
+ Contract liability of $4,566 (8,676 – 4,110) for the unredeemed points GIANG HA ACCA
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IFRS 15 Specifics Exam Exampl ple e 3 – Sal ale es with with a ri righ ghtt of return turn
Quirky Co is an online clothing retailer retailer.. Customers are entitled to return items within 28 days of purchase for a full refund if they do not fit or ore otherwise not suitable. In the last week of December 20X8. Quirky co sold 200 dresses for $400 each. The dresses cost $250 each. Quirky Co has an expected average average level of returns of 2 25%. 5%. None of the dresses sold in the final week of December 20XB have been returned by the end of the month. Required What are the accounting ac counting entries required to record the sale of the dresses in Quirky Co's financial statements the ended 31 December 20X8?
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IFRS 15 Specifics Example Exam ple 3 – Sales Sale a right righ t of return retuxrn$400). – Answer Answer Quirky receives cashsofwith $80,000 (200 dresses Ouirku should recognise revenue only in respect of the 75% of dresses not expected to be returned: 200 dresses x 75% x $400 $ 400 = $60,000. Quirky should recognise a refund liability for the 25% of dresses expected to be returned: 200 dresses dresses x 25% x $400 = $20,000 The journal entry to record the sale with the right of return is: Dr Cash $80,000 Cr Revenue $60,000 Cr Refund Liability $20,000 The 200 dresses sold had a purchase cost Of $50,000 (200 dresses x $250). This amount will be included in purchases, within cost of sales. As none of
these 200 dresses are held at the year end, none of them will be included in closing inventory. GIANG HA ACCA
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IFRS 15 Specifics Example Exam ple 3 – Sales Sales with a right right of return return – Answer Answer
Therefore, the total amount in cost of sales relating to the dresses is an expense of $50,000. However, no revenue has been recognized in relation to 25% of the dresses. Therefore, the purchase expense in relation to the dresses that are expected to be returned that is included within cost of sales needs to be reversed reversed and an asset should be recognized for the right to recover the dresses: 200 dresses x 25% x $250= $12,500 Dr Asset for right to rec recover over dresses $12,500 Cr Cost of sales $12,500 This leaves a correct expense within cost of sales for the 75% of the dresses which are not expected to be returned: 200 dresses x 75% x $250 = $37,500 which matches the revenue to be recognized. This can also be calculated as total purchases of $50,000 less cost of dresses expected to be returned of $12,500. GIANG HA ACCA
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16
Chapter IFRS 16 – LEASES
GIANG HA, FCCA, CPA
[email protected]
091 266 1988
194 19 4 387
IFRS 16 • IFRS 16 Leases is to be adopted for accounting periods start starting ing on or after 1 January 2019. It can be adopted earlier but only if the entity has already adopted IFRS 15 Revenue from contracts with customers.
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IFRS 16 The new standard on leases is replacing the old standard (IAS 17) where wher e the existe existence nce of operati operating ng leases leases meant meant that significan significantt amounts of finance were held off off the balance sheet. In adopting the new standard all leases will now be brought on to the the st stat atem emen entt of fina financ ncia iall pos posit itio ion, n, exce except pt in th the e foll follow owin ing g circumstances: • leases with a lease term of 12 months or less and containing no purchase options – this election is made by class of underlying asset; and • leases where the underlying asset asset has a low value when new (such as personal computers or small items of office furniture) – this election can be made on a lease-by-lease basis. The account accounting ing for low value or short-te short-term rm leases is done through through expensi expensing ng the rental through profit or loss on a straight-line basis The accounting for low value or short-term leases is done through
expensing the rental through profit or loss on a straight-line basis. GIANG HA ACCA
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IFRS 16 Ex Exam ampl ple e 1: Low Low – va valu lue e asse assets ts Banana leases out a machine to Mango under a four year lease and Mango elects to apply the low-value exemption. The terms of th the e le leas ase e ar are e th that at th the e an annu nual al lease lease rent rental alss are are $2,0 $2,000 00 payable in arrears. As an incentive, Banana grants Mango a rent-free period in the first year. Explain how Mango would account for the lease in the financial finan cial stateme statements nts
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IFRS 16 Exa Example mple 1: Lo Low w – valu lue e as asse sets ts - ANSWER An expense of $1,500 would be recognised through profit or loss for each of the four year lease. At the end of year one an accrual of $1,500 would be recognised on the statement of financial position of which $500 would be released over the remaining three years of the lease. $2,000 x 3 Expense (p.a.) = = $ 1,500 4
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IFRS 16
KEY DEFINITION
Lease A contract that gives the right to use an asset for a period of time in exchange for consideration • There's 3 te test stss to see if the contract is a lease. • The asset must be identifiable • This can be explicitl explicitlyy - it's in the contr contract act Or implicitly - the contract only makes sense by using this asset (There is no identifiable asset if the supplier can substitute the asset (and would benefit from doing so)
• The customer must be able to get get sub subst stant antial ially ly all the ben benefi efits ts while while it uses it • The customer customer must must be able to direc ectt how how and for what the asset is used
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IFRS 16 Examp Example le 2: Lease Lease contr contract act A contract gives you exclusive exclusive use of a specific airplane You can decide when it flies and what you fl flyy (passengers, cargo etc) The airplane supplier though operates it using its i ts own staff The airplane supplier can substitute the airplane for another but it must meet specific conditions and would, in practice, cost a lot to do so So does the contract contain a lease?
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IFRS 16 Examp Example le 2: Lease Lease contr contract act - An Answ swer er 1. th ther ere e an Iden Identi fiab able le asse asset? t? YesIsthe airplane istifi explicitly referred to and the substitution right is not substantive substantive as they would incur significant costs 2. Does the the cus custom ome er hav have subs substtantial tially ly all benefi nefits ts du durring ing the period period? ? Yes it has exclusive use 3. Does Does th the e cu cust stom omer er dire direct ct th the e us use? e? Yes the customer decides where and when the airplane will fly So, yes this contract contract contains contains a lease because it's... A contract that gives the right to use an asse sset for a period of time tim e in ex excha chang nge e fo forr consid consider erati ation on
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IFRS 16 Lessee accounting - Initial recognition At the st start art of the lease lease the lessee lessee initia initially lly re reco cogni gnises ses a right-of-use asset and a lease liability
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IFRS 16 Lessee accounting - Initial recognition Right o off u usse a assset
Lease lliiability
Measured at the amount of Measured at the present value of the lease th the e lease lease liab liabil ility ity plus plus any any pa payme yments nts payabl payable e ove overr the lease lease ter term, m, initial direct costs incurred by discounted at the rate implicit in the lease the lessee.
• Lease liability • Initial direct direct cos costs ts • Estimated costs for dismantling Payments less less inc incen entiv tives es • Payments befo before re co comme mmenc ncem emen entt date
• Fixed payments payments less incentives • Variable payments (e.g. CPI/rate) • Expected residual residual value guarantee • Penalty Penalty for terminat terminating ing (if reasonably reasonably certain) • Exerc Exercise ise price price of pur purchas chase e option option (if reasonably certain) Note: if the rate implicit in the lease cannot Note: if be determined determined the lessee shall use their incremental increment al borrowing rate GIANG HA ACCA
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IFRS 16 Lessee accounting - Subsequent measurement Right of use asset Lease liability Cost less accumulat accumulated ed depreciation depreciation Financial liability at amortized amortized cost Note: Depreciation is based on the Note: Depreciation earlier of earlier of the use useful ful life life and lease term,, unles term unlesss ow owner nershi ship p tran transf sfer erss, in which case us use e th the e us usef eful ul life life.
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IFRS 16 Lessee accounting - Subsequent measurement
Non-current portion Current portion
Non-current portion Current portion
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IFRS 16 Lessee accounting - Subsequent measurement Ex Exam ampl ple e 3 – Le Less ssee ee ac acco coun unti ting ng On 1 January 2015, Plum entered into a five year lease of machinery. The machinery has a useful life of six years. The annual lease payments are $5,000 per annum, with the first payment made on 1 January 2015. To obtain the lease Plum incu incurrs in init itia iall di dire rect ct cos osts ts of $1 $1,0 ,000 00 in rela relati tion on to th the e arrangement of the lease but the lessor agrees to reimburse Pear $500 towards the costs of the lease. The rate implicit in the lease is 5%. The present value of the minimum lease payments is $22,730. Demo De mons nstr trat ate e how how th the e le leas ase e will will be acco accoun unte ted d in th the e fina financ ncia iall st stat atem emen ents ts over over the the five five year year peri period od..
GIANG HA ACCA
| 399
200 20 0 399
IFRS 16 Lessee accounting - Subsequent measurement Ex Exam ampl ple e 3 – Le Less ssee ee ac acco coun unti ting ng – – Answer Initial Initi al recognitio recognition n Rec ecor ord d th the e ri righ ghtt of us use e asse assett and and le leas ase e liab liabil ilit ity y DR Rig igh ht-of t-of-u -use se ass sse et $2 $22, 2,73 730 0 CR Lease liability $22,730 Re Reco cord rd the the init initia iall di dire rect ct co cost stss DR Rig igh ht-o -off-use asset $1,000 CR Cash $1,000 Re Recor cord d the incen incentiv tive e pa payme yments nts re recei ceive ved d DR Cash $500 CR Rig igh ht-o -off-u use asset $500 Right-of-use asset = 22,730 + 1,000 – 500 = 23,230 GIANG HA ACCA
| 400
400
IFRS 16 Lessee accounting - Subsequent measurement Ex Exam ampl ple e 3 – Le Less ssee ee ac acco coun unti ting ng – – Answer Subsequen Subse quentt measureme measurement nt Depreciate the asset over the earlier lease term of o f five years. $23,230 = $4,646 Expense (p.a.) = 5 Record finance lease payments and interest using the rate implicit in the lease Year
B/f
Payment
Capital balance
Finance cost (5%)
C/f
1
22,730 22
(5,000)
17,730
887 18,617
2
18,617
(5,000)
13,617
681 14,298
3
14,298
(5,000)
9,298
465
9,763
4
9,763
(5,000)
4,763
237
5,000
5
5,000
(5,000)
-
GIANG HA ACCA
| 401
201 20 1 401
IFRS 16 Sale and leaseback • A sale and leaseback transaction occurs when one entity (seller) transfers an asset to another entity (buyer) who then leases the asset back to the original seller (lessee). • The companies are required to account for the transfer contract and the lease applying IFRS 16, however consideration is first given to whether the initial sale of the transferred asset is a performance obligation under IFRS 15. • If the the tran transf sfer er of of the asset is not a sale then the following rules apply: Seller-Lessee
Buyer-Lessor
Continue to recognise the asset
Do not recognise the asset
Recognise a financial liability Recognise (= proceeds)
Recognise a financial asset Recognise (= proceeds)
GIANG HA ACCA
| 402
402
IFRS 16 Sale and leaseback • If the tran transf sfer er of of the asset is a sale then the following rules apply: Seller-Lessee
Buyer-Lessor
• Derecognise the asset • Recognise the sale at fair value
• Recognise purchase of the asset
Recognise lease liability liability (PV of lease rentals) rentals) • Apply lessor • Recognise accounting Recognise a right-of-use right-of-use ass asset, et, as a proportion • Recognise of the previous carrying value of underlying asset = Previous Carrying value x Lease liabilities/Proceeds
• Gain/loss on rights transferred to to the buyer
GIANG HA ACCA
| 403
202 20 2 403
IFRS 16 Sale and leaseback Ex Exam ampl e 4quire –ired Sa Sale and andds leas leaseb ack kance (1) (1)e a ne Ap Apple pleple re requ dle funds fun toebac fin financ new w ambit ambitio ious us rebr rebrand anding ing exercise. It’s only possible way of raising finance is through the sale and leaseback of its head office building for a period of 10 years. The lease payments of $1 million are to be made at the end of the lease period The current fair value of the building is $10 million and the carrying value is $8.4 million. The interest rrate ate implicit in the lease is 5%. Advise Apple on how to acc cco ount for the sale and leaseback in its fina fi nanc ncia iall stat statem emen ents ts if th the e offi office ce buil buildi ding ng we were re to be sold sold at th the e fa fair ir va valu lue e of $1 $10 0 milli million on and: and: (a (a)) Perfo Performa rmance nce obliga obligatio tions ns ar are e not sa satis tisfie fied; d; or, or, (b) Perfo Performa rmance nce obliga obligatio tions ns ar are e sa satis tisfied fied..
GIANG HA ACCA
404
IFRS 16 Sale and leaseback
| 404
GIANG HA ACCA
| 405
203 20 3 405
IFRS 16 Sale and leaseback Answe swerr Exam Ex ampl ple e4 Sa Sale le and an d not leas leaseb ack k (1) (1) - An (i) Trans ransfer fer– of asse asset t is aebac ssale ale Seller
Lessor
• Continue to recognise the asset at $8.4 million and depreciate.
• Do not rrecognise ecognise the asse assett as it has not been sold to the buyer.
• Recognise a financial liability at transfer transf er proceeds of $10 million.
• Recognise a financial asset at transfer transf er proceeds of $10 million.
GIANG HA ACCA
| 406
406
IFRS 16 Sale and leaseback Exam Ex ampl ple e 4 – Sa Sale le and and leas leaseb ebac ack k (1) (1) - An Answe swerr (ii) Transfer Transfer of asset is sale Seller
Lessor
• Derecognise the asset at $8.4 million • Recognise pu purchase rchase of the asset at $10 million (fair value = proceeds) • Recognise lease liability at P PV V of lease • Apply lessor accounting rentals • Recognise a right-of-use asset, as a proportion of the previous carrying value of underlying asset • Gain/loss on rights ttransferr ransferred ed
GIANG HA ACCA
| 407
204 20 4 407
IFRS 16 Sale and leaseback Answe swerr Exam Ex ple efer4 of – Sa Sale le and an leas leaseb ebac ack k (1) (1) - An (ii)ampl Trans Transfer asset is d sale DR Bank $10,000,000 DR Right of use asset (W2) $6,486,257 CR Lease liability (W1) $7,721,735 CR PPE – Building $8,400,000 CR Gain on transfer $364,522 (W1) Lease liability = PV of lease rentals at rate implicit in the lease Lease Lea se = $1 mil millio lion n x [1[1-(1+5 (1+5%)^ %)^(-10 (-10)]/ )]/5% 5% = $7,7 $7,721,7 21,735 35 (= $1 millio million n x 7.722= $7,721,735) (W2) $
$
Right-of-use retained
7,721,735
77.22%
6,486,257
Rights transferred
2,278,265
22.78%
1,913,743
10,000,000
100.0%
8,400,000
Total
GIANG HA ACCA
| 408
408
IFRS 16 Sale and leaseback Note: If Note: proc ocee eeds ds are less less than than the fair air valu value e of the asset or the If the pr le leas ase e paym paymen ents ts are are les esss th than an mark market et ren enttal th the e foll follow owin ing g adjustments adjustmen ts to sales proceeds apply: shoulld be acc accou oun nted for as a • Any below-market terms shou prepayment of prepayment of the lease payments; and, • Any abo above-m ve-mark arket et terms terms should be accounted for as additional financing provide financing provided d to the lessee. lessee.
GIANG HA ACCA
| 409
205 20 5 409
IFRS 16 Sale and leaseback Exam Ex ampl ple e 5 – Sa Sale le and and lefinance aseb ebac ack (2) (2) ambitious rebranding exercise. It’s Apple required funds toleas aknew only possible way of raising finance is through the sale and leaseback of its head office building for a period of 10 years. The lease payments of $1 million are to be made at the end of the lea se period The current fair value of the building is $10 million and the carrying value is $8.4 million. The interest rate implicit in the lease is 5%. Ad Advi vise se Appl Apple e on how how to ac acco coun untt fo forr the the sa sale le an and d le leas aseb ebac ack k in it itss fi fina nanc ncia iall st stat atem emen ents ts if th the e pe perf rfor orma manc nce e ob obli liga gati tion onss ar are e sati satisf sfie ied d and th the e bu buil ildi ding ng is sol sold d for the fo follo llowin wing: g: (a) $9 mill millio ion; n; or, (b) $11 $11 mill milliion on..
GIANG HA ACCA
| 410
410
IFRS 16 Sale and leaseback Exam Ex ampl ple e 5 – Sa Sale le and and leas leaseb ebac ack k (2) (2) - An Answe swerr (i) The pro roce cee eds of $9 mill illion ion are below elow the $1 $10 0 milli illion on fair value lue of the asset and so the below low-market proceeds of $1 million ion are treat tre ated ed as a prepa prepayme yment nt.. DR Bank $9,000,000 DR Prepayment $1,000,000 DR Right of use asset (W2) $6,486,257 CR Lease liability (W1) $7,721,735 CR PPE – Building $8,400,000 CR Gain on transfer $364,522
GIANG HA ACCA
| 411
206 20 6 411
IFRS 16 Sale and leaseback Answe An swerr Exam Ex 5ocee –eeds Sa Sale le and an leas le ebac ack (2) (2e) -grea (ii) (ii)ampl The Thple e epr proc ds of d $1 $11 1aseb mill mi llio ion nk ar are greate terr th than an th the e $1 $10 0 mi mill llio ion n fa fair ir value of the asset, so the above market proceeds are treated as addit dditio iona nall fi fin nanci cin ng provide vided d by th the e buyer-l er-les esso sorr to the sel sellerlerlessee. DR Bank $11,000,000 DR Right of use asset (W2) $6,486,257 CR Le Leas ase e liab liabil iliity ($7, ($7,72 721, 1,73 735 5 (W1) (W1) + $1 $1,0 ,00 00, 0,00 000) 0) $8,721,735 CR PPE – Building $8,400,000 CR Gain on transfer $364,522
GIANG HA ACCA
| 412
412
17
Chapter TAXATION
GIANG HA, FCCA, CPA
[email protected]
091 266 1988
207 20 7 413
CONTENT
TAXATION IAS 12 INCOME TAXES
DEFERRED TAX
Accoungting Entries
Accounting Profit ≠ Taxable Profit
Specific Scenarios
Deferred Tax Liabilities
Deferred Tax Assets
GIANG HA ACCA
| 414
414
IAS 12 – Income Income Taxe Taxess • IAS 12 states that there are two elements of tax that will need to be accounted accounted for: 1. Curr Current ent tax: tax: (the (the amount of income taxes payable/recoverable in respect of the taxable taxable profit/loss profit/loss for a period) 2. Def Deferred erred tax (an tax (an accounting adjustment adjustment aimed aimed to match match the the tax effects effec ts of transactions transactions to the rel relevant evant accounting period) To introduce tax payable by the company: Dr Inco Income me tax tax expe expens nse e (in statement of profit or loss) Cr Incom Income e tax tax paya payable ble (in (in SFP as current liability)
GIANG HA ACCA
|
415
208 20 8 415
Deferred Tax
DEFINITION
Deferred Deferr ed tax is: The estimated future future tax tax consequences of transactions and events recognized in the financial statements of the current current and and previous periods.
GIANG HA ACCA
|
416
416
Deferred Tax Deferred taxation is a basis of allocating tax charges to particular accounting periods. The key to deferred taxation lies in the tw two o quite quite diffe differen rentt concep concepts ts of profit profit::
Accounting Profit
Taxable Profit
Is the figure of profit before tax, reported to the shareholders in the published accounts
Is ther figure of profit in which the taxation authorities base their tax calculations
Causes: Permanent differences
Temporary differences GIANG HA ACCA
|
417
209 20 9 417
Deferred Tax
ACCOUNTING ENTRIES
Carrying value of non – current asset
X
Tax base
X
Temporary difference
X
Deferred ta tax
Temporary Different
Tax rate
Increase in deferred Increase in deferred tax provision provision Dr Income tax expense/ equity Cr Deferred ta tax (SFP)
X X
Reduction in deferred tax provision Reduction in Dr Deferred tax (SFP) Cr Dr Inco Income me ta taxx expe expens nse/ e/ equi equity ty
X X GIANG HA ACCA
|
418
418
Deferred Tax Deferr Defe rred ed ta taxx ass assets ets IAS 12 required that: deductibl ctible e tempora temporary ry difference difference arises where the tax tax ba base se of of • A dedu asset exceed exceedss its carry carrying ing value value..
• To the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized (It as deferred tax asset arises from the company making lossed previ previous ously ly,, they they must must be abl able e to demons demonstr trat ate e th that at suffic sufficie ient nt forecasted profits will be made to realise the asset).
GIANG HA ACCA
|
419
210 21 0 419
Deferred Tax Ex Examp ample le 1: Deferr Deferred ed Tax axati ation on A company’s financial statements show profit before tax of $1,000 in each of years 1, 2 and 3. This profit is stated after charging depreciation of $200 per annum. This is due to the purchase of an asset costing $600 in year 1 which is being depreciated over its 3-year 3 -year useful economic life on a straight line basis. The tax allowances granted for the related asset are: Year ear 1 $2 $240 40 Year ear 2 $2 $210 10 Year ear 3 $1 $150 50 Income tax is calculated as 30% of taxable profits. Apart form the above depreciation and tax allowances there are no other differences differe nces between the accounting and taxable profits. Required: Ignoring deferred tax, prepare statement of profit or loss extracts for each of years 1, 2 and 3. Accountin Accoun ting g for def deferr erred ed tax tax,, prepa prepare re stat stateme ement nt of profi profitt or loss loss and statement statem ent of financial position extracts for each of years 1, 2 and 3. GIANG HA ACCA
|
420
420
Deferred Tax Defe De ferr rred ed tax tax assets assets:: Reva Revalu luat atio ion n of no non n – cu curr rren entt as asse sets ts • When a revaluation takes takes place the carrying value value of the asset will change but the tax base will remain unaffec unaffected. ted.
• The difference between the carrying amount of a revalued asset and its tax base is an example of a temporary difference and will give rise to a deferred tax liability or asset.
GIANG HA ACCA
|
421
211 21 1 421
Deferred Tax Ex Examp ample le 2: Deferr Deferred ed Tax axati ation on – Revalu Revaluati ation on of non non-cu -curre rrent nt asse assets ts On 1 January 20X8 Simone Ltd decided to revalue its land for the first time. A qualified property valuer reported that the market value of land on that date dat e was $80,000. $80,000. The land was origi original nally ly pur purcha chase sed d 6 years years ago for $65,000. Simone does not make a transfer to retained earnings in respect of excess depreciation on the revaluation of its assets. The required provision for income tax for the year ended 31 December 20X8 is $19,400. The difference difference between the carrying amounts of the net assets of Simone (including the revaluation of the property in note (above) and their (lower) tax base at 31 December 20X8 is $27,000. The opening balance in the deferred tax account was $2,600. Simone’s rate of income tax is 25% Required: Prepare extracts of the financial statements statements to show the effect of the above transactions.
GIANG HA ACCA
422
Taxation SUMMARY Income tax Year end estimate Under/Over provision Increase/Decrease in deferred tax Char Charge ge to re reco cord rd in th the e stat statem emen entt of prof profit it or loss loss
X X/(X) X/(X) X
Deferred tax Balance b/f Balance c/f (to SOFP) (Temporary different x tax rate)
X X/(X)
Increase/decrease in deferred tax
X/(X)
|
422
(to either statement statement of profit or loss or equity)
GIANG HA ACCA
|
423
212 21 2 423
Taxation Ex Examp ample le 3: The following trial balance relates to Weiser, a listed company, at 31 Dec 20X8:
GIANG HA ACCA
|
424
424
Taxation Ex Examp ample le 3: The following information is relevant: (i)
(ii (ii))
The dir director ectorss had the le leasehold asehold p prope roperty rty value value at $24 mi million llion on 1 JJan an 20X8 by an independent surveyor. The directors wish to incorporate this this value value into into fin financ ancial ial stat stateme ements nts.. The pro proper perty ty was was origin originall allyy purchased 4 years ago and is being depreciate depreciated d over its original useful economic life of 20 years which has not changed as a result of the revaluation. Weiser does not make transfer to retained earnings in respect resp ect of ex excess cess amortization. amortization. The rev revaluat aluation ion gain will create create a deferre def erred d tax liabilit liabilityy (see note (ii)). Plan Plantt and equipment is being depre dep recia ciated ted at 20% per annum annum on a reduc reducing ing balanc balance e bas basis. is. All depreciation/amortization depreciation/ amortization should be charged to cost of sales. A provisi provision on for inc income ome ta taxx for the year en ended ded 31 Dec 20X 20X8 8 of $12 million is required. At 31 Dec 20X8, the tax base of Weiser’s net assets was $7 million less than their carrying amounts. This excludes the effects of the revaluation of the leased property. The income taxe rate
of Weiser is 30% GIANG HA ACCA
|
425
213 21 3 425
Taxation Ex Examp ample le 3: Required: Prepare a statement of profit or loss and other comprehensive income, a statement of changes in equity for the year ended 31 Dec 20X8, and a statement statem ent of financial position as at that date.
GIANG HA ACCA
|
426
426
PRACTICE QUESTIONS
GIANG HA, FCCA, CPA
[email protected]
091 266 1988 427
214 21 4 427
18
Chapter IAS 33 – EARNINGS PER SHARE
GIANG HA, FCCA, CPA
[email protected] 091 266 1988
428
Basic EPS - Considera Consideration tion Test yo your ur und unders erstan tandin ding g1 A Gerard’s earnings for the year ended 31 December 20X4 are $2,208,000. On 1 Jan Januar uaryy 20X4 20X4,, the issue issued d sha share re cap capita itall of Ger Gerard ard was 8,2 8,280,0 80,000 00 ordinary shares of $1 each. The company issued 3,312,000 shares at full market value on 30 June 20X4. Ca Calcu lcula late te th the e EPS EPS fo forr Ge Gera rard rd fo forr 20 20X4 X4
Basic EPS =
Earnings
Wℎ ℎ (full market price issue)
GIANG HA ACCA
|
429
215 21 5 429
Bonus Issue A bonus issue (or capitalisation capitalisation issue or scrip issue):
• does not provide provide additional resources resources to to the issuer • means that the shareholder owns the same proportion of the business before and after the issue In th the e ca calcu lcula lati tion on of EP EPS: S:
• The bonus shares are are deemed deemed to to have been is issu sued ed at the the start tart of the yea yearr • Compara Comparativ tive e figures figures are restated restated to to allow for the proportional increase in increase in share capital ca caus used ed by th the e bonu bonuss iss issue ue.. • Note: if you have a issue of shares at full market price and a bonus bonus issue issue,, you apply a bonus fracti fraction on fr from om the the st star artt of the the yea year up to the dat date of the bonus onus issu issue e. For example, if the bonus issue was 1 share for every 5 owned, the bonus fraction would be 6/5 (as everyone who had 5 shares now has 6) GIANG HA ACCA
|
430
430
Basic EPS - Considera Consideration tion Test yo your ur und unders erstan tandin ding g2 Dorabella had the following capital and reserves on 1 April 20X1:
Dorabella makes a bonus issue, of one share for every seven held, on 31 August 20X2. Dorabella plc’s results are as follows:
Calculate EPS for the year ending 31 March 20X3, together with the compa compara rati tive ve EPS EPS fo forr 20 20X2 X2 th that at woul would d be pr pres esen ente ted d in th the e 20 20X3 X3 acc accou ount nts. s. GIANG HA ACCA
|
431
216 21 6 431
Rights Issue Rights issues present special problems:
• they contribute additional additiona l resources • they are normally normall y priced below full market price. Therefore they combine the characteristics of issues at full market price and bonus issues
GIANG HA ACCA
|
432
432
Rights Issue • Adjust Adjust for bonus bonus element element in rig rights hts issue, issue, by multiplying capital in issue before the rig right htss issue issue by th the e follo followin wing g fraction
Market price before issue
Theoretical ex rights price • Calculate the weig weighted hted averag average e capital in the issue as above
• Calculating EPS when there has been a rights issue can be done using a four four-ste -step p process process..
GIANG HA ACCA
|
433
217 21 7 433
Rights Issue Step 1
Ca Calcul lculat ate e theor theoret etica icall ex rig right htss pri price ce (TE (TERP) RP) Start with the number of shares previously held by an individual at their market price. Then add in the number of new shares purchased at the rights price. You can then find the TERP by dividing the total value of these shares by the number held. held. For example, if there was a 1 for 3 rights issue for $3, and the market price before this was $5: 3 shares @ $5 market price = $15 1 new share @ $3 rights price = $3 Therefore a shareholder now has 4 shares with a value of $18. The TERP is now $18/4 = $4.50 GIANG HA ACCA
|
434
Rights Issue Step 1
Ca Calcul lculat ate e theor theoret etica icall ex rig right htss pri price ce (TE (TERP) RP)
Step 2
Bonuss fraction Bonu fraction Market price before issue Theoretical ex rights price In this example, the bonus fraction would therefore be 5/4.5
434
GIANG HA ACCA
|
435
218 21 8 435
Rights Issue Step 1
Ca Calcul lculat ate e theor theoret etica icall ex rig right htss pri price ce (TE (TERP) RP)
Step 2
Bonuss fraction Bonu fraction
Step 3
Weight eighted ed av avera erage ge number number of shares shares (W (WANS ANS)) You would draw up a table to calculate the weighted average averag e number of shares. When doing this, the bonus fraction would be applied from the start of the year up to the date of the rights issue, issue , but not afterwards. afterwards.
GIANG HA ACCA
|
436
436
Rights Issue Step 1
Ca Calcul lculat ate e theor theoret etica icall ex rig right htss pri price ce (TE (TERP) RP)
Step 2
Bonuss fraction Bonu fraction
Step 3
Weight eighted ed av avera erage ge number number of shares shares (W (WANS ANS))
Step 4
Ea Earni rnings ngs per share share (EPS) (EPS) You can now calculate earnings per share (PAT/WANS). It is important to note that if you're asked to restate the prior year EPS, then this is simply the prior year's EPS multiplied by the inverse of the bonus fraction
GIANG HA ACCA
|
437
219 21 9 437
Rights Issue Test yo your ur und unders erstan tandin ding g3 On 31 December 20X1, the issued share capital consisted of 4,000,000 ordinary shares of 25c each. On 1 July 20X2 the company made a rights issue in the propotion of 1 for 4 at 50c per share and the shares were quoted immediately before the issue at $1. Its trading results for the last two years were as follows:
Show the calculation of basic EPS to be presented in the financial statements for the year ended 31 December 20X2 (including the comparativ compar ative e figur figure). e).
GIANG HA ACCA
|
438
438
Diluted earnings per share deal wi with th pote potent ntia iall or ordi dina nary ry shar shares es,, adjust basic earnings and • To deal numb number er of shar shares es assuming conve convert rtibl ibles, es, optio options, ns, etc. etc. had converted to the equity o heterrfi.rst day of the accounting th e da date teshares of is issu sue, e,niftla late period, or on
• DEPS is calculated as follows: Earnings + notional extra earnings Number of shares + notional extra shares
GIANG HA ACCA
|
439
220 22 0 439
Diluted earnings per share Dilut uted ed EPS is calcul calculat ated ed by adjus adjusti ting ng the net profi profitt due to • Dil continuing operations attributable to ordinary shareholders and the weighted average number of shares outstanding for the effects of all dilutive potential potential ordinary shares • These securities securities include include:: A separ separat ate e class class of equit equityy share sharess which which at prese present nt is not entitled to any dividend, but will be entitled after some future date Convertible loan stock or convertible preferred shares which give their holders the right at some future date to exchange their securities for ordinary shares of the company, at a predetermined determin ed conversion conversion rate Options or warrants
GIANG HA ACCA
|
440
440
Diluted earnings per share Convertibles The principles of convertible bonds and convertible convertible preference shares are similar and will be dealt with together. together. If the the co conv nver erti tible ble bo bond nds/ s/pr pref efer eren ence ce sh shar ares es had had converted:: converted
been been
• the inte intere rest st/d /div ivid iden end d woul would d be save saved d therefore earnings woul wo uld d be high higher er • the nu numb mber er of sh shar ares es woul would d incr increa ease se
GIANG HA ACCA
|
441
221 22 1 441
Diluted earnings per share Test yo your ur und unders erstan tandin ding g4
GIANG HA ACCA
|
442
442
Diluted earnings per share Op Opti tion onss an and d wa warr rran ants ts to su subs bscr crib ibe e fo forr sh shar ares es An option or warrant give ives the holde lder the rig right to buy shares at some time ime in th the e futur uture e at a pred predete etermined rmined price price.. Cash does enter the entity at the time the option is exercised, and the DEPS calculation calculation must allow for for this. numb mber er of sh shar ares es is issu sued ed on the the ex exer erci cise se of The total nu of the option or warrant is split split into into tw two o:
• The nu numb mber er of sh sha are ress that would have been issued if the the cash received had been used to buy shares at fair value (using the averag ave rage e price price of of the shares during the period) • The remainder remainder,, which are tr trea eate ted d like like a bonu bonuss issu issue e (i.e. as having been issued for no consideration).[*] consideration).[*] The e num umb ber of sh sha ares is issu sued ed for no co con nsi sid der era atio ion n is added to [*] Th
the th e nu numb mber er of sh shar ares es wh when en ca calcu lcula lati ting ng th the e DE DEPS PS..
GIANG HA ACCA
|
443
222 22 2 443
Diluted earnings per share Opti Op tion onss an and d wa warr rran ants ts to su subs bscr crib ibe e fo forr sh shar ares es On exercise: • DEPS calculation must allow for cash received therefore no adju adjust stme ment nt to earn earnin ings gs is is • No effect on the earnings, therefore required
GIANG HA ACCA
444
Diluted earnings per share Test yo your ur und unders erstan tandin ding g5
|
444
GIANG HA ACCA
|
445
223 22 3 445
Diluted earnings per share Exam Ex ampl ple e – Dilu Dilute ted d EP EPS S In 20X7 Co had 105c earnings of $105 $105,0 ,000 00Farrah and 100,00 100, 000 0 aordin orbasic dinary aryEPS $1ofshare sha res. s. based It also alsoonhad in iss issue ue $40,00 $40 ,000 0 15% convertib convertible le loan stock stock which which is convert convertible ible in two years' time at the rate of 4 ordinary shares for every $5 of stock. The rate of tax is 30%. Required: Calculate Required: Calculate the diluted EPS
GIANG HA ACCA
|
446
446
Diluted earnings per share SOLUTION Diluted EPS is calculated as follows. • Step Step 1: 1: Number Number of shares: the additional equity on con conversion version of the loan stock stock will be be 40,000 × 4/5 = 32,000 32,000 shares. • Step 2 : Earnings: Farrah Co will save interest payments of $6,000 (40,000 x 15%) but this increase in profits will be taxed. Hence the earnings figure may be recalculated: (105,000 + (6,000 x 70%)) = $109,200 Step 3: 3: Calculation: • Step Calculation: Diluted EPS = $109,200/132,000 $109,200/132,000 = 82.7c • Step Step 4: 4: Dilution: Dilution: the dilution in earnings would be 105c - 82.7c = 22.3cc per share. 22.3 share.
GIANG HA ACCA
|
447
224 22 4 447
Importance of EPS Price Pri ce ea earni rnings ngs ra ratio tio The EPS figure is used to compute the major stock market indicator of performance, the price earnings ratio (P/E ratio). The calculation is as follows: Market value of shares P/E ratio = EPS
GIANG HA ACCA
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448
448
Importance of EPS Although EPS is based on profit on ordinary activities after taxation, the trend in EPS may be a more accurate performance indicator than the trend in profit, EPS:
• Measur Measures es performan performance ce from the perspec perspective tive of invest investors ors and potential investors • Show Showss th the e amou amount nt of earn earnin ings gs av avai aila labl ble e to each each ordi ordina nary ry shareholder, so that it indicates the potential return on individual investments
GIANG HA ACCA
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449
225 22 5 449
Importance of EPS DEPS is important important for the followin following g reasons:
• It shows what the current year’s EPS would be if all the dilutive potential ordinary shares in issue had been converted • It can be used to assess trends in past performance • In theory, it serves as a warning to equity shareholders that the return on their investment may fall in future periods
GIANG HA ACCA
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450
450
Limitation of EPS Apparent growth in earnings • It does not take account of inflation. Apparent may not be real.
• It is based based on his histor toric ic info informa rmatio tion n and there therefo fore re it does does not necessarily have have predictive predictive value. • An entity’s earnings are affected by the choice of its accounting policies. Therefore it may not always be appropriate to compare the EPS of different companies. • DEPS is only an additional measure of past performance despite looking at future potential shares.
GIANG HA ACCA
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451
226 22 6 451
Presentation and disclosure of EPS The amounts amounts used as the numerator numeratorss in calcula calculating ting basic and • The diluted EPS, and a reconciliation of those amounts to the net profit or loss for the period weighted av averag erage e number number of ordinary ordinary shares used as the • The weighted de deno nomi mina nattor in calcu alcula lati ting ng basi basicc and and dilu dilutted EPS EPS, and and a reconciliation reconcilia tion of these denominator denominatorss to each other An entity may present alternative EPS figures if it wishes. The
weighted average number of shares as calculated under IAS 33 must be used.
A
re reco conc ncil ilia iati tion on must must be give given n if nece necess ssar aryy betw betwee een n th the e component of profit used in the alternative EPS and the line item for profit reported in the statement of profit or loss and other comprehensive comprehens ive income.
EPS must be shown with equal prominence prominence Basic and diluted EPS GIANG HA ACCA
452
PRACTICE QUESTIONS
GIANG HA, FCCA, CPA
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452
[email protected] 091 266 1988 453
227 22 7 453
19
Chapter Interpretation Interpr etation of Financial Statements
GIANG HA, FCCA, CPA
[email protected] 091 266 1988
454
Needs for ratio analysis FS
Key ratios
Better understanding
Making Economi Economic c Decisi Decision! on!
Compare
GIANG HA ACCA
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455
228 22 8 455
Key Ratios 2.3 Liquidity, Gearing /
2.1 Profitability and Return
Leverage and Working Capital
•Gross margin
•Current ratio
•Net margin
•Quick ratio •Receivable collection period
•Return on capital
•Payable payment period
employed (ROCE)
•Inventory turnover period
•Asset turnover
•Debt ratio •Gearing / Leverage ratio •Interest cover
2.2 Shareholder Ratio
• Dividend cover • Dividend yield Dividend per share •• EPS • P/E GIANG HA ACCA
|
456
456
2.1 Profitability and Return Gross margin
Net margin
ROCE
Asset turnover Example
Formula
Gross Profit
Net Profit
Sales
Sales
ABC Co. The Statement of comprehensive income for the year ended
31.12.2013 Normally, Being shown as %
Meaning
How much the business earns from sales of $ 100
Sale 1.000 COGS (700) G&A G&A exp exp (5 (500 00)) Gross margin: 30% Net margin: (20%) Gross margin positive still
The ability of genera generating ting profit from sales
be good. However, net margin negative the company loss suffering from G&A exp indicator for HA ACCA | 457 correctGIANG action
229 22 9 457
2.1 Profitability and Return Gross margin
Formula
Net margin
ROCE
Usage:
Profit before interest and taxation (PBIT)
Compare: • The change change in in ROCE from one year to the next for comparison ROCE E being earned by other • The ROC companies for companies for comparison • Compare with current market borrowing rates to rates to assess the performance of the Co and the efficiency in using the borrowing resources
Capital employed
Capital employed = Shareholder’s equity + Noncurrent liabilities (or total asset – current liabilities) PBIT = profit before tax + interest charges on long-term loan
Meaning
Asset turnover
How much the business earns from capital of $ 100 To assess profits or profit growth by growth by assess the amount of fund (capital) that were employed in making the profits.
GIANG HA ACCA
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458
458
2.1 Profitability and Return Gross margin
Formula
Net margin
Profit after tax and preference dividend (PAID)
Ordinary share capital or other equity
Meaning
This ratio gives a more restricted view of capital than ROCE, but it is based on
ROE (Return on equity)
Asset turnover
the same principles.
GIANG HA ACCA
|
459
230 23 0 459
2.1 Profitability and Return Gross margin
Formula
Net margin
Sales
ROCE
ROCE =
Asset turnover Profit Sales
×
Sales Capital employed
Capital employed
Gross margin
Assets turnover
increase To increase ROCE Gross margin or Assets turnover Meaning
How much the business generate Revenue from capital of $ 1. The turnover of assets participating in the business cycle.
Note for comment on these ratios: • Ah high igh profit profit ma margin rgin sales prices are high sales turnover will be depressed asset turnover will be lower • A high asset turnover means the the company is generating a lot of sales and it might have to keep its prices down low profit margin.
GIANG HA ACCA
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460
460
2.2 Shareholder Ratios PAT and Pref. Dividend Dividend cover = Ordinary share dividend • This is the number of times the current year's dividend could have paid paid out out of th the e curr curren entt year year's 's prof profit it avail vailab able le to ordi ordina nary ry shareholders. • A high figure indicates high levels of security. In other words, profits in future years could fall substantially and the company would still be able to pay the current level of dividends. • An alternative alternative view of a high dividend cover is that it indicates that the company operates a low dividend distribution policy..
GIANG HA ACCA
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461
231 23 1 461
2.2 Shareholder Ratios Dividend yield = Dividends per share Stock price Dividend per share =
Total dividends Number of shares outstanding 2000
2001
2002
Market price per share (given)
1188
863
780
Dividend per share
22.5
26.5
32.1
1.89%
3.07%
4.12%
Dividend yi yield
It is a crude me meas asur ure e of the the retu return rn to sh shar areh ehol olde ders rs,, but it does ignore capital growth which is often much higher than the return for dividends. GIANG HA ACCA
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462
462
2.2 Shareholder Ratios PAT & Preference Dividend
=
EPS
Weighted averages no. ℎ
EPS is basically the earnings available for distribution divided by the number of shareholders in issue. In isolation, this ratio is meaningless for intercompany comparisons. Its major usefulness is as part of the P/E ratio, and as a measure of profit trends.
Price Pri ce ea earni rnings ngs ra ratio tio The EPS figure is used to compute the major stock market indicator of performance, the price earnings ratio (P/E ratio). The calculation is as follows: Market value of shares
P/E ratio
EPS
GIANG HA ACCA
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463
232 23 2 463
2.2 Shareholder Ratios
P/E ratio (times)
2000
2001
2002
26.8
16.0
12.0
Ca Can n be usef useful ul fo forr asse assess ssin ing g th the e relative risk of an investment (expec (ex pecta tatio tion n of invest investor) or).. Say the price of a company's shares is £2.40, and its last reported EPS was 20p. It would have a P/E ratio of 12.
GIANG HA ACCA
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464
464
2.3 Liquidity L iquidity,, Gearing Gearing/Lever /Leverage age and Working Capital Long-term Solvency
Debt ratio
Formula
Debt ratio =
Gearing / Leverage
Total debts
Gearing
Total assets
Capital gearing =
Total long−term debt Shareholder’s equity + total long−term debt Measure the % of debt in the total
capital employed (equity + debt). Meaning
Assess how much the company owes in relation to its size
The high gearing ratio indicates reliance
on debt for financing. More debts more interest costs
50% is 50% is a helpful benchmark as a safe limit to debt
more difficult to earn sufficient profit to pay for such interest. Normally >50% high-geared
GIANG HA ACCA
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465
233 23 3 465
2.3 Liquidity L iquidity,, Gearing Gearing/Lever /Leverage age and Working Capital Long-term Solvency Debt ratio
Formula
Debt ratio =
Leverage = Leverage =
Gearing / Leverage
Total debts Total assets
Leverage
Shareholder’s equity Shareholder’s equity + total long−term debt
=
Shareholder’s equity Total assets – current liabilities
Leverage converse of gearing.
Meaning
Assess how much the company owes in relation to its size 50% is 50% is a helpful benchmark as a safe limit to debt
measures
the prop proportion ortion of total assets financed by equity, and which may be called the equity to assets ratio.
Gearing ratio + Leverage ratio = 100% Gearing/leverage degree of financial independence of the entity
GIANG HA ACCA
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466
466
2.3 Liquidity L iquidity,, Gearing Gearing/Lever /Leverage age and Working Capital Formula
Interest Cover
Current ratio
Profit before interest and tax Interest charges
Current ratio =
Current assets Current liabilities liabilities
Meaning ability of profit to cover for interest
cost. Low interest cover + high gearing ratio high financial risk (bankruptcy). ability to repay current debts due
from current assets. The ideal ratio is 1:1 and excess of 1
should be expected, but it will depend on the industry
Current assets − inventory Quick ratio/ acid test ratio
Current liabiliti liabilities es
Test of the immediate ability to
repay debt as it takes time to convert stock into cash.
The ideal ratio is 0.8:1, 0.8:1 , but will vary
depends on industry.
GIANG HA ACCA
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467
234 23 4 467
2.3 Liquidity L iquidity,, Gearing Gearing/Lever /Leverage age and Working Capital Formula
Receivable Collection Period
Trade receivable
365 days
Sales
Trade accounts payable Payable Payment Period
Purchases
Inventory Inventory Turnover Period
Cost of Sales
Meaning
365 days
365 days
Time
from sales to the ti time me payment payment is collected from debtor. If the period is lengthening compared with last year, it may indicate the relaxed debt collection policy of the company to encourage sales (or indication of bad debts). the
time from purcha purchase se of stock until payment to supplier. If the period is lengthen compared wit with h last year the company can obtain better payment terms in dealing with suppliers the
time from stock purchase to the time it is sold. If the period is lengthen from y year ear to year, the reason may be slow stock turnover,, stock are o ut-of-fashion, in the turnover mature or decline phase etc.
GIANG HA ACCA
|
468
468
2.3 Liquidity L iquidity,, Gearing Gearing/Lever /Leverage age and Working Capital Formula
Receivable Turnover
Meaning
Sales AR
To count circles of P/ AP turnover
AP
COGS
working capital
Inventory Turnover
Inventory
GIANG HA ACCA
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469
235 23 5 469
2.3 Liquidity, Gearing/Leverage and Working Capital Example 1 You are given the following information about Company R: At 31 December Year 6 $000 Total assets 5,800 Share capital 1,200 Reserves 2,400 3,600 Long-term liabilities liabilities (Bank loans) 1,500 Current liabilities 700 5,800 For the year to 31 December Year 6 $000 Profit before interest and taxation 700 Interest (230) 470 Taxation (140) Profit after taxation 330 Required: Use this data to calculate: Required: • the gearing ratio at 31 December Year 6 • the interest cover in Year 6.
GIANG HA ACCA
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470
470
3.Limitation of ratio analysis Differences in accounting policy, estimation… estimation…
It does not make sense when comparing with others.
It is possible to calculate the same ratio in different ways. For example, there are several variations of return on capital employed (ROCE) and gearing.
Comparisons can be misleading if different calculations are used.
Ratios can only indicate possible strengths or weaknesses in financial position and financial performance. They might raise questions about performance, but do not provide answers.
They are not easy to interpret, and changes in financial ratios over time might not be easy to explain.
Using historical information
Do not reflect future transactions
or events
GIANG HA ACCA
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471
236 23 6 471
3.Limitation of ratio analysis Window dressing, Profit smoothing… manipulate figures inaccurate ratios
Creative accounting
Related party relationships and transactions
Using figures in the statement of financial position
Not arm’s length transactio transaction. n.
Misleading if the business is seasonal
Non – financial information i.e. Brief of entity’s strategy, objectives, key
Ratio analysis just uses financial information while there are a lot
business risks, key relationship with other entities….
of non-financial information that is easier to understand & useful. GIANG HA ACCA
| 472
472
4.Interpretation Approach to interpretat interpretation ion Identify user and format required for solution
question and analyse analyse data Read question - Look for obvious change changes/differe s/differences nces in the figur figures es (no rratio atio calculations get, but can consider % movements year on gear) Calculate keg ratios as required by the question Write up your answer summarising performance and position:
- Structured using your categories categories - Comment on main features first - Then bring in relev relevant ant ratios to support your arg arguments uments - Suggest reasons for key changes
- Use any any inf information ormation given in the ques question! tion! Reach a conclusion GIANG HA ACCA
| 473
237 23 7 473
4.Interpretation Interpretation scenarios in the exam Interpretation The Financial Reporting examining team has ha s produced several technical articles to help students improve their performance in this area. You should read the articles titled “Tell me a story”, “How to improve your answer to interpretation questions” and “Financial statements interpretation” which can be found on the ACCA website (wvm.accaglobal.com). The articles clearly indicate that there are six different different types of interpretation question you may be faced with in Section C of the exam. Key points relating to each type of question are provided in the sections below.
GIANG HA ACCA
| 474
474
4.Interpretation Interpretat Interpretation ion scenarios in the exam -
Compa Comparison rison of one enti entity ty over over tw two o per periods iods
-
Comparison of two entities in the same period
-
Comparison of an entity with the ssector ector averages averages
-
Analysis of Consolidated financial stat statements ements — acquisition of a subsi subsidiary diary
-
Analysis of Consolidated financial stat statements ements — disposal of a subs subsidiary idiary
-
Analy Analysis sis of Cash flow inf informat ormation ion
-
Analysis of other (including non-financial) information
GIANG HA ACCA
| 475
238 23 8 475
4.Interpretation Stakeholder perspectives Stakeholder
Performance Performance of management during the gear
Shareholders
buy, hold or sell shar shares es Decision to buy, potential tial Future growth and profit poten
Potential investors
Investment decision Ability to pay existing existing inter interest est and loan capital
Banks and capital providers Employees Management Suppliers Government
Potential interest
to gran grantt further loons Decision whether to
stability ag an employer Company stability Wage negotiation negotiatio n Weak performing performing areas that need at attention tention Whether targets met
Credit worthiness worthiness as a cust customer omer
Statistics
whetherr to a award ward a g grant rant Decision whethe
GIANG HA ACCA
476
PRACTICE QUESTIONS
GIANG HA, FCCA, CPA
| 476
[email protected] 091 266 1988 477
239 23 9 477
21
Chapter STA ST ATEMENT OF CASH C ASH FLOW F LOW
GIANG HA, FCCA, CPA
[email protected] 091 266 1988
478
IAS 7 – Cash Flow Flow Stateme Statement nt OBJECTIVE entity’ ty’ss abil abilit ity y to • Provide to users of financial statement about an enti ge gene nera rate te ca cash sh and and ca cash sh equi equiva vale lent ntss, as well as indi indica cati ting ng th the e ca cash sh needs of needs of the entity.
SCOPE • A cash flow statement should be presented as an integral part of an enti entity ty’’s fina financ ncia iall stat statem emen ent t . All ent entit itie iess are requir uired ed by the standard to produce a cash flow statement.
GIANG HA ACCA
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479
240 24 0 479
IAS 7 – Cash Flow Flow Stateme Statement nt KEY DEFINITION Operating activities • are the principal revenue-prod revenue-producing ucing activities activities of of the enterprise and other activities that are not investing investing or financing activities
Investing activities • are the acquis acquisiti ition on and dis dispos posal al of of non-current assets and other investments not included in cash equivalents (loans and other borrowings)
Financing activities • are activities that res resul ultt in cha hang nges es in the siz ize e an and d com ompo possit itio ion n of th the e eq equit uity y ca capit pital al and bo borr rrowi owing ng of the entity GIANG HA ACCA
480
IAS 7 – Cash Flow Flow Stateme Statement nt BASIC PRINCIPLES for prepare CF OPENING BALANCE – Cash & Cash equivalent equivalent Operating CF Cash Flows in the period (MOVEMENT)
Investing CF Financing CF
|
480
ENDING BALANCE – Cash & Cash equivalent equivalent GIANG HA ACCA
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481
241 24 1 481
Cash and Cash equivalents Cash Equivalents • Not held for investment or other long-term purposes, but rather to meet short short-ter -term m cash commitmen commitments. ts. • Example: Term Term deposit (2 months) An investment’s (loan loan,, borr borro owing wing,, bank ank overdraft…) ma matu turi rity ty date date should should normally normally be thre e mo mont nths hs from from its acquisition date (noted: three equity investment like shares shares in in other companies other companies equivalentt) NOT cash equivalen NOTE for CF pr prese esent ntat ation ion:: Mov Moveme ement ntss between dif diffe fere rent nt types types of cash and cash equivalent
NOT INCL IN CLU UDE DED Dtransfer in cash cash flow flowssaccounts . i.e. i.e. Ter erm m NOTmatured deposits to bank GIANG HA ACCA
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482
482
Presentation of Cash Flow Flo w Statement 2 Methods DIRECT
INDIRECT
(not use for current exam) Di Disc sclo lose se majo majorr clas classe sess of gros grosss cash ash rece receip ipts ts and and gross cash payments ( Rarely Rarely used in practice as
Net pr prof ofit it or loss loss is ad adju jussted ed for for the effects of transactions of a non-cash nature, nature, any def deferr errals als or accruals, items of income or expense associated with
costly to prepare)
inves inv estin ting g or fin finan ancing cing cas cash h flo flows ws
GIANG HA ACCA
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483
242 24 2 483
Presentation of Cash Flow Flo w Statement Basis for Indirect method Ex Exam ample ple 1: ABC Co. Cash sale: 100 Expense (paid): 60 Prof ofiit: 40 = Net movement of cash account
Example 2: ABC 2: ABC Co. Cash sale: 100 Expense (paid): (60) Depreciation: Depreciati on: (10) Profit: 30 Net CF CF = 100 – 60 = 40 = 30 + 10 (depreciation) Reason: Depreciation Non-cash items
(i) Adjust non-cash items from Ne Nett pr profi ofitt
Example 3: ABC 3: ABC Co. Cash sale: 100 Expense (paid): (60) Depreciation: Depreciat ion: (10) Profit: 30 AR-OB: 15 AR – EB: 10 Net CF = 100 100 – 60 + (15(1510) = 45 = 30 + 10 (depreciation) + 5 (change in AR balance)
(ii) Add changes in working capital + NCA + Equity (issue shares…) GIANG HA ACCA
|
484
484
Presentation of Cash Flow Flo w Statement 3 Cash Flows F lows for presentation OPERATING ACTIVITIES
INVESTING ACTIVITIES
FINANCING ACTIVITIES
• Cash receipts from receipts from the sale of goods and the rendering services receipts from • Cash receipts from royalties, fees, commission and other revenue payments to • Cash payments to suppliers for suppliers for goods and services
• Cash payments payments to to acquire NCA • Cash receipts receipts from from Disposal of FA • Cash payments payments to to acquire shares or debentures of other enterprises • Cash receipts receipts from from sales of shares or debentures of other enterprises • Loans Loans made made to other
• Cash proceeds proceeds from from issuing shares • Cash payments Cash payments to owners to owners to acquire or redeem the enterprise’ss shares enterprise’ • Cash proceeds proceeds from from issuing debentures, loan, notes, bonds, mortgages and other short or long-
• Cash payment to and on behalf of employees
parties • Cash receipts receipts from from the repayment of loans made loans made to other parties
term borrowings • Cash repayments repayments of of amount borrowed GIANG HA ACCA
|
485
243 24 3 485
Format of CF – Direct method method $ Cashflows from operatin operating g acti activiti vities es Cash receipts from customers Cash paid to supplier and employees Cash generated from operations Interest paid Income taxes paid Net cash from operating operating activi activities ties Cashflows from inv investi esting ng acti activiti vities es Purchase of property, plant and equipment Proceeds from sale of equipment Interest received Dividend received Ne Nett cashused in inv inves estin ting g act activi ivitie tiess Cash flows from financing activities Proceeds from issuance of share capital Proceeds from long-term borrowings Dividends paid *
$ xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx
Cashflows from financin financing g acti activiti vities es Cash receipts from shares issued Long term loan paid Ne Nett cashfrom financi financing ng activit activitie iess
xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx
Net increase in cash and cash equivalent Cash and cash eq equivalent at beginning of period Cash and cash equivalent at end of period
xxxxxxx xxxxxxx xxxxxxx
GIANG HA ACCA
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486
486
Format of CF – Indirect method method $’ $’m/ m/00 000 0 Cash Cas h flows flows from from ope operat rating ing act activi ivitie tiess Net profi profitt bef before ore tax taxation ation XXX Adjustment for : Adjustment Depreciation XX Investment income (XX) Interest expense XX Operating profit before working XXX changes Increa Increase/ se/Dec Decrea rease se in tr trade ade and (XX)/XX other receivables Increase/D Incre ase/Decreas ecrease e in inven inventories tories (XX)/XX Incr Increa ease se/D /Dec ecre reas ase e in tr trad ade e payable Cash Cash gener enerat ated ed from from oper opera ati tion onss
XX/(XX) XXX XXX
$’m/ $’m/00 000 0 Non-Cash PL items: • Depreciation/Amortization • Provisions/Allowance To classify investing activities To present separately interest paid as required by IAS Change Chang e in WC Increase in trade and other receivables Subtract Increase in inventory Subtract Increase in trade payables Add Decrease in trade and other receivables Add Decrease in inventory Add Decrease in trade payables Subtract Note: AR/AP excluded balance related to Income
Interest paid Income taxes paid Net cash ash from from oper operat atiing acti activ vit itie iess
(XX) (XX)
tax & interest payables as tax paid & interest paid presented as separate lines. lines.
XXX GIANG HA ACCA
|
487
244 24 4 487
Format of CF – Indirect method method Cash flows from inv investi esting ng activ activities ities Purc Purcha hase se of prop proper erty ty,, pl plan antt and and equipment Proceeds from sale of equipment Interest received Dividend received Net ca cash u ussed iin n iin nvesting a acctivities Cash Cas h flows flows fro from m financ financing ing act activ iviti ities es Proc Procee eeds ds from from is issu suan ance ce of shar share e capi capita tall Proceeds from long-term bor orrrowings Dividends paid * Net Net cas cash h used in fina financi ncing ng act activi ivitie tiess Net inc increase ase in cash ash and and cash ash equi equiva vale lent nt
(XX) XX XX XX XXX
May be presented as operating CF
XX XX (XX)
Cash and cash equivalen equivalentt at beginnin beginning g of period (note) Cash and cash equivalent at end of period
XXX XXX XX XX
(note) GIANG HA ACCA
488
Cash Flow Statement Example: Present Example: Present CF with the following information
|
488
GIANG HA ACCA
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489
245 24 5 489
Cash Flow Statement Example: Present Example: Present CF with the following information
GIANG HA ACCA
|
490
490
Suggested steps to prepare pre pare a CFS Step 1
Set out the preformed preformed of CFS (as mentioned mentioned above)
Step 2
Begin with the reconciliation of profit before tax to net cash from operating operating activities activities as far as possible
Step 3
Calculate the cash flow figures for dividends paid, purcha pur chase se or sale sale of NCAs NCAs,, iss issues ues of share sharess and repayment of loans
Step 4
Calculate the net profit to net CF from operating activities (if the profit figure figure is not given)
Step 5
Complete the statement
GIANG HA ACCA
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491
246 24 6 491
Reporting requirements General
GROSS BASIS
Special Case
NET BASIS
Cash receipts and payments on behalf of customers when the cash flows reflect the activities of the customer rather than those of the entity (funds (funds held for customers by an investment entity) entity) Cash re Cash recei ceipts pts and payme payment ntss for items items in which which the tu turn rnov over er is quic quick, k, th the e amou amount ntss are are larg large, e, an and d th the e matu ma turi riti ties es are are shor shortt (the purchase and sale of investments)) investments GIANG HA ACCA
|
492
492
FC Cashflows • FC cash flows flows arising arising from tr transac ansactio tions ns shall shall be record recorded ed in an entity’s fun funct ction ional al curren currency cy by applying applying to the foreign foreign currenc currencyy amount the exchange rate between the functional currency and the foreign currency at the da date te of the the cash cash fl flow ow.. • The cash flows of a for forei eign gn sub subsid sidiar iary y shall be translated translated at at the exchange rates between the functional currency and the foreign currency at the the da date tess of the the cash cash flow flows. s. Unrealized gains and losses arising from changes in foreign currency • Unrealized gains exchange rates are not not ca cash sh fl flow owss
• The effect effect of of exchange rate changes on cash and cash equivalents held or due in a foreign currency is reported in the statement of cash flows in order to re reco conc ncil ile e cash cash an and d cash cash eq equi uiva vale len nts at the the
be begi ginn nnin ing g an and d the the en end d of the the pe peri riod od
GIANG HA ACCA
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493
247 24 7 493
Interest and Dividends interes erestt and dividends dividends received received and and paid shall each • Cash flows from int be disclosed separately. • Each shall be classified into three act activities ivities as the case may be. amount of int of interes erestt paid during paid during a period is disclosed in the • The total amount st stat atem emen entt of ca cash sh flows flows whethe whetherr it has been been reco recogn gnise ised d as an expense in expense in profit or loss or capitalised in accordance with IAS 23 Borrowing Borrow ing Costs Costs.
GIANG HA ACCA
|
494
494
Interest and Dividends Inter erest est paid paid and int inter eres estt and divid dividend endss recei received ved are are usually • Int classi cla ssifie fied d as opera operatin ting g cash cash flo flow ws for a financial institution. • There is no consensus on the classification of these cash flows for other entities.
• Interest paid and interest and dividends received ma may y be classified operating cash flows because they enter into the determination of profit or loss. • On the other hand, interest paid and interest and dividends received may ma y be cl cla ass ssif ifie ied d as fina financ ncin ing g ca cash sh flow flowss an and d inve invest stin ing g cash cash fl flow owss respectively respecti vely,, because they are costs of obtaining obtaining financial f inancial resources resources or returns on investments.
GIANG HA ACCA
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495
248 24 8 495
Income Incom e Taxes Taxes Cash h flow flowss aris arisin ing g from from ta taxxes on inco income me sh shal alll be separately • Cas disclosed and sh shall all be class classifi ified ed as cash cash flows flows from from ope opera rati ting ng activities unless they can be specifically identified with financing and investing activities
GIANG HA ACCA
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496
496
Non cash items • Investing and financing transactions that do not require the use of cash or cash equivalents equivalents shall be excluded from a statement statement of cash flows.
• Such transac transaction tionss shal shalll be disclose disclosed d elsewher elsewhere e in the financi financial al statements in a way that provides all the relevant information about these investing and financing activities.
GIANG HA ACCA
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497
249 24 9 497
Other disclosures • Restrictions on the use of or access to any part of cash equivalents; • Amount of indr of indrawn awn borrowing borrowing facilities facilities which are available; and • Cash flows which inc incre rease ased d opera operatin ting g capa capacit city y compared to cash flows which merely maintained operating activities
GIANG HA ACCA
|
498
498
Advantages and criticism of cash flow accounting ADVANTAGES • Survi Survival val in busines businesss depends on the ability to genera generate te cash. Cash flow accounting directs attention towards this critical issue • Cash flow is more comprehensive than “profit” which is dependent on accounting conventions and concepts • Creditors (long and short-term) are more interested in an enterprise’s ability to repay them than in its profitability • Cash flows reporting provides better mean of comparing the result of differentt companies rather than traditional profit reporting differen • Management: Management: informa information tion for decisi decision on making (relevant (relevant cos cost, t, future future cash…) • Sha Share rehol holde der/a r/audi udito tor: r: pro provid vide e satisf satisfact actory ory bas basis is fo forr stew steward ardshi ship p accounting
Cash flow forecasts are easier to prepare and more useful than profit forecasts • Accruals concept is confusing and cash flows are more easily understood
• Forecast can subsequently be monitored by compare actual cash flow against the forecast. GIANG HA ACCA
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Advantages and criticism of cash flow accounting Criticism of preparing cash flow not easy easy to • Cash equivalent not to distinguish distinguish and unrealistic unrealistic (like an investment has to be within three months of maturity).
• No interpretation of the CFS is provided within the accounts. • Non-cash transactions transaction s (bonus issue) are not highlighted, they are of interest to users as they will impact future cash flows.
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PRACTICE QUESTIONS
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[email protected] 091 266 1988 501
251 25 1 501
Past Exam • Q3. Jun, Dec 2013
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22
Chapter
FOREIGN CURRENCY
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[email protected] 091 266 1988
252 25 2 503
IAS 21 - The Effec Effects ts of Changes in Foreign Ex Exchange change Rates Key Definitions • Foreig Foreign n curren currency cy:: A currency other than the functional currency of the entity • Funct Functional ional curren currency: cy: the the currency pf the primary economic environment in which the entity operates. • Presen Presentati tation on currency: currency: The The currency in which the financial statements are presented. • Exch Exchange ange rat rate: e: The The ratio of exchange for two currencies. • Ex Excha change nge dif differ ferenc ence: e: The diff differenc erence e resulting resulting form trans translatin lating g a give given n number num ber of uni units ts of one cur curre rency ncy into into anot another her cur curre rency ncy at differ different ent exchange rates. • Closi Closing ng rat rate: e: The The spot exchange rate at the year – end date. • Spo Spott ex excha chang nge e ra rate: te: The The exchange rate for immediate delivery. • Mon Moneta etary ry it items: ems: Units of currency held and assets and liabilities to be received or paid in a fixed f ixed or determinable number of units of currency.
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IAS 21 - The Effec Effects ts of Changes in Foreign Ex Exchange change Rates Functional Currency • Each entity – whether an individual company, a parent of a group, or an operation within a group (such as a subsidiary, associate or branch) – should determine its fun functi ctiona onall curr currenc ency y and me meas asu ure it itss re resu sult ltss an and d fin financ ancial ial positi position on in tha thatt cur curren rency cy..
Factorss to consider Factor a. b. c.
The cur curre rency ncy that that m main ainly ly influ influenc ence e sales sales pri prices ces for for goods and services (often the currency in which prices are a re denominated and settled) The cur curren rency cy of the cou count ntry ry who whose se competi competitiv tive e forces forces and regula regulatio tions ns mainly determine the sales prices of its goods and services The currency currency that mainly influe influence ncess labour labour,, mat materia eriall and oth other er cos costs ts of of
providing goods or services (often the currency in which prices are denominated and settled)
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IAS 21 - The Effec Effects ts of Changes in Foreign Ex Exchange change Rates Foreign currency transactions 1. Conv onversion sion • Conversion is the the process of ex exchanging changing amounts of one foreign foreign currency for another.
2. Tran ansl sla ation tion Foreign currency translation, as distinct form conversion conversion,, does not involve the cat of exchanging one currency for another. Translation Translation is is required at the end of an accounting a ccounting period period when when a company still holds assets or liabilities in its statement of financial position which were obtained or incurred in a foreign currency. These assets or liabilities might consist of: a. An individual ho home me ccompany ompany holding individual assets o orr liabilit liabilities ies originating in a foreign currency “deal” b. An individual home com company pany with with a sseparate eparate branch o off the b business usiness operating abroad which keeps its own books of account in the local currency. GIANG HA ACCA
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IAS 21 - The Effec Effects ts of Changes in Foreign Ex Exchange change Rates Foreign currency transactions 1. Conv onversion sion
• Conversion is the the process of ex exchanging changing amounts of one foreign foreign currency for another. Example: 1.5: Purchase goods from supplier: 10 MVND, Forex = 20.000 VND/ USD Functional currency: USD Entry: Dr Purchase/Cr AP: 10M/20k = 500 USD When payment, payment, Forex =24.000 VND/USD Entry: Dr AP: 500 USD Cr : 10M/24k=417 USD
Cr: Gain on conversions: 83 USD
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IAS 21 - The Effec Effects ts of Changes in Foreign Ex Exchange change Rates Accounting for Forex transactions
Initial measurement recorded, ded, • IAS 21 states that a foreign currency transaction should be recor on initia initiall recog recognit nition ion in the functi functional onal cur curre rency ncy,, by app applyi lying ng the ex exchan change ge rate rate bet betwe ween en the repor reportin ting g cur curre rency ncy and the the fo forei reign gn currency at the date of the transaction to the foreign foreign currency amount. • An av aver erage age ra rate te for for a period may be used if exchange exchange rates do not fluctuate significantly. fluctuate significantly.
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508
IAS 21 - The Effec Effects ts of Changes in Foreign Ex Exchange change Rates Accounting for Forex transactions
Reporting at subsequent year ends • It is important to distinguish between monet monetary ary and non – monetary items. Mon Monet etary ary it items ems involve involve the right receive of the obligation to de deliv liver er a fix fixed ed or determ determinab inable le amo amount unt of cur curre rency ncy.. This This would would include receivables, payables, loans etc. Non Non – mo mone neta tary ry it item emss would be items such as a s non-current assets and inventories. • The following rules apply at each subsequent year end. a. Report foreign currency monet monetary ary items items using the closi closing ng rat rate e b. Reporting non-m non-monet onetary ary items (eg items (eg non-current assets, inventories) which are carried at his histor torica icall cost cost in a foreign currency using the
ex exch chan ange ge ra rate te at th the e da date te of the the tran transa sact ctio ion n (historical rate) non-monet monetary ary items items which which are carried at fa fair ir valu value e in a c. Reporting nonforeign currency using the exchange rates that exists wh whe en the val values ues were were measur measured. ed. GIANG HA ACCA
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509
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IAS 21 - The Effec Effects ts of Changes in Foreign Ex Exchange change Rates Accounting for Forex transactions
Recognition of exchange differences There are two situations to consider: a. The transa transactio ction n is sett settled led in the same peri period od as tha thatt in which it occurred: all the exchange difference is recognized recognized in that period. b. The transacti transaction on is se settl ttled ed in a sub subseq seque uent nt acco account unting ing per period iod:: the exchange difference recognized in each intervening period up to period of settlement is determined by the change in exchange rates during that period. In other words, where a mo mone neta tary ry it item em has has not not been been se sett ttle led d at the the end end of a period, its should be re rest stat ated ed us usin ing g the the cl clos osin ing g exch exchan ang ge rat ate e and any gain gain or lo loss ss taken aken to prof profit it or lo loss ss..
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510
510
IAS 21 - The Effec Effects ts of Changes in Foreign Ex Exchange change Rates Accounting for Forex transactions
Recognition of exchange differences • Exchange differences occur when there is a change in the exchange rate between the transaction date and the date of settlement of monetary items arising form a foreign currency transaction. • Exchange differences arising on the settle ettlemen mentt of mon monet etary ary items items (receivables, payables, loans, cash in a foreign currency) or on translating an entity’s monetary items at rates different form those at which they were wer e translate translated d initi initially ally,, or repor reported ted in prev previous ious financ financial ial sta statemen tements, ts, should be recognized in pr prof ofit it or loss loss in in the period in which they arise.
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22
Chapter
ACCOUNTING ACCOUNTIN G FOR INFLATION
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[email protected] 091 266 1988
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Alternative models of Historical cost Historical cost vs. Current value
The move towards current value accounting has already taken a number of steps. Entities are now permitted to revalue non-current assets such as land and buildings in line with market value and financial assets and liabilities such as securities and investments cab be carried at fa fair ir valu value e, defined in IFRS 13 as: “ The price that would be received to sell an asset or pai paid d to trans transfer fer a liabil liability ity in an ord order erly ly trans transacti action on betwee between n mar marke kett participants at the measurement date.”
Advantage?
Disadvantages?
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Alternative models of Historical cost Current purchasing power (CPP) • CPP accoun accountin ting g is a met method hod of acc accoun ountin ting g fo forr gener general al (no (nott specif specific) ic) inflation, if does so by expressing asset values in a stable monetary unit, the $ of current purchasing power. Example: Rice and Price set up in business on 1 January 20X5 with no non-current assets, and cash of $5,000. On 1 January they acquired inventories for the full $5,000, which they sold on 30 June 20X5 for $6,000. On 30 November they obtained a further $2,100 of inventory on credit. The index of the general price level gives the following figures: Date Index 1 January 20X5 300 30 June 20X5 330 30 November 20X5 350 31 December 20X5 360 Required: Calculate the CPP profits (or losses) of Rice and Price for the year to 31 December 20X5 GIANG HA ACCA
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Alternative models of Historical cost Current purchasing power (CPP) accountin ting g is a met method hod of acc accoun ountin ting g fo forr gener general al (no (nott specif specific) ic) • CPP accoun inflation, if does so by expressing asset values in a stable monetary unit, the $ of current purchasing power. Answer:
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515
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Alternative models of Historical cost Current cost accounting (CCA) • CCA is base based d on a physic physical al con concept cept of capi capital tal maint maintenan enance ce.. Pro Profit fit is re recog cogniz nized ed after after the ope opera ratin ting g cap capabi ability lity of the bus busine iness ss has bee been n maintained.
Value to the business (deprival value) Current cost accounting (CCA) reflects an approach to capital maintenance based bas ed on maint maintain aining ing the op oper erat atin ing g capa capabi bili lity ty of a bu busi sine ness ss.. The The conceptual basis of CCA is that the value of assets consumed or sold, and the value of assets in the statement of financial position, should be stated at th thei eirr va valu lue e to th the e bu busi sine ness ss (also (also known as “depriv “deprival al value”). • The deprival value of an asset is the loss which a business entity wo woul uld d suff suffer er if it we were re de depr priv ived ed of the the us use e of the the as asse set. t.
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Alternative models of Historical cost Current cost accounting (CCA) based d on a physic physical al con concept cept of capi capital tal maint maintenan enance ce.. Pro Profit fit is • CCA is base re recog cogniz nized ed after after the ope opera ratin ting g cap capabi ability lity of the bus busine iness ss has bee been n maintained.
Value to the business (deprival value) Value to the business, or deprival value, can be any of the following values a. Repla eplace ceme men nt co cost st:: in the case of non-current assets, it is assumed that the replacement cost of an asset would be its net replacement cost (NRC),, its gross replac (NRC) replacement ement cost minus an approp appropriat riate e provi provision sion for depreciation to reflect the amount of its life already “used up”. b. Ne Nett real ealiz izab able le value alue (NRV) NRV):: what the asset could be sold for, net of any
disposal costs. Economic value (EV), or value in use: what the existing asset will be
c.
worth to the company over the rest of its useful life. GIANG HA ACCA
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Alternative models of Historical cost Concepts of capital maintenance and the determination of profit a.
b.
Under a financial concept of capital, su such ch as inv invest ested ed money money or invested purchasing power, capital is the net assets or equity. The financial concept of capital is adopted by most entities. Under a physical concept of capital, such as oper operating ating capability capability, capital is the productive capacity of the entity based on, for example, units of output per day.
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Chapter
23 SPECIALISED, SPECIALIS ED, NOT-FOR-PROFIT NOT-FOR-PROFI T AND PUBLIC SECTOR ENTITIES
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Non-for-Profit organisations Not-for-profit and public sector entities: Not-for-profit 1. Central governmen governmentt departments and age agencies ncies 2. Local or federal governmen governmentt departments bodies providing healthcare and social housing 3. Publicly funded bodies 4. Further and higher education institutions 5. Charitable bodies The first four are public sector entities. Charities are private not-for-profit entities. Until recently, public sector accounts were prepared on a cash basis. A transition is still in progress which will get them operating on an accruals basis, in line with normal practice in the private sector sector..
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24
Chapter REVISIONS
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[email protected] 091 266 1988
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Over Ov erall all – F7 – Financ Financial ial Repor Reportin ting g Main capabilities?
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Over Ov erall all – F7 – Financ Financial ial Repor Reportin ting g Main capabilities?
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Over Ov erall all – F7 – Financ Financial ial Repor Reportin ting g Main capabilities?
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Over Ov erall all – F7 – Financ Financial ial Repor Reportin ting g A. The conceptual and regulatory framework for financial reporting
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Over Ov erall all – F7 – Financ Financial ial Repor Reportin ting g A. The conceptual and regulatory framework for financial reporting
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Over Ov erall all – F7 – Financ Financial ial Repor Reportin ting g A. The conceptual and regulatory framework for financial reporting
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Over Ov erall all – F7 – Financ Financial ial Repor Reportin ting g A. The conceptual and regulatory framework for financial reporting
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Over Ov erall all – F7 – Financ Financial ial Repor Reportin ting g B. Accounting for transactions in financial statemen statements ts
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Over Ov erall all – F7 – Financ Financial ial Repor Reportin ting g B. Accounting for transactions in financial statements statemen ts
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Over Ov erall all – F7 – Financ Financial ial Repor Reportin ting g B. Accounting for transactions in financial statemen statements ts
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Over Ov erall all – F7 – Financ Financial ial Repor Reportin ting g B. Accounting for transactions in financial statements statemen ts
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Over Ov erall all – F7 – Financ Financial ial Repor Reportin ting g B. Accounting for transactions in financial statemen statements ts
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Over Ov erall all – F7 – Financ Financial ial Repor Reportin ting g B. Accounting for transactions in financial statements statemen ts
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Over Ov erall all – F7 – Financ Financial ial Repor Reportin ting g B. Accounting for transactions in financial statemen statements ts
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Over Ov erall all – F7 – Financ Financial ial Repor Reportin ting g B. Accounting for transactions in financial statements statemen ts
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Over Ov erall all – F7 – Financ Financial ial Repor Reportin ting g B. Accounting for transactions in financial statemen statements ts
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Over Ov erall all – F7 – Financ Financial ial Repor Reportin ting g B. Accounting for transactions in financial statemen statements ts
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Over Ov erall all – F7 – Financ Financial ial Repor Reportin ting g B. Accounting for transactions in financial statemen statements ts
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Over Ov erall all – F7 – Financ Financial ial Repor Reportin ting g B. Accounting for transactions in financial statemen statements ts
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Over Ov erall all – F7 – Financ Financial ial Repor Reportin ting g C. Analysing and interpreting the financial statements statem ents of single entities and groups
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Over Ov erall all – F7 – Financ Financial ial Repor Reportin ting g C. Analysing and interpreting the financial statements statem ents of single entities and groups
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Over Ov erall all – F7 – Financ Financial ial Repor Reportin ting g C. Analysing and interpreting the financial statements statem ents of single entities and groups
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Over Ov erall all – F7 – Financ Financial ial Repor Reportin ting g C. Analysing and interpreting the financial statements statem ents of single entities and groups
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Over Ov erall all – F7 – Financ Financial ial Repor Reportin ting g D. Preparation of financial statements
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Over Ov erall all – F7 – Financ Financial ial Repor Reportin ting g D. Preparation of financial statements
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Over Ov erall all – F7 – Financ Financial ial Repor Reportin ting g D. Preparation of financial statements
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