Financial Operations Notes

- 1-
TUITION
CIMA
CLASS NOTES
F1
FINANCIAL OPERATIONS
F1 FINANCIAL OPERATIONS
- 2F1 FINANCIAL OPERATIONS
- 3-
Payments in advance................................................................................... 115

C2(a) apply the accounting rules contained in IFRSs and IASs dealing
with reporting of performance................................................................... 117
C2(b) - Explain the accounting rules contained in IFRSs and IASs
governing share capital transactions. ....................................................... 120
with reporting of performance................................................................... 126
Groups financial statements......................................................................... 136

c.
single company financial statements.................................................... 89
with events after the reporting period ......................................................... 89
C2(a)- apply the accounting rules contained in IFRSs and IASs dealing
with provisions and contingencies .............................................................. 91
single company financial statements.................................................... 96
C2(a) apply the accounting rules contained in IFRSs and IASs dealing with
inventories .................................................................................................. 96
C2(a)- apply the accounting rules contained in IFRSs and IASs dealing
with construction contracts (and related financing costs) ........................... 98
with leases (lease only) ............................................................................ 109
c.
Contents Page ................................................................................................. 3
Paper Information ............................................................................................ 6
How to Pass..................................................................................................... 7
The Verb Hierarchy .......................................................................................... 9
LEARNING OUTCOMES GRID ..................................................................... 10
PUBLISHED FINANCIAL STATEMENTS (C) ................................................ 15
C1(a) Prepare a complete set of financial statements, in a form suitable for
publication for a single company ................................................................ 15
non current assets ......................................................................................... 46
C2(a) apply the accounting rules contained in IFRSs and IASs dealing with
non current assets ...................................................................................... 46
with non current assets, including their impairment. ................................... 67
A principles of business taxation.................................................................... 74
A4(a)- apply the accounting rules for current and deferred taxation,
including calculation of deferred tax based on a given set of rules............. 74
CONTENTS PAGE
- 4-
C1(b) Apply the conditions required for an undertaking to be a subsidiary or

an associate of another company............................................................. 136
C1(d) Apply the concepts of fair value at the point of acquisition,
identifiability of assets and liabilities, and recognition of goodwill. ............ 139
C1(c) Prepare the consolidated statement of financial position (balance
sheet) for a group of companies comprising directly held interests in one or
more fully-controlled subsidiaries (such interests having been acquired at
the beginning of an accounting period); ................................................... 140
C1(d) Apply the concepts of fair value at the point of acquisition,
identifiability of assets and liabilities. ........................................................ 150
C1(c) Prepare the consolidated statement of comprehensive income (income
statement) for a group of companies comprising directly held interests in one
or more fully-controlled subsidiaries (such interests having been acquired at
the beginning of an accounting period); ........................ 155
A proforma CSCI - 100% Sub and 30% Associate ................................... 160
EXAMPLE 1 ............................................................................................. 161
PRACTICE QUESTION ........................................................................... 164
Regulation AND ETHICS of financial reporting (B) ...................................... 167

B1(d) - Explain the meaning of given features of the IASBs Framework for
the Presentation and Preparation of Financial Statements ...................... 167
B1g - Explain in general terms, the role of the external auditor, the elements of
the audit report and types of qualification of that report........................ 171
B1a - Explain the need for regulation of published accounts and the concept
that regulatory regimes vary from country to country ............................... 177
B1b - Explain potential elements that might be expected in a regulatory
framework for published accounts ............................................................ 177
B1c - Describe the role and structure of the International Accounting
Standards Board (IASB) and the International Organisation of Securities
Commissions (IOSCO) ............................................................................. 178
B1e - Describe the process leading to the promulgation of an international
accounting standard (IAS) ........................................................................ 179
B1f - Describe ways in which IASs interact with local regulatory
frameworks............................................................................................... 179
B2(a) Explain the importance of the exercise of ethical principles in
reporting and assessing information;........................................................ 180
B2 (b) Describe the sources of ethical codes for those involved in the
reporting or taxation affairs of an organisation, including the external
auditors; ................................................................................................... 180
B2(c) Apply the provisions of the CIMA Code of Ethics for Professional
Accounts of particular relevance to the information reporting, assurance and
tax-related activities of the accountant. .................................................... 180
Principles of Business Taxation (a) .............................................................. 184
- 5-
A1b - Describe the features of the principal types of taxation likely to be of

relevance to an incorporated business in a particular country (e.g. in terms of
who ultimately bears the tax cost, withholding responsibilities, and principles of
calculating the tax base)....................................................... 184
A2b - Describe sources of tax rules and explain the importance of
jurisdiction. ............................................................................................... 188
A3a prepare corporate income tax calculations based on a given simple set of
rules................................................................................................ 191
A1e illustrate numerically the principles of different types of tax based on
provided information ................................................................................. 191
A1b- describe the features of the principal types of taxation likely to be of
relevance to an incorporated business in a particular country .................. 208
A1c explain key administrative requirements and the possible enquiry and
investigation powers of taxing authorities associated with the principal types of
taxation likely to be of relevance to an incorporated business.............. 218
A1d- explain the difference in principle between tax avoidance and tax evasion
..................................................................................................... 220
A2a identify situations in which foreign tax obligations (reporting and liability)
could arise and methods of relieving foreign tax ......................... 222
- 6-
one or two compulsory questions.

Section C - 50 marks
six compulsory short answer questions,
each worth 5 marks.
Section B - 30 marks
a variety of compulsory objective test
questions, each worth between 2 and 4 marks.
Section A - 20 marks
FORMAT OF THE PAPER
There will be a written examination paper of three hours, with the

following
sections.
60%
Financial Accounting and Reporting
c
15%
Regulation and Ethics of Financial Reporting
b
25%
Principles of Business Taxation
a
Syllabus Outline
PAPER INFORMATION
- 7-
? Have sound theoretical knowledge

(attend tuition classes)
? Practice application skills
(question practice)
? Be prepared!
(attend revision & QBR)
? Read the question requirements
? Add value to the scenario material
HOW TO PASS
THE VERB HIERARCHY
(a)
apply the accounting rules for current and deferred taxation,

including calculation of deferred tax based on a given set of rules.
4. Apply the accounting rules for current and deferred taxation.

(a) prepare corporate income tax calculations based on a given
simple set of rules.
3. Prepare corporate income tax calculations.
(a) identify situations in which foreign tax obligations (reporting and
liability) could arise and methods for relieving foreign tax;
(b) explain sources of tax rules and the importance of jurisdiction.
2. Explain fundamental concepts in international taxation of
incorporated businesses.
(A) identify the principal types of taxation likely to be of relevance to
an incorporated business in a particular country;
(B) describe the features of the principal types of taxation likely to be
of
relevance to an incorporated business in a particular country;
(C) explain key administrative requirements and the possible
enquiry and investigation powers of taxing authorities associated
with the principal types of taxation likely to be of relevance to an
incorporated business;
(D) explain the difference in principle
between tax avoidance and tax evasion;
(E) illustrate numerically the principles of different types of tax based
on provided information;
1. Explain the types of tax that can apply to incorporated businesses,
their principles and potential administrative requirements.
Component
Lead
LEARNING OUTCOMES GRID
A Principles of Business Taxation 25%
(a) explain the importance of the exercise of ethical principles in

reporting and assessing information;
(b) describe the sources of ethnical codes for those involved in the
reporting of
taxation affairs of an organization, including the external
auditors;
(c) apply the provision of the CIMA Code of Ethics for Professional
Accountants of particular relevance to the information reporting,
assurance and
tax-related activities of the accountant.
2. Apply the provisions of the CIMA Code of Ethics for Professional
Accountants.
(a) prepare corporate income tax calculations based on a given
simple set of rules.
(b) explain potential elements that might
be expected in a national regulatory framework for published
accounts;
(c) describe the role and structure of the
International
Accounting Standards
Board (ASB) and the International Organisation of Securities
(d)
(e)
(f)
(g)
Commissions (IOSCO);
explain the meaning of given features or parts of the IASBs Framework for the
Presentation and Preparation of Financial Statements;
describe the process leading to the promulgation of an IFRS;
describe ways in which IFRSs can interact with local regulatory
frameworks;
explain in general terms, the role of the external auditor, the elements of the
audit report and types of qualification
of that report.
1. Explain the need for and methods of regulating accounting and

financial reporting.
Component
Lead
11
B Regulations and Ethics of Financial Reporting 15%

F1 Financial Operations
(a) apply the accounting rules contained in IFRSs and IASs dealing eith
reporting performance, non-current assets, including their
impairment, inventories, disclosure of related parties to a business,
construction contracts (and related financing costs), post-balance
sheet events, provisions,
contingencies and leases (lessee only);
(b) explain the accounting rules contained
in IFRSs and IASs governing share capital transactions.
2. Apply international standards delaing with a range of matters and
items.
(a)
prepare a complete set of financial statements, in a form

suitable for publication for a single company;
(b) apply the conditions required for an
undertaking to be a subsidiary or an associate of another
company;
(c) prepare the consolidated statement of financial position (balance
sheet) and
statement of comprehensive income for a group of companies in
a form suitable for publication for a group of
companies comprising directly held interests in one or more fullycontrolled subsidiaries and associates (such interests having been
acquired at the beginning of an accounting period);
(d) apply the concepts of fair value at the
point of acquisition, identifiability of assets and liabilities, and
recognition of goodwill.
1. Prepare the full financial statements of a single company and the
consolidated statements of financial position and comprehensive
income for a group (in relatively straightforward circumstances).
Component
Lead
12
Reporting 60%
C Financial Accounting and
13
OVERVIEW
14
IASS
PUBLISHED FINANCIAL STATEMENTS

(C)
C1(a) Prepare a complete set of financial statements, in a form

suitable for publication for a single company
15
IAS 1 provides the following formats within its Implementation

Guidance for the first three statements. These are shown below for a
basic incorporated company only. The cash flow will be considered
later in the chapter under IAS 7.
Fair presentation and compliance with
IFRSs
Fair presentation requires the faithful representation of the effects of
transactions, other events and conditions in accordance with the
definitions and recognition criteria set out in the IASBs Framework.
The financial statements should specifically state their compliance with
IFRSs by note. Any departure from the requirements of a Standard
should also be disclosed.
Fair presentation is achieved by compliance with IFRSs but also
requires an
en
tity
to:
a Statement of Financial Position
an Statement of Comprehensive Income a
Statement showing changes in equity
a Statement of Cash Flow
notes for accounting policies and other explanatory notes.
?
?
?
?
?
statements of all other entities. IAS 1 sets out overall requirements for
the presentation of financial statements, guidelines for their structure
and minimum requirements for their content.
A complete set of financial statements
comprises:
general purpose financial statements, to ensure comparability both with
the
entitys financial statements of previous periods and with the financial
of
The objective of this Standard is to outline the basis for presentation
IAS 1 PRESENTATION OF FINANCIAL STATEMENTS
16
Standards change; or
The nature of the entitys operations changes it is more appropriate
to
? follow a different presentation or classification
?Going
Concern
Financial statements shall be prepared on a going concern basis
unless management either intends to liquidate the entity or cease
trading, or has no realistic alternative but to do so.
When financial statements are not prepared on a going concern basis,
it should
be
disclosed,
together
withthe
basis
on which
the
financial statements are prepared
and the reason why the entity is not regarded as a going concern.
Accruals
basis
accounting
of
An entity should prepare its financial statements, other than the

Statement of Cash Flow, using the accruals (matching) basis of
accounting.
Transactions should be recognised in the period to which they relate
rather than when physical cash flows take place and expenses should
be matched in the Statement of Comprehensive Income with the
income they generate.
Consis
tency
Presentation and classification of items should be consistent from
period to period unless;
events or conditions
?enable the users to
information
Provide disclosures to clarify transactions, where compliance with
the IFRS may not understand their impact.
understandable
and
relevant, reliable, comparable
provides
?
Estimates and Errors when selecting and applying its accounting

policies
Present information, including accounting policies, in a manner that
Accounting
in
Changes
Policies,
Accounting
8
IAS
Follow
?
17
financial
the
in
reported
amounts
all
for
period
previous
the
disclosed for
statements.
Materiality and aggregation
Each material class of similar items should be presented separately in
the financial statements.
Immaterial items should be aggregated with similar items of the face of
the statement or in the notes.
Offsetting
Assets and liabilities, and income and expenses, should not be offset
unless required or permitted by a standard (see IAS 11).
Comparative information
Unless a Standard requires otherwise, comparative information should
be
18
Total comprehensive income for the year

(X)
X
X
Other comprehensive income:
Available
for sale
financial assets
Gains on property
revaluations
Income tax relating to components of other comprehensive income
Profit for the year

Loss for the year from discontinued operations
Profit for the year from continuing operations
Profit before tax
Income
taxoperations*
expense
Profit from
Finance costs
(X)
(X)
X (X)
X (X)
(X)
Distribution costs
Administrative expenses
Gross profit
Revenue
Cost of sales
$
X (X)
X
Two formats of Statement of Comprehensive Income are provided by
IAS 1 but we shall consider the most likely to be examined.
Classification of expenses by function
Statement of Comprehensive Income for the year ended 31

December
2009
Statement of Comprehensive Income
19
is
it
but
IAS1
in
operations
from
profit
* There is no requirement to show often beneficial for you to do so.
Question One Creighton Ltd

The following is an extract from the trial balance of Creighton Ltd, at
31st
December 2009
DR
CR
Sales
Purchases
45200
83200
Inventory
1 January 2009
Distribution at
costs
26000
12000
Bad debts written off
Hire of Machinery
Production wages
Loan
Interest
(loan repayable 2009)
Dividends
received
10000
1200
1000
800
2100
Motor
Cost Vehicles:
2000
Accumulated depreciation at 1 January 2009

Machinery
Cost
6000
Accumulated depreciation at 1 January 2009
1800
1000
3400
The following information should be taken into account:
1
Depreciation is to be provided for on a straight line basis as
follows:
- Motor Vehicles 25 %
-
Machinery 10%
Depreciation of motor vehicles is to be divided equally between

distribution costs and administrative expenses, depreciation of
machinery is to be charged wholly to cost of sales.
Bad Debts written off are to be included in administrative expenses
Closing inventory at 31 December 2009 was $31200
20
The estimated income tax expense for the year ended 31

December 2009 is $6000
Required:
Prepare Creighton Ltds Statement of Comprehensive Income for the year
ended 31 December 2009 in a form suitable for publication.
21
22
STATEMENT OF COMPREHENSIVE INCOME

QUESTION 1 CREIGHTON ANSWER
23
WORKING PAPER
24
Total assets
Current assets
X
XX
X
Inventories
Trade receivables
Other
current
assets
Cash and
cash equivalents
X
X
XXX
Non-current assets
Property, plant and equipment
Goodwill
Other intangible assets
Available-for-sale
investments
$
$
ASSETS
Statement of Financial Position as at 31 December 2009
THE STATEMENT OF FINANCIAL POSITION
25
TOTAL EQUITY AND LIABILITIES

X
X
XXXX
Current liabilities
Trade and other payables
Short-term borrowings
Current portion of long term borrowings
Current tax payable
Short-term
provisions
X
Non-current liabilities
Long-term borrowings
Deferred tax
Long-term
Total equityprovisions
EQUITY AND LIABILITIES

Capital and reserves
Share
capital
Other reserves
Retained earnings
X
XX
X
X
XX
26
Balance at 31 December
2009
X
X
X
(X)
X
X
(X)
(X)
X
X
X
Restated balance
Changes in equity for
2009
Total comprehensive income for the period Dividends
Issue of share capital Transfer to Retained earnings
X
(X)
(X)
Balance at 31 December
2008
Changes in accounting policy
$
X
$
X
$
X
$
X
Revaln
reserve
Tota
l
Retain
ed earnin gs
$
X
Share
premi um
Share
capit al
The statement of changes in equity provides a comprehensive
summary of all movements in the share capital and reserves during the
year.
Statement of Changes in Equity for the year ended 31 December
2009
STATEMENT OF CHANGES IN EQUITY
27
the
in
applied
necessarily
is
that
policy
Each specific accounting
financial
statements
?
The measurement basis used in preparing the financial statements e.g.
Historic Cost; and
?
It is unlikely full sets of notes would be requested. It is more likely that
specific notes would be requested. Many disclosures are laid out in the
standard itself e.g. IAS 16
Accounting policies note;
NOTES TO THE FINANCIAL STATEMENTS
QUESTION 2 MONKS LTD

Monks Ltd is a company with authorised share capital of 250 000 $1
Ordinary shares
The company prepares its accounts annually to 31 December and its trial
balance for the year ended 31 December 2009, before final adjustments, is as
follows:
DR
$
CR
$
Ordinary share capital, issued and fully paid

200 000
Share premium
7500
Retained earnings at 1 January 2009

61000
6% debenture stock
50000
Land and buildings
Cost
Accumulated depreciation 1 January 2009
200 000
76000
Plant and equipment
Cost
Additions in year
75000
10000
Accumulated depreciation 1 January 2009

30000
Trade receivables and Payables
Prepayments and accruals
Inventory
as at 31 December 2009
Cash at Bank
100000
140000
80000
30000
160000
90000
Profit for the Year (subject to items in the notes)

111000
Interim dividend paid
Sale proceeds of plant
2500
12000
717500
717500
The following should be taken into account:
1 The plant disposed if originally cost $16 000 and depreciation was
$3200 had been charged by the date of

disposal.
2 Annual
depreciation
is calculated
at the year end as :
? Land
and buildings
2% on
?
cost;
Plant and equipment 20% reducing balance method
28
3 The debenture stock is repayable at par by 5

equal annual installments starting on the 30
September 2010
4 Tax for the year is estimated to be $10 000
5 During the year 50 000 shares had been issued at $1.10
each. This share issue has been accounted for,
2010
Required:
Prepare in a form suitable for publication, the Statement of
Financial Position as at the 31 December 2009. A statement
showing the changes in equity should also be prepared.
29
th
A final dividend of 20p per share is proposed on the 10 of January

30
Statement of Financial Position as at 31 December 2008

QUESTION 2 MONKS LTD ANSWER
31
WORKING PAPER
32
Some examples of what would be included under these headings are

shown in the pro forma. This pro forma follows the indirect method
approach. The direct method approach is considered later.
Activities that result in changes in the size and composition
of
the contributed equity and borrowings of the entity
Financing activities
The acquisition and disposal of long term assets and other
investments not included in cash equivalents.
Investing activities
The principal revenue producing activities of the entity and other
activities that are not investing or financing activities.
Operating activities
HEADINGS OF THE CASH FLOW
Short term, highly liquid investments that are readily convertible to
known amounts of cash and which are subject to an insignificant risk of
changes in value
Cash
flows
Inflows and outflows of cash and cash
equivalents
DEFINITIONS
Cash
Cash on hand and demand deposits
Cash equivalents
alongside the Statement of Comprehensive Income, Statement of
Financial
Position and statement of changes in equity.
The cashflow is a primary statement that will be produced by a
company
IAS 7 STATEMENT OF CASH FLOWS
33
(X)
Net cash used in investing activities
(X)
(X) X X
X
(X)
Cash flows from investing activities
Purchases of property, plant and equipment Proceeds of sale of
property, plant and equipment Purchase of intangibles
Purchase of investments
Interest received
Investment
income received
X
Net cash from operating activities

Cash generated from operations
Interest paid Income taxes paid Dividends paid*
Operating profit before working capital changes
Increase in trade receivables Increase in inventories
Increase in trade payables
X
(X) X
X (X)/X X/(X)
X (X) (X) X
X (X) (X) (X)
Adjustments for:
Interest expense Investment income Depreciation
Amortisation Profit/loss on disposal Increase/Decrease in provisions
X
Cash flows from operating activities
Net profit before tax
$
$
Statement of Cash Flow for the year ended 31 December 2009
34
Cash and cash equivalents

X
Short-term investments
X
Cash on hand and balances with banks (inc overdrafts)
2005
$
31 December
2006
$
* Allowed alternative presentation
Analysis of cash and cash equivalents
Cash and cash equivalents at end of period
(X)
XX
Net cash used in financing activities

Net increase in cash and cash equivalents
Cash and cash equivalents at beginning
of period
X
X (X) (X) (X)
Cash flows from financing activities

Proceeds from issue of shares Proceeds from issue of debt
Redemption of debt
Payment of finance lease liabilities
Dividends paid*
35
Cash from operating

activities
SAME
SAME
Cash from operating activities
X
in
Increase
receivables
Increase in payables
(X)
X (X) (X)
Investment income
Interest expense
Increase in inventories
and employees
suppliers
to
payments
Cash
Profit before taxation
Depreciation
Cash received from customers
$000
XX
$000
XX
Indirect method
Direct method
IAS 7 allows the cash flow to be prepared using either of the two
methods
below. It is important to note that both methods should give the same
overall outcome.
DIRECT VERSUS INDIRECT METHOD
36
or
managed
well
being
isnt
may not be the case if the working capital
unusual
transactions
haveoperating
taken place.
In general
net cash from
activities should be higher than
profit
from operations due to the effect of the adjustment for depreciation.
This
A cash flow alone cannot give enough information to enable a user to
know
if the entitys funds are being managed efficiently. Reviewing the
yearend Statement of Financial Position and considering the
relationship between components of working capital and financing
would be advisable.
Cash balances can also be distorted in the short term by holding back
payments to suppliers by a matter of days at the yearend, delaying
buying inventories or offering settlement discounts for prompt
payments.
Most businesses would not survive a prolonged period of net cash
outflows.
Whilst others who have too much tied up in liquid resources
have shareholders who would benefit from a cash outflow for example
investing in non-current assets or paying a dividend.
Ideally the cash flow should show a net increase in cash during a
period but
itINTERPRET
is obviouslyAnot
as OF
cut CASH
and dryFLOWS
as that within a business.
TION
Question 3 - Bean
Beans Statement of Comprehensive Income for the year
ended
31
December 2009 and Statement of Financial Positions at 31
December 2008 and 31 December 2009 were as follows:
Statement of Comprehensive Income for the year ended 31

December
2009
$000
Revenue
Cost of sales and other expenses

Depreciation
Loss on disposal
360
82
59
9
150
Profit from operations

Finance costs
Profit
tax
Incomebefore
tax expense
210
14
196
62
Profit after tax

37
134
STATEMENT OF FINANCIAL POSITIONS FOR

BEAN AS AT
31 December
December
31
2009
$000
2008
$000
$000
$000
Non-current assets
Cost
Depreciation
798
159
780
112
639
668
Current
Inventoryassets
Trade receivables
Bank
12
10
34
24
26
28
70
64
709
732
Share capital
180
170
Share premium
Accumulated profits
18
343
12
245
541
427
Long term loans

Current liabilities
Trade payables
Income tax
100
250
21
47
15
68
40
709
732
During the year, the company paid $45,000 for a new piece of machinery
and a dividend of $36,000
38
55
Required:
Prepare a Statement of Cash Flow for Bean for the year ended 31
December 2009 in accordance with the requirements of IAS 7.
39
40
BEAN CASHFLOW STATEMENT FOR THE YEAR ENDED
31 DECEMBER 2009
QUESTION 3 BEAN ANSWER
41
WORKING PAPER
Question 4 - Penny
The financial statements of Penny at 31 August 2008 and 2009

are given below:
$000
Revenue
10,050
Cost of sales
(6,040)
Gross profit
4,010
Operating expenses
(2,300)
1,710
Finance costs
(150)
Profit from operations before tax
1,560
Income tax expense
(500) Profit from operations after tax
1,060
42
STATEMENT OF FINANCIAL POSITION FOR PENNY

NOTE
YEAR ENDED 31
AUGUST
2008
2009$000
$000
Non-current assets
$000
$000
6,400
1
8,500
Current assets
Inventories
1,200
1,400
Trade receivables
1,500
1,400
200
300
Cash at bank
2,900
3,100
9,300
11,600
Capital and reserves
Called up share capital
2,000
2,200
Share premium account
2,340
2,540
Revaluation reserve
Retained earnings
1,000
2,400
2,960
6,740
8,700
3
Current liabilities
Trade payables
800
700
Taxation
Bank overdraft
400
360
500
200
1,560
1,400
9,300
11,600
43
1,500
1,000
NOTES
(1) Movements in fixed assets:
Cost or valuation
At 1 September
2008
Additions
Land
Buildings
$000
$000
2,000
3,000
Plant and
Total
equipment
$000
3,400
8,400
2,500
2,500
Disposals
(1,000)
(1,000) Revaluation 1,000
1,000
At 31 August 2009
3,000
Accum
ulated
deprec
iation
At 1 September
2008
Provision for year
Disposals
$000
3,000
4,900
10,900
400
1,600
2,000
60
1,140
(800)
1,200
(800) At 31 August 2009

460
1,940
2,400
Net book value
3,000
2,540
2,960
8,500
2008
At 31st August
2009
2,000
2,600
1,800
6,400
(2) Dividends paid during the year amounted to $500,000.

(3) Issue of debentures a further $500,000 of 10% debentures was
issued at par on 1 September 2009. Interest on all debentures is paid
on 28
February and 31 August each year.
(4) Plant sold during the year realised $250,000.
Req
uire
d:
Prepare a Statement of Cash Flow for Penny for the year ended 31 August
2009, complying as far as possible with IAS 7 Statement of Cash Flows,
using the indirect method.
st
At 1 September
QUESTION 4 PENNY ANSWER
4
4
45
PENNY CASHFLOW STATEMENT FOR THE YEAR ENDED
31 AUGUST 2009
C2(a) apply the accounting rules contained in IFRSs and IASs

dealing
with
46
non current assets

initial estimate of the costs of dismantling and removing the item and
restoring the site on which it is located where a present obligation
exists (IAS37)
Eg: site preparation, delivery and handling costs, installation and
assembly,
testing,attributable
professional
any costs directly
tofees
bringing the asset to the location and
condition necessary for it to be capable of operating in the manner
intended by management.
purchase price, including irrecoverable taxes and after deducting trade
discounts
(not cash/settlements discounts)
The cost of an item of property, plant and equipment is made up of:
INITIAL RECOGNITION
are expected to be used during more than one period.
held for use in the production or supply of goods or services, for rental
to
- others, or for administrative purposes, and
Property plant and equipment are tangible items that are:
IAS 16 PROPERTY PLANT & EQUIPMENT
LEARNING OUTCOME
NON CURRENT ASSETS
Q
U
E
S
TI
O
N
1
Steve purchases a printing machine that had a list price of
$100,000 but was offered a trade discount of 10%. If Steve pays
for the machine within the next twenty days he can take
advantage of a further 5% settlement discount.
In addition to the list price Steve also incurred the
following charges:
$
Shipping & handling charges
2,500
Pre
production
testing
10,000
Maintenance contract for three years
18,000
Site
preparation
costs:
Electrical cabling costs

Floor reinforcing
In house labour costs
10,000
5,000
7,000
5
2
,
5
0
0
Included in the electrical cabling costs is $3,000 which is as a result of Steve

providing incorrect requirements for the asset.
The
company
paid
after
eighteen days.
R
e
q
u
i
r
e
d
:
What initial cost should be recorded for the machine in the Statement of
Financi
al
Positio
n?
47
48
QUESTION 1 ANSWER
49
incurred. However, to the extent that they satisfy the IAS 16

rules for separate components, such costs should be capitalised
separately as a non- current asset and depreciated over their useful
lives.
The cabins on the ship in the above example show this rule in action.
Every five years the cost of overhauling the interior of the cabins
should be capitalised as a non-current asset and depreciated over the
five-year period before the next overhaul is carried out.
An overlap arises here with IAS37. A provision should only be made is
costs are unavoidable. It is felt that an inspection or overhaul could be
avoided by selling the asset and so no provision should be made.
Normally all inspection and overhaul costs are expensed as they
are
a life of 20 years while the cabin interiors only have a life of five years.
In such situations the separate components should be capitalised as
separate assets and each depreciated over their useful lives.
components with different useful lives. For example, a ship might itself
have
separate
comprise
equipment
and
plant
property,
of
items
Some
Separate components, inspection and overhaul costs
Subsequent expenditure on property, plant and equipment should only
be capitalised if it improves the asset beyond its originally assessed
standard of performance e.g. faster production or higher quality output.
All other subsequent expenditure should be written off.
SUBSEQUENT EXPENDITURE
50
Reducing balance
NBV x selected % = falling depreciation charge
Methods of depreciation
IAS 16 only offers guidance the depreciation method used shall
reflect the pattern in which the assets future economic benefits are
expected to be consumed by the entity.
Straight line
(Cost residual value)/ useful life of the asset = constant
depreciation charge
the period over which an asset is expected to be available for use by
an
entity; or
the number of production or similar units expected to be obtained from the asset
by the entity
Useful life is;

The estimated amount that an entity would currently obtain from
disposal of
the
asset, after
deducting the estimated costs of disposal.
RESIDUAL
VALUE
The cost of an asset, or other amount substituted for cost, less its
residual
value.
DEPRECIABLE AMOUNT
Its intention is to match the cost of acquiring a non current asset with
the
income
that itisgenerates
in the allocation
Statementofofthe
Comprehensive
Income.of
Depreciation
the systematic
depreciable amount
an
asset
over it useful life.
Depreciation
QU
EST
ION
2
Gamel purchased a refrigeration unit for $80,000 on 1 January
2004 when its useful life was estimated to be ten years with a
residual value of $10,000. A straight line depreciation policy was
selected.
On 31 January 2009 the Gamel reviewed the useful life of the asset
and found that it had a remaining life of eight years.
R
e
q
u
ir
e
d
:
What will the depreciation charge be for the year ended 31
December 2009?
51
The useful economic lives of assets should be reviewed at least at

each financial year-end and, when necessary, revised. (see IAS8) The
asset will then be depreciated over its revised useful life (longer or
shorter).
Revision of lives
Sum of the digits
n(n +1)/2
n = useful life of the asset
sum of digits x cost = falling depreciation charge
52
QUESTION 2 ANSWER
QUE
STIO
N3
A lorry was purchased for $80,000 on 1 January 2004 when its
useful life was estimated to be ten years with a residual value of
$10,000. The depreciation policy of 20% reducing balance was
selected.
On 1 January 2009 the directors have now decided that to give a
fair presentation a depreciation policy of straight line over the useful
economic life should be followed. There has been no change in the
estimated useful economic life of the asset as a result.
R
eq
ui
re
d:
What would be the depreciation charge for the year ended 31
December
2
0
0
9
?
53
A change from one method of providing depreciation to

another is permissible only on the grounds that the new method
will give a fairer presentation of the results and of the financial position.
Such a change does not, however, constitute a change of accounting
policy; it is a change in accounting estimate, so the net book amount
should be written off over the remaining useful economic life,
commencing with the period in which the change is made. (see IAS8)
Change in method
54
QUESTION 3 - ANSWER
55
Fair value the amount for which an asset could be exchanged

between
knowledgeable,
willing
an sufficient
arms length
transaction.
Revaluations shall
be parties
made in
with
regularity
to ensure that
the
carrying amount does not differ materially from that which would
be determined using fair value at the Statement of Financial Position
date.
i.e. its fair value at the date of the revaluation less any
subsequent
accumulated depreciation and subsequent accumulated impairment
losses.
After initial recognition of the asset, an item of property, plant and
equipment
whose fair value can be measured reliably can be carried at a revalued
amount
REVALUATION MODEL
After initial recognition of the asset, an item of property, plant and
equipment
should be carried at its cost less any accumulated depreciation
and accumulated impairment losses.
COST MODEL
Carrying amount the amount at which an asset is recognised
after
deducting any accumulated depreciations and accumulated
impairment losses.
An entity can choose either the cost model or the revaluation model as
its
accounting policy applied consistently to each class of property, plant
and equipment. The resulting carrying amount will be held under noncurrent
assets.
MEASUREMENT AFTER RECOGNITION
56
Dr Revaluation surplus
Cr
Retained
earnings
Each
year the
extra depreciation charged as a result of the revaluation
should be transferred from the revaluation surplus to retained
earnings.
ANNUAL RESERVE TRANSFER
Revaluation surplus = Revalued amount NBV at date of revaluation
The figure posted to the revaluation surplus can be calculated quickly
as
follows:
Cr
Revaluation surplus
The resulting balance is posted to a revaluation surplus
Accumulated depreciation
Dr
The accumulated depreciation on the asset is eliminated
Non-current assets cost/valuation
Dr
When revaluing an asset the first step is to increase the cost account
up to
the
revalued amount.
ACCOUNTING
FOR A REVALUATION
QU
ES
TIO
N4
Charlie bought an industrial oven on 1 January 2005 for $50,000.
The oven had an estimated useful economic life of five years with
no residual value. A straight line method of depreciation was
adopted.
On 1 January 2007 Charlie decided to revalue all non- current
assets in line with IAS 16. The oven was revalued at $60000. The
useful economic life is unchanged.
R
e
q
u
i
r
e
d
:
Show how the revaluation would be accounted for and the
subsequent depreciation calculation following the revaluation.
57
58
QUESTION 4 - ANSWER
QUESTION 5
Continuing from Question 4 above.
On 1 January 2009 Charlie decided to sell the oven. It realised
$25,000
Required:
Show the accounting entries to dispose of the item of plant and
the final reserve transfer?
59
Dr Revaluation surplus
Cr Retained earnings
surplus
journal to complete. Should any balance remain in the revaluation
for this asset it should be transferred to retained earnings.
When a revalued asset is sold the basic accounting is the same for an
asset
held at depreciated historic cost. However, there is potentially an
additional
DISPOSAL OF A PREVIOUSLY REVALUED ASSET
60
QUESTION 5 - ANSWER
61
Carrying value 31 December 2009

X
Carrying value 1 January 2009

At 31 December 2009
X
X (X) (X)
X
X (X) (X)
X (X) (X)
X
X (X) (X)
Accumulated depreciation:
At
1 January
Charge
for year2009
Disposal Revaluation
At 31 December 2009
X
X (X) X
X
X (X) X
X
X (X) X
X
X (X) X
Cost or valuation:
At
1 January 2009
Additions Disposals Revaluation
Total
$000
Plant
$000
Motor
Vehicles
$000
Land and
buildings
$000
The main disclosure required for property, plant and equipment is
shown
below:
DISCLOSURES
62
The items traded are homogenous

Willing buyers and sellers can normally be found at any time
Prices are available to the public
?
?
?A market in which the following conditions are met:
ACTIVE MARKET
knowledgeable, willing parties in an arms length transaction.
exchanged between
be
could
asset
an
which
for
amount
The
FAIR VALUE
The systematic allocation of the depreciable amount of an intangible
asset
over its useful economic life.
AMORTISATION
A resource controlled by an entity as a result of past event and from
which
future
ASSETeconomic benefits are expected to flow to the entity.
An identifiable non-monetary asset without physical substance.
INTANGIBLE ASSET
DEFINITIONS
IAS 38 INTANGIBLE ASSETS
63
If this is not possible then the intangible becomes part of the overall
goodwill
obtained
theIFRS3
business
combination.
Accordingin to
Business
Combinations, if an intangible asset
is
acquired in a business combination, the cost of that intangible asset is
its fair value at the acquisition date. Assuming a fair value can be
allocated to the intangible asset.
As part of a business combination
? Purchase price, import duties and non-refundable purchase taxes
less
any trade discounts
? Any directly attributable costs of preparing the asset for its intended
use eg professional fees, testing
This cost should comprise;
This usually means that the cost of the intangible asset is automatically
measured
reliably
i.e.entity
what to
you
paid.
The price paid
by an
separately
acquire an intangible asset
usually
reflects the expectations about the probability of obtaining the
future economic benefit generated by the intangible asset.
SEPARATE ACQUISITION
An intangible asset shall be measured initially at cost.
An intangible asset is recognised if, and only if;
? It is probable that the expected future economic benefits that
are attributable to the asset will flow to the entity; and
cost of the asset
measured reliably
? The
INITIAL
RECOGNITION
OFcan
ANbe
INTANGIBLE
ASSET
64
Its ability to measure reliably the expenditure attributable to the

intangible
asset during its development.
?
The availability of adequate technical, financial and other resources to
complete
the development and to use or sell the intangible asset.
?
How the intangible asset will generate probable future economic
benefits. Among other things, the entity can demonstrate the existence
of a market for the output of the intangible asset or the intangible asset
itself or, if it is to be used internally, the usefulness of the intangible
asset.
?
Its ability to use or sell the intangible asset.
?
Its intention to complete the intangible asset and use or sell it.
?
The technical feasibility of completing the intangible asset so that it will
be
? available for sale.
An intangible asset arising from development shall be recognised if,
and
only if, an entity can demonstrate ALL of the following:
All costs incurred in research are written off directly to the Statement of
Comprehensive
Income.
RESEARCH & DEVELOPMENT
No internally generated goodwill should be recognised.
GOODWILL
INTERNALLY GENERATED INTANGIBLES
Q
U
E
S
T
I
O
N
7
Barry has the following research and development costs for the
year ended
31
Decem
ber
2009:
P
r
o
j
e
c
t
A
Expected total revenues $5,000,000, starting in early 2009. Expected total
costs will be $3,000,000. Costs incurred to date, all in 2009, are
$2,000,000.
P
r
o
j
e
c
t
B
Expected total revenues $4,000,000. Costs incurred to date are
$1,500,000. Expected total costs are $2,500,000. The commencement of
commercial sales is uncertain due to problems in raising funds to cover the
final development costs.
P
r
o
j
e
c
t
C
Expected total revenues $1,500,000 with $300,000 of revenue
already earned in 2008. Total development costs incurred, all in
2009, were
$
1
,
8
0
0
,
0
0
0
.
P
r
o
j
e
c
t
D
Research projects incurred total costs spent in 2009 were
$500,000.
R
e
q
u
i
r
e
d
:
Explain how each of costs incurred for projects A-D above should be
treated in Barrys Statement of Comprehensive Income and Statement of

Financial Position according to any relevant accounting standard.
65
Internally generated brands, mastheads, publishing titles, customer

lists and
items similar in substance should not be recognised as intangible
assets.
OTHERS
66
An intangible could be considered to have an indefinite useful life if

there is
no foreseeable limit to the period over which the asset is
expected to generate net cash flows for the entity.
If an intangible has a finite life then it should be amortised over its
useful
economic life. Residual value is normally assumed to be zero unless
there is a commitment from a buyer or an active market exists.
Amortisation
If no active market exists the intangible must be carried at cost
less
amortisation
andshould
impairment.
The asset value
be reviewed regularly so that the carrying
value in
the Statement of Financial Position should never be materially different
from its fair value
If an active market exists where it is possible to establish an
intangibles fair
value it is carried at its fair value less any accumulated amortisation
and impairment losses.
REVALUATION MODEL
The intangible is carried at its cost less any accumulated amortisation
and
impairment
losses.
COST MODEL
An entity can choose either the cost model or revaluation model.
MEASUREMENT AFTER RECOGNITION

dealing
67
with non current assets, including their impairment.

The present value of the future cash flows expected to be derived from
an
asset.
VALUE IN USE
The amount obtainable from the sale of an asset in an arms
length
transaction between knowledgeable, willing parties, less the
costs
of disposal.
FAIR VALUE LESS COSTS TO SELL
The higher of an assets fair value less costs to sell and its value in use.
Recoverable amount
The amount at which an asset is recognised after deducting
depreciation
(amortisation)
and accumulated impairment losses thereon.
CARRYING AMOUNT
DEFINITIONS
IAS 36 IMPAIRMENT OF ASSETS
LEARNING OUTCOME
68
immediately in the Statement of

The resulting impairment is recognised
Comprehensive
Income.
less that its carrying
amount, the
written down to its recoverable
If the recoverable amount of an asset is
carrying amount of the asset shall be amount.
Assets held at cost less accumulated depreciations and impairments:
ACCOUNTING FOR AN IMPAIRMENT
?
Evidence of obsolescence or physical damage of an asset
Internal reporting indicates the economic performance of an asset is,
or will be, worse than expected
Changes in the manner in which the asset is used eg asset becoming
idle, restructuring or discontinuing operations in which the asset
operates, reassessing the useful life of the asset
?
?Examples of internal indications:
?
?Changes in the market value of the asset
Changes in technological, market, economic or legal environment in
which the entity operates
Interest rate changes (present value calculation)
Competitors actions
?
?Examples of external indications:
Impairment reviews should be conducted if an impairment is indicated.
In plain English when what you have in the Statement of Financial
Position
is greater than what you will get for the asset whether you keep it or
sell
An it.
asset is impaired when its carrying value exceeds its
recoverable
amount.
IDENTIFYING AN ASSET IS IMPAIRED
QUE
STIO
N9
A plate making machine was acquired on 1 January 2005 at a cost
of
$50,000 and has a useful economic life of
eight years.
At 31 December 2009 an impairment review was performed. The fair value of
the machine less selling costs was established to be $15,000. The expected
future cash flows are $5,000 per annum for the next five years. The current cost
of capital is 10%. An annuity factor for this rate over this period is 3.791
Is the machine
impaired?
What if the future cash flow was $4,000 per

annum?
69
QU
EST
ION
10
Continuing from the question 9. How would the
impairment
loss
be accounted for if
the machine had been revalued and its depreciated historical
cost was $17,000?
70
is
amount
Once the impairment has been accounted for the recoverable
then depreciated over the remaining useful economic life.
Depreciated historic cost recoverable amount written off to the
Statement
of
Comprehensive
Carrying
amount Income
depreciated historic cost reduces revaluation
surplus
Any write down in the carrying value of a previously revalued asset
should
first be treated as revaluation decrease and then any balance written
off to the Statement of Comprehensive Income immediately.
71
recoverable
its
below
reduced
be
should
CGU
the
in
asset
NB: No single
amount.
? Firstly, goodwill allocated to the CGU
? Secondly, other assets in the unit on a pro rata basis of the carrying
amount of each asset in the unit
The impairment loss should be allocated in the following order:
ALLOCATION OF IMPAIRMENT LOSSES TO A CASH
GENERATING
UNIT
The impairment review is conducted in the same way as an individual
asset,
with impairment again being identified where carrying value of the
CGU is higher than the recoverable amount.
A cash generating unit is the smallest identifiable group of assets that
cash
flows can be allocated to. This could include intangible assets like
goodwill as well as tangible and other assets.
It is not always possible to allocate cash flows to an individual asset.
To
overcome
this problem
a cash generating unit can be used.
CASH GENER
ATING UNITS
QUE
STI
ON
11
Siobhan owns a company called Harry. Extracts from Siobhans
Statement of Financial Position relating to Harry:
$
0
0
0
Goodwill
80,000
Franchise
50,000
Restored
costs
furniture
(at
cost)
90,000
Buildings
100,000
Other
net
assets
50,000
3
7
0
,
0
0
0
The restored furniture has an estimated realisable value of $115 million. The
franchise agreement contains a sell back clause, which allows Harry to
relinquish the franchise and gain a repayment of $30 million from the
franchisor. An impairment review at 31 March 2009 has estimated that the
value of Harry as a going concern is only $240 million.
R
e
q
u
i
r
e
d
:
Show how the impairment would be dealt
with.
72
73
QUESTION 11 - ANSWER
A4(a)- apply the accounting rules for current and deferred

taxation, including calculation of deferred tax based on a
given set of rules
74
The tax equivalent of an accounting item.

TAX ALLOWANCES
profit for a
taxable
The amount of income taxes payable in respect of the
period
CURRENT TAX
taxes are
income
established by the taxation authorities, upon which
payable.
with the rules
The profit or loss for a period determined in accordance
TAXABLE PROFIT
The profit or loss for a period before deducting tax expense.
DEFINITIONS
ACCOUNTING PROFIT
IAS 12 INCOME TAXES
LEARNING OUTCOME
A PRINCIPLES OF BUSINESS TAXATION
QUESTION 1
At 31 December 2008 Ava estimates that its current tax liability
for the year will be $150,000. In August 2009 Ava pays its tax
liability for the year ended
31 December 2008 at $147,000.
At 31 December 2009 Ava again estimates its income tax liability,
this time at $155,000.
Required:
Show Statement of Comprehensive Income and Statement of
Financial
Position extracts to reflect the above for the two years ended 31
December.
75
X
Total tax charge for the year
Income tax expense:
X
X/(X)
Current
taxprovision
chargefrom
for the
yearyear
Under/over
previous
as
charge
tax
years
This balance will then be incorporated to the current
you
cannot
go backisand
lastamount
years figures.
Often
this estimate
notrestate
the exact
that is actually paid
resulting in
an
over ortax
under
provision
Income
expense
(IS) for income taxes.
Income
tax liability (BS)
Dr
Cr
At the end of the financial year a company will estimate the amount of
tax
payable on profits for the period. This amount is charged to the
Statement of
Comprehensive Income and shown as a current liability in the
Statement
of
Financial Position.
CURRENT TAX
QU
ES
TI
ON
2
Becky purchased a boat on 1 January 2007 for $4 million. It was
estimated that the boat had a useful economic life of 5 years but
according to the tax authority had a 50% tax allowance in its first
year and 20% reducing balance there after.
Becky made an accounting profit of $3m for the year. This is
expected to continue for the next two years at least.
Income
tax
rate
30%
R
e
q
u
i
r
e
d
:
Ignoring deferred tax calculate the profits for Becky for each of the
three years ending 31 December 2007-2009.
76
IAS 12 considers only temporary differences.

Items that would have been used in calculating accounting profit and
taxable
profit but in different accounting periods e.g. depreciation/tax
allowances.
Temporary differences
Items that would have been used in calculating accounting profit but
would
NOT be used in calculating taxable profit e.g. some entertaining
expenses
Permanent differences
The reasons for this can be split into two categories:
Accounting profit Taxable profit
Deferred tax arises because;
Deferred TAX
77
QUESTION 2 - ANSWER
78
Reduce the provision
Dr Deferred tax provision

Cr Income
expense
Increase
thetax
provision
Dr Income tax expense
Cr
Deferred
taxmovement
provision in the provision is recorded.
NOTE:
only the
X/(X)
Movement to IS
Closing provision
Opening provision
$000
X (X)
In subsequent years the provision should be recalculated as above
and the
closing
provisiontocompared
to the opening
provision
This is referred
as the Statement
of Financial
Position Liability
Method or
full
provision.
Income
tax expense
Deferred tax provision
Dr
Cr
This is recorded as;
X% x temporary difference = closing deferred tax provision
Then multiply the temporary difference by the income tax rate.
X
Temporary difference
(X)
Tax base (cost tax allowance)
X
NBV
To calculate the deferred tax provision you must first calculate the
temporary
difference.
$
0
0
CALCULATING DEFERRED TAX 0
QUESTION 3
Using the information in question 3 above. Calculate the
profits for Becky for the same years but this time accounting
for deferred tax.
Use this proforma to help
NBV
2007
$000
Tax base (cost tax

allowance) Temporary
difference
Closin
g
provisi
on
Openi
ng
provisi
on
Move
ment
to IS
Statement of Comprehensive Income
2008
$000
2009
$000
extract: Profit before tax

Income
tax
expense:
Current
tax
Deferred tax
Profit after tax
Statement of Financial Position extract

Provision for deferred tax

79
QU
ES
TIO
N4
Jane purchased an airplane for $5,000,000 on 1 October 2005. It
had an estimated life of eight years and an estimated residual value
of $800,000. The airplane is depreciated on a straight-line basis. The
tax authorities do not allow depreciation as a deductible expense.
Instead a tax allowance of 40% of the cost of this type of asset can
be claimed against income tax in the year of purchase and 20% per
annum (on a reducing balance basis) of its tax base thereafter. The
rate of income tax can be taken as 30% and the current tax estimate
for the year 2008 is $2m.
R
e
q
u
i
r
e
d
:
In respect of the airplane, calculate the deferred tax charge/credit in
Janes Statement of Comprehensive Income for the year to 30
September 2008 and the deferred tax balance in the balance sheet
at 30 September 2007 and
2
0
0
8
.
note: work to the
nearest $000.
80
QUEST
ION 5
The accountant of Tropical Ltd is in the process of calculating the
deferred tax for the year ended 31 October 2008. The deferred
taxation account had a credit balance of $1.5 million at 31 October
2007. All of these amounts arose in respect of the difference
between depreciation and capital allowances.
During the year ended 31 October 2008, the company charged
$18.0 million in depreciation and claimed $20.8 million in capital
allowances.
The income tax current charge for the year is $4.7m. There was an
over
Assume an income tax rate of 30%
throughout.
Req
uire
d:
Explain the purpose of deferred
taxation.
Prepare Statement of Comprehensive Income and Statement of
Financial
Position extracts for taxation in accordance with IAS 12 income
taxes.
81
st
provision from the year ended 31 October 2007 of $0.8m

82
QUESTIONS 4&5 ANSWER SHEET

QUESTION 6
The following information relates to New, a manufacturing company.

$000
$000
Revenue
Inventory at 1 October 2007
Purchases
Advertising
Administrative salaries
Manufacturing wages
Interest paid
Dividends received
Audit fee
Bad debts
Taxation
Dividends paid
Premises (cost)
Plant (cost)
Premises (depreciation)
Plant (depreciation)
Investments (long-term)
Trade receivables
Bank
Trade Payables
Deferred taxation
Loan notes
Share capital
Retained earnings at 1 October 2007
430
10
75
15
14
60
14
12
7
10
37
60
450
280
40
160
100
23
139
7
62
140
100
343
1,294
1,294
=====
=====
83
(a) Inventory was worth $13,000 on 30 September 2009.

(b) Premises consist of land costing $250,000 and buildings
costing
$200,000. The buildings have an expected useful life of
50 years.
(c)
Plant includes an item purchased during the year at a cost of $70,000.

This was the only transaction involving non-current assets during the
year.
Depreciation of plant is to be charged at 10 per cent per annum on a straightline basis.

(d)
The balance on the income tax account comprises the under provision
for income tax brought forward from the year ended 30 September
2009.
(e)
The provision for deferred tax is to be reduced by $17,000.
(f)
The directors have estimated that income tax of $57,000 will be paid on
the profits of the year.
Required:
Prepare an Statement of Comprehensive Income for New for the year ended
30 September 2009, a Statement of Changes in Equity and a

Statement of
Financial Position at that date. These should be in a form suitable for

presentation to the shareholders, in accordance with the requirements of
International Financial Reporting Standards.
84
85
QUESTION 6 ANSWER
86
QUESTION 6 ANSWER
STATEMENT OF FINANCIAL POSITION
87
QUESTION 6 ANSWER
STATEMENT OF CHANGES IN EQUITY
88
QUESTION 6 ANSWER
WORKING PAPER

dealing with events after the reporting period
89
If an entity declares dividends after the Statement of Financial Position

date,
the entity does not recognise those dividends as a liability in the
Statement of Financial Position.
These events will be disclosed when material.
? nature of the event
? estimate of the financial effect, or a statement that such an
estimate cannot be made
DIVIDENDS
Those that are indicative of conditions that arose after the Statement of
Financial
Position
Those events
that date
provide additional evidence of conditions that
existed at
the Statement of Financial Position date.
NON-ADJUSTING EVENTS
Those events, favourable and unfavourable, that occurred

between the
Statement of Financial Position date and the date when the
financial statements are authorised for issue.
ADJUSTING EVENTS
EVENTS AFTER THE STATEMENT OF FINANCIAL POSITION
DATE
DATE
DEFINITIONS
IAS 10 EVENTS AFTER THE STATEMENT OF FINANCIAL
POSITION
Learning Outcome
C. SINGLE COMPANY FINANCIAL

STATEMENTS
QUESION 1
Should each of the following be treated as an adjusting or nonadjusting event?
(i)
the company makes an issue of 100,000 shares which

raises
$200,000 shortly after the Statement of Financial Position date.
(ii)
a legal action had brought against the company for breach of contract
prior to the year end. The outcome was decided shortly after the
Statement of Financial Position date, and as a result the company will
have to pay costs and damages totaling $80,000. No provision has
currently been made for this event.
(iii)
inventory included in the accounts at the year end at cost $30,000 was
subsequently sold for $10,000.
(iv)
a building in use at the Statement of Financial Position date and

valued at $500,000 was completely destroyed by fire. Unfortunately,
only half of the value was covered by insurance. The insurance
company has agreed to pay $250,000
in accordance
with the companys policy.
90
C2(a)- apply the accounting rules contained in IFRSs and IASs

dealing with provisions and contingencies
91
?
?
an entity has a resent obligation, legal or constructive, as a result of a
past event;
it is probable that an outflow of resources will be required to settle the obligation;

a reliable estimate can be made of the amount of the obligation
?
A provision shall be recognised when;
RECOGNITION OF PROVISION
An event that creates a legal or constructive obligation that results in
an
entity
having noEVENT
realistic alternative to settling that obligation.
OBLIGATING
is
A present obligation arising from past events, the settlement of which
expected to result in an outflow or economic benefits.
LIABILITY
A liability of uncertain timing and amount.
DEFINITIONS
PROVISION
ASSETS
IAS 37 PROVISIONS, CONTINGENT LIABILITIES AND
CONTINGENT
Learning Outcome:
Q
u
e
st
io
n
2
After a wedding in the summer of 2008 ten people died as a result
of food poisoning from eating food manufactured by Future. At 31
December 2008 the company was advised that there was probably
no liability and the matter was disclosed as a contingent liability at
that date.
As the result of developments in the case, which is still not settled,
the company was advised that it is now probable, as at 31 March
2009 that the company will be found liable.
Some directors consider that the matter should remain a contingent
liability until the court case decides the matter, while others
consider that provision should be made for it in the financial
statements for the year ended 31
Ma
rch
20
09.
What
do
you think?
Justify with reference

to IAS 37.
92
a contract
legislation
other operation of law
?
?
?An obligation that derives from;
Legal obligation
the
of
estimate
best
The amount recognised as a provision should be the
expenditure
required to settle the present obligation.
Measurement
QUE
STI
ON
3
During the year Bebob acquired a gold mine at a cost of $5 million.
In addition, when all the ore has been extracted (estimated in 10
years time) the company will face estimated costs for landscaping
the area affected by the mining that have a present value of $2
million. These costs would still have to be incurred even if no further
ore was extracted. The directors have proposed that an accrual of
$200,000 per year for the next ten years should be made for the
landscaping.
R
e
q
ui
r
e
d
:
Discuss whether you think the Directors are right in their chosen
treatment.
93
of
part
as a result, the entity has created a valid expectation on the
those
other parties that it will discharge those responsibilities.
?
by an established pattern of past practice, published policies or a
sufficiently specific current statement, the entity has indicated to other
parties that it will accept certain responsibilities; and
?
An obligation that derives from an entitys actions where;
CONSTRUCTIVE OBLIGATION
94
No obligation arises for the sale of an operation until the entity is

committed
to
sale ie
thereplan
is a for
binding
sale agreement.
? the
detailed
formal
the restructuring
has been identified
? valid expectation has been raised in those affected that it will be
carried out by either implementing the plan or announcing it to
those
affected
A provision should only be recognised if a constructive obligation
exists, ie
Examples sale or termination of a business, closure or relocation of a
business, changes in management structure, fundamental
reorganisations.
RESTRUCTURING
The present obligation under the contract should be recognised

as a
provision.
A contract in which the unavoidable costs of meeting the obligations
under
the contract exceed the economic benefits expected to be received
under
it.
ONEROUS
CONTRACTS
No provision for future operating losses
FUTURE OPERATING LOSSES
SPECIFIC EXAMPLES
IAS 37 highlights certain situations and gives guidance on their
treatment.
95
A contingent asset is a possible asset that arises from past events and
whose existence will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the
control of the
entity.
CONTINGENT ASSETS
ii
it is not probable that an outflow of resources will be required to
settle
the obligation
the amount of the obligation cannot be measures with sufficient reliability
i
A contingent liability is:
? a possible obligation that arises from past events and whose
existence will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly
within the control of the entity
? a present obligation that arises from past events but is not
recognised because;
CONTINGENT LIABILITIES
C. SINGLE COMPANY FINANCIAL

STATEMENTS
dealing
with inventories
96
Include costs incurred in bringing the inventories to their present

location
and
condition.
Other
Costs
Costs directly related to the units of production, such as direct labour.
Costs of Conversion
Trade discounts are deducted but cash or settlement discounts are
not.
Purchase price, irrecoverable taxes, transport, handling and other
costs
directly attributable to the acquisition of finished goods, materials
and services.
Cost of Purchase
conversion and other cost incurred in bringing the inventories to
their
present location and condition
of
The cost of inventories shall comprise all costs of purchase,
costs
COST
Inventories should be carried at the lower of cost and net
realisable
value.
IAS 2 INVENTORIES
Learning Outcome:
QU
ES
TI
ON
1
Neil paid $3 per unit for the raw materials of its products. To
complete each unit incurred $2 per unit in direct labour.
Production overheads for the year based on normal output of
12,000 units was $72,000.
Due to industrial action only 10,000 units were produced and
1,000 units were in inventory at the end of the year.
As a result of the industrial action some units were badly stored
and became damaged. Its is estimated that 200 of the units will
now only be sold for $12 each after minor repairs of $2 each
R
e
q
u
i
r
e
d
:
What figure for closing inventory would be shown in the
Statement of
Financia
l
Position
97?
X
X
Finished goods
Raw materials
Work
in progress
$
XX
DISCLOSURES
estimate
the
of
based on the most reliable evidence available at the time
less
any costs
related
to selling
inventories.
The amount
at directly
which the
inventories
arethe
expected
to realise should be
Exclusions: abnormal costs, storage costs, administration costs and
selling
expenses.
NET REALISABLE VALUE
C2(a)- apply the accounting rules contained in IFRSs and IASs

dealing with construction contracts (and related financing costs)
98
How much revenue to included each year;

How to calculate related costs;
How much profit can be recognised each year or how to deal with
losses
?
?
?A construction contract will often span more than one accounting
period
which
creates
additional problems such as:
GENERAL
PRINCIPLES
A construction contract in which the contractor is reimbursed for
allowable or
otherwise defined costs, plus a percentage of these costs or a fixed
fee.
Cost plus contract
A construction contract in which the contractor agrees to a fixed
contract
price,
a fixed
rate per unit of output.
Fixed or
price
contract
combination of assets that are closely interrelated or
interdependent in
terms of their design, technology and function or their ultimate purpose
or use.
or a
A contract specifically negotiated for the construction of an asset
Construction contract
DEFINITIONS
IAS 11 CONSTRUCTION CONTRACTS
Learning Outcome:
99
As is common with construction contracts an invoice may only be

raised on
completion but the customer will make payments on account as the
contract is completed. It is important to note that these payments do
not represent
the revenue figure to be included.
If the outcome can be estimated with reasonable certainty then IAS 11
requires revenue and costs to be recognised according to the stage of
completion method. The level of completion would normally be
assessed by a professional surveyor.
If the outcome cannot be estimated with reasonable certainty then no
profit
should be recognised. However, the Statement of Comprehensive
Income must still represent the activity for the period. As a result
revenue is matched against the costs incurred so as no profit or loss is
shown.
The first thing that must be established is whether the outcome of
the
contract
can be TREATMENT
foreseen with reasonable
certainty.
ACCOUNTING
STATEMENT
OF COMPREHENSIVE
INCOME
Each construction contract must be accounted for separately.
Comprehensive Income must show a fair presentation of the activities
of the
entity
and the matching concept wins!
of
Statement
the
Overall
period.
same
the
in
recognised
be
to
Prudence would require no income or profits are anticipated until
actually
realised whilst matching would require costs and the income they
generate
Straight away you have a conflict between two key concepts
Prudence
and Matching
100
balancing
a
becomes
sales
of
and
done
work
on
based
calculated
figure.
be included are both
profit to
and
cost
completed.
The amount of revenue
The recognition of contract profit is usually based on the percentage of
work
PROFITABLE CONTRACTS
? Proportion of work done either verified by professional surveyor or
by comparing costs incurred to date to total contract costs
? By identifying specific points in the contract where the work
completed has separately ascertainable values.
There is no set rule on how to calculate this but two main methods
exist:
CONTRACT REVENUE
QUESTION 2
Tarkwin has a contract which commenced in 2009. The following
is details from the year ended 31 December 2009.
$
m
Total contract value
Costs incurred to date
Estimated
costs
to completion
Work certified
as completed
in the year
40.0
25.0
3.5
12.0
Stage of completion
80% Profit recognised to date
5.5
Required:
Show
how this
Statement
contract
of
would
be
dealt
with
in
the
Comprehensive Income for the year ended 31 December 2009.

101
QUESTION 3
Tarkwin has a second contract which commenced in 2009
and will be completed in 2010. The following is details from
the year ended 31
December 2009.
$
m
Total contract value
Costs incurred to date
Estimated costs to completion
Stage of completion
35.0
20.0
19.5
50%
Required:
Show how this contract would be accounted for in the Statement of
Comprehensive Income for the year ended 31 December 2009.

102
potential loss but the next step is slightly different.

the
identify
will
outcome
Forecasting the
as soon as it is anticipated.
When a contract is expected to make a loss, the loss must recognised
in full
Loss making contracts
103
X
Gross amounts due (to)/from
customers
Costs incurred
X
X (X)
(X)
Recognised profits
Recognised
Amounts billedlosses
current
a
as
balance
the
in
IAS 11 requires this amount to be disclosed
asset or liability depending on the outcome.
Gross amounts due to/from customers$
ACCOUNTING TREATMENT STATEMENT OF FINANCIAL
POSITION
Q
U
E
S
T
I
O
N
4
Jenny has a three year contract which commenced on 1 April
2008. At 31
March 2009, Jenny had the following balances in its ledger
relating to the contract:
$000
$000 total contract value
120,000 cost incurred up to 31 March 2009:
attributable to work completed
42,000 inventory purchased for use
in 2008/9
6,000
4
8,000
progress
payments
received
50,000 other information:

expected further costs to completion
38,000
At 31 March 2009, the contract was certified as
50% complete.
R
e
q
u
i
r
e
d
:
Prepare the Statement of Comprehensive Income and
Statement
of Financial Position extracts
showing the balances relating to this contract, as required by
IAS 11 long-term contracts.
104
QUESTION 5
Winnie designs and builds schools. During the year ended 31
December
2009 Winnie had two contracts start with the following details. All
outcomes can be estimated with reasonable certainty:
Tigger
Piglet
$m
Contract price
Total costs to date
Sales value to date (as certified by

professional surveyors and billed to
$m
70
55
45
40
49
27
customers)
Estimated future costs to completion
10
16
Payments on account
Completion
50
70%
34
60%
Required:
Calculate figures for the Statement of Comprehensive Income and
Statement of Financial Position for Winnie.

105
106
To the extent that funds are borrowed specifically for the

purpose of
obtaining a qualifying asset, the amount of borrowing costs
eligible for capitalisation on that are the actual borrowing costs
incurred less any
investment income on the temporary investment of those borrowings.
Specific Borrowings:
The borrowing costs directly attributable to the acquisition, construction
or
production of a qualifying asset are those borrowing costs that would
have been avoided if the expenditure on the qualifying asset had not
been made.
AMOUNT TO BE CAPITALISED
Borrowing Costs that are directly attributable to the acquisition,
construction
or production of a qualifying asset shall be capitalised as art of the cost
of that asset.
Allowed alternative;
Borrowing costs should be recognised as expense in the period in
which
they are incurred.
ACCOUNTING
An asset that necessarily takes a substantial period of time to get
ready for
its intended use or sale
Qualifying asset
Interest and other costs incurred by an entity in connection with
the
borrowing
funds.
Borrowingofcost
DEFINITIONS
IAS 23 BORROWING COSTS
Q
U
E
S
T
I
O
N
6
Christopher Robin constructed a Hospital at a cost of $100
million over eight Christopher Robin took out an $80 million 10%
loan on 1 January. The loan year.
R
e
q
u
i
r
e
d
:
Calculate the initial cost valuation of
the hospital.
107
following
the
until
open
not
did
hospital
The
December.
31
on
repaid
was
to finance the project
months from 1 January to 31 August. In order
108
Capitalisation of borrowing costs shall cease when substantially all the

activities necessary to prepare the qualifying asset for its use or sale
are complete.
Suspension of capitalisation of borrowing costs shall occur during
extended
periods in which active development is interrupted.
Expenditures for the asset are being incurred;
Borrowing costs are being incurred; and
Activities
that are
necessary
to prepare
Capitalisation
commences
when;
COMMENCEMENT, SUSPENSION AND CESSATION

The amount of borrowings costs capitalised during a period shall not
exceed
the
of borrowing
costs
during
that period.
Theamount
capitalisation
rate shall
be incurred
the weighted
average
of the borrowing
costs
applicable to the borrowings of the entity that are outstanding during
the period. (Excluding borrowings made specifically for the purpose of
obtaining
a qualifying asset.)
To the extent that funds are borrowed generally and used for the
purpose of
obtaining a qualifying asset, the amount of borrowing costs eligible for
capitalisation shall be determined by using a capitalisation rate to the
cost of
that asset.
General Borrowings:

dealing with leases (lease only)
109
A lease that substantially transfer all risks and rewards of ownership to

the
lessee.
Legal
title may or may not eventually transfer.
FINANCE
LEASE
An agreement whereby the lessor conveys to the lessee in return for a
payment or series of payments the right to use an asset for an agreed
period of time.
DEFINITIONS
LEASE
IAS 17 LEASES
When accounting we always follow substance rather than legal form.
This is
demonstrated by the accounting for leases.
Substance refers to the economic reality of the situation i.e. is the
asset
actually
treated as if its owned.
of
Form refers to the legal position which often relates to the ownership
legal title of an asset.
of
Although there is no accounting standard internationally the
concept
substance
over form is an extremely important one.
SUBSTANCE
LEARNING OUTCOME:
110
?
?
?
?
The lease transfer ownership of the asset to the lessee by the end of
the lease term
The lessee has the option to purchase the asset at a price expected to be
sufficiently lower than fair value at the date the option is available and it is likely
that the option will be taken up
The lease term is for the major part of the life of the asset even if legal
title isnt transferred
At the start of the lease the present value of the minimum lease payments is
substantially all of the fair value of the leased asset
The leased assets are of such a specialised nature that only the lessee can use
them without major modifications
?
Examples of situations that individually or in combination would
normally
lead
to a lease
classified
Indications
of being
a finance
leaseas a finance lease are;
If not its an operating lease.
This reflects the concept of substance. Even though legal title does not
initially
the asset
treated
its owned.
A leasepass
is classified
asisa being
finance
lease as
if itiftransfers
substantially all the
risks
and
rewardsAincidental
ownership.
CLASSIFIC
TION OF to
LEASES
Not a finance lease!
OPERATING LEASE
EX
A
MP
LE
4
Danny has taken out an operating lease on its photocopier paying
a non- refundable deposit of $3,000. The lease is or three years
with annual payments of $5,000 after which the photocopier goes
back to the lessor. The photocopier has a useful economic life of
five years.
R
e
q
u
i
r
e
d
:
Show how the photocopier will be accounted for in the
Statement of
Financial
Position
and
Comprehensive Income.
Statement
of
111
Following substance legal title has not transferred but the asset
being
treated
as if its
owned
so theassets
accounting must reflect that.
Non-current
assets
leased
Lease
liability
Dr
Cr
The leased asset is firstly recognised at its fair value (cash price) or if
lower
the present value of the minimum lease payments. The opposite side
of the entry is to establish the lease liability
FINANCE LEASE
being
is
asset
the
and
transferred
Following substance legal title has not
treated
anotheras if its being hired not owned.
expense on a straight line basis over the lease term unless
systematic basis is more appropriate for the way the asset is used.
OPERATING LEASE
Lease payments under an operating lease shall be recognised as
an
ACCOUNTING FOR LEASES
112
liability
the
on
interest
of
allocation
an
be
must
there
Also each year
outstanding.
Depreciation expense
Accumulated
depreciation
Dr
Cr
The accounting for depreciation is in line with IAS 16;
depreciated
be
life of the asset would be used. Otherwise the asset would
over
shorter
of the
term and theusing
useful
life.
Eachthe
year
the asset
is lease
then depreciated
a systematic
basis. If it
is
likely that the lessee will obtain legal title at the end of the lease the
useful
113
Total interest
X
total interest x 1/6
3
X
2
X
1
Instalment
The total interest is then systematically allocated using the sum of the
digits,
i.e.
X
Total interest
X
Total payments
(X)
Cash
price/fair
value
The total
interest
needs to be calculated
2
= 6
3(3+1)
2
e.g.
lease
was paid
over 3 instalments
whereifnthe
is the
number
of instalments
paid.
n(n+1)
Use the following formula to initially work out the sum of the digits.
Sum of the digits
Each instalment must be split between interest and capital
repayment.
Interest should be allocated to each period during the lease term do as
to produce a constant periodic rate of interest on the remaining
balance of the
liability.
METHODS OF ALLOCATING INTEREST
LEASE PAYMENTS
BFWD
X IMPLICIT INTEREST RATE
CASH PRICE/FAIR VALUE

1
CFWD
PAID
INTEREST
BFWD
INSTALMENT
AB
(X) (X) (X)
XXX
XXX
1
2
3
CFWD
PAID
INTEREST
BFWD
INSTALMENT
114
Payments in arrears
Using a three year lease again.
as
digits
the
the digits method. Work out the interest charges using sum of
above
andway
then
thefigures
interestfor
amounts
to the table.
The best
to slot
workinout
the Statement
of Financial Position
liability is to use the table above. This would be used automatically if using
the
method
but ison
just
as easy made
to useinif arrears.
you re following the sum of
Theactuarial
above table
is based
payments
CALCULATING THE LEASE LIABILITY FOR THE STATEMENT OF FINANCIAL
POSITION
This method uses actuarial tables or interest tables to allocate the interest
charges to particular periods. it also has reducing charges for interest but is more
accurate than the above sum of the digits method.
To be able to apply the actuarial method in a question you would need to be given an
implicit rate of interest.
ACTUARIAL METHOD
EXAMPLE 5
Danny also starts a finance lease on 1 January 2009 acquiring a camera
which has a fair value of $10,000.
The lease requires a deposit of $575
followed by seven annual instalments of $2,000 payable in arrears. The
implicit interest rate in the lease is 11%.
Required:
Show how the finance lease would be treated in the Statement of
Comprehensive Income and Statement of Financial Position for the year
ended 31 December 2009.
XX
BX
x
AC
X
(X) (X)
(X)
XX
X
1
2
3
= CFWD
+ INTEREST
=
CAPITAL
- PAID
BFWD
INSTALMENT
115
the end of the year.

at
outstanding
no
is
there
arrears
in
made
are
(A B)
Current liability
Finance lease
When payments
B
Non-current liability
Finance lease
Payments in advance
x
interesting
E
X
A
M
P
L
E
6
A lease rental of $20,000 was paid on 1 April 2008. It is the first of
five annual payments in advance for the rental of an item of
equipment that has a cash purchase price of $80,000.The implicit
interest rate in the lease as
12% per annum. Leased assets should be depreciated on a
straight-line basis over the life of the lease.
R
E
Q
UI
R
E
D
:
Show how the finance lease would be treated in the
Statement of Comprehensive Income and Statement of
Financial Position for the year ended 31 March 2009.
116
When payments are made in advance, interesting is outstanding at the

end
ofXthe year and needs to be accrued.
B
(A C)
Finance lease
Accrued interest
C
Non-current liability
Finance lease
Current liability

dealing with reporting of performance
117
Those persons having authority and responsibility for planning,

directing and controlling the activities of the entity, directly or indirectly,
including any director of that entity.
Key management personnel
Joint
control agreed sharing of control over an economic activity.
Is the contractually
Is the power to govern the financial and operating policies of an entity
so as to obtain benefits from its activities.
Control
The transfer of resources, services or obligations between related
parties, regardless of whether a price is charged.
Definition of a related party transaction
?
?
?
?
?
?
?
controls, is controlled by, or is under common control with, the
entity
has an interest in the entity that gives a significant influence over the entity
has joint control over the entity
is an associate (IAS 28 Investment in Associates)
is a joint venture in which the entity is a venturer (IAS 31 Interests in joint ventures)
is a member of the key management personnel of the entity or its parent
is a close family member of any of the above
is a post-employment benefit plan for the employees of the entity or of any entity
that is a related party of the entity
?
Definition of a related party
A party is related to an entity if the party:
IAS 24 RELATED PARTY DISCLOSURES
LEARNING OUTCOME:
118
Disclosure should be made irrespective of whether a price is charged.

At a minimum the disclosure should include:
The amount of the transactions
The amount of outstanding balances, including terms and
conditions, whether they are secured and the nature of the
consideration to be provided
Provisions for doubtful debts based on the amount outstanding
The expense recognised during the period in relation to bad and
doubtful debts
about the types of transactions and the outstanding balances
necessary for an understanding of the financial statements
disclose the nature of the related party relationships as well as
information
entity should
If there have been transactions between related parties, an
Disclosure of transactions and balances generally
Short-term employee benefits
Post-employment benefits
Other long term benefits
Share based payments
?
?
?
?
each of the
Disclosure of key management personnel compensation
Key management personnel compensation in total and for
following;
if different the ultimate controlling party
?
Significant influence
Is the power to participate in the financial and operating policy
decisions of an entity but is not control over those policies. Significant
influence may be gained by share ownership, statute or agreement.
DISCLOSURES
Relationships between parents and subsidiaries shall be disclosed
irrespective of whether there have been transactions between those
related parties.
? Name of entitys parent and;
119
If the users of the financial statements are aware of these

relationships,
transactions and balances then they can take them into account
when assessing the performance and position of the entity.
When it comes to balances outstanding the same could be true eg an
entity
allows an extended credit period to its related parties so distorting is
debt collection figures.
This relationship can have a direct impact on the financial performance
of an
individual company. This mainly due to the special terms and
arrangements that could arise between related parties eg an entity
sells its products to a
subsidiary in the same group at a smaller mark up than it would to a
entity that wasnt a related party. Obviously this would have a direct
impact on profit margins.
Related party relationships are a normal part of everyday business.
Often
groups
of companies
are formed based
on their trading relationship.
WHY ARE
THE DISCLOSURES
NECESSARY
The above should be made separately for each of the following
? The parent
? Entities with joint control or significant influence over the entity
? Subsidiaries
? Associates
? Joint ventures in which the entity is a venture
? Key management personnel
? Other related parties
C2(b) - Explain the accounting rules contained in IFRSs and IASs

governing share capital transactions.
On liquidation, paid after debts have been paid
The last to be paid if the entity goes into liquidation, if at all
Risks
Dividend usually fixed But can be suspended Cumulative dividends are
outstanding until paid
Paid the dividend before the ordinary shareholders
Dividend decided by the directors. Owners of all profits after all other claims have
been met
Rewards
Not normally
Almost always though voting and non-voting shares may exist
Voting rights
Preference
Ordinary
120
distinguish.
whether a shares are one of the more difficult instruments to
Preference
The terms of each share should be considered to identify contractual
obligation exists (financial liability) or not (equity).
contractual
entity after deducting all of its liabilities ie have no
obligation
Equity any contract that evidences a residual interest in the assets of an
Financial liabilities any liability that is a contractual obligation to make one
or more
payments
in the
future
their true substance
rather
than what
entities
may want to show them as. It
distinguishes
between liabilities (debt) and equity.
on
based
IAS 32 helps to ensure that financial instruments are recognised
PRESENTATION
IAS 32 FINANCIAL INSTRUMENTS DISCLOSURES AND
TYPES OF SHARE
LEARNING OUTCOME:
QUESTION 1
Required:
Should the following be classified as equity or financial
liability? Ordinary shares
Non redeemable cumulative preference shares
Redeemable Preference shares
Non redeemable preference shares
Loan notes & bonds
121
This initial transaction will automatically be at nominal value

Dr Cash
Cr Share capital
FIRST ISSUE
ACCOUNTING FOR SHARE ISSUES BASIC TRANSACTIONS
constant
Comprehensive Income over the life of the instrument to give a
annual
rate redeemable
of interest onfor
thecash
outstanding
balance of
the liability.
Any shares
are automatically
financial
liabilities.
IAS 32
& IAS 39 requires the total finance cost be allocated to the Statement
of
REDEEMBALE SHARES
QUE
STIO
N2
Gamel decides to make a bonus issue on the basis of one new
share for every four owned by its existing shareholders. The capital
and reserves immediately before the issue were:
$
0
0
0
Ordinary
$1
shares
1,000
Share
500
Retained
premium
earnings
4,350
Re
qu
ire
d:
Show how capital and reserves would change after the issue.
122
use
otherwise
used,
be
would
premium
share
Ideally
Financial Position.
retained
earnings.
The choice
of reserve will be dependent on what exists in the
Statement of
Dr Reserves
Cr shares
Share are
capital
The
given to existing shareholders for no consideration.
BONUS ISSUE
Cash
Share capital nominal value only
Share
premium - balance
Dr
Cr
Cr
ISSUE AT A PREMIUM
QUES
TION
3
Consider Gamel again who this time instead of the bonus issue
makes a rights issue on the basis of one new share for every four
owned by its existing shareholders. The issue price is $2 and the
issue is fully taken up. The capital and reserves immediately before
the issue were:
$
0
0
0
Ordinary
$1
shares
1,000
Share
500
Retained
premium
earnings
4,350
The market price of a Gamel share before the issue was $5
Req
uire
d:
Show how capital and reserves would change after the issue.
123
Cash
Share capital nominal value only
Share
premium balance
Dr
Cr
Cr
The shares are given to existing shareholders for a price lower than
market
price.
RIGHTS ISSUE
124
When an entity acquires its own equity shares, and at the Statement of
Financial Position date has not cancelled them, they are referred to as
treasury shares.
TREASURY SHARES
The value of the equity element is the difference between the fair value
of
the
overall instrument
and thealldebt
element.
To calculate
the debt portion
future
payments capital and interest
are
discounted
present
value.
If a financialtoliability
has
an option to convert to equity it is most likely a
compound instrument part debt, part equity. It must be accounted for
accordingly.
CONVERTIBLE DEBT
The issue of shares from announcement to application and allotment
can be
found
in Chapter
17the
pages
361 of
- 366
Payments
made to
holders
financial liabilities, even if described
as
dividends will be taken to finance costs in the Statement of
Comprehensive
Income
Payments made to equity holders will be treated as dividends and
taken to
the
Statement
of Changes
in Equity
DIVIDENDS
AND
INTEREST
IAS 32 requires share issue costs to be taken directly to equity not the
Statement
of Comprehensive
Income.
SHARE ISSUE
COSTS
125
The simplest option is to buy back the shares. It is usually required to

ensure that equity capital is maintained. This is done by a transfer from
distributable reserves to a non-distributable reserve capital
redemption
reserve.
PURCHASE AND REDEMPTION OF SHARES
The shares should be reclassified and shown as a deduction from
equity.
IAS32 requires that no gain or loss be recognised in the Statement of
Comprehensive Income as a result of the change in equity.

dealing with reporting of performance
126
will result in the
The
This retrospective
change should be applied retrospectively. This
restatement
opening balances and comparatives.
Policies may of
also
changing the policy would result in fairer presentation.
need
where changes
in standards
take
place. consistently
Once amending
chosen accounting
policies
should be
applied
unless
Changing accounting policies
Faithful representation
Reflect the substance Neutral, free from bias Prudent
Complete
?
?
?
?
?Reliable
Relevant to the economic decision making needs of users; and
In all other situations policies should be selected so as to result
in
information
that
andaccounting
reliable in line
with the Framework.
requirements
of is
therelevant
applicable
standards.
entity must firstly consider the
an
accounting policies
In selecting
Selecting accounting policies
by
applied
The specific principles, bases, conventions, rules and practices
an
entity in preparing and presenting the financial statements.
DEFINITION
Accounting policies
ESTIMATES AND ERRORS
IAS 8 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING
LEARNING OUTCOME:
Q
U
E
S
T
I
O
N
1
SPC Construction incurs considerable finance costs on its
financing for the construction of superstores. Its chosen
accounting policy to date has been expense the finance costs
as incurred. The final accounts for the year ended
31 December 2007, and the 2008 draft accounts, reflect this
policy and show the following.
Profit before tax
$000
$000
6,200
4,450
(1,900)
(1,400)
Income tax expense
Profit for the year

and loss account
23,000 forward
2007
8,700
6,200
(2,500)
(1,750)
Finance costs
Profit
2008
brought
4,300
3,050
26,050
30,350
======
26,050
======
On the advice of the auditors the directors have now decided to change
the accounting policy to one of capitalisation of finance costs to give a
fairer presentation. SPC incurs no finance costs other than those related
to the construction of the superstores.

127
For a change to be truly a change in accounting policy it must affect

any one
of the following; recognition, presentation or measurement. Otherwise
it will be a change in an accounting estimate.
adjustment is referred to as a prior period adjustment and shown in the
statement of changes in equity.
At the beginning and end of 2008 SPC had the following balances:
Ordinary
share capital
Share premium
$
,
0
0
0
5,000
3,000
SPC paid a dividend of $1m during the year ended 31 December 2008.
Required:
Show how the change in accounting policy will be reflected in the financial
statements for the year ended 31 December 2008.
QUESTION 2
Required:
Would the following be a change in accounting policy or
revision of an estimate?
If a company decides to change its method of depreciation from
straight line method to reducing balance method.
If a company decides to change from capitalising finance costs to
immediate write off.
128
Errors
Any fundamental errors or omissions would be dealt with in the same
way as the change in accountings policy.
Changes in estimates are adjusted prospectively in the current
years
Statement of Comprehensive Income but not retrospectively as with
changes in accounting policy.
As a result of inherent uncertainties in a business many estimates will
be
made.
As estimates
revisions
will obviously need to be made.
Changes
in accounting
estimates
Q
U
E
S
T
I
O
N
3
On 1 January 2007 Scrunchie Ltd bought an item of plant for
$200,000.
It has an expected useful life of 10 years but will realise nothing
on final disposal. On 31 December 2009, after three years of
using the asset, it was decided to sell the plant.
A plan was put in place and instructions given to locate a
buyer. The plant is in great demand so Scrunchie Ltd is
confident that the machine will be sold promptly. Its current
market value is $130,000. As the item of plant is a considerable
size dismantling costs to make it available for sale will be
incurred at $1,000.
R
e
q
u
i
r
e
d
:
Show how the asset should be presented in the Statement of
Financial
Position for the year ended 31
December 2009.
129
The asset should be held at the lower of its carrying value and fair
value less
costs to sell.
Accounting
Management commitment to the sale

Actively marketed
Completed with one year
?
?
?For this to be the case the asset must be available for immediate sale
and
its
probable
An sale
assethighly
is classified
asie;
held for sale if its carrying amount will be
recovered
principally through a sale transaction rather than through continuing
use.
The objective of IFRS 5 is to specify the accounting for assets held for
sale
and the presentation and disclosure of discontinued operations.

ASSETS HELD FOR SALE
IFRS5 ASSETS HELD FOR SALE AND DISCONTINUED

OPERATIONS
130
?
?
?
The revenue, expenses and pre-tax profit or loss of discontinued
operations
The related income tax expense

The gain or loss recognised on the measurement to fair value less costs to sell, or
on the disposal, of the assets constituting the discontinued operation
The related income tax expense.
?
(b)An analysis of this single amount must be presented into
PRESENTATION IN THE STATEMENT OF COMPREHENSIVE
INCOME
(a) An enterprise must disclose a single amount on the face of the
Statement of Comprehensive Income, comprising the total of:
? the post-tax profit or loss of discontinued operations; and
? the post-tax gain or loss recognised on the measurement
to fair value less costs to sell, or on the disposal, of the
assets constituting the discontinued operation.
? Represents a separate major line of business or geographical area
of
operations,
? Is part of a single co-ordinated plan to dispose of a separate major
line of business or geographical area of operations
A component of an entity that either has been disposed of or is
classified as
held
for sale and; OPERATION
DISCONTINUED
DEFINITION
131
* Detail given in the notes

X
Total profit for the period
X
Discontinued operations
Profit for the period from discontinued operations*
X
Profit for the period from
continuing operations
X
(X)
Profit before tax
Income
tax expenses
X
(X)
Operating profit
Finance
costs
X
(X) (X)
Gross profit
Distribution costs
Administration
expenses
X
(X)
Continuing operations
Revenue
Cost
of sales
$
PROFORMA Statement of Comprehensive Income presentation

132
Revenue from the sale of goods can be recognised when all the
following
conditions have been met:
? transfer of significant risks and rewards of ownership to the buyer
? sellers no longer retains any managerial involvement or control
over
the goods
? the amount of revenue can be measured reliably
? it is probable economic benefits from the transaction will be
received
? the costs incurred can be measured reliably
REVENUE FROM SALE OF GOODS
IAS 18 considers when revenue should be recognised in the Statement
of
Comprehensive Income. Revenue could arise from;
? the sales of goods
? the rendering of services
? the use by others of entities assets yielding interest,
royalties or dividends
RECOGNITION
REV
ENU
E
The gross inflow of economic benefits during the period arising in the
course of the ordinary activities of an entity when those inflows result in
increases in equity, other than increases relating to contributions from
shareholders.
DEFINITION
IAS 18 REVENUE
133
?
the accounting policies adopted for the recognition of revenue
the amount of each significant category of revenue (sale of goods,
rendering of services, interest, royalties and dividends) recognised
during the period
the amount of revenue arising from exchanges of goods or services
included in each significant category of revenue.
?
?
An enterprise should disclose:
Revenue should be measured at the fair value of the consideration
received
or receivable.
Disclosure requirements
MEASUREMENT
Revenue from interest, royalties and dividends may be recognised
when it is
probable that the benefits of the transaction will flow to the entity, and
the amount of the revenue can be measured reliably.
INTEREST ROYALTIES AND DIVIDENDS
?
?
the amount of revenue can be measured reliably
it is probable that economic benefits associated with the transaction
will be received
the stage of completion of the transaction at the Statement of Financial
Position date can be measured reliably
the costs incurred can be measured reliably
?
?
Revenue from services may be recognised only when certain
conditions have
been met relating to:
REVENUE FROM SERVICES
134
?
the nature of the regulatory environment (banking, insurance, etc.).
the methods used to distribute the products or services;
?
?
the type of customer for the products or services;
the nature of the production process;
?
the nature of the products or services;
l
Operating segments can be aggregated where they have similar
economic
characteristics
similar
in each ofofthe
transactionsand
withare
other
components
thefollowing:
same entity);
(b) whose operating results are regularly reviewed by the entitys
chief
operating decision maker to make decisions about resources to be
allocated to the segment and assess its performance; and
(c) for which discrete financial information is available.
to
expenses relating
and
revenues
(including
expenses
incur
The only definition given in IFRS 8 is that of an operating segment. An
operating segment is a component of an entity:
(a) that engages in business activities from which it may earn revenues and
geographical areas in which it operates, and its major customers.

the
services,
and
products
entitys
the
about
also
and
segments
The core principle of IFRS 8 is: An entity shall disclose information
to
enable users of its financial statements to evaluate the nature and
financial effects of the business activities in which it engages and

the
economic environments in which it operates. IFRS 8
sets
out
requirements for disclosure of information about an entitys
operating
IFRS 8 OPERAING SEGEMNTS
135
the
of
75%
least
at
identified, even if they do not meet the 10% tests, until
revenue
is in fact included
the segmental
The segmental
analysis inmust
cover at analysis.
least 75% of the total
consolidated or
enterprise revenue. If the reportable segments total less than this it
may be possible the segments which do not meet the 10% test should
be combined with similar segments. If this is not feasible, additional
segments have to be
total sales revenue, including sales to other segments; or
total profits of all profit-making segments; or total losses
of all loss-making segments; or total assets.
?
?
?
?
An operating segment is a reportable segment if the operation
contributes at
least
10 per centSEGMENTS
of:
REPORTABLE
C1(b) Apply the conditions required for an undertaking to be

a subsidiary or an associate of another company.
136
Control is the power to govern the financial and operating policies

of
an
so as to
benefit
from its
activities.
Theentity
key concept
in obtain
determining
whether
or not
an investment
constitutes a
subsidiary is that of control.
A subsidiary is an entity, including an unincorporated entity such
as a
partnership, which is controlled by another entity (known as
the parent).
A parent is an entity that has one or more subsidiaries.
In order to fulfil the needs of investors and other users, additional
information is likely to be required, and therefore the IASB has in
issue several accounting standards setting out the principles and
practices that
must be followed where an investment comprises a significant
proportion of the total equity of the investee entity.
It is often the case that businesses conduct part of their operations by
making investments in other business entities. For example, a
business that aims to expand its market share could opt to purchase
one or more of its competitors, rather than taking the slower route of
building market share by gradual growth. Another example is where a
business purchases an investment in one or more of its suppliers of
key goods and services in order to integrate and secure its supply
chain.
INVESTMENT IN SUBSIDIARIES
GROUPS FINANCIAL STATEMENTS
137
When there is:

A) power over more than half of the voting rights by virtue
of an agreement with other investors;
B) power to govern the financial and operating policies of the entity
under a statute or agreement;
C) power to appoint or remove the majority of the members of the
board of directors or equivalent governing body and control of
the entity is by
that board or body; or
In most cases, control can be easily determined by looking at the
percentage ownership of the ordinary share capital in the investee
entity. provided ownership is greater than 50% a parent/subsidiary
relationship can
be assumed. However, there are exceptions. A parent/subsidiary
relationship can exist even where the parent owns less than 50% of
the voting power of the subsidiary since the key to the relationship
is control.
IAS 27 supplies the following instances:
IAS 27 defines a subsidiary as;
IAS 27 Consolidated and separate financial statements
(B) SUBSIDIARY
100% OSC
(A) PARENT
FIG 1
achieved by the purchase of more than 50% of a companys ordinary
share
capital
Control(OSC)
is usually
A group exists where one entity controls another.
138
In the financial operations examination, you will only be examined on a

subsidiary
fully controlled
by the
(100%
The reasonthat
for is
describing
the nature
of parent.
control in
suchcontrol).
detail in IAS 27
is
that entities have sometimes created ownership structures designed
to evade the requirements for accounting for subsidiaries.
D) power to cast the majority of votes at meetings of the board of
directors or equivalent governing body and control of the entity is by
that board or body.
C1(d) Apply the concepts of fair value at the point of

acquisition, identifiability of assets and liabilities, and
recognition of goodwill.
139
Goodwill on acquisition is the aggregate of:

Consideration, measured at fair value
Less
Net assets acquired (the fair value of identifiable assets acquired less
liabilities assumed)
IFRS 3 requires that entities should account for business combinations

by
applying the acquisition method of accounting. This involves
recognising and measuring the identifiable assets acquired, the
liabilities assumed and any non-controlling interest in the acquiree
entity. Measurement should be at fair value on the date of acquisition.
Where 100% of the equity of a
subsidiary is acquired, goodwill on acquisition is calculated as follows:
IFRS 3 business combinations
Usually, the owners of a profitable business will expect to receive more
in
exchange for the investment than its net asset value. This additional
amount arises for various reasons. It is quite likely that the assets
recognised in the statement of financial position do not represent all
the assets of the firm but
intangibles such as good reputation and customer loyalty may be
worth something to the purchaser. The difference between the cost of
investment and the fair value of the net assets acquired is known as
goodwill on acquisition, and the accounting standard ifrs 3
business combinations requires its recognition in consolidated
financial statements.
GOODWILL
When a controlling investment is made the parent is investing in the
net assets of the subsidiary. The value of the assets presented on the
statement of financial position is unlikely to be what is paid by the
investing
entity.
C1(c) Prepare the consolidated statement of financial position

(balance sheet) for a group of companies comprising directly
held interests in one or more fully-controlled subsidiaries (such
interests having been acquired at the beginning of an
accounting period);
140
(W4)
(W3)
x
x
share capital
reserves (eg
RE,SP)
$
xx
statement of
$xx
financial position
Acquisition
(W2)
Net assets of subsidiary
S
100%
P
(W1) GROUP STRUCTURE
WORKINGS REQUIRED
by
subsidiaries
the
of
acquisition
position/income statement illustrating the
the
parent. We need a plan!
financial
of
statement
group
a
form
to
companies
individual
from
This process involves the combining together of two or more sets of

figures
MECHANICS OF CONSOLIDATION
141
Having completed these core workings we then consolidate the

statement of
financial position itself based on control and representing the
single economic entity
x
100% parent
$subsidiarys post acquisition
xx
Share premium/revaluation reserve
calculation is the same as for retained earnings
ownership so the
still based on
Other reserves:
Each
reserve has a separate calculation
x
100% parent
Subsidiarys post acquisition profits
(W2)
less impairment (W3)
$
(W4) Group retained earnings
Cost of investment
Less net assets at acquisition
Goodwill
at acquisition
$
X (x)
x
(W3) Goodwill
X x (x)
142
XXX
X
Share Capital (Parent only)
Reserves (W5)
Non-current liabilities (100% P + S) Current liabilities (100% P + S)
X
X
XX
Current Assets
Inventory (100% P + S) Receivables (100% P + S)
X
Bank & cash (100% P + S)
X
Non Current Assets
Goodwill (W3)
Tangible (100% P + S)
$000
Consolidated Statement of Financial Position at 31 December
2009
Question 1
Summarised statements of financial position
for the year to 31 December 2009
James
Neil
$
$ Non Current Assets

Tangible
Investment in Neil
1000
500
600
- Current
Assets
800
600
2400
1100
Share Capital
500
200
Retained earnings
800
400
Current liabilities
1100
500
2400
1100
1) James purchased 100% of Neil for $600 two years ago when
Neils
retained earnings showed a balance of $100
2) Goodwill arising on acquisition of Neil has suffered no impairment

to date.
143
Required:
Prepare the consolidated statement of financial position for the
James Group for the year to 31 December 2009.
144
If, for example, a parent sells to a subsidiary and the subsidiary has
not sold
on the goods by the year end an extra adjustment is required to
remove the
profit
on the are
transaction.
When goods
sold by one company in a group to another in the
same
group a cancellation would be required to remove, in accordance with
IAS
27s single entity concept, the receivable/payable amount on the
group statement of financial position.
Unrealised Profit - Inventory
NO! Therefore these balances are not true outstanding balances from
a
group point of view and need to be cancelled or receivables and
payables would be overstated. The same is true for any balance
between parent and subsidiary.
If this is the case, ask yourself this will the parent receive cash from
outside the groups? And, will the subsidiary pay cash outside the
group?
Elimination of intra group balances
IAS 27 requires all transaction and balances between group
companies to be eliminated on consolidation. Consolidated financial
statements treat the two companies as if they are one. If the parent
has sold goods to the subsidiary there could be receivable and
payable balances between them at the end of the year.
145
is
100 is the unsold inventory x mark-up of 25% over 100 plus the markup.
The 20 is an artificial profit that doesnt exist as far as the outside
world
concerned. It, therefore, needs to be removed at the consolidation
stage.
125
100 ??
25
? 20
therefore the profit element is

S has not sold the goods on by the end of the year.
P sells $100 goods to S at cost plus 25% (25% mark-up)
Illustration 1
(W4 GRE)
P
?Inventory
sells to
IF
S
(CSFP)
?Profit
(W4 GRE)
S
?Inventory
sells to
IF
P
(CSFP)
?Profit
Make the adjustment
STEP 2
100 ? Mark ? up
unsold inventory ?
Mark ? up
Calculate the PUP

STEP 1
Question 2
Summarised statements of financial position for the year to
31 December 2009
James
Molly
$

Tangible
900
Investment in Molly
500
800
- Current Assets
700
600
2400
1100
Share Capital
500
200
Retained earnings
800
400
1100
500
Current liabilities
2400
1100
146
1) James purchased 100% of Molly for $800 two years ago when
Mollys
reserves showed a balance
of $200.
2) James and Molly traded with each other and at the year end Molly owed
James $150. This is included in both sets of individual company figures.
Also included in the inventory of James was $30 of goods purchased
from Molly at mark up on cost of 25%.
1) Goodwill arising on acquisition of Molly has been impaired by $200.
Required:
Prepare the consolidated statement of financial position for the James
Group for the year to 31 December 2009.

147
QUESTION 3
Summarised statements of financial position
for the year to 31 December 2009
Jack
Cate

Tangible
Investment in Cate
2,000
900
800
-
Current Assets
Inventory
250
180
Receivables
300
200
Bank
90
50
3,540
1,230
1,000
200
Retained earnings
900
350
Non-current
500
100
Share Capital
liabilities
Current liabilities
148
1,140
580
3,540
1,230
1) Jack purchased 100% of Cate for $900 two years ago when
Cates
reserves showed a balance of
$100.
2) Jack and Cate traded with each other and at the year end Cate owed
Jack $50. This is included in both sets of individual company figures.
Also included in the inventory of Cate is goods bought from Jack for $50
at a mark up on cost of 25%
3) Goodwill arising on acquisition of Cate has been impaired by $300.

Required:
Prepare the consolidated statement of financial position for the Jack
Group for the year to 31 December 2009.

149
C1(d) Apply the concepts of fair value at the point of

acquisition, identifiability of assets and liabilities.
150
The amount for which an asset could be exchanged, or a liability

settled,
between knowledgeable, willing parties in an arms length transaction.
FAIR VALUE IS DEFINED AS:
Sometimes, at the point of acquisition, the recorded book value of an
item in
the subsidiary statement of financial position is different to its fair
value. For example, a property may be carried on the statement of
financial position at
a depreciated historic loss but it is worth 3 times that on the open
market. IFRS3/IAS27 says that a subsidiarys net assets should be
adjusted to fair value before goodwill is calculated and the fair value
adjustments included
in the group
figures.
Fair Value Adjustments net assets
Question 4
Summarised statements of financial position for the year to 31
May 2009
Pam
Sam
$000
$000
10,000
6,000
6,000
Inventory
6,000
1,000
Receivables
5,000
6,000
Bank
1,000
2,000
28,000
15,000
Share Capital
12,000
4,000
Retained earnings
13,000
8,000
3,000
3,000
28,000
15,000
Non Current Assets

Tangibles
Investments
Current Assets
Current liabilities
151
1)
Pam acquired 100% of the shares in Sam for $6m four

years ago when Sams reserves show a balance of
$1m. At this date Sams tangibles had a market value
of $3m and a book value of $2.5m.
have a remaining life of 10 years.
These tangibles
2)
Pam owed Sam $1.5m in respect of group trading that had

occurred during the year. This balance is reflected in both
companies statement of financial positions.
3)
Goodwill on acquisition has been impaired by a total of
$150,000.
4)
During the year Sam sold $1m goods to Pam at a mark- up of 25%
on cost. Three quarters of these goods had been sold by Pam by
the year end.
Required:
Prepare the consolidated statement of financial position for the year to 31 May
2009.
152
Question 5
Summarised statements of financial position for the year to
31 March 2009
Jenny
Becky
$
$ Non
Current
Assets
Tangibles
Investment in
10,000
5,000
7,000
- Becky
Current Assets
Inventory
8,000
3,000
Receivables
6,000
2,000
Bank
5,500
1,000
36,500
11,000
Share Capital
Share premium
Reserves
Current liabilities
16,000
3,000
2,000
1,000
14,000
5,500
4,500
1,500
36,500
11,000
153
1) Jenny purchased 100% of Becky three years ago, when

the reserves of Becky were $1,000. At the time Beckys
tangibles had a book value of $1,000 and a market value of
$2,000.The assets have a remaining useful life of five years.
2) On 31 March 2009 Jenny sent a cheque to Becky to clear an
outstanding liability of $500.
Becky did not receive the
cheque until 6 April 2009.
There are no other transactions
between the two group companies.
3) Goodwill on acquisition has been impaired by $125.
Required:
Prepare the consolidated statement of financial position for the
Jenny group for the year ended 31 March 2009.
154
C1(c) Prepare the consolidated statement of comprehensive

income (income statement) for a group of companies
comprising directly held interests in one or more fullycontrolled subsidiaries (such interests having been acquired at
the beginning of an accounting period);
PROFORMA CIS FOR A GROUP WITH AN 80% SUBSIDIARY.
155
Cost of sales (100% of P and S), less

inter- company purchases, add
unrealised profit in inventory
Gross profit (cast down)
Distribution costs (100% of P and S)
Administrative expenses (100% of P
and S) Investment income (external
only)
Finance cost (external
only) Profit before tax
(cast down)
Income tax expense (100% P
and S) Profit for the year
Key issues also include unrealised profit and fair value adjustments as
well
as
goodwill
impairment.
Revenue
(100%
of P and S), less inter- company sales
$000
$000
for the
income
Consolidated
statement of comprehensive
year ended .....
QUESTION 1
Statement of comprehensive income for the year ended 30
September 2009
Revenue
Cost of sales
BILL
$000
100,000
(50,000)
BEN
$000
80,000
Gross profit
(30,000)
50,000
Admin expenses
50,000
(20,000)
30,000
(35,000)
15,000
Investment
income
Profit before tax
10,000
40,000
15,000
Income
taxyear
expense
Profit for the
(10,000)
30,000
(5,000)
10,000
1)
Bill acquired 100% of Ben on 1 October 2008.

Goodwill on acquisition was $4m and has been
impaired by $1m during the year.Impairment for the
group
should
be
charged
to
admin expenses.
2)
At acquisition Bens tangibles had a fair value of $2m

more than their carrying value and the tangibles have a
remaining life of 5 years. The depreciation is to be
included in admin expenses
3)
During the year Ben sold $5m goods to Bill at a mark up

of 25% on cost. of those goods are in inventory at the
year end.
4)
Ben paid a dividend of $10m during the year which is

included in the investment income of Bill.
Required:
Prepare the consolidated Statement of comprehensive income for
the year to 30 September 2009.
156
Question 2
income statement for the year ended 30 September
2009
Jo
$m
100
Revenue
80 cost of sales
(30)
50
50
(20)
30
15 investment
10
40
15 income tax
(10)
(5)
30
10 retained
50
30
(50)
gross profit
Admin expenses
income
profit before tax
expense
profit for the year
earnings bfwd
retained earnings cfwd

1)
Jo
acquired
Steve
$m
80
100%
of
(35)
40
Steve
on
October
2008.
Goodwill on acquisition was $10m and is impaired by $1m during this

year.
2)
At acquisition Steves plant had a fair value of $2m more than their
carrying value and are being depreciated over 5 years on a straight
line basis.
3)
During the year Steve sold $3m goods to Jo at a mark up of 25%

on cost. Half of those goods are in inventory at the year end.
REQUIRED:
Prepare the group Statement of comprehensive income for the year

to 30
September 2009
157
158
in
This means it is treated as an associate and equity is accounted for
accordance with IAS 28 (no line by line consolidation).
A shareholding of between 20% and 50% is assumed to give the
investing
company
significant
influence TECHNICAL
over its investment.
PROVISION
OF ESSENTIAL
INFORMATION
If the investing company acquires less than 51% of the ordinary share
capital of another company, then control is not achieved and no
consolidation will occur.
?
?
?
?
representation on the board of directors;
participation in policy-making processes;
material transactions between the investor and the entity;
interchange of managerial personnel;
The key concept in the definition is significant influence. IAS 28
explains
that significant influence is the power to participate in the financial and
operating policy decisions of the entity but is not control over those
policies. The existence of significant influence by an investor is usually
evidenced in one or more of the following ways:
IAS 28 INVESTMENT IN ASSOCIATES
If an investor holds, directly or indirectly, 20 per cent of the voting
rights of an entity then it is normally considered an associated entity
and is accounted for in accordance with IAS 28 investment in
associates. IAS 28
states that there is a presumption that the investor has significant
influence over the entity, unless it can be clearly demonstrated that this
is not the case.
159
operating profit on the group

under
The income from associate goes
statement of comprehensive income.
X
X
(X)
% AS PROFIT AFTER TAX
LESS GOODWILL IMPAIRED THIS YEAR
Associate and is calculated as
From
Its called Income
(W3) is required.
follows:
Group structure is needed but no MI calculation. MI is a third party
interest in
the group and the associate is not in the group. Once again an extra
working
Group Income Statement
X
X
X (X)
COST OF INVESTMENT IN A
ADD POST ACQUISITION RESERVES (W5)
LESS IMPAIRMENT OF ASSOCIATES GOODWILL
entitled investment in associate
is
This
An extra working (w6) is required.
and
is calculated
as follows:
calculation
is needed.
Group reserves are required as normal.
No minority interest
the same way as they would be for a subsidiary.
Group structure, net assets and goodwill calculations are all calculated
in
Group Statement of financial position
The Mechanics of Equity Accounting
A proforma CSCI - 100% Sub and 30% Associate
160
Taxation
Group (100% P and S)
Profit after tax
Revenue (100% of P and S), less inter-company
sales
Cost of sales (100% of P and S), less inter- company purchases , add unrealised
profit in inventory
Gross profit
Administrative expenses (100% of P and S) Distribution costs (100% of P
and S) Operating profit
Share of profits of associates(30% of Assoc
PAT) impairment of associates goodwill

Investment income (external only) Interest payable (100% P and
S)
Profit before tax (cast down)
$00
0
$000
EXAMPLE 1
161
52,000
51,000
76,000
25,000
17,000
10,000
10,000
13,000
28,000
30,000
21,000
25,000
Share Capital
Reserves
Current liabilities
52,000
51,000
76,000
7,000
11,000
12,000
9,000
13,000
9,000
11,000
5,000
7,000
Current Assets
Inventory
Receivables
Bank
22,000
20,000
25,000
28,000
Tangibles
Investment
Jacob
Samuel
$000
$000
31 December
to
the year
for
Summarised Financial Statements
2009
Statement of financial positions

Oliver
$000
Non Current Assets

162
During the year Oliver sold goods to Jacob to the value of $10m at
a mark-up of 25% on cost. Oliver also sold goods to Samuel to the
value of $15m at the same mark-up. All of the goods sold to Jacob
were still in Inventory at the year end but Samuel had sold
half of his inventory by the year end.
3)
two years ago
by $1,350,000
Oliver
also purchased 25% of Samuel for $13m
when reserves were $6m. Goodwill was impaired of which $250,000
relates to this year.
2)
by $750,000.
Goodwill has been impaired during the
Reserves
at acquisition were $5m.
2009.
January
on 1
year
of
Jacob for $15m
Oliver purchased 100%
1)
12,000
15,000
16,000
Profit After Tax
29,000
(17,000)
32,000
(17,000)
29,000
(13,000)
Profit Before Tax
Taxation
29,000
32,000
17,000
12,000
59,000
(30,000)
68,000
(36,000)
52,000
(35,000)
Gross Profit
Operating Expenses
Operating Profit
Investment Income
Revenue
Cost of Sales
Samuel
$000
125,000 (66,000)
Jacob
$000
160,000 (92,000)
Oliver
$000
133,000 (81,000)
Income Statements
Required:
Prepare both the group statement of financial position and income
statement for the year to 31 December 2009.
163
Jacob paid a dividend of $16m during the year.

4)
PRACTICE QUESTION
164
104
102
152
50
34
20
20
26
56
60
42
50
Share Capital
Reserves
Current liabilities
104
102
152
14
22
24
18
26
18
22
10
14
Current Assets
Inventory
Receivables
44
40
50
Bank
56
Non Current Assets
Tangibles
Investment
NOTE 1)
Dick
Harry
$m
$m
Tom
$m
Summarised Financial Statements for the year to 31 December 2009
Statement of financial positions
165
During the year Dick sold goods to tom to the value of $8m at a
mark-up of 25% on cost. All of the goods sold to tom were still in
inventory at the year end. There was an outstanding balance
between the two companies at the end of the year of $3m as a
result of this transaction.
3)
Tom also purchased 30% of harry for $26m two years ago when
reserves were $5m. Goodwill was impaired by $500,000 of which
$150,000 relates to this year. The other 70% of Harrys shares are
owned by a number of small investors who hold no more than 2%
each.
2)
year by $1,000,000.
Goodwill has been impaired during the
Reserves
at acquisition were $6m.
2009.
on 1 January
of Dick for $30m
100%
Tom purchased
1)
24
30
32
Profit After Tax
58
(34)
64
(34)
58
(26)
24
Investment Income
Profit Before Tax
Taxation
58
64
34
118
(51)
136
(59)
104
(70)
Gross Profit
Operating Expenses
Operating Profit
Revenue
Cost of Sales
Harry
$m
Dick
250 (132)
$m
Tom
320 (184)
$m
Income Statements
266 (162)
REQUIRED:
Prepare both the group statement of financial position and income
statement for the year to 31 December 2009.
166
REGULATION AND ETHICS OF

FINANCIAL REPORTING
(B)
B1(d) - Explain the meaning of given features of the IASBs
Framework
for
167
the Presentation and Preparation of Financial Statements

IASB with
accounting
accounting
in financial statements prepared in conformity with
standards
? provide
those who
about its
are interested in
the work
of the information
approach
to the formulation
of standards.
standards and in dealing with topics that do not form the subject of
an
accounting standard
? assist auditors in forming an opinion as to whether financial statements conform

with accounting standards
? help users of financial statements to interpret the information contained
accounting
applying
in
statements
financial
of
preparers
? assist
number of
?accounting
assist the IASB by providing a basis for reducing the
alternative accounting treatments permitted by law and standards
presentation of financial statements for external users.
In detail, the intended role of the framework is to:
? assist the IASB in its development of future accounting standards
and in its review of existing accounting standards
and
preparation
the
underlying
concepts
the
out
sets
statements
The IASBs framework for the preparation and presentation of
financial
OF FINANCIAL STATEMENTS
IASBS FRAMEWORK FOR THE PRESENTATION AND
PREPARATION
Learning Outcome:
168
Comparability users must be able to compare the financial

statements of
an
entityrepresentation
from period to period and from company to company
Faithful
Reflect the substance Neutral, free from bias Prudent
Complete
?
?
?
?
?The
four
characteristics are:
main
Understandability assuming users have a reasonable knowledge of

business and a willingness to study information with reasonable
diligence, the financial statements should be readily understandable to
users.
Relevance to be useful, information must be relevant to the decision
making needs of the user.
Re
lia
bl
e
Qualitative characteristics of financial statements
3
Accruals basis the effects of transactions and other events are
recognised
when they occur and not when cash transfers. They are reported in the
financial statements in the period to which they relate.
Going concern the financial statements are prepared on the basis
that en entity will continue in operation for the foreseeable future.
Underlying assumptions
2
To provide information about the financial position, performance
and
changes in financial position of an entity that is useful to a wide range
of users in making decisions.
The objective of financial statements
1
TOPICS COVERED BY THE Framework
The framework is not itself an accounting standard nor can it
override
the requirements of any existing accounting standard.

169
Historical cost - cash price or fair value at acquisition or obligation.

Most
commonly used but widely criticised
Current cost what would be the cash price today

Realisable value - what could be realised/satisfied today
Present value discounted future cashflows
Measurement of the elements of financial statements

6
-
Meet the definition of the element (as above)

Probable future economic benefit will flow to or from the entity
The item can be measured reliably
In order to recognise anything in the Statement of Financial Position
and
Statement of Comprehensive Income it must meet all three of the
following criteria:
Recognition of the elements of financial statements
5
Asset is a resource controlled by the enterprise as a result of past
events
and from which future economic benefits are expected to flow to the
enterprise.
Liabilities are an entitys obligations to transfer economic benefits as
a
result of past transactions or
events.
Equity is the residual amount found by deducting all liabilities of the entity
from all of the entitys

assets.
Income is increases in economic benefits during the accounting period in the form
of inflows or enhancements of assets or decreases in liabilities that result in
increases in equity, other than those relating to contributions from equity
participants.
Expenses are decreases in economic benefits during the accounting period in the
form of outflows or depletions of assets or incurrences of liabilities that result in
decreases in equity, other than those relating to distributions to equity participants.
The elements of financial statements

4
170
of
concept
financial
capital:
of
The Framework refers to two concepts
capital and physical concept of capital.
Concepts of capital and capital maintenance.
7
The Framework does not state which of the four should be used
B1g - Explain in general terms, the role of the external

auditor, the elements of the audit report and types of
qualification of that report
171
These are secondary reporting duties which means that you only see
them
referred to in an audit opinion if they are not being done or are wrong.
Director transactions with company (if missing from FS)
Where Directors Report is inconsistent with FS
Where all Info and explanations were not received
Where Proper accounting records have not been kept
Where Accounting records are inconsistent with the FS
Where Returns not received from all branches of the company
? To report on other areas, dependent on national law, e.g. (for UK):
The above are primary reporting duties.
? To report on proper preparation of FS
? To report on truth and fairness of FS
Auditors Duties
Learning Outcome:
Independent Auditors
Financial Statements
Report
on
the
Group
To
the
Members
of Z plc
We have audited the group financial statements for the year ended 30 sep
2006 which comprise
of
the
consolidated
Statement
of
Comprehensive Income, consolidated balance sheet,
consolidated
statements of recognised income
and
expense, consolidated cash flow statement and the
related notes 1 to 27. These group financial statements have been
prepared under the accounting policies set out therein.
We have reported separately on the Parent Company financial statements
of Z plc for the year ended 30 Sep 2006 and on the information in the
Report on Directors remuneration that is described as having been
audited.
This report is made solely to the Companys members, as a body, in
accordance with Section 235 of the Companies Act 1985. Our audit work
has been undertaken so that we might state to the Companys members
those matters we are required to state to them in an auditors report and
for no other purpose. To the fullest extent permitted by law, we do not
accept or assume responsibility to anyone other than the Company and
the Companys members as a body, for our audit work, for this report, or
for the opinions we have formed.
172
Date and Signature

6.
they
whether
and
fair,
and
true
are
Opinion whether the Accounts
have
been properly prepared
5.
Basis of Opinion explaining how the audit work was done and the
opinions
reached
4.
Respective responsibilities of directors and auditors making it
clear that directors are responsible for producing the Accounts, whilst
auditors are responsible for forming opinions on them
3.
Introduction identifying what has been audited. Accounts are often
published as part of a larger Annual Report, not all of which is subject
to audit
2.
Title addressing the report (usually the shareholders)
1.
Basic Elements of an Audit Report
Respective responsibilities of Directors and Auditors. The Directors

are responsible for preparing the Report and Accounts for the Group
financial statements in accordance with applicable United Kingdom law
and International Financial Reporting Standards (IFRSs) as adopted by
the European Union as set out in the Statement of Directors
responsibilities.
Our responsibility is to audit the Group financial statements in accordance
with relevant legal and regulatory requirements, and International
Standards on Auditing (UK and Ireland).
We report to you our opinion as to whether the Group financial statements
give a true and fair view, the Group financial statements have been
properly prepared in accordance with the Companies Act 1985 and Article
4 of the IAS regulation and ether the information given in the Directors
report is consistent with the financial statements. The information given in
the Directors report includes that specific information presented in the
Chief Executives statement that is cross referred from the Business
Review section of the Directors report.
We also report to you if, in our opinion, we have not received all the
information and explanations we require for our audit, or if
information specified by law regarding Directors remuneration and
other transactions is not disclosed.
We review whether the Corporate governance statement reflects the
Companys compliance with the nine provisions of the 2003 FRC
Combined Code specified for our review by the Listing Rules of the
Financial Services Authority, and we report it does not. We are not
required to consider whether the Boards statements on internal control
cover all risks and controls, or form an opinion on the effectiveness of the
Groups corporate governance procedures or its risk and control
procedures.
We read other information contained in the Report and Accounts and
consider whether it is consistent with the audited financial statements.
The other information comprises the Chairmans statement, Chief
Executives statement, Financial review and the Corporate governance
statement. We consider the implications for our report if we become
aware of any apparent misstatements or material inconsistencies with the
financial statements. Our responsibilities do not extend to any other
information.
173
Basis of audit opinion. We have conducted our audit in accordance with

International Standards on Auditing (UK and Ireland) issued by the
Auditing Practices Board.
An
audit
includes
examination on a test basis, of evidence relevant to the amounts and
disclosures in the Group financial statements.
It also includes an
assessment of the significant estimates and judgements made by the
Directors in preparation of the financial statements, and of whether the
accounting policies are appropriate to the Groups circumstances,
consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information
and explanations which we considered necessary in order to provide us
with sufficient evidence to give reasonable assurance that the Group
financial statements are free from material misstatement, whether caused
by
fraud
or
other
irregularity
or
error.
In forming our opinion we also evaluated the overall adequacy of the
presentation of the information in the Group financial statements.
O
p
i
n
i
o
n
.
I
n
o
u
r
o
p
i
n
i
o
n
:
The Group financial statements give a true and fair view, in accordance
with IFRSs as adopted by the European Union, of the state of the
Groups affairs as at 30 April 2006 and of its profit for the year then
ended.
174
LIMITATION ON SCOPE
DISCLAIMER
DISAGREEMENT ADVERSE
LIMITATION ON SCOPE
EXCEPT FOR
DISAGREEMENT EXCEPT FOR
175
It will always require a bit of judgement by the external auditor to select

the
most
appropriate
type of
qualified opinion.
How Much
Evidence
is Available
Qualified Audit Opinions
1)
Types of Modification
176
usually goes before the opinion, refers to the note prepared by the
directors
that is in the financial statement and states that the opinion is not
qualified in this respect.
This
by including an emphasis of matter paragraph in the audit report.
However, this event is important so the external auditor needs to
highlight it
statements. This will mean that there is no grounds for qualifying the
audit
opinion
no disagreement
or limitation
on the
scope).
If so, the(i.e.
directors
should disclose
this matter
in the
financial
outcome.
No-one will know the outcome of this event until much later.
is no
There
missing evidence it is just the passing of time that will determine the
final
Sometimes an event occurs before the end of the year that will not be
resolved
until after
the date that the audit
Fundamental
Uncertainty/Emphasis
of report
Matterwill be signed.
2)
B1a - Explain the need for regulation of published accounts

and the concept that regulatory regimes vary from country
to country
B1b - Explain potential elements that might be expected in a
regulatory framework for published accounts
177
different if two countries are compared. Let us briefly consider each of

these
elements
in turn.
Every
accounting.
country is different, potentially every one of the above could be
international conceptual framework for
developed or
locally
?
?
?
?
?
?
local law that applies to entities;
locally adopted accounting standards; local stock exchange
requirements; international body requirements; international
accounting standards;
There are several potential elements that might be expected in a
regulatory
framework
a particular
ones are: and other
Financial within
statements
and country.
reports The
formain
shareholders
users are
prepared using principles and rules that can be interpreted in different
ways. To provide guidance and try and ensure that they are interpreted
in the same way, each time some form of regulation is required.
Learning Outcomes
B1c - Describe the role and structure of the International

Accounting Standards Board (IASB) and the International
Organisation of Securities Commissions (IOSCO)
178
statements for cross-border offerings and listings.

set of standards that IASC
members permit incoming to prepare their financial
IOSCOs Technical Committee agreed a core
would develop. IOSCO recommended that its multinational issuers to
use these standards
The International Organisation of Securities Commissions
(IOSCO)
Securities commissions are the bodies responsible for the regulation
of stock markets in their country. IOSCO encourages international
investment by making stock market regulations more consistent
between countries.
Interpretations Committee.
IASB publishes its standards in a series of pronouncements called
IFRSs .
Reporting
Financial
International
the
by
interpretations
of
approval
Seven of the full-time members of staff are responsible for liaising
with
national standard-setters in order to promote the convergence of
accounting standards.
The IASB has complete responsibility for all IASC technical
matters,
including the preparation and publication of international financial
reporting standards (IFRS) and exposure drafts; withdrawal of
IFRSs and final
whom are full-time employees.
based on their having sufficient has the experience to tackle the
The IASB has 14 members, 12 of
Appointment of members is primarily technical expertise to ensure
the IASB
relevant business and economic issues.
The International Accounting Standards Board(IASB)
B1e - Describe the process leading to the

promulgation of an international accounting standard
(IAS)
B1f - Describe ways in which IASs interact with local regulatory
frameworks.
179
?
?
IASB and national standard-setters co-ordinating their work plans, so
that they can be reviewing an issue at the same time enabling each
party to play a full part in developing international consensus. National
standard-setters could consider this international consensus when
voting on their own national standards, although they would not be
required to vote for the IASBs preferred solution.
IASB and national bodies would continue to issue their own
exposure drafts, but may consider issuing them at the same time and
invite comments on any significant differences in proposed accounting
treatments.
?
IASB is currently exploring ways in which it can integrate its standardsetting
process more closely with those of national standard-setters. The
Board is currently investigating the following:
Many countries in this position have been working for many years to
narrow
the gap between their local standards and IFRSs. This usually takes
the form of all new or revised standards being developed to take
account of
international standards and comply with them in all material
respects. Although most of the standards now comply with IFRSs, they
are often
different in some way. Examples include Brazil, India, Japan and
Australia.
Countries with a track record in setting accounting standards already
had
standards in place before the original IASC was formed. As these
standards pre-dated IFRSs, they often did not conform with them.
B2(a) Explain the importance of the exercise of ethical

principles in reporting and assessing information;
B2 (b) Describe the sources of ethical codes for those
involved in the reporting or taxation affairs of an organisation,
including the external auditors;
B2(c) Apply the provisions of the CIMA Code of Ethics for
Professional Accounts of particular relevance to the
information reporting, assurance and tax-related activities of
the accountant.
180
The principle of integrity imposes an obligation on all professional

accountants
to be
Straightforward and honest in professional and business relationships. Integrity
also implies fair dealing and truthfulness.
A professional accountant should not be associated with reports, returns,
communications or
Other information where they believe that the information: (a)
contains a materially false or misleading statement;
(b) contains statements or information furnished recklessly; or
(c) omits or obscures information required to be included where such
omission or obscurity would be misleading.
INTEGRITY
A professional accountant should be straightforward and honest in all
professional and business relationships.
Integrity
Objectivity
Professional competence and due care
Confidentiality
(A)
(B) (C) (D)
FUNDAMENTAL PRINCIPLES OF THE CODE
A professional accountant is required to comply with the following
fundamental principles:
Learning Outcome
181
CONFIDENTIALITY
A professional accountant should respect the confidentiality of
information acquired as a result of professional and business
relationships and should not disclose any such information to third
parties without proper and specific
authority unless there is a legal or professional right or duty to
disclose.
PROFESSIONAL COMPETENCE AND DUE CARE
A professional accountant has a continuing duty to maintain
professional knowledge and skill at the level required to ensure that a
client or employer receives competent professional service based on
current developments in practice, legislation and techniques. A
professional accountant should act diligently and in accordance with
applicable technical and professional standards when providing
professional services.
The principle of professional competence and due care
imposes the following obligations on
Professional accountants:
(a) to maintain professional knowledge and skill at the level required
to ensure that clients or Employers receive competent professional
service;
and
(b) to act diligently in accordance with applicable technical and
professional standards when Providing professional services.
A professional accountant may be exposed to situations that may
impair
objectivity. It is Impracticable to define and prescribe all such
situations. Relationships that bias or unduly influence the professional
judgment of the professional accountant should be avoided.
OBJECTIVITY
A professional accountant should not allow bias, conflict of interest or
undue influence of others to override professional or business
judgments.
The principle of objectivity imposes an obligation on all
professional accountants not to
Compromise their professional or business judgment because of bias,
conflict of interest or the undue influence of others.
182
A professional accountant in business should maintain information for

which
the professional
Accountant
in business is responsible in a manner that:
(a) describes clearly the true nature of business transactions, assets or
liabilities;
(b) classifies and records information in a timely and proper manner; and
(c) represents the facts accurately and completely in all material

respects.
A professional accountant in business who has responsibility for the
preparation or approval of the general purpose financial statements of
an employing organization should ensure that those financial
statements are
presented in accordance with the applicable financial reporting
standards.
SECTION 220 OF CIMAS CODE OF CONDUCT
PREPARATION
AND REPORTING OF INFORMATION
Professional accountants in business are often involved in the preparation and
reporting of information that may either be made public or used by others inside or
outside the employing organization. Such information may
include financial or management information, for example, forecasts and
budgets, financial statements, management discussion and analysis, and
the management letter of representation provided to the auditors as part of an
audit of financial statements. A professional accountant in business should prepare
or present such information fairly, honestly and in accordance with relevant
professional standards so that the information will be understood in its context.
The principle of confidentiality imposes an obligation on professional

accountants to refrain
From:
(a) disclosing outside the firm or employing organization confidential information

acquired as a result of professional and business relationships without proper
and specific authority or unless there is a legal or professional right or duty to
disclose; and
(b) using confidential information acquired as a result of professional and
business relationships to their personal advantage or the advantage of third
parties.
183
may also
in business
accountant
section 140 of the code. The professional
wish to seek legal advice or resign.
Where it is not possible to reduce the threat to an acceptable level, a
professional accountant in business should refuse to remain
associated with information they consider is or may be misleading.
Should the professional
accountant in business be aware that the issuance of misleading
information is either significant or persistent, the professional
accountant in business should consider informing appropriate
authorities in line with the guidance in
The significance of such threats will depend on factors such as the
source
of the pressure and the degree to which the information is, or may be,
misleading. The significance of the threats should be evaluated and, if
they are other than clearly insignificant, safeguards should be
considered and applied as necessary to eliminate them or reduce them
to an acceptable level. Such safeguards may include consultation with
superiors within the employing organization, for example, the audit
committee or other body responsible for governance, or with a relevant
professional body.
Threats to compliance with the fundamental principles, for example
selfinterest or intimidation threats to objectivity or professional
competence and due care, may be created where a professional
accountant in business may
be pressured (either externally or by the possibility of personal gain) to
become associated with misleading information or to become
associated with misleading information through the actions of others.
A1b - Describe the features of the principal types of taxation

likely to be of relevance to an incorporated business in a
particular country (e.g. in terms of who ultimately bears the
tax cost, withholding responsibilities, and principles of
calculating the tax base)
184
Taxation can also be used as a means of influencing economic

decision
making or promoting social values and priorities in a country. Hence,
no two countries tax systems will be identical.
As tax contributes to state revenue it is clearly collected by the
government,
and is the main means by which the government raises money to meet
its expenditure.
Tax as a Source of Government Revenue
General principles are all important for the F1 exam, with questions
being
set on fictitious countries rather than requiring a detailed knowledge of
a particular tax regime.
Most (developed/developing) countries have, at least, a basic tax
system
with many of the same general principles included in each system.
Indeed, many countries have based their tax system on the UK tax
system.
that it is compulsory and is levied on different taxable persons, means
that it
is
a certainty
which cannot be evaded.
The
fact
individuals, property or businesses (Oxford English Dictionary).
Tax is defined as a contribution to state revenue compulsorily levied
on
INTRODUCTION
(A)
PRINCIPLES OF BUSINESS TAXATION
185
Indirect Taxes
An indirect tax is one that is levied on one part of the economy with the
intention that it will be passed on to another e.g. VAT in the UK.
Direct Taxes
These are taxes which fall directly on the person or entity who is
expected to pay it e.g. corporation tax.
Basic Tax Terminology
cost
Efficiency it should be administered efficiently and
effectively
iv.)
and
Convenient it should be convenient in terms of timing
payment
iii.)
Certainty it should be certain (i.e. not forever changing)
ii.)
Equity it should be fair, reflecting an ability to pay
i.)
An ideal tax system is clearly as close to perfection as any tax system
can
get. Adam Smith suggested that an ideal tax system should
incorporate the following characteristics:
No tax system is perfect everyone has some complaint about any tax
system.
Principles of Taxation
186
Withholding
Responsibilities
Sometimes a person or business paying a particular type of income to
persons or entities are required by law to deduct tax from the payment
before it is made. For example, UK Banks and Building Societies
deduct tax at 20% on interest paid to individuals prior to the payment.
This tax withheld is called withholding tax, which is then paid over
for the relevant tax authority.
designated for the UK state pension scheme.
originally
were
contributions
Insurance
National
e.g.
expenditure
of
Hypothecation
This means that the revenue from certain taxes is devoted to specific
types
Competent
Jurisdiction
The tax authority must have the legal power to assess and collect
taxes. In the UK, as with many other countries, this is done both
centrally (e.g. Corporation Tax) and locally (e.g. Council Tax). Either
way both authorities have the legal power to set and collect the
relevant tax(es).
business entity or an individual (obviously different taxes for each type
of
taxable person!).
It could be a
Taxable Person
This is the person accountable for the payment of a tax.
ii.)
Formal incidence the person or business having direct contact
with the tax authorities.
Effective (or actual) incidence the person or business which
actually ends up bearing the cost of the tax.
i.)
Incidence
The incidence of tax refers to the distribution of the tax burden and can
be divided into two elements
187
Consumption e.g. excise duties on alcohol.

iii.)
Capital or wealth e.g. capital gains tax and inheritance tax.
ii.)
Income e.g. income tax and corporation tax
i.)
A tax base is something that is liable to tax and can be based upon:
Tax Bases and Classification of Taxes
Regressive taxes these take a decreasing proportion of income
as
income rises (e.g. National Insurance Contributions 11% to 1%
for employees).
iii.)
Proportional taxes these take the same proportion of income
as income rises.
ii.)
Progressive taxes these take an increasing proportion of
income as income rises e.g. income tax.
i.)
There are three types of tax:
Tax Rate Structure
A2b - Describe sources of tax rules and explain the

importance of jurisdiction.
188
Sources of tax
rules
The nature of tax rules vary considerably from one country to another;
however, it is possible to categorise the sources and influences on
those rules. Within any country the balance between each source will
be different, but in most countries the same elements will be present to
a greater or lesser extent. The main sources of tax rules in a country
are usually as follows:
All tax systems are based on domestic primary legislation either
at the central government level or at the local authority level or both.
In some countries the legislation is very detailed and specific, setting
out every possible item of income and expense. In other countries
the legislation is less detailed and is supplemented by court rulings or
case law.
The practice of the relevant taxing authority will create
precedents which will be followed in the future. Tax authorities
sometimes issue guidelines or interpretations which are aimed at
clarifying the taxation legislation.
Supranational bodies may issue directives which the government
of a country has to include in the legislation, for example, European
Union (EU) directives on VAT.
International tax treaties signed with other states are also a
source of tax rules as the agreements often vary from the
countrys own tax regulations.
Learning Outcome
QUESTION 1
Which of the following is not one of Adam Smiths characteristics of
good
tax?
(A)
Equity
(B)
(C)
(D)
Certainty
Simplicity
Efficiency
(2 marks)
QUESTION 2
An indirect tax is a tax that:
(A)
is levied directly on an individual
(B)
(C)
is
based
on earnings
an individual
is paid
indirectly
to the taxofauthorities
(D)
is levied on one person with the intention that it is passed on to

another
(2 marks)
QUESTION 3
List the three main tax bases used in developed countries.
(2 marks)
189
QUESTION 4
With reference to an entity paying tax, which of the following is the
best
definition of competent jurisdiction:
(A)
The country whose laws apply to the
entity (B)
Any country where the entity has
operations (C)
Any country where the
entity has an office (D)
Any country where
the entity has employees
(2 marks)
QUESTION 5
BM has a taxable profit of 30,000 and receives a tax
assessment of
$3,000.
BV has a taxable profit of $60,000 and receives a tax assessment of 7,500

BM and BV are resident in the same tax jurisdiction.
This tax could be said to be
(A)
a
progressive tax
(B)
a
regressive tax
(C)
a direct
tax
(D)
a proportional tax
190
(2 marks)
A3a prepare corporate income tax calculations based on

a given simple set of rules
A1e illustrate numerically the principles of different
types of tax based on provided information
191
assessed in different ways, many countries operate a schedular

system to
categorise each type of taxable income. In the UK the schedules
are as
follows:
Because income can arise from different sources and be
taxation.
Schedular Systems of Corporate Taxation
In most countries all of the income and gains of a business are liable
to
In some countries (UK and USA particularly) there are large
differences
between accounting profit and taxable profits. Where as in Germany
and
France
is not
closely
linked
to accounting
profit.countries.
rules ontaxable
what isprofit
and is
taxable
differ
widely between
Precise
Profits from trade and other activities
Gains on the sale of investments and assets

Other non-business income
i.)
ii.)
The Corporation Tax Base
iii.)
Corporation Tax (the tax that a company pays) is levied on the

following:
Direct Tax on a Business Profits and Gains
Learning Outcome
192
X
Taxable trading profit
X
(X)
allowable for tax purposes)**
Adjusted Trading Profit
Less capital allowances
X
not
just
or
non-trading
(either
expenditure
Add: disallowable
X
(X)
accounting profit that isnt trading
income*
in
included
income
Less
X
Accounting profit
Profits from a Trade of a
Company
In this category we are only interested in the trade of the company and
the resulting profits. Income and expenses for non-trading activities
therefore are ignored.
Because a company will produce accounts for reporting purposes, it is
necessary (certainly in the UK) to adjust accounting profit to get to the
profits from the trade. This is done as follows:
The most important one of these is the Schedule DI profits from a

trade of
a company.
Profits from a trade

Interest receivable
Dividends received from foreign companies
Income from Land and Property
Schedule A
Schedule D Case I Case III Case V
193
Most donations to charities and political parties

vi.)
Cost of entertaining anyone other than staff
v.)
Capital expenditure (including initial repairs to new and unused
assets prior to the repairs)
iv.)
Losses on the sale of capital items
iii.)
Depreciation but a form of tax depreciation is deductible in
taxable trading profit as a capital allowance
ii.)
Non-trading expenses (e.g. interest payable for non-trading
purposes)
i.)
These expenses are numerous the key ones being
** Disallowable expenditure is added back and relates to
items
of
expenditure which have been deducted for financial reporting purposes
but which are not allowable expenses for trading profit purposes,
Rental income (taxable under Schedule A)
Interest receivable (taxable under Schedule DIII) Dividends
Capital profit (e.g. on the sale of an asset)
* Income included in accounting profit that is not trading income
includes
QUESTION 6
Rainbow Limited commenced business, making soft toys, on 1
June 2003. The company has prepared its first set of accounts
for the year to 31 May
2004. Rainbow Limited made the following purchases and
sales of fixed assets:
Purchases
2007
$
Industrial Building
260,000
June
2009
1
June
Stitching
(plant)
machine
1
June
Packing machine (plant)
31
Machine
47,000
58,000
Sales
2009
bought
on
9,500
May
June 2003
In your exam if a capital allowance computation arises the relevant
rates will
be
given.sizes of a company.
different
Capital allowances are statutorily set at different rates for
trading profits.
Instead a company can claim capital allowances as a deduction in
taxable
Depreciation and Capital Allowances
Any depreciation and amortisation is a disallowable trading expense
due to the many methods by which such depreciation can be
calculated.
1
9
4
Rainbow Limited qualifies for accelerated first-year allowances on

the plant at the rate of 50% for the first year. The second and
subsequent years will be at
25% on the reducing balance method.
The industrial building qualifies for an annual tax depreciation
allowance of
5% on the straight line basis.
Required:
Calculate Rainbow Ltds tax depreciation for the years ended 31 May 2007,
2008 and 2009.

195
196
Taxes paid to lower levels of government

?
Repairs
?
Trade subscriptions
?
Audit and accountancy costs
?
Advertising
?
Legal expenses
?
Staff wages and employer national insurance contributions
?
Interest paid for trading purpose
?
The
expense for taxable trading profit and no adjustment will be needed.
following
itemshas
of expenditure
arefor
often
allowed:
If an expense
been incurred
trading
purposes, it will be an
allowable
Allowable Expenditure
197
where an asset has been owned for a substantial period of times its
value
would have increased as a result of inflation. In the UK the rise in the
value of the asset as a result of inflation can be deducted in calculating
the taxable capital gain, by way of indexation.
However,
This is essentially the sale proceeds less the cost.
the asset.
The basic idea of a capital gain is to work out the profit on the disposal
of
Gifts to charities of land, buildings and certain works of art
Gifts
i.) of any type of asset to government institutions and museums
ii.)
Some disposals are also exempt from tax.
Private motor cars
Qualifying corporate bonds
Chattels
bought and sold for less than 6,000
Wasting chattels (tangible moveable property with a life expectance of less than 50
years e.g. a horse)
i.)
ii.) iii.) iv.)
Most assets or investments being disposed of are chargeable
assets,
however,
some gains
key exemptions
exist.
Taxable capital
of a company
are subject to corporation tax in
the UK.
A capital gain is the taxable profit on the disposal of an asset or
investment.
Capital Gains
QUESTION 7
Radiance Limited bought a warehouse which cost $10,000 in
February
1988. It was sold in April 2009 for $20,000. Retail price indices were:
February 1988
103.7
April 2009
180.0
Required:
Calculate the chargeable gain on the sale of the warehouse for Radiance
Limited.
198
199
In the UK, this relief is commonly known as rollover relief and allows
the
company to roll the gain arising on the sale against the base cost
of the replacement asset. The effect is that when the replacement
asset is
sold in the future, a larger gain will arise at that time, resulting in
more tax payable in the future, effectively deferring the tax due
on the 1st gain.
In addition to indexation allowance, most countries allow for capital
gains
arising to be deferred where an item has been sold and
subsequently replaced. In these circumstances, businesses
often re-use the cash
realized on the sale of an asset to buy the replacement, leaving no
cash
available
to paygains
any tax liability.
Relief
from capital
Exam standard Question

Country Z has the following tax regulations in force for the years 2008
and 2009 (each year January to December):
? Corporate
O
O
O
income is taxed at the following rates:
$1 to $10,000 at 0%;
$10,001 to $25,000 at 15%;
$25,001 and over at 25%.
When calculating corporate income tax, country z does

not allow the following types of expenses to be
charged against taxable income:
O
O
O
? Tax
entertaining expenses;
taxes paid to other public bodies;
accounting depreciation of non-current assets.
relief on capital expenditure is available at the following rates:
O buildings at 4% per annum on straight line basis;

O all other non-current tangible assets are allowed tax
depreciation at 27%
per annum on reducing
balance basis.
DB commenced business on 1 January 2008 when all assets were purchased.
No first year allowances were available for 2008.
Non-current assets cost at 1 January 2008
$
Land
27,000 buildings
70,000
Plant and equipment
80,000
On 1 January 2006, DB purchased another machine for $20,000. This

machine qualified for a first year tax allowance of 50%.
DBs income statement for the year to 31 December 2009
$
Gross profit
160,000
81,000
Entertaining
600
Tax paid to local government
950
Depreciation on buildings
1,600
Depreciation on plant and equipment
20,000
Distribution costs
20,000
35,850
Finance cost
1,900 profit before tax
33,950
Required:
Calculate DBs corporate income tax due for the year 2009.
2
0
0
201
Capital losses are never carried

gains arising in future accounting period(s).
back
or offset
against
other
countries
capital
losses
are income.
only ever offset against capital gains
arising in
the same accounting period or are carried forward and offset against
capital
In most
Capital Losses
Capital losses are calculated in the same way as capital gains.
iv.)
accounting period
Group relief (see later)
other income and gains of one or more previous
iii.)
other income and gains of the same accounting
ii.)
of trading loss to offset against future trading
Carry forward
income
Offset against period
Offset against
i.)
Trading Losses
If a business makes a trading loss instead of a trading profit, it is
allowed to offset that loss using trading loss relief. The methods of
loss relief include:
Treatment of Losses
QUESTION 8
Country ABB has the following tax regulations:
? Taxable profits are subject to tax at 25%.
? Capital gains are added to profits from trading to give taxable
profits.
?
?
Trading losses can be carried forward indefinitely but cannot be

carried back to previous years.
Capital gains/losses cannot be offset against trading gains/losses or visa
versa.
Hazel Limited began to trade in 2007 and has the following profits/losses:
Trading profit / (loss)
(loss)
$000
Capital
profit/
$000
2007
(300)
400
2008
550
2009
700
(150)
Required: Calculate the tax payable by Hazel Limited in each year.

202
203
cannot be transferred between different companies, however, in

many
countries it is possible to transfer assets between tax group companies
without any gains or losses arising. A capital loss only arises if an
asset is sold outside of the group.
Capital losses
capital loss purposes.
Different rules apply to groups for
Capital Losses and Tax Groups
groups, for example, in the UK a tax
purposes
where
holding
(direct or
Tax
groups
differthe
from
accounting
group can only exist for loss relief indirect) is at least 75%.
This allows for a group of companies for tax purposes to be
recognised.
Essentially, where a tax group is in evidence, if a trading loss is made
by one company, this can be offset against the taxable income and
gains of (an)other group company/ies.
Tax Consolidation
Terminal Loss Relief in the UK, and extends the carry back period to
up to 3
years.
This is known as
income and gains of previous accounting periods.
In a business makes a trading loss in the final 12 months of trade,
most
countries allow the business to carry the loss back and offset against
the
Trading Losses on Cessation of a Business
QUESTION 9
A schedular system of corporate income tax means:
(A) A method used to calculate the corporate income tax
payable
(B) A system that has a number of schedules which set
out how different types of incomes should be taxed
(C) A system that has a number of schedules which set out when
tax
(D)
returns and tax payments should be made
A system that has a number of schedules which set out the various
tax rates
204
(2 marks)
QUESTION 10
KM commenced business on 1 June 2007, making up the first
accounts for the year to 31 May 2008.
The entitys purchases and sales of fixed assets were as follows:
Purchases
2007
2009
1 June
Industrial Building
300,000
1 June
Plant
40,000
1 June
Plant
60,000
31 May
Plant bought on 1
12,000
Sales
2009
J
u
n
e
2
0
0
7
205
KM qualifies for accelerated first-year allowance on the plant at the

rate of
50% for the first year. The second and subsequent years will be at
25% on the reducing balance method. No additional charge will
result if the asset is
disposed of early.
The industrial building qualifies for an annual tax depreciation
allowance of
4% on the straight line basis.
Required:
Calculate KMs tax depreciation for the year ended 31 May 2009.
(4 marks)
QUESTION 11
Rollover relief:
(A)
allows deferral of the payment of corporate income tax on

gains arising from the disposal of a business asset
(B) allows stock values to be rolled over, replacing cost of
purchases with current values
(C) allows trading losses to be carried forward or rolled over to
future periods
(D) allows capital losses to be carried forward or rolled over to
future
periods
(2 marks)
206
QUESTION 12
Country W has the following tax regulations:
? Taxable profits are subject to
tax at 25%
? Capital gains are added to profits from trading to give taxable
profits
? Trading losses can be carried forward indefinitely but cannot be
carried back to previous years
? Capital gains/losses cannot be offset against trading gains/losses or
visa versa
LN started trading in 2004 and has the following profits/losses
Trading profit / (loss)
Capital
$000
$000
2007
(350)
2008
200
2009
700
(150)
profit/(loss)
Required:
Calculate the amount of tax due for 2009.
(3 marks)
207
A1b- describe the features of the principal types of taxation

likely to be of relevance to an incorporated business in a
particular country
208
the
Partial imputation system
Only part of the underlying corporation tax is passed to
shareholder by way of a tax credit.
iii.)
company is taxed on the dividends but the shareholder is not.
In other words
corporation tax on the distributed income.
the
the
Imputation
system
The shareholder receives a tax credit to the sum of
ii.)
causes the potential double taxation of dividends.
This system is easy to understand but it
dividends received.
Classical system
The business is responsible for corporation tax on all its taxable
income and gains. The shareholder is liable to income tax on
i.)
There are four main systems for taxing the profits of a business (hence
dealing
with the
above
anomaly):
If a company
pays
a dividend
to an individual, it is paid out of post tax
profits. The individual then includes that dividend as part of his/her
taxable income upon which income tax is paid.
This results in the
dividend being taxed twice.
System
The Interaction of the Corporate Tax System with the Personal
Tax
Learning Outcome
209
Wealth Tax
In some countries a wealth tax is imposed on the total wealth of an
individual and/or entity. In countries where a wealth tax exists for
entities, an entitys wealth, i.e. a measure of their asset value, will be
taxed each year.
3)
Property Tax
This is a tax usually on land and buildings, based upon the capital
value of the property.
2)
To discourage the excessive consumption of a product
To alter the distribution of income by taxing luxuries
To
a) help pay for increased costs of e.g. healthcare for smokers
b)
c)
Excise Duties
These are specific taxes on certain commodities e.g. tobacco,
motor vehicles and fuel. Excise duties are levied in order to:
1)
Indirect taxes paid by the entity fall into three main categories:
Indirect taxes and Employee Taxation
Split ratio system
These systems distinguish between distributed profit and retained
profits and charge a lower rate of corporation tax on distributed profits
to avoid the double taxation of dividends.
iv.)
210
to
passed
usually
is
burden
tax
system the
purchases. In this
the
b) end consumer.
A cumulative or cascade tax which does not allow credit for
taxes paid on transfers between levels meaning that tax paid at each
stage is treated as a business cost.
VAT and similar systems where credit is allowed for tax paid on
a)
Multi-stage taxes
This is a tax each time a product or its components is sold. There are
two types of multi-stage taxes.
2)
Single-stage taxes
These apply at one level of the production/distribution chain e.g. at the
retail level. Few countries use single-stage taxes although the USA
uses a single stage retail sales tax at the local state level rather than
the federal level.
1)
The two types of
These are taxes levied on the consumption of goods.
consumption
are:
Consumptiontax
Taxes
Q
U
E
ST
IO
N
13
A manufacturer, M makes microwave ovens.
These
are
sold first to a wholesaler, W, who sells in turn to a retailer, R.
Finally R sells to the ultimate consumer,
C.
The prices at which these transactions
take place (excluding sales tax) are as follows:
? M sells to W for $100
? W sells to R for $160
? R sells to C for $300
The country levies a multi-stage cumulative tax at the rate of 5% each time
a sale is made.
R
e
q
u
i
r
e
d
:
Calculate the sales tax due by each entity and in
total.
211
212
Other input tax incurred in the production of all supplies e.g.

heat/light
expenses, is reclaimed on a pro-rata basis.
It can reclaim input tax relating to all standard rated and zero rated
supplies.
It
cannot reclaim
input tax relating to exempt supplies.
Partially
Exempt
Trades
If an entity conducts several activities some being standard rated,
some zero rated and some exempt, it can register for VAT but its right
to offset input tax is restricted.
Although it may not be obvious there is a difference between zero
rated and
exempt supplies. If an entity makes zero rated supplies it can register
for
VAT and therefore reclaim input VAT incurred relating to those supplies. If an
entity makes wholly exempt supplies it cannot register for VAT and therefore
cannot reclaim input VAT incurred relating to the exempt supplies.
Exempt not taxed

iv.)
Zero rated taxed at the zero rate
iii.)
Higher rated taxed at the appropriate higher rate
ii.)
Standard rated taxed at the standard rate
i.)
Each supply of goods or services in the course of business falls into
one of
the
types oftransactions
supply:
VATfollowing
taxes business
falling within the scope of VAT.
Such a
transaction
is called
a taxable supply.
Value Added
Tax (VAT)
QUE
STIO
N 14
Country XYZ has a VAT system which allows organizations to
reclaim input tax paid. Vat is at 15% of selling price.
B manufactures ladies clothes and sells them to C, a wholesaler. C
resells them to D a retailer.
D
eventually sells them to E for $120.
The
prices at which transactions take place (excluding VAT) are as
follows:
? B sells to C for $50
? C sells to D for $80
R
e
q
u
ir
e
d
:
Calculate the VAT due from B, C
and D.
(3 marks)
213
Pensions received after cessation of employment are also taxable.

Generally the assessment will cover basic salary or wage,
commissions,
fees,
exact profit-sharing, bonuses and benefits in kind.
Basis of Assessment
Employees pay income tax on their earnings from employment.
basis of assessment varies from country to country.
Employee Taxation
The
214
cars
fuel for cars beneficial loans
private medical expenses
round-sum
expense allowances
Some benefits in the UK are taxable on Directors and employee
earning at
least
8,500 per year and include:
living accommodation that is not job-related
cash
Somevouchers
benefits are taxable on all employees in the UK and include:
employer contributions into a pension scheme
provision of job related living accommodation
In
Some benefits are exempt and are therefore not included in the tax
base.
the
UK exempt
benefits include:
Benefits
in Kind
These are non cash benefits given to an employee as part of a
remuneration package.
Professional subscriptions
Donations to charity through a payroll giving scheme
Contributions
into an occupational pension scheme.
1)
2)
3)
Deductible Expenses
Some expense are deductible in calculating earnings from
employment. The key ones are as follows:
Q
U
E
S
T
I
O
N
1
5
Jim is a 38 year old Finance Director earning
$80,000 per annum.
During the tax year Jim received a 10% profit share bonus and
benefited from the use of a company car for which the
assessable benefit valuation was $5,090.
Jim pays $1000 per year membership to the Institute of
Accountants and
$750 for gym club
membership.
R
e
q
u
i
r
e
d
:
Calculate Jims income tax computation assuming the
following:
a) his personal allowance is $6475; and
b) the tax rates are 20% on the first $38,000 and 40%
thereafter.
215
contributions for each employee. There is usually no maximum
contribution
for
employers.
Employers
also have to pay social security
contribution per month.
The employee pays a percentage of earnings usually up to a maximum
from
Social Security Contributions
These contributions are assessed on individuals and deducted
earnings in the same way was employee taxation is deduction.
QUE
STIO
N 16
Country HG has a duty that is levied on all drinks of an alcoholic
nature where the alcohol is above 20% by volume. This levy is $4
per 2 litre bottle. This duty could be said to be:
(A) Ad
valorem tax
(B)
Specific unit
tax (C)
Direct
tax
(D)
Value added tax
(2 marks)
QUESTION 17
List three advantages of requiring employers to deduct employee
tax from employees pay each month.
(3 marks)
216
In the UK this system is

security contributions from the individuals earnings.
known
as Pay
as You Earn (PAYE).
Collection
of Employment
Income taxes
In most countries tax from employment income is collected by the
employer using deduction at source the employer withholds tax
along with social
QUESTION 18
An entity purchases products from a foreign entity. These
products cost $21 each and on import are subject to an excise
duty of $4 per item and VAT at
20%. If the entity imports 100 items, how much do they
pay the tax authorities?
(
A
)
$
4
0
0
(
B
)
$
4
2
0
(
C
)
$
5
0
0
(
D
)
$
9
0
0
(2 marks)
QUESTION 19
If a product is exempt for VAT purposes it means that an entity:
(A)
Can charge VAT on sales at standard rate and cannot

reclaim input taxes paid
(B) Cannot charge Vat on sales and can reclaim on input
taxes paid (C)
Cannot charge VAT on sales and cannot
reclaim input taxed paid (D) Can charge VAT on sales and
can reclaim input taxes paid
(2 marks)
217
A1c explain key administrative requirements and the possible

enquiry and investigation powers of taxing authorities
associated with the principal types of taxation likely to be of
relevance to an incorporated business
218
Orders and delivery notes

Purchases and sales books
Cash books and other account books
Invoices
Bank statements
?
?
?
?
?VAT or Sales Tax
In many countries adequate records must be kept including
business documentation such as:
Corporate
Income Tax
A business must keep all records required to support its financial
statements and all records to support adjustments made to the
financial statements for tax purpose.
Corporate tax
VAT or sales tax Excise duties Employee taxes
?
?
?
?will
Records
The Need for Record Keeping and Record Retention
Tax legislation usually required businesses to retain records. usually
be kept for:
Administration of Taxation
Learning Outcome
219
Power to review and query filed returns

Power
to request special reports or returns
Power to examine records (generally extending back some years) Power to enter
and search
Power to exchange information with foreign tax authorities
1)
2)
3)
4)
5)
In addition to this
offences related to corporation tax and sales tax/VAT.

they
haveofthe
powers:
Powers
Taxfollowing
Authorities
to Ensure Compliance with Tax Rules
Revenue authorities generally have powers to inflict penalties for
various
In other countries the tax authorities raise the assessment after the
entity
has submitted certain information regarding its financial statements
etc. to the tax authority.
In some countries tax is paid by way of self assessment where the
entity
prepares the tax return and files that with the amount of tax it thinks is
due.
The Need for Deadlines for Reporting (Filing Returns) and
Tax
Payments
Deadlines are set by tax authorities, to ensure that taxpayers submit tax returns
and pay outstanding tax on time.
Employee Taxes and Social Security

Employers keep detailed records of employees pay and amounts of
tax and social security deductions.
Overseas Subsidiaries
If a business has an overseas subsidiary, it will also need to retain
records relating to transfer pricing policy between the two entities.
A1d- explain the difference in principle between tax avoidance

and tax evasion
220
administration.
tax
friendly
customer
and
equitable
honest,
an
developing
avoidance by
and
towards evasion
Changing social attitudes
4)
Reducing the overall gain by regularly reviewing the penalty structure.
3)
Increasing the perceived risk by auditing tax returns and payments.
2)
Reducing the opportunity by deducting tax at source and simplifying
the
1) tax structure.
Anti-Avoidance Provisions
As well as legislating, tax authorities use other administration methods
to minimise evasion and avoidance.
Tax Avoidance
Tax avoidance is tax planning to minimise the tax liability. It is strictly
legal but usually exploits loopholes in legislation.
Tax Evasion
Tax evasion is the illegal manipulation of the tax system to avoid
paying tax and can include falsifying tax returns and claiming fictitious
expenses.
Tax Evasion and Avoidance
Learning outcome
QUESTION 20
Which of the following taxes is an entity unlikely to need to keep
additional detailed records for:
(A)
Corporate income tax
(B)
(C)
(D)
VAT
Employee
Property tax tax deducted from salaries
(2 marks)
QUESTION 21
Requirements:
(i)
Outline the difference between tax avoidance and tax
evasion.
(2 marks)
(ii)
Describe the methods that governments can use to

reduce tax avoidance and tax evasion.
(3 marks)
221
A2a identify situations in which foreign tax obligations

(reporting and liability) could arise and methods of relieving
foreign tax
222
possible that an entity has income taxed in the country it was earned
and
also
It is in a different company where the company is resident.
than one country which will lead to the problem of double taxation.
It is therefore possible for an entity to be resident for tax purposes in
more
An entity
use both bases to establish residency for tax purposes.
would
becontrol
resident
if itplace
meets
of the above
criteria.
Place of
and
of either
incorporation
some
countries (e.g. UK)
3)
Place of incorporation if a country uses this as a basis any entity
registered in that country will be deemed to be resident for tax
purposes.
2)
Place of control and central management the country from where
control of the group is exercised is deemed to be the country of
residence for tax purposes.
1)
Concept
of
Corporate
Residence
Corporate income tax is usually residence based. The test for
establishing residence of an entity varies from one country to another.
The main types of test are as follows:
International Taxation
Learning Outcome
QUEST
ION 22
H owns 30% of the equity shares in S, an entity resident in a foreign
country. H receives a dividend of $36,000 from S, the amount
received is after deduction of withholding tax of 20%. S had before
tax profits for the year of $400,000 and paid corporate income tax of
$100,000.
Re
qui
red
:
Calculate the underlying tax that H can claim for double
taxation relief.
223
This leads to double taxation.

be taxed again.
therefore
would
and
purposes in the receiving companys tax computation
The overseas dividend would be included as income for
corporate tax
receives a dividend from a company in Country B, the dividend would
have
been taxed in Country B before receipts. The foreign tax paid in
relation to this dividend receipt is called underlying tax.
If a company in Country A
Underlying Tax
Dividends are paid out of post tax profits.
Double taxation treaties between countries aim to reduce or
eliminate
withholding
Withholdin taxes and double taxation.
g Tax
In many countries, payments made abroad are subject to a
withholding tax. The type of payments normally subject to withholding
tax include interest, dividends and capital gains.
QUESTION 23
Which of the following could NOT be used to indicate an
organisation is resident in a country?
(A)
Place of effective management
(B)
(C)
(D)
Buying or selling goods in a country

Place of incorporation
Close economic relations with a country
224
(2 marks)
A place of management
A
Anbranch
office
A
factory
A workshop
A mine, oil or gas well
A
1)building or construction site
2)
3)
4)
5)
6)
7)
apparent.
is
establishment
be taxed in a country where permanent
Permanent establishment includes:
The OECD model suggests that business profits of an enterprise can
only
The OECD Model Tax Convention
The OECD has suggested a model tax convention which states can
adopt in their dealings with each other for tax purposes.
Double taxation relief exists to reduce the incidence of tax being paid
twice.
Often the taxpayer is allowed to deduct form its total tax liability, an
amount equal to the tax already paid overseas, thus eliminating tax
being paid twice.
Double Taxation Treaties
QUESTION 24
Which of the following would NOT normally be subject to a
withholding tax?
(A)
(B)
Rents
Divide
nds
(C)
Interes
t (D)
Profits
(2 marks)
QUESTION 25
The OECD model tax convention defines a permanent
establishment to include a number of different types of
establishments:
(i)
Which
A place of management
(ii)
(iii)
(iv)
A warehouse
A
workshop
A quarry
(v)
A building site that was used for 9 months
of the above
permanent
are
included
in the
OECDs
list
of
establishments?
(A)
(i), (ii) and
(iii) only (B)
(i),
(iii) and (iv) only (C)
(ii), (iii) and
(iv) only (D)
(iii),
(iv) and (v) only
( 2 marks)
225

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- 1-

- 2F1 FINANCIAL OPERATIONS

Payments in advance................................................................................... 115

Groups financial statements......................................................................... 136

C1(b) Apply the conditions required for an undertaking to be a subsidiary or

Regulation AND ETHICS of financial reporting (B) ...................................... 167

A1b - Describe the features of the principal types of taxation likely to be of

one or two compulsory questions.

FORMAT OF THE PAPER

There will be a written examination paper of three hours, with the

? Have sound theoretical knowledge

- 8F1 FINANCIAL OPERATIONS

- 9F1 FINANCIAL OPERATIONS

THE VERB HIERARCHY

apply the accounting rules for current and deferred taxation,

4. Apply the accounting rules for current and deferred taxation.

LEARNING OUTCOMES GRID

A Principles of Business Taxation 25%

(a) explain the importance of the exercise of ethical principles in

1. Explain the need for and methods of regulating accounting and

B Regulations and Ethics of Financial Reporting 15%

prepare a complete set of financial statements, in a form

PUBLISHED FINANCIAL STATEMENTS

C1(a) Prepare a complete set of financial statements, in a form

IAS 1 provides the following formats within its Implementation

An entity should prepare its financial statements, other than the

Estimates and Errors when selecting and applying its accounting

Total comprehensive income for the year

Profit for the year

Statement of Comprehensive Income for the year ended 31

Question One Creighton Ltd

Accumulated depreciation at 1 January 2009

The following information should be taken into account:

Depreciation of motor vehicles is to be divided equally between

Bad Debts written off are to be included in administrative expenses

Closing inventory at 31 December 2009 was $31200

The estimated income tax expense for the year ended 31

STATEMENT OF COMPREHENSIVE INCOME

TOTAL EQUITY AND LIABILITIES

EQUITY AND LIABILITIES

QUESTION 2 MONKS LTD

Ordinary share capital, issued and fully paid

Retained earnings at 1 January 2009

Accumulated depreciation 1 January 2009

Profit for the Year (subject to items in the notes)

$3200 had been charged by the date of

3 The debenture stock is repayable at par by 5

A final dividend of 20p per share is proposed on the 10 of January

Statement of Financial Position as at 31 December 2008

Some examples of what would be included under these headings are

Net cash from operating activities

X (X) (X) (X)

Cash and cash equivalents

Net cash used in financing activities

Cash flows from financing activities

Cash from operating

Statement of Comprehensive Income for the year ended 31

Cost of sales and other expenses

Profit from operations

Profit after tax

STATEMENT OF FINANCIAL POSITIONS FOR

Long term loans

BEAN CASHFLOW STATEMENT FOR THE YEAR ENDED

The financial statements of Penny at 31 August 2008 and 2009