CIMA F1 Notes Details

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Financial
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Contents
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A. REGULATORY ENVIRONMENT AND CORPORATE GOVERNANCE

1.
Regulatory environment
2.
External audit and the audit report
3.
Corporate Governance
3
3
9
13
B. FINANCIAL ACCOUNTING AND REPORTING

4.
Conceptual Framework for Financial Reporting
15
15
C. ACCOUNTING STANDARDS
5.
IAS 1 Presentation of Financial Reporting
6.
IAS 7 Statement of Cash Flows
7.
IAS 16 Property, Plant and Equipment
8.
IAS 23 Borrowing costs
9.
IAS 20 Government Grants
10. IAS 40 Investment Properties
11. IAS 38 Intangible Assets
12. IAS 36 Impairment of Assets
13. IFRS 5 Non-current assets held for sale and discontinued operations
14. IAS 19 Employee Benefits
15. IAS 21 Foreign Currency Transactions
16. IAS 10 Events after the reporting period
17. IAS 2 Inventories
18. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
19. IAS 12 Income Taxes
20. IFRS 8 Operating Segments
21. IAS 34 Interim financial Reporting
22. IFRS 13 Fair value Measurement
19
19
23
31
37
39
41
43
45
49
53
57
59
61
63
65
67
69
71
D. CONSOLIDATED FINANCIAL STATEMENTS (Group Accounts)

23. Consolidated Statement of Financial Position
24. Consolidated Statement of Profit or Loss
25. Associates
73
73
83
87
E. MANAGEMENT OF WORKING CAPITAL, CASH AND SOURCES OF SHORT-TERM FINANCE89

26. Cash Management
89
27. Short-term finance and cash investment
93
28. Working Capital
95
29. Working Capital Management
101
F. FUNDAMENTALS OF BUSINESS TAXATION
30. Taxation
31. Regulatory Environment and International Taxation Issues
109
109
119
Answers to Examples
125
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A. REGULATORY ENVIRONMENT AND

CORPORATE GOVERNANCE
Chapter 1
REGULATORY ENVIRONMENT
1. Regulation of financial reporting information
The financial performance (profit/loss) and position (assets/liabilities) of an incorporated
entity are essential parts of a business that need to be understood by the users of the
accounts, primarily the shareholders.
Shareholders will need to ensure that the financial performance and position of the entity
show useful information. Through regulation of the accounting standards the shareholders
will be confident that the information presented to them gives the information needed.
2. Regulatory environment
The key elements of the regulatory environment are
Local corporate law Accounting regulations must follow the legal requirement of the
country where it is registered
Local and international conceptual frameworks Accounting standards are driven by

conceptual frameworks, the fundamental principles/ideas that must be followed in
developing accounting standards.
Local and international financial reporting standards Accounting standards are

developed both locally and internationally. Companies will follow either local rules or
international rules depending on the local corporate laws.
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3. Sources of professional codes for ethics

Codes of ethics have developed in the accounting profession to ensure that their professional
reputation is upheld.
The key to a respected code of ethics is that it must evolve over time as beliefs and principles
change in society.
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Sources of ethical codes are as follows:
Law
Religion
Social attitudes
Professional bodies
Businesses
4. CIMA Code of Ethics for Professional Accountants

CIMA is a member of the International Federation of Accountants (IFAC), whose aim is to
develop a set of high quality principles-based ethical standards that govern ethical behaviour
within the accounting profession.
IFACs established an ethics committee (International Ethical Standards Board of Accountants
(IESBA), which has published the Code of Ethics for Professional Accountants.
CIMA and many other professional bodies have used the principles within this conceptual
framework to develop their own code of ethics.
The following are the fundamental principles contained in CIMAs code of ethics:
1.
Integrity
2.
Objectivity
3.
Professional competence and due care
4.
Confidentiality
5.
Professional behaviour
4.1. Integrity
A professional accountant should be straightforward and honest in all 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:
Contains a materially false or misleading statement;
Contains statements or information furnished recklessly; or
Omits or obscures information required to be included where such omission or

obscurity would be misleading.
4.2. Objectivity
A professional accountant should not allow bias, conflict of interest or undue influence of
others to override professional or business judgments.
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Relationships that bias or unduly influence the professional judgment of the professional
accountant should be avoided.
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4.3. 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 to:
Maintain professional knowledge and skill at the level required to ensure that clients or
Employers receive competent professional service; and
Act diligently in accordance with applicable technical and professional standards when
providing professional services.
4.4. 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.
A professional accountants should therefore refrain from:
Disclosing outside the firm or employing organization confidential information

acquired as a result of professional and business relationships without proper and spec
Using confidential information acquired as a result of professional and business

relationships to their personal advantage or the advantage of third parties.
4.5. Professional behaviour

A professional accountant should comply with relevant laws and regulations and should
avoid any action that discredits the profession.
Example 1 Ethics
Which ONE of the following is NOT a fundamental principle identified in CIMAs code of
ethics?
A
B
C
D
Professional competence
Professional behaviour
Integrity
Independence
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5. Threats to ethical behaviour

The ethical code identifies five areas that provide a threat to the fundamental principles.
Self-interest
a 'conflict of interest' which may inappropriately influence

judgement or behaviour.
Self-review
When you are required to evaluate the results of a previous

judgement or service
Advocacy threat
Arising if promoting a position or opinion to the point that your

subsequent objectivity is compromised.
Familiarity
When you become so sympathetic to the interests of others as a

result of a close relationship that your professional judgement
becomes compromised.
Intimidation
When you are deterred from acting objectively by actual or

perceived pressure or influence
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6. Regulatory bodies
The regulatory bodies ensure that both local and international frameworks and standards are
upheld to take account of the ever changing nature of corporate business.
6.1. Financial reporting standards
International Financial Reporting Standards (IFRSs) A global set of accounting

standards that are prepared on international conceptual frameworks
Local Generally Accepted Accounting Principles (Local GAAP) Accounting

standards that are prepared following local conceptual frameworks.
6.2. Principles of financial reporting standards
Principles based the preparation of the accounting standards follows the principles/
idea laid out in the conceptual framework, which results in more judgement in the
preparation of the financial statements
Rules based the preparation of the accounting standards follows rules, as there are
no fundamental principles to follow.
6.3. Role and structure of regulatory bodies

IFRSs are developed and published by the International Accounting Standards Board (IASB).
The IASB has 14 members, 12 of whom are full-time employees. Appointment of members is
primarily based on their having sucient technical expertise to ensure the IASB has the
experience to tackle the relevant business and economic issues.
Seven of the full-time members of sta are responsible for liaising with national standardsetters in order to promote the convergence of accounting standards.
The IASB has complete responsibility for all technical matters, including the preparation and
publication of international financial reporting standards (IFRS) and exposure drafts;
withdrawal of IFRSs and final approval of interpretations.
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IFRS Foundation oversees the processes of the IASB. Its objectives are:
Develop a set of high, quality, understandable, enforceable and globally accepted

international accounting standards.
Promote the use and application of those standards
Take account of the financial reporting needs of emerging economies and small and
medium-sized entities
Bring about convergence on national accounting standards and IFRSs
IFRS Advisory Council will consult with local standard setters, academics and other interested
parties to determine their views on a range of issues.
IFRS Interpretations Committee is responsible for reviewing new financial reporting issues
and issuing guidance on the application of IFRSs.
As well as the IASB and its associated bodies, other bodies can also influence the setting of
IFRSs.
International Organisation of Securities Commissions (IOSCO) represent the worlds
securities markets regulators
Financial Accounting Standards Board (FASB) US accounting standards setting body
6.4. Standard setting process for IFRS

Since 2002 both the FASB and IASB have been working closely to bring together both US
GAAP and IFRSs, in what has been known as the Convergence Project.
This has led to the development of several new/updated IFRSs, notably IFRS 9 Financial
Instruments and IFRS 13 Fair Value.
The process of developing a new accounting standard follows a four step process.
1.
Advisory Committee
2.
Discussion Papers
3.
Exposure Draft
4.
Issue new IFRS
Example 2 Regulatory bodies

Which ONE of the following would NOT be regarded as a responsibility of the IASB?
A
B
C
D
Responsible for all IFRS technical matters

Publish IFRSs
Overall supervisory body of the IFRS organisations
Final approval of interpretations by the IFRS Interpretations
Committee
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Chapter 2
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EXTERNAL AUDIT AND THE AUDIT

REPORT
An audit is an independent review of a companys financial statements by external auditors
The auditors produce a report to the shareholders that gives their opinion on the financial
statements.
1. Powers and duties of the external auditors

The primary duties of the external auditor are to report on truth and fairness and fair
presentation of the financial statements.
Fair presentation is taken as being factual, free from bias and reflecting the commercial
substance of the business transactions.
Auditors will express their opinion that the financial statements are free from material
misstatement in their audit report.
In preparing their report the auditors are required to consider the following:
Compliance with legislation
Truth and fairness of accounts
Adequate records and returns
Agreement of accounts to records
Consistency of other information
In order to carry out the duties, the auditors have the following rights:
Access to records
Information and explanation
Attendance at general meetings
Right to speak at general meetings
Rights in relation to written resolutions
Right to require laying of accounts
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2. Content of the audit report

Title addressing the report (usually the shareholders)
2.
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
3.
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
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1.
4.
Basis of Opinion explaining how the audit work was done and the opinions reached
5.
Opinion whether the Accounts are true and fair, and whether they have been
properly prepared
6.
Date and Signature
3. Types of audit opinion

Unmodified
True and fair
Materiality
Emphasis of matter paragraph
Modified
Qualified opinion arises when there is either a material misstatement of insucient

appropriate audit evidence but it is not pervasive
Adverse opinion financial statements are not free from material misstatement and
therefore do not give a true and fair view
Disclaimer of opinion insucient audit evidence and is pervasive.
Emphasis of matter paragraph

An emphasis of matter paragraph draws the attention of the shareholders to a specific event
that usually occurs before the end of the year that will not be resolved until after the date that
the audit report will be signed.
The event is important so the external auditor needs to highlight it by including an emphasis
of matter paragraph in the audit report. This 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.
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Example 1 Audit opinion (1)

The external auditors of AB have completed their year-end audit and disagree with the accounting
treatment of a material item in the financial statements. They have concluded that the eect of the
issue is material, but not pervasive to the financial statements.
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Which ONE of the following audit opinion will the external auditors use for ABs financial
statements?
A
An unmodified opinion
B
An adverse opinion
C
An emphasis of matter
D
A qualified opinion
Example 2 Audit opinion (2)

If an external auditor does not agree with the directors accounting treatment of a material item in
the accounts, the first action they should take is to FORCE/PERSUADE the directors to change the
accounting treatment of the item in the accounts.
Delete as appropriate.
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Chapter 3
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CORPORATE GOVERNANCE
Directors are acting as agents of the entity as they run the business on behalf of the
shareholders.
Shareholders need to ensure that the systems and processes that are in place to control the
running of the entity are regularly monitored and controlled.
Corporate governance is the process that ensures the systems and processes are monitored
and controlled.
Corporate Governance has come to the attention of many over recent years following major
corporate scandals.
Enron
WorldCom
Co-Operative Group
Volkswagen Group
All of the above corporate scandals came about due to inappropriate corporate governance
in place.
1. Approach to Corporate Governance

Principles based
Focuses on the objectives
Can be applied across dierent legal jurisdictions
Can stress areas where rules cannot easily be applied
Puts the emphasis on investors making up their own minds.
Rules based
Emphasises measurable achievements by companies
Can easily be applied in jurisdictions where the letter of the law is stressed.
2. Corporate governance regulation in different markets

UK voluntary code based upon principles of openness, integrity and accountability that has
developed to include some specific guidelines, whereby if there is no compliance then
explanations for non-compliance are required.
US a rules based approach as the culture is on obeying the letter of the law and therefore
the code becomes part of legislation.
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B. FINANCIAL ACCOUNTING AND REPORTING
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Chapter 4
CONCEPTUAL FRAMEWORK FOR
FINANCIAL REPORTING
1. The role of the framework
The role of the framework is to:
Assist the IASB in its development of future accounting standards and in its review of
existing accounting standards
Assist the IASB by providing a basis for reducing the number of alternative accounting
treatments permitted by law and accounting standards
Assist preparers of financial statements in applying accounting 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 in financial

statements prepared in conformity with accounting standards
Provide those who are interested in the work of the IASB with information about its
approach to the formulation of accounting standards.
The framework is not itself an accounting standard nor can it override the requirements of
any existing accounting standard.
2. The objective of financial statements

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.
3. Underlying assumption
Going concern the financial statements are prepared on the basis that an entity will
continue in operation for the foreseeable future.
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4. Fundamental qualitative characteristics of financial

statements
Relevance to be useful, information must be relevant to the decision making needs of
the user. Information is relevant if it is material (size and nature).
Faithful Representation to be useful must faithfully represent the phenomena that it

purports to represent, which is only possible if accounted for substance and economic
reality.
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Neutral free from bias

Complete includes all necessary information, descriptions and explanations.
Free from error in the descriptions and processes the financial information is
produced
5. Enhancing qualitative characteristics
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.
Comparability users must be able to compare the financial statements of an entity

from period to period and from company to company
Timeliness - Information produced quickly makes it more useful as a basis for current
decisions.
Verifiability - Information needs to be supported by representation (either written or

verbal) to allow us to confirm its validity.
6. The elements of financial statements
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.
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7. Recognition of the elements of financial statements
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To recognise an element of the financial statements it must meet all three of the following
criteria:
Probable future economic benefit will flow to or from the entity
The item can be measured reliably
8. Measurement of the elements of financial statements
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 cash flows
Example 1 Framework (1)

The International Accounting Standards Board (IASB) Framework for the Preparation and
Presentation of Financial Statements (Framework) is the IASBs conceptual framework.
Which one of the following does the Framework not cover?
A
The format of financial statements
B
The objective of financial statements
C
Concepts of capital maintenance
D
The elements of financial statements
Example 2 Framework (2)

The IASBs Framework identifies faithful representation as one of its fundamental qualitative
characteristics of financial information.
Which one of the following is not an element of faithful representation?
A
Information should be timely
B
Information should be free from material error
C
Information should be free from bias
D
Information must be complete
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C. ACCOUNTING STANDARDS
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Chapter 5
IAS 1 PRESENTATION OF FINANCIAL
REPORTING
IAS 1 sets out overall requirements for the presentation of financial statements, guidelines for
their structure and minimum requirements for their content.
Financial statements will present to the users of accounts:
Statement of financial position
Statement of profit or loss and other comprehensive income
Statement of changes in equity
Statement of cash flows
Notes to the accounts
Comparatives
Financial statements should provide a fair presentation of the results, which is achieved by
compliance with IFRSs.
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Statement of financial position as at [date]

$000s
ASSETS
Non-current assets
Property, plant and equipment
Intangibles
Investments
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
$000s
X
X
X
X
X
X
X
Total assets
X
X
EQUITY AND LIABILITIES

Equity
Equity shares ($1)
Share premium
Irredeemable preference share capital
Revaluation surplus
Retained earnings
Total equity
X
X
X
X
X
X
Non-current liabilities
Redeemable preference share capital
Borrowings
X
X
X
Current liabilities
Trade and other payables
Dividends payable
Overdraft
Tax payable
Total equity and liabilities
X
X
X
X
X
X
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Statement of profit and loss and other comprehensive income for the year ended
[date]
$000s
Revenue
X
Cost of sales
(X)
Gross profit
X
Distribution expenses
(X)
Administrative expenses
(X)
Profit before interest and tax
X
Finance costs
(X)
Investment income
X
Profit before tax
X
Income tax expense
(X)
Profit for the year
X
Other comprehensive income
Gain on non-current asset revaluations
Total comprehensive income for the period
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Statement of changes in equity for the year ended [date]
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B/f
Issue of share capital
Dividends
Total comprehensive income for the
year
Transfer to retained earnings
C/f
Equity
Share Revaluatio Retained
shares premium n surplus earnings
$000s
$000s
$000s
$000s
X
X
X
X
X
X
(X)
Total
$000s
X
X
(X)
(X)
X
X
X
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Chapter 6
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IAS 7 STATEMENT OF CASH FLOWS

Statement of cash flows for the year ended [date]
$m
Operating Activities
Profit before tax
Depreciation
Impairment
Gain/loss on disposal of PPE
Finance cost
Inventory
Receivables
Payables
Cash generated from operations
Interest paid
Tax paid
Cash generated from operating activities
Investing Activities
Proceeds from sale of PPE
Purchase of PPE
Dividends received
Cash generated from investing activities
Financing Activities
Proceeds from issue of shares
Loan issue/repayment
Dividend paid
Cash generated from financing activities
Change in cash and cash equivalents
Opening cash and cash equivalents
Closing cash and cash equivalents
$m
X
X
X
(X)/X
X
(X)/X
(X)/X
X/(X)
X
(X)
(X)
X
X
(X)
X
X
X
X/(X)
(X)
X
X/(X)
X
X
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1. Cash and cash equivalents

Cash Cash on hand and demand deposits
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Cash equivalents 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.
Example 1 Cash and cash equivalents

Statement of financial position at 31 December 20X5 (extract)
Current assets
Government bonds
Cash
Current liabilities
Overdraft
20X5
$000
20X4
$000
1,200
400
1,000
-
150
Calculate the movement in cash and cash equivalents
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2. Operating activities
The principal revenue producing activities of the entity and other activities that are not
investing or financing activities.
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IAS 7 allows two methods to calculate the cash generated from operations.
Direct method using nominal ledger T-accounts
Indirect method using the financial statements
2.1. Direct method
Cash received from customers

Cash payments to suppliers and employees
$000
X
X
Cash from operating activities
Example 2 Direct method

Extracts from a companys general ledger show the following information:
Sales for the year
Purchases for the year
Wages and salaries
Other operating expenses
Receivables @ start year
Receivable @ year-end
Payables @ start year
Payables @ year-end
$000
4,700
3,300
580
430
400
500
300
450
Calculate the cash from operating activities to appear in the companys statement of cash
flows.
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2.2. Indirect method

$000
X
X
(X)
X
(X)
(X)
Profit before taxation

Depreciation
Investment income
Finance cost
Increase in inventories
Increase in receivables
Increase in payables
X
Example 3 Indirect method

Statement of profit or loss (extract) for the year-ended 31 December 20X5
Finance cost
Investment income
Profit before tax
Income tax
Profit for the year
$000
3,200
(500)
150
2,850
(350)
2,500
Statement of financial position (extract) as at 31 December 20X5

20X5
$000
20X4
$000
Current assets
Inventory
Receivables
Cash
6,500
4,300
250
7,200
3,900
500
Current liabilities
Trade payables
5,200
6,500
Depreciation for the year was $850,000.

Calculate the cash from operating activities to appear in the companys statement of cash
flows.
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2.3. Interest and tax paid
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Interest payable
B/f
Bank ()
C/f
Finance cost (SPL)
Tax payable
B/f current tax
Bank ()
C/f current tax
Tax expense (SPL)
Example 4 Interest/tax paid

Statement of profit or loss (extract) for the year-ended 31 December 20X5
Finance cost
Investment income
Profit before tax
Income tax
Profit for the year
$000
3,200
(500)
150
2,850
(350)
2,500
Current liabilities
Trade payables
Tax payable
Interest payable
20X5
$000
20X4
$000
5,200
180
120
6,500
210
90
Calculate the interest paid and tax paid to appear in the companys statement of cash flows.
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3. Investing activities
The acquisition and disposal of non-current assets (PPE, intangibles and investments)
3.1. Disposal of PPE
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Profit/loss on disposal =
Proceeds
Carrying value
Example 5 Profit or loss on disposal

DBA disposed of a piece of plant and equipment in the year for $250,000 with a carrying value of
$225,000.
Show how this would be presented in the statement of cash flows for DBA.
3.2. Acquisition of PPE

PPE (CV)
B/f
Revaluation
X
Depreciation
Disposal
C/f
Cash - additions ()
Example 6 Acquisition of PPE

Non-current assets
Property, plant and equipment
Equity
Revaluation surplus
20X5
$000
20X4
$000
13,200
12,500
500
150
Additional information:
1. Depreciation of $850,000 has been charged in the year
2. An item of machinery was disposed of for $120,000 with a carrying value of $100,000
Calculate the cash outflow for the purchase of property, plant and equipment to appear in
the statement of cash flows.
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3.3. Interest received
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B/f
Interest receivable
X
Interest income (SPL)
Bank ()
C/f
C/f
4. Financing activities
Activities that result in changes in the size and composition of the contributed equity and
borrowings of the entity
Debt
Issue of debt = increase in borrowings
Repayment of debt = decrease in borrowings
Equity
Issue of shares = movement in share capital and share premium
Dividend paid
Retained earnings
B/f
Dividend paid ()
C/f
PFY (SPL)
X
X
2016 Examinations
CIMA F1
Example 7 Statement of cash flows

Statement of profit or loss for the year ended 31 December 20X5
$000
360
150
210
14
196
62
134
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Revenue
Cost of sales and other expenses
Profit from operations
Finance costs
Profit before tax
Income tax expense
Profit after tax
Statement of financial position as at 31 December 20X5

31 December 20X5
31 December 20X4
$000
$000
$000
$000
Non-current assets
Cost
798
780
159
112
Depreciation
639
668
Current assets
Inventory
12
10
Trade receivables
34
26
Bank
24
70
28
64
709
732
Share capital
Share premium
Retained earnings
Non-current liabilities
Bank loan
Current liabilities
Trade payables
Income tax
21
47
180
18
343
541
170
12
245
427
100
250
68
709
15
40
55
732
1.
During the year, the company paid a dividend of $36,000
2.
Included within expenses are a loss on disposal of $9,000 and depreciation of $59,000
3.
Property, plant and equipment includes $45,000 for the purchase of a new piece of
machinery
Prepare a statement of cash flow for the year ended 31 December 20X5 in accordance with
the requirements of IAS 7.
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CIMA F1 31
Chapter 7
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IAS 16 PROPERTY, PLANT AND

EQUIPMENT
Property plant and equipment are tangible items that are:
Held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes, and
Expected to be used during more than one period.
1. Initial Recognition
The cost of an item of property, plant and equipment is made up of:
Purchase price, including irrecoverable taxes and after deducting trade discounts (not
cash/settlements discounts)
Costs directly attributable to bringing the asset to the location and condition necessary
for it to be capable of operating in the manner intended by management (e.g. site
preparation, delivery and handling costs, installation and assembly, testing, professional
fees)
Note:
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 are included in the
cost of the asset at present value.
The following costs are not included in the cost of an item of property, plant and
equipment:
Costs that are incidental to the construction (e.g. errors)
Start-up costs
General overhead costs
Initial losses before the asset reaches its intended use
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Example 1 Initial recognition

Jones purchases a machine that had a list price of $100,000 but was oered a trade discount of
10%.
A further settlement discount of 5% is available if payment is made within 15-days.
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Jones also incurred the following charges in getting the asset ready for its intended use:
Shipping & handling charges
Pre-production testing
Site preparation costs
General overheads
$
3,500
12,000
17,000
4,500
Included in the site preparation costs is $3,000 which is as a result of Jones providing incorrect
requirements for the asset.
Calculate the initial cost of the machine to be recorded in accordance with IAS 16 Property,
plant and equipment.
2. Subsequent Expenditure
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 o.
Separate components, inspection and overhaul costs
If items of property, plant and equipment comprise separate components with dierent
useful lives the separate components should be capitalised as separate assets and each
depreciated over their useful lives.
Normally all inspection and overhaul costs are expensed as they are 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.
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3. Depreciation
Straight line
Reducing balance
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Depreciation starts when the asset is ready for its intended use and not from when it starts to
be used.
Any change in estimate is applied prospectively by applying the new estimates to the
carrying value of the PPE at the date of change.
Example 2 Change in useful life

Ecuador bought an item of property, plant and equipment for $25 million on 1 January 2012 and
depreciated over its useful life of 10 years.
On 31 December 2014, the assets remaining life was estimated as 5 years.
Calculate the amounts to shown in the financial statements of Ecuador for the year-ended 31
December 2015.
Example 3 Change in method

A lorry was purchased for $80,000 on 1 January 20X4 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 20X9 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.
What would be the depreciation charge for the year ended 31 December 20X9?
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4. Subsequent measurement
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Revaluations
Cost Model
Revaluation Model
Carried at cost less

accumulated depreciation
and impairment losses
Carried at revalued amount

(fair value less accumulated
depreciation and impairment
losses)
Review periodically and keep revaluations up to date
Consistent policy for each class of asset (avoids cherry-picking of assets)
Revalue at fair value
Depreciate the revalued asset less residual value over its remaining useful life
5. Accounting for a revaluation

Dr
Non-current assets cost/valuation
Dr
Accumulated depreciation
Cr
The figure posted to the revaluation surplus can be calculated quickly as follows:
Note: A company has the option to make an annual reserve transfer for any excess
depreciation charged as a result of the revaluation.
Dr
Revaluation surplus
Cr
Retained earnings
Example 4 - Revaluation
Charlie bought a building on 1 January 20X5 for $500,000 with an estimated useful economic life of
twenty five years and no residual value. A straight line method of depreciation was adopted.
On 1 January 20X7 Charlie decided to revalue all non- current assets in line with IAS 16. The
building was revalued at $600,000. The useful economic life is unchanged.
Show how the revaluation would be accounted for in the financial statements for the year
ended 31 December 20X7.
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6. Disposal of a previously revalued asset

The profit or loss on disposal is calculated as previously and any gains held in reserves are
transferred to retained earnings in the statement of changes in equity.
Revaluation surplus
Cr
Retained earnings
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Dr
Example 5 Disposal of revalued asset

William bought a building on 1 January 20X5 for $400,000 with an estimated useful economic life
of twenty five years and no residual value. A straight line method of depreciation was adopted.
On 1 January 20X7 William decided to revalue all non-current assets in line with IAS 16. The
building was revalued at $500,000. The useful economic life is unchanged.
On 1 January 20X9 William disposed of the oven for $550,000.
Calculate the profit or loss on disposal of the building at 1 January 20X9 and record the
journal entry for the previously held gains to be transferred within reserves.
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Chapter 8
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IAS 23 BORROWING COSTS

Borrowing costs, net of income received from the investment of the money borrowed, on a
qualifying asset must be capitalised over the period of construction.
Capitalisation starts when:
Expenditure on the asset commences
Borrowing costs are being incurred
Activities necessary to prepare the asset are in progress
Capitalisation must stop when the asset is ready for its use (whether or not it is being used) or
when there is no active construction.
Capitalisation for specific borrowings is capitalised using the eective rate of interest.
Example 1 Specific borrowings

Columbia commenced the construction of an item of property, plant and equipment on 1 March
2015 and funded it with a $10 million loan. The rate of interest on the borrowings was 5%.
Due to a strike no construction took place between 1 October and 1 November.
Calculate the amount of interest to be capitalised as part of the non-current assets.
Example 2 General borrowings

Venezuela had the following bank loans in issue during 2015.
$m
4% bank loan
3% bank loan
25
40
Venezuela commenced the construction of an item of property, plant and equipment on 1 January
2015 for which it used its existing borrowings. $10 million of expenditure was used on 1 January
and $15 million was used on 1 July.
Calculate the amount of interest to be capitalised as part of the non-current assets.
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Chapter 9
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IAS 20 GOVERNMENT GRANTS

Recognise the grant when the:
Entity will comply with the conditions attached to the grant
Entity will actually receive the grant
Grants should be recognised according to the deferred income approach, using a systematic
basis. This spreads the income over the period in which the related expenditure is recognised.
If the grant is used to buy depreciating assets, the grant must be spread over the same life
and using the same method.
Example 1 Grants and depreciable assets

Tweddle bought an item of property, plant and equipment for $10 million and received a
government grant of $2 million. The PPE has a useful life of 10 years and has no residual value.
Explain how the purchase of the property, plant and equipment and government grant
would be dealt with in the financial statements of Tweddle.
Note: If a government grant becomes repayable, it is treated as a change in accounting

estimate. The payment is first shown against any remaining deferred income balance. If the
payment exceeds the deferred income balance then the excess payment is treated as an
expense.
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Chapter 10
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IAS 40 INVESTMENT PROPERTIES

Investment property is property (land or a building or part of a building or both) held) to
earn rentals or for capital appreciation or both, rather than for:
Use in the production or supply of goods and services or for administrative purposes
(IAS 16); or
Sale in the ordinary course of business (IAS 2); or
Future use as an investment property (IAS 16 until completed)
Initial measurement
Investment properties should initially be measured at cost plus directly attributable costs.
Subsequent measurement
Fair value model
The investment properties are revalued

to fair value at each reporting date
Gains or losses on revaluation are

recognised directly through profit or
loss
Cost model
The investment properties are held
using the benchmark method in IAS 16
(cost)
The properties are depreciated like any
other asset
The properties are not depreciated
Transfers into and out of investment property should only be made when supported by a
change of use of the property.
IP to owner occupied (IAS 16) Fair value at date of change
IP to inventory (IAS 2) Fair value at date of transfer
Owner occupied (IAS 16) to IP Revalue under IAS 16 and then treat as IP
Inventory (IAS 2) to IP Fair value on change and gain/loss to profit or loss
Example 1 Investment property and change of use

Addlington owns a property that it is using as its head oce. At 1 January 2015, its carrying value
was $20 million and its remaining useful life was 20 years. On 1 July 2015 the business was
reorganised cheaper premises were found for use as a head oce. It was therefore decided to
lease the property under an operating lease.
The property was valued by a qualified professional, who assessed the propertys value as $21
million on 1 July and $21.6 million on 31 December 2015.
Explain the accounting treatment of the property in the financial statements for the yearended 31 December 2015.
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42
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Chapter 11
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IAS 38 INTANGIBLE ASSETS

An identifiable, non-monetary asset with no physical substance but has value to the business.
patents
brand names
licences
3 factors to consider
Identifiability
Control
Recognition
i.e. can sell separately

Framework
IAS 38
Separate acquisition
Capitalise at cost (purchase price, import duties and non-refundable purchase taxes less any
trade discounts) plus any directly attributable costs (e.g. legal fees, testing costs).
Amortisation is charged over the useful life of the asset, starting when it is available for use.
Research
Research expenditure is charged immediately to profit or loss in the year in which it is
incurred.
Development
Development expenditure must be capitalised when it meets all the criteria.
Sell/use
Commercially viable
Technically feasible
Resources to complete
Measure cost reliably (expense)
Probable future economic benefits (overall)
Internally generated
Internally generate brands, mastheads cannot be capitalised as their cost cannot be
separated from the overall cost of developing the business.
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Revaluations
An intangible asset can only be revalued if there exists an active market.
An active market is one where the following conditions are all met:
The items traded are homogenous
Willing buyers and sellers can normally be found at any time
Prices are available to the public
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Amortisation
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.
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.
It will therefore be subject to annual impairment reviews.
Example 1 Intangibles
GKS is a large pharmaceutical business involved in the research and development of viable new
drugs. It commenced initial investigation into the viability of a new drug on 1 February 20X5 at a
cost of $40,000 per month. On 1 August 20X5 GSK were able to demonstrate the commercial
viability of the new drug and intend to sell it on the open market once fully complete.
Costs subsequent to 1 August 20X5 remained at $40,000 per month. At 31 December 20X5, GSKs
reporting date, the drug was not yet complete but it is believed that by mid-20X6 the drug will be
available for sale.
The finance director is confident of the success of the drugs sales that he wishes to revalue the
intangible at the reporting date, using a discounted future cash flow model to establish the fair
value.
Explain the treatment of the above costs in GSKs financial statements for the year-ended 31
December 20X5.
Intangibles and business combinations

If an intangible asset is acquired in a business combination (i.e. acquisition of a subsidiary,
that has a previously unrecognised internally generated brand), the cost of that intangible
asset is recognised at fair value in the consolidated financial statements.
If a fair value cannot be established the intangible is not recognised separately and becomes
part of the overall goodwill established on acquisition of the subsidiary..
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Chapter 12
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IAS 36 IMPAIRMENT OF ASSETS

1.
Identify possible impairments (external vs. internal)
2.
Perform impairment review (if identified possible impairments)
3.
Record the impairment
1. Indicators of Impairment
External sources
A significant decline in the assets market value more than expected by normal use or
passage of time
A significant adverse change in the technological, economic or legal environment
Internal sources
Obsolescence or physical damage
Significant changes, in the period or expected, in the way the asset is being used e.g.
asset becoming idle, plans for early disposal or discontinuing/ restructuring the
operation where the asset is used
Evidence that assets economic performance will be worse than expected
Operating losses or net cash outflows for the asset
Loss of key employee
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2. Impairment review
If the carrying value of the asset is greater than its recoverable amount, it is impaired and
should be written down to its recoverable amount.
Recoverable amount - the greater of fair value less cost to sell and value in use.
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Fair value less costs to sell - the amount receivable from the sale of the asset less the costs
of disposal.
Value in use - the present value of the future cash flows from the asset.
Example 1 - Impairment
A machine was acquired on 1 January 20X5 at a cost of $50,000 and has a useful economic life of
ten years.
At 31 December 20X9 an impairment review was performed. The fair value of the machine is
$26,000 and the selling costs are $2,000.
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
Prepare extract from the financial statement for the year-ended 31 December 20X9.
3. Record the impairment

Individual asset
The reduction in carrying value is taken through profit or loss unless related to a revalued
asset, in which case it is taken to any revaluation surplus first.
Once the impairment has been accounted for the recoverable amount is then depreciated
over the remaining useful economic life.
Cash generating unit (CGU)
It is not always possible to allocate cash flows to an individual asset. To overcome this
problem a cash generating unit can be used.
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.
1.
Specific assets
2.
Goodwill
3.
Remaining assets (pro-rata)
Note: No single asset in the CGU should be reduced below its recoverable amount.
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Example 2 Impairment (GCU)

Siobhan fully owns a company called Harry. Extracts from Siobhans statement of financial position
relating to Harry are as follows:
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Goodwill
Franchise costs
Restored furniture (at cost)
Buildings
Other net assets
$000
90,000
50,000
90,000
100,000
50,000
370,000
The restored furniture has an estimated realisable value of $115 million. The franchise agreement
contains a sell back clause, which allows Harry to cease using the franchise and receive a
repayment of $30 million from the franchisor. An impairment review at 31 March 20X5 has
estimated that the value of Harry as a going concern is only $250 million.
Demonstrate how the impairment would be accounted for in the financial statements.
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Chapter 13
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IFRS 5 NON-CURRENT ASSETS HELD

FOR SALE AND DISCONTINUED
OPERATIONS
1. Non-current assets held for sale
Must be available for immediate sale and sale must be highly probable (sell < 1 year, active
programme to locate buyer, actively marketing).
Non-current asset held for sale is valued at the lower of the carrying value and fair value less
costs to sell. Any reduction in value is recorded as an impairment through profit or loss.
IFRS 5
Cost Model
Revaluation Model
Asset is revalued to fair value

immediately before
classification as held for sale
Once classified as a non-current asset held for sale it is no longer depreciated.
The subsequent sale of the asset will give rise to a profit/loss on disposal.
Example 1 NCA-HFS
At 1 January 2014, Namibia carried a property in its statement of financial position at its revalued
amount of $14 million in accordance with IAS 16 Property, Plant and Equipment. Depreciation is
charged at $300,000 per year on the straight line basis.
In April 2014, the management decided to sell the property and it was advertised for sale. By 31
April 2014, the sale was considered to be highly probable and the criteria for IFRS 5 Non-current
Assets Held for Sale and Discontinued Operations were met at this date. At that date, the assets fair
value was $154 million. Costs to sell the asset were estimated at $300,000.
On 31 January 2015, the property was sold for $156 million.
Explain how the above transaction should be dealt with in the financial statements of
Namibia for the year-ended 31 December 2014 and 31 December 2015.
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2. Discontinued operations
IFRS 5
Discontinued Operations
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Definition
When discontinued
P or L
PFY face
Definition
Disposed of, or
Held for sale, and:
Separate major line of

business or geographical
area of operations
Disclosure
Single co-ordinated
plan to dispose of a
separate line of
business/geographical
area
Is a subsidiary
acquired exclusively
with a view to re-sale
Discontinued
Disposed of in the
year
Held for sale
Disclose in year of
disposal
Disclose in year
held for sale
Disclosure
SCF
Net cash flows face or notes
Revenue, expenses, pre-tax

profit, tax expense face
or notes
SFP
Fully disposed of none
Not fully disposed of assets
held for sale
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Statement of profit or loss for the year-ended [date]
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$000
Continuing operations
Revenue
Cost of sales
Gross profit
Distribution costs
Administration expenses
Operating profit
Finance costs
Profit before tax
Income tax expenses
Profit for the period from continuing operations
X
(X)
X
(X)
(X)
X
(X)
X
(X)
X
Discontinued operations
Profit for the period from discontinued operations*
Total profit for the period
X
X
* Detail given in the notes
Example 2 Discontinued operations

Angolas car manufacturing operation has been making substantial losses. Following a meeting of
the board of directors, it was decided to close down the car manufacturing operation on 31 March
20X6. The companys reporting date is 31 December and the car manufacturing operation is
treated as a separate operating segment.
Explain how the decision to close the car manufacturing operation should be treated in
Angolas financial statements for the years ending 31 December 20X5 and 20X6.
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Chapter 14
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IAS 19 EMPLOYEE BENEFITS
Short-term benefits
Long-term benefits
Post-employment benefits
1. Pensions
Defined Contribution Scheme (money purchase)

This does not present any accounting problems as the income statement charge will
equal the contributions payable into the scheme.
Contributions are accrued in the financial statements with an expense recognised in
profit or loss.
Defined Benefit Scheme (final salary)

At any point in time (usually each year) we need to know the value of the scheme so
that we can decide whether or not it is worth enough (i.e. the assets will be enough to
cover the liabilities.)
Statement of financial position (extract)
Fair value of scheme assets
Fair value of scheme liabilities
Net pension asset/(liability)
$m
X
(X)
X/(X)
The valuation of a defined benefit scheme will be carried out by an actuary who will decide if
the scheme is in surplus (net pension asset) or deficit (net pension liability)
This is done by making a number of assumptions:
Level of investment return
Number of leavers
Number of new members
Number of people who die
As time goes by the actual outcome will not be the same as the assumed outcome.
The dierences are known as actuarial dierences (remeasurement component).
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Statement of profit or loss and other comprehensive income (extract)

$m
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Profit or loss
Operating costs
Current service costs
Past service costs
(X)
(X)
Financing costs
Interest expense
Return on investment
(X)
X

Re-measurement gain/(loss) (W)
X/(X)
Current service cost increase in the value of the scheme liabilities as a result of
employee service during the period.
Past service cost increase in the value of the scheme liabilities as a result of employee
service in previous periods.
Interest cost represents the unwinding of the discount factor- the nearer you get to
paying o a liability the bigger it gets.
Return on investment this is the interest or dividends receivable on the pension fund
assets.
Note: Actuarial dierences are recognised in other comprehensive income, hence no impact
on profit or loss.
Workings
Assets
$m
Liabilities
$m
Opening
Opening
Interest
Contributions paid in
Service costs
Benefits paid out
(X)
Benefits paid out
(X)
Expected
Expected
Re-measurement component ()
Closing (per actuary)
X/(X)
X
Re-measurement component ()
X/(X)
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Example 1 Defined benefit scheme

Finland operates a defined benefit pension scheme for all of its employees. The closing balances on
the scheme assets and liabilities, at 31 December 2014, were $60 million and $64 million
respectively.
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Finlands actuary has provided the following information that has yet to be accounted for in the
year-ended 31 December 2015.
$m
Current service cost

Past service cost
Benefits paid out
9
8
5
6
Fair value of plan asset

Fair value of plan liabilities
66
75
Yield on high quality corporate bonds
5%
Calculate the amounts that will appear in the financial statements of Finland for the yearended 31 December 2015.
2. Curtailment
A curtailment occurs when there are a significant number of employees who leave the
scheme, commonly seen if there is a re-organisation of the business or change in scheme
from defined benefit to defined contribution.
The asset and liability are re-measured to fair value and any change is taken to profit or loss.
Example 2 Curtailment
Flannagan announces the re-organisation of its business, resulting in the loss of jobs within the
business.
The fair value of the plan assets and liabilities, immediately before the re-organisation, were $48
million and $60 million respectively.
The plan assets do not change following the curtailment but the pension liabilities are measured at
$55 million.
Explain the accounting treatment of the curtailment in the financial statements.
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3. Asset ceiling
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If a company has an overall pension asset on its statement of financial position then the asset
can only be recognised up to the level of the asset ceiling. The asset ceiling is the present
value of any future cash savings of not having to contribute to the scheme as it is in surplus. If
the asset needs to be reduced to the asset ceiling limit then the reduction in the asset is
shown as an expense in profit or loss.
Example 3 Asset ceiling
Brannagan has a net pension asset in its statement of financial position of $30 million. It therefore
anticipates that it will not have to pay its usual contributions into the scheme for the next few
years. It is estimated that the present value of the future reduction in contributions will be $26
million.
Explain how the net pension asset will be treated in the financial statements.
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Chapter 15
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IAS 21 FOREIGN CURRENCY

TRANSACTIONS
If an entity has foreign currency transactions then the amount will need to be translated into
the functional currency before it is recorded within the general ledger.
The functional currency is the currency of the primary economic environment in which the
entity operates. This is deemed to be where the entity generates and expends cash.
Management should consider the following factors in determining the functional
currency:
The currency that dominates the determination of the sales prices
The currency that most influences operating costs
The currency in which an entitys finances are denominated is also considered.
Individual company accounts

Record the transaction at the exchange rate in place on the date the transaction occurs.
Monetary assets and liabilities are retranslated using the closing rate at the reporting date,
with any gains or losses going through profit or loss.
Non-monetary assets and liabilities are not retranslated at the reporting date, unless carried
at fair value, whereby translate at the rate when fair value was established.
Note: No specific guidance is given as to where any exchange dierences are recorded within
profit or loss. The general accepted practice is:
Trading transaction operating costs
Financing transaction financing costs
Example 1 Functional currency

Jones Inc. has its functional currency as the $USD. It trades with several suppliers overseas and
bought goods costing 400,000 Dinar on 1 December 20X5. Jones paid for the goods on 10 January
20X6. Joness year-end is 31 December. The exchange rates were as follows:
1 December 20X5
31 December 20X5
10 January 20X6
4.1 Dinar : $1USD

4.3 Dinar : $1USD
4.4 Dinar : $1USD
Show how the transaction would be recorded in Joness financial statements.
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Chapter 16
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IAS 10 EVENTS AFTER THE REPORTING

PERIOD
IAS 10
Adjusting
Non-adjusting
Information relating to a condition that existed

at the reporting date
Doesnt reflect conditions that existed at the

reporting date
Fall in value of investments
Settlement of outstanding court case
Major purchase of assets
Bankruptcy of a customer
Announcing a discontinued operation
Sale of inventory at below cost
Announcing a restructuring
Determination of purchase/sale price of

PPE
Disclose nature and financial eect if MATERIAL
Example 1 Events after the reporting period

The following events took place between the 31 December 20X5 reporting date and the date the
financial statements were authorised for issue.
1.
The company makes an issue of 100,000 shares which raises $200,000 shortly after the
Statement of Financial Position date.
2.
A legal action had been 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 totalling $80,000. No provision has
currently been made for this event.
3.
Inventory included in the accounts at the year end at cost $25,000 was subsequently sold for
$15,000.
4.
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.
Explain how each of the above items should be treated in the financial statements for the
year ended 31 December 20X5.
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Chapter 17
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IAS 2 INVENTORIES
Measure @ lower of
Cost
Costs incurred in bringing inventory
to its present condition and location
Materials
Labour
Manufacturing overheads (based
on normal output)
NRV
Selling price
Less:
Costs to complete (X)

Costs of selling
(X)
NRV
X
Transport costs
Irrecoverable taxes
Costs specifically excluded include:
Abnormal costs
Storage costs
Administration costs
Selling expenses
Line-by-line basis
Example 1 Inventory Valuation

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
What figure for closing inventory would be shown in the Statement of Financial Position?
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Chapter 18
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IAS 8 ACCOUNTING POLICIES, CHANGES

IN ACCOUNTING ESTIMATES AND
ERRORS
IAS 8
Accounting Estimates
Accounting Policies
Prior Period Errors
1. Accounting policies
The specific principles, bases, conventions, rules and practices applied by an entity in
preparing and presenting the financial statements.
Selection
Apply the standard that

specifically deals with the
transaction
Apply a policy that gives relevant

and reliable information
Standard of a similar item
IASB Framework definitions
Change in accounting policy
New IFRS
Apply a new policy that gives more

relevant and reliable information
Follow treatment given in new IFRS
Voluntary change
Retrospective application
Adjust b/f figures
Restate comparatives
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2. Accounting estimates
Changes in accounting estimate are recognised prospectively:
Period of change
Period of change and future periods
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Example 1 Accounting Estimates

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 o.
Would the following be a change in accounting policy or revision of an estimate?
3. Prior period error

Accounting errors (omissions and misstatements) include:
Errors in applying accounting policies
Oversights
Fraud and the eects of fraud
Material errors are corrected retrospectively, the same as for a change in accounting policy.
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Chapter 19
IAS 12 INCOME TAXES
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1. Current tax
Current tax is the amount of income taxes payable (recoverable) in respect of the taxable
profit (tax loss) for a period.
2. Recognition
Current tax should be recognised based on the year-end estimate of the tax payable.
The income tax expense though profit or loss is adjusted for any under/over provision from
the prior year.
Example 1 Current tax

The following trail balance (extract) relates to Claire as at 31 December 20X5:
$000
Current tax
$000
500
The following notes are also relevant:

1.
A provision for current tax for the year ended 31 December 20X5 of $4.2 million is required.
2.
The balance on current tax in the trial balance represents the under/over provision of the tax
liability for the year ended 31 December 20X4.
Prepare extracts from the statement of profit or loss for Claire for the year ended 31
December 20X5 and from the statement of financial position as at the same date with
regards tax.
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Chapter 20
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IFRS 8 OPERATING SEGMENTS

IFRS 8 Operating segments aims to assist users to:
Understand past performance
Understand the risk and returns of each segment
Make better informed judgements
An operating segment is one whose results are regularly reviewed by the chief operating
decision maker (CODM), thus giving the users of the accounts an internal view of the
company and how the results are reviewed.
Operating segments can be aggregated where they have similar economic characteristics
and are similar in each of the following:
the nature of the products or services;
the nature of the production process;
the type of customer for the products or services;
the methods used to distribute the products or services;
the nature of the regulatory environment (banking, insurance, etc.).
1. Disclosure
An operating segments results must be disclosed if:
Segment revenue is greater than 10% of the total revenue (internal and external)
Segment profits are greater than 10% of the total profits (excluding losses)
Segment assets are greater than 10% of total assets
If the total reportable segment revenue does not make up at least 75% of external revenue
then additional segment will need to be disclosed.
Two or more operating segments may be combined if they have similar economic
characteristics with regards to the following:
The nature of the products or services
The nature of the production process
The type or class of customer
The methods used to distribute the products/services
The nature of the regulatory environment
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Each reportable segment should then disclose:

Segment revenue
Segment results
Segment assets
Segment liabilities
Capital expenditure
Depreciation/amortisation
Other non-cash expenses
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General disclosures are:
How the operating segments have been identified
The products and services that the group provides
Reliance on major customers
Geographical information (limited to revenue and non-current assets)
Example 1 Operating segments

Gulf is preparing is operating segment disclosure note for the first time following its listing on the
local stock exchange during the year. Its chief operating decision maker (CODM) regularly reviews
the results of its three separate divisions:
Domestic railway operations
International railway operations
Railway construction
Gulf is intending to report two operating segments in its disclosure note as opposed to the three
reviewed by the CODM. The domestic and international operations are to be combined because it
is felt that they have similar economic characteristics due to the services that they oer.
The domestic operations involve a competitive tender process to run the railway service, which is
then awarded by the local transport authority. The local transport authority then sets the ticket
prices and collects the fares which are then distributed amongst the various operators running the
contracts.
The international operations ticket prices are set by Gulf, who collects the fares from the
passengers directly.
Advise Gulf as to whether the proposed combination of the two operating segments is
appropriate.
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Chapter 21
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IAS 34 INTERIM FINANCIAL REPORTING

IAS 34 requires only condensed financial statements (headings and sub-totals) and selected
explanatory note disclosures, with particular focus on new events, activities and
circumstances. The minimum content specified is as follows:
Statement of financial position at interim date and previous reporting date.
Statement of profit or loss and other comprehensive income for both interim/
cumulatively to date for the year and previous interim/cumulatively to date for previous
year (incl. EPS and diluted EPS)
Statement of changes in equity cumulatively to interim date and direct comparative
Statement of cash flows cumulatively to date and comparable period.
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Chapter 22
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IFRS 13 FAIR VALUE MEASUREMENT

Definition
The price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
The IFRS says that you should always use market value wherever possible and gives more
detailed guidance on measurement of items that do not have a readily available market price.
Level one inputs: quoted prices
If there is an active market then the market price should be used.
Level two inputs: similar quoted prices
If there is no quoted price available then market data should be used to find a similar
estimated market value.
Level three inputs: unobservable inputs
I neither of the first two work then financial modelling( such as discounted present value)
should be used to obtain an estimated market value.
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D. CONSOLIDATED FINANCIAL STATEMENTS

(GROUP ACCOUNTS)
Chapter 23
CONSOLIDATED STATEMENT OF
FINANCIAL POSITION
1. Introduction to Group Accounts
P
100%
Basic principles
P Ltd and S Ltd separate legal

entities
P Group Ltd one single entity,
prepare accounts using substance
Control and ownership

Control (power to direct activities)
100%P + 100%S
Ownership Non-controlling interest
(NCI%)
A parent is an entity that has one or more subsidiaries.

A subsidiary is an entity which is controlled by another entity (known as the parent).
The key concept in determining whether or not an investment constitutes a subsidiary is that
of control.
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Control is the power to govern the financial and operating policies of an entity so as to
obtain benefit from its activities.
Control is usually achieved by the purchase of more than 50% of a companys equity share
capital.
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2. Basic consolidation
2.1. Basic steps
100% P + 100% S assets and liabilities, ignoring the investments in subsidiary
100% P share capital and share premium only (reporting to parents shareholders)
Retained earnings (balancing figure)
Example 1 Basic consolidation

Peter acquired 100% of the equity share capital of Steven on 31 December 20X4 for $1,000,000.
The financial statements of the two companies at that date were as follows:
Investment in Steven Co
Other assets
Total assets
Equity share capital
Retained earnings
Liabilities
Peter
$000
1,000
1,500
2,500
Steven
$000
1,200
1,200
1,000
1,100
2,100
400
2,500
250
750
1,000
200
1,200
Prepare the consolidated statement of financial position for the Peter Group at 31 December
20X4.
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Example 2 Basic consolidation (continued)
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Following Peters acquisition of the 100% of Stevens equity share capital of Steven on 31
December 20X4, both companies continued to trade. The financial statements of the two
companies at the end of the following year 31 December 20X5 were as follows:
Investment in Steven Co
Other assets
Total assets
Retained earnings
Liabilities
Peter
$000
1,000
1,900
2,900
Steven
$000
1,450
1,450
1,000
1,400
2,400
500
2,900
250
900
1,150
300
1,450
Prepare the consolidated statement of financial position for the Peter Group at 31 December
20X5.
2.2. Non-controlling interest

Control is exerted through a shareholding of greater than 50%, so therefore it is not always
necessary to fully own a subsidiary.
Shareholdings of 75% will still give the parent the power to direct the activities of the
subsidiary and therefore it must prepare consolidated financial statements.
As the parents 75% holding still maintains control, the assets and liabilities of the subsidiary
are consolidated 100% on a line-by-line basis.
It is necessary to account for 25% ownership interest in the subsidiary which is referred to as
the non-controlling interest. It is shown in the equity section of the consolidated statement of
financial position.
The non-controlling interest is measured using either of the following methods:
Proportionate share of net assets
Fair value
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Example 3 Non-controlling interest
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Pierre acquired 80% of Stefans equity share capital on 31 December 20X4 when Stefans retained
earnings were $750,000. The financial statements of the two companies at the end 31 December
20X5 were as follows:
Investment in Stefan Co
Other assets
Total assets
Retained earnings
Liabilities
Pierre
$000
800
1,900
2,700
Stefan
$000
1,450
1,450
1,000
1,200
2,200
500
2,700
250
900
1,150
300
1,450
Prepare the consolidated statement of financial position for the Pierre Group at 31 December
20X5 assuming the non-controlling interest is measured using the proportionate share of net
assets method
2.3. Goodwill
On acquisition of a subsidiary, the parent will usually pay more for the subsidiary than the
value of the net assets (assets less liabilities). Why?
Customer loyalty
Good reputation
The dierence between what the parent pays and what the net assets are truly worth is
referred to as goodwill.
Example 4 - Goodwill
A parent company buys 75% of the equity shares in a subsidiary company for $156,000.
The remaining shares were valued at $56,000 and the net assets at acquisition were $170,000.
Calculate the goodwill arising on acquisition assuming that:
Non-controlling interest is measured using the proportionate share of net assets method
1.
2.
Non-controlling interest is measured using the fair value method.
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2.4. Other reserves (e.g. revaluation reserve)

Each reserve has a separate calculation still based on ownership so the calculation is the same
as for group retained earnings
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Group revaluation reserve

100% P
Add: Ps % of Ss post acqn revaluation reserve
X
X
X
Workings
W1) Group Structure
P
20-50%
>50%
A
S
W2) Net assets of subsidiary
Equity shares
SP
Ret. earnings
At reporting
date
X
X
X
At
acquisition
X
X
X
Post
acquisition
W3) Goodwill
FV of consideration (shares/cash)
NCI at acquisition
FV of net assets at acquisition (W2)
Goodwill at acquisition
X
X
X
(X)
X
W4) Non-controlling interests

NCI @ acquisition (W3)
Add: NCI% x Ss post-acqn profits (W2)
X
X
X
W5) Group retained earnings

100% P
Add: Ps % of Ss post acqn retained earnings (Ps% x (W2))
X
X
X
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Example 5 - Workings
Matthews purchased 80% of Jones for $600,000 two years ago when Joness retained earnings
showed a balance of $100,000.
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Non-current assets
Investment in Jones
Current assets
Total assets
Equity share capital ($1)
Retained earnings
Liabilities
Matthews
$000
1,000
600
800
2,400
Jones
$000
500
600
1,100
500
800
1,300
1,100
2,400
200
400
600
500
1,100
Matthews measures the non-controlling interest using the fair value method.
The fair value of Joness equity shares was $200,000 at acquisition
Prepare the consolidated statement of financial position for the Matthews group for the
year-ended 31 December 20X5.
2.5. Mid-year acquisition

If a subsidiary is acquired mid-year the issue revolves around calculating the retained
earnings at the acquisition date. To calculate the retained earnings figure at the acquisition
date we assume, unless told otherwise, that the profits for the year made by the subsidiary
have accrued evenly and adjust either the opening or closing retained earnings figure.
Illustration Mid-year acquisition
Richard acquired 80% of Andys equity share capital on 1 August 20X5. Both have a year end
of 31 December 20X5.
Andys retained earnings at the end of the year were $600,000 and its profit for the year was
$120,000.
Assuming the profit accrued evenly during the year then the Andys retained earnings figure
at 1 August 20X5 is calculated as follows:
$600,000 (5/12 x $120,000) = $540,000
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3. Adjustments Group
3.1. Intra-company balances
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The intragroup receivable balance and intragroup payable balance should not be shown in
the consolidated accounts as we treat the group as a single entity.
Remove the payable
Remove the receivable
3.2. Cash in transit

The intragroup receivable and intragroup payable balance should be equal. If they are not
then it will be due to cash in transit.
Illustration Cash in transit
P has an intra-company trade receivable of $1,500 at the year-end due form S. This does not
agree with the corresponding $1,000 trade payable in S due to a cheque of $500 sent by S
immediately prior to the year-end, which P did not receive until after the start of the new
accounting year.
To account for the cash in transit and intra-company balances we need to:
1.
Record the cash in transit in the group accounts

DR Bank
CR Receivables
2.
$500
$500
Eliminate the equal intra-company balances

DR Payables
$1,000
CR Receivables
$1,000
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3.3. Unrealised profits

Inventory PUP - Need to remove the intra-group profit included in inventory held @ year-end (cost
structures)
X
Dr Retained earnings (of seller)
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Cr Inventory (CSFP)
If S is seller Adjust (W2)
If P is seller Adjust (W5)
Illustration Unrealised profits

P sells $100 goods to S at $125 and S has not sold the goods on by the end of the year.
Example 6 Unrealised profits

Statements of financial position as at 31 December 20X5
James
$000
Molly
$000
Non-current assets
PPE
Investment in Molly
900
800
500
-
Current Assets
700
600
2,400
1,100
500
800
1,100
2,400
200
400
500
1,100
Share Capital
Retained earnings
Current liabilities
1.
James bought 80% of the equity shares in Molly for $800,000 when the retained earnings
were $150,000.
2.
Non-controlling interest is measured using the fair value method.
3.
During the year Molly sold goods to James at $120,000 based on a mark-up of 20%. Half of
the goods remain in inventory at the year-end.
Prepare the James Group consolidated statement of financial position as at 31 December

20X5.
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3.4. Consideration
A parent may acquire a controlling interest in a subsidiary in other fashions as opposed to just
a cash payment.
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Other considerations are as follows:
Share for share exchange
Deferred cash consideration
Contingent consideration
Share for share exchange

1.
Calculate the number of subsidiary shares acquired
2.
Calculate the number of P shares issued
3.
Value the P shares issued
4.
Record the journal entry
Example 7 Share exchange

Harry acquired 80% of the 10 million ordinary $1 shares of Sally by oering a share exchange of one
for every four shares acquired. The fair value of Harrys shares is $3 per share.
Calculate the cost of investment for the acquisition and prepare the journal entry to record
the share issue.
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3.5. Deferred consideration

A parent may agree to pay cash in the future following the acquisition of the subsidiary. This
deferred consideration is recorded on acquisition at present value.
Example 8 Deferred consideration
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Pony acquired 80% of the 30 million $1 equity shares of Star on 1 January 20X5. The consideration
was through the oer of a share exchange of two shares issued for every three shares acquired and
a cash payment of $1 per share payable on 31 December 20X5. The fair value of the Panys equity
shares was $2 at 1 January 20X5.
The present value of $1 received in one years time is $0.91 at a rate of 10%.
Calculate the cost of the investment in Star at 1 January 20X5
The deferred consideration needs to be unwound to its final value and is done so using the
interest rate originally applied to discount back the original entry and is recorded as follows:
Dr
Finance cost
Cr
Deferred consideration liability
NOTE: The adjustment does not impact the fair value of consideration.
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Chapter 24
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CONSOLIDATED STATEMENT OF
PROFIT OR LOSS
X/12
Revenue
COS
-PUP (Inventory )
Gross profit
Dist costs
Admin exp.
Finance cost
Investment income
-Dividend from S
Profit before tax
Taxation
PFY
P
X
(X)
(X)
S
X
(X)
(X)
(X)
(X)
(X)
X
(X)
(X)
(X)
(X)
X
(X)
Adj.
(X)
X
Group
X
X
(X)
(X)
X
Parent ()
NCI = NCI% x Ss PFY
(X)
X
(X)
(X)
(X)
X
X
(X)
X
X
X
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Example 1 Basic consolidation

Statements of profit or loss for the year-ended 31 December 20X5
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Revenue
Cost of sales
Gross profit
Distribution costs
Finance costs
Investment income
Profit before tax
Taxation
Profit for the year
Vader
$000
1,645
(1,205)
440
(100)
(90)
250
(55)
10
205
(35)
170
Maul
$000
1,280
(990)
290
(70)
(50)
170
(30)
140
(28)
112
1.
On 1 July 20X5, Vader acquired 80% of the equity shares of Maul. It is the group policy to
measure the non-controlling interest at acquisition at fair value.
2.
Maul declared a dividend during the year of $10,000.
3.
Assume that profits accrue evenly during the year.
Prepare a consolidated statement of profit or loss for the Vader group for the year-ended 31
December 20X5
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1. Adjustments
1.1. Intra-group trading transactions
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E.g. sales, loans/debenture interest and management charges

Remove the expense adjustment column
Remove the income adjustment column
1.2. Unrealised profits

PUP adjustment on goods unsold at year-end (cost structures) by increasing CoS in sellers
column.
Example 2 Unrealised profits

Statement of profit or loss for the year ended 31 December 20X5
Revenue
Cost of sales
Gross profit
Operating expenses
Profit from operations
Finance cost
Profit before tax
Income tax expense
Profit for the year
Gary
$000
120,000
(70,000)
50,000
(20,000)
30,000
(2,000)
28,000
(6,000)
22,000
Nick
$000
90,000
(40,000)
50,000
(35,000)
15,000
(500)
14,500
(3,000)
11,500
Additional information
1.
Gary acquired 80% of Nick on 1 January 20X5. Goodwill on acquisition has been impaired by
$1m during the year and should be charged to operating expenses.
2.
During the year Nick sold $10m goods to Gary at a mark-up of 25% on cost. One quarter of
those goods are in inventory at the year end.
Prepare the Gary Group consolidated statement of profit or loss for the year to 31 December
20X5.
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IFRS 10 Consolidated Financial Statements defines control and tells us how to consolidate.
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 and the power to
direct the activities.
The following instances are where control is exerted:
power over more than half of the voting rights by virtue of an agreement with other
investors;
power to govern the financial and operating policies of the entity under a statute or
agreement;
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
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.
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Chapter 25
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ASSOCIATES
A shareholding of between 20% and 50% is assumed to give the investing company
significant influence over its investment.
This means it is treated as an associate and is equity accounted for in accordance with IAS 28
1. Group Statement of financial position Investment in

associate
The investment in associate is calculated as follows:
Cost of investment in A
Add: % of As post acquisition reserves
Less: impairment of goodwill
$
X
X
(X)
X
Example 1 Associate (SFP)

Penny bought 30% of the equity share capital of Alex on 1 January 20X5 for $250,000. Alexs profits
for the year were $170,000.
An impairment review was carried out at the end of the year and the investment in Alex was found
to be impaired by $20,000.
Calculate the investment in associate to appear in Pennys financial statements at 31
December 20X5.
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2. Group Statement of profit or loss Share of profit of

associate
A share of profit of associate is calculated as shown below and shown immediately before
profit before tax.
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% of As profit for the year

Less: goodwill impaired during the year
X
(X)
X
IAS 28 Investment in Associates evidences the following additional ways in which significant
influence can arise:
Representation on the board of directors
Participation in the policy making decision
Material transaction between the investor and investee
Interchange of managerial personnel
Provision of essential technical maintenance
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E. MANAGEMENT OF WORKING CAPITAL, CASH

AND SOURCES OF SHORT-TERM FINANCE
Chapter 26
CASH MANAGEMENT
A business can be profitable whilst at the same time be losing cash. It is vitally important for a
business therefore to ensure that it does not just focus on profitability but also manage its
cash position.
To ensure that the business can determine if it is generating or spending cash overall it will
need to prepare cash flow forecasts.
A cash flow forecast will identify exactly when the cash inflows and outflows will arise which
can then help identify when the business will have either cash surpluses or cash deficits.
Inflows
Cash sales
Cash from credit customers
X
X
X
X
X
X
Outflows
Cash purchases
Cash payments to credit suppliers
Cash expenses
Capital expenditure
Interest
Taxation
(X)
(X)
(X)
(X)
(X)
(X)
(X)
(X)
(X)
(X)
(X)
(X)
(X)
(X)
(X)
(X)
X/(X)
X
X
X/(X)
X
X
X/(X)
X
X
Net movement
Opening balance
Closing balance
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1. Cash receipts from credit customers

Information from predicted future sales and the cash settlement by customer is used to
calculate the cash received from credit customers.
Example 1 Cash inflows
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Sales in December were $10,000 and are expected to increase by 10% each month from the start of
the year
90% of the sales are made on credit terms, the remainder for cash, and credit customers settle the
balance as follows:
1.
60% in the month of sale
2.
40% in the month following sale
Calculate the cash inflows for January and February.
2. Cash payments to credit suppliers

Information from predicted sales can be used to calculate the cost of sales using cost
structures.
Stock holding policies can be used to determine purchases and from this we can determine
the cash payments to credit suppliers.
Example 2 - Cash outflows

Sales in December were $10,000 and are expected to increase by 10% each month from the start of
the year
A constant gross profit margin on 40% is expected
Inventory levels are maintained at 20% of the following months sales
Suppliers are paid in the month following purchase.
Calculate the cash payments to credit suppliers for January and February.
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Example 3 Cash flow forecasts

CF manufactures a single product and is preparing monthly budgets for the first three months of
20X5. The cash balance at the end of December 20X4 is expected to be $50,000.
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The following standard revenue and cost data is available:

Selling price
$1500 per unit
Materials
2 kg per unit at $240 per kg
Labour
$160 per unit
Direct expenses
$140 per unit
Sales in January and February 20X5 are forecast to be 10,000 units in each month. As a direct result
of marketing expenditure of $95,000 in March 20X4, sales are expected to be 11,000 units in March
and to increase by 1,000 units in each subsequent month.
30% of sales are paid for when they occur and 70% of sales are paid for in the month following sale.
Stocks of finished goods at the end of each month are required to be 20% of the expected sales for
the following month. Stocks of materials at the end of each month are required to be 50% of the
materials required for the following months production.
Materials are paid for in the month following purchase.
Labour and direct expenses are paid for in the month in which they occur. Overheads for
production, administration and distribution will be $32,000 per month, including depreciation of
$10,000 per month. These overheads are payable in the month in which they occur.
CF has a $500,000 bank loan at 5% per annum on which it pays interest twice per year, in March
and September.
Prepare the cash flow forecast for CF for the three months of 20X5.
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92
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CIMA F1 93
Chapter 27
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SHORT-TERM FINANCE AND CASH

INVESTMENT
On preparation of the cash flow forecast the businesses can then identify whether it needs to
raise short-term finance is there is a cash deficit or alternatively deposit cash if it has a surplus
cash balance.
1. Short-term finance
1.1. Trade payables
A company can delay the payment due to suppliers, which eectively acts as a source of
finance. It is therefore using the credit terms on oer by its supplier.
This is a risky strategy as if cash flow diculties occur then the supplier may no longer supply
the company.
1.2. Overdrafts
An overdraft is a facility provided to the company by a bank whereby the company can
borrow up to a predetermined limit on its bank account.
Interest is paid on any amounts of cash lent by the bank and the bank has the right to recall
the overdraft facility on demand.
1.3. Short-term loans

A short-term loan is an agreement between the company and the bank to borrow a set
amount of cash that is then repayable over a fixed period.
1.4. Debt factoring

Debt factoring is where a companys receivables are sold to a third party (a debt factoring
company) for cash. The debt factoring company then collects the cash on behalf of the
company for an agreed fee.
The factor is often more successful at enforcing credit terms leading a lower level of debts
outstanding. Factoring is therefore not only a source of short-term finance but also an
external means of controlling or reducing the level of debtors.
2. Short-term cash investment

A company needs to consider the following principles of investing when deciding on how to
invest short-term cash:
Maturity
Risk
Security
Yield
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2.1. Interest bearing deposits

A company can deposit excess funds at a high street bank and receive interest on the
amounts deposited.
It is very low risk as banks will be able to repay the amounts deposited but also carries a low
level of return.
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The liquidity of the funds depends on the specific nature of the deposit account oered.
2.2. Short-term treasury bills

A company can purchase treasury bills which are issued weekly by governments. The bills do
not pay interest but the company pays less than the face value that is repaid on maturity.
They are highly liquid as they can be sold before their maturity date.
2.3. Bills of exchange

A bill of exchange is simply an agreement to pay a certain amount at a certain date in the
future, in essence an IOU. No interest is payable on the note but is implicit in the terms of the
bill.
2.4. Certificates of deposit

A fixed-term (one-month, three-month, six-month) investment with a bank or credit union,
carrying a fixed rate of interest. The deposit is usually insured and so carries minimal risk,
making it similar to a bank deposit.
2.5. Commercial paper

A fixed-term investment of less than 270 days, which is purchased at a discount and carries
lower interest rates than bonds. The interest rate is higher for longer dated commercial
papers.
Example 1 Short-term cash investment

A company has surplus funds to invest for a short-term period of 3 months and has the two
following investments to consider:
Treasury bills
Purchase the central banks treasury bills for $995 per $1,000 today for a period of 91 days.
Bank deposit account
Invest in a 30 day notice bank deposit account with a variable rate of interest of 2.5% per annum,
payable quarterly.
Explain the advantages and disadvantages to the company of each of the investments, using
calculations where relevant.
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Chapter 28
WORKING CAPITAL
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1. Definition
Working capital is the amount of current assets (inventory, receivables and payables) that a
business needs to maintain in order to fund its debts as they fall due.
The ability of a company to pay its obligations as and when they fall due (its liquidity) is a
major concern of any credit analysis.
Short term liquidity can be assessed by comparing current assets with current liabilities in a
variety of forms:
Working Capital = Current Assets - Current Liabilities.
A working capital surplus represents a cushion of protection for current creditors; it indicates
the amount by which the value of current assets could decrease still leaving enough to repay
current liabilities from the sale of current assets.
The optimum amount of working capital varies considerably from company to company and
from industry to industry, thus the nature of the company's business and the quality of its
assets must be considered.
Companies functioning within industry sectors with short production/sales cycles (e.g.
supermarkets) can generally function satisfactorily with a much smaller amount of working
capital than those with a long production cycle (e.g. heavy engineering).
2. Working capital policies

Inventory needs to be managed to ensure the correct amount is held to meet customer
demand, without holding too much that results in additional costs to the business.
Cash from credit customers needs to be collected on a regular basis to ensure the risk of
irrecoverable debts is kept to a minimum.
Payment made to credit suppliers need to be made on a regular basis as any delay or default
could lead to the loss of supplier goodwill.
The business needs to finely balance the requirements of having the correct level of current
assets, whilst ensuring the finance used to fund the investment in current assets is
appropriate.
A HIGH level of working capital will mean the business is always able to respond to changes in
requirements but holding high levels of inventory/receivables/cash is expensive.
A LOW level of working capital is less expensive but the company may not be able to respond
to a change in demand.
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A companys policy on working capital will be influenced by the risk relating to working
capital and will lead to one of the following approaches:
Conservative Attempts to reduce the risk by holding high levels of working capital.
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High levels of finished goods

Generous customer payment terms
Prompt payment to suppliers
Unproductive assets, increased finance cost and cash flow issues
Aggressive Attempts to reduce the finance cost and increase profitability.
Reduction in inventory levels

Improved credit control
Delaying payment to suppliers
Increased risk of system breakdown and loss of goodwill with suppliers and
customers
3. Working capital financing

The financing of working capital is done with either short-term or long-term financing, with
short-term financing being usually cheaper.
Permanent current assets a core level of investment in inventory and receivables e.g.
a buer level of inventory, a minimum level of cash kept in the bank
Fluctuating current assets the increases/decreases in receivables/payables

Assets ($)
Fluctuating current
assets
Short-term
funds
Short-term
funds or longterm funds?
Permanent current assets
Long-term
funds
Non-current assets
Time
Conservative - Mostly long term finance used. All permanent and most fluctuating
current assets are funded using long term finance.
Short-term finance when current assets increase

Cash surplus if current assets are low
Aggressive - Mostly short term finance used. All fluctuating and part of the permanent
current assets are funded using short term finance.
Increased risk of liquidity problems

Cheaper and flexible
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Moderate - Permanent current assets are funded using long term finance.
Fluctuating current assets are funded using short term finance.
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4. Measuring working capital

Working capital ratios can be calculated to determine how much working capital a business is
holding and to see if it has too much or too little.
4.1. Current ratio

Current ratio =
Current assets
Current liabilities
A current ratio of over one indicates that a company has a higher level of current assets than
current liabilities and should, therefore, be in a position to meet its short term obligations as
and when they fall due. However, some companies function adequately on current ratios of
less than one whilst others need a much higher ratio. Generally the more liquid the current
assets are the higher this ratio will be.
Trends are dicult to analyse but generally higher ratios indicate greater liquidity. However,
an increase may reflect a high level of unsaleable stock or overdue receivables whereas a
decrease may result from greater eciency.
Some factors to consider:
Asset quality
Seasonality
4.2. Quick ratio (acid test)

Quick ratio (acid test) =
Current assets - inventory

Current liabilities
This quick ratio shows how easily a company can meet its current obligations using funds
raised from quick assets (those assets which can be converted quickly into cash).
A comparison of the quick ratio and current ratios which shows increases in both, but with
the current ratio increasing more, would indicate that the company has been building up
stock.
4.3. Inventory days

Inventory days =
Inventory
x 365
Cost of sales
Shows how long a business is holding its inventory. A higher number of days inventory might
indicate holdings of obsolete or unsaleable inventory, but it might also signify a purchase of
raw materials now in anticipation of an increase in price later.
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4.4. Trade receivables collection period

Trade receivables collection period =
Trade receivables
x 365
Revenue
Providing revenue is evenly spread throughout the year the ratio will indicate how eectively
debts are being collected.
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An increase in the ratio of receivables to revenue could, providing the proportion of cash
sales has not increased, indicate one of the following:
Receivables are being given or are taking longer to pay. What are the terms of trade?
The total receivables figure includes long outstanding debts. Should provisions be
made?
4.5. Trade payables payment period

Trade payables payment period =
Trade payables
Cost of sales
x 365
If purchases are spread evenly throughout the year, this ratio will show the length of credit
the company is taking. An increase in the ratio may indicate that more reliance is being
placed upon the payables to finance the business. A drop in days may indicate that a
company is taking cash discounts or may indicate suppliers are cutting credit terms because
of the company's decreased creditworthiness.
Example 1 Liquidity ratios

Ariel has the following balances under current assets and current liabilities:
Current assets
Inventory
Trade receivables
Bank
Current liabilities
Trade payables
Interest payable
$
50,000
70,000
10,000
88,000
7,000
Calculate the current ratio and the quick ratio.
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Example 2 Eciency ratios

Extracts from a companys trial balance at the end of its financial year are given below:
$000
2,600
1,800
1,650
220
350
260
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Sales revenue (85% on credit)

Cost of sales
Purchases (90% on credit)
Inventory of finished goods
Trade receivables
Trade payables
Calculate the following working capital ratios:

(i) Inventory days
(ii) Trade receivables days
(iii) Trade payables days
Example 3 Working capital requirement

Profit and loss account extract
Revenue
Gross profit
$000
250
90
The operating cycle has been calculated as:

Inventory
68 days
Receivables
88 days
Payables
114 days
Calculate the investment in working capital.
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CIMA F1
5. Cash operating cycle

The operating cycle is the length of time between the companys outlay on raw materials,
wages and other expenditures and the inflow of cash from the sale of goods.
Inventory days
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Credit purchase
Receivable days
Credit sale
Cash receipt
Cash payment
Payable days
Operating cycle
An increase in the operating cycle shows that cash is not being recovered as quickly from
business activities, which can cause cash flow problems.
A business will try to reduce the length of the cash operating cycle through careful
management of inventory, receivables and payables.
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Chapter 29
WORKING CAPITAL MANAGEMENT
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1. Inventory management
Many companies, particularly those involved in manufacturing, will hold levels of stock to
meet expected customer demand. It is an important consideration as holding stock incurs
costs but in order to reduce level of inventory and the associated cost the risk of stock out
arises.
The costs of inventory management that will need to be controlled are as follows:
Ordering costs (independent of order size)
Holding costs
cost of the investment in stock

Storage
Insurance
Deterioration
Obsolescence
Theft
Stock shortage costs
Administrative
Delivery
Lost sales/contribution
Loss of customers
Purchase costs of new supply
Production stoppages
Purchase cost
Bulk discounts
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2. Economic order quantity (EOQ)

The order quantity that minimizes the total annual cost (annual holding cost plus annual
ordering cost).
Annual ordering cost = no. orders per annum x cost per order
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Annual holding cost = average stock x annual holding cost per unit
Q=
Cost
TAC
holding cost
ordering cost
Order size
2C o D
Ch
Co = Cost per order

D = Annual demand
Ch = Cost of holding one unit for one year
Example 1 - EOQ
The annual demand for an item of inventory is 32,000 units. The item costs $40 per unit to
purchase with order costs of $15 per order. The annual inventory holding costs are $1.20 per unit.
Calculate the economic order quantity for this item and the total annual cost of inventory.
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3. Bulk discounts
If a quantity discount is oered by a supplier, we can evaluate the discount simply by
comparing the total annual cost that would arise if the discount were accepted, against the
corresponding total annual cost at the EOQ.
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Example 2 Bulk discounts

Annual demand is 120,000 units. Ordering costs are $30 per order and holding costs are $20/unit/
annum. The material can normally be purchased for $10/unit, but if 1,000 units are bought at one
time they can be bought for $9,800. If 5,000 units are bought at one time, they can be bought for
$47,500.
What reorder quantity would minimize the total cost?
4. Trade receivables
A company will oer credit to its customers to increase the level of sales but this then
introduces an increased level of risk as the customer may default on payment.
To ensure that the business grants the correct amount of credit it should:
Assessing the credit status of its customer
Consider the specific terms it oers its customers
Plan on how it will management the collection of cash on a day to day basis.
4.1. Assessing credit status

The creditworthiness of all new customers must be assessed before credit is oered.
Existing customers must also be re-assessed on a regular basis.
The following may be used to assess credit status of a company:
Bank references
Trade references
Published accounts
Credit rating agencies
Companys own sales record.
4.2. Oering credit terms

Upon deciding to grant a customer credit status a business must then determine the specific
credit terms to be oered, which may include:
Credit limit value
Number of days credit
Discount on early payment
Interest on overdue account.
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4.3. Collecting debts

The collection of the debt is dependent on the credit controllers implementing a set of simple
but rigorous procedures.
Consideration should be given to the following actions at specific points in time following
initial invoicing and despatch of goods:
Send statement of account
Reminder letter
Send a second reminder letter
Threaten legal action
Take action to recover funds
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Control of trade receivable information

Trade receivables are usually analysed by the age of the debt to monitor the specific level and
amount of outstanding debt and aid collection.
This is simply a list of the customers who currently owe money, showing the total amount
owed, and the period of time for which money has been owed.
There is no set proforma for an age analysis of trade receivables, but a typical exam question
is shown below.
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5. Costs of financing receivables

Consideration needs to be given to the two costs that arise from oering customers trade
credit:
Interest cost
Settlement discounts
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5.1. Interest cost

The receivables balance needs to be financed, usually via short-term finance. Any change to
the receivables balance will lead to a change in the financing cost of the business.
Interest cost = Receivables balance Interest rate
Example 3 Interest cost

EFG has year-end receivable of $10m based on total sales for the year of $42m. Any increase in the
receivables is financed from an overdraft carrying an interest rate of 10%.
(a)
(b)
Calculate EFGs receivable days

Calculate the interest cost associated with financing the receivables.
5.2. Settlement discounts

Cash discounts are often given to encourage early payment by customers.
Advantages
Decrease in receivables and interest charge.
Reduction of irrecoverable debts.
Disadvantages
Diculty in setting the terms.
Increased uncertainty with regards the cash receipts being received.
May not reduce bad debt in practice.
Customers may pay over normal terms but still take the cash discount.
Example 4 Settlement discounts

EFG has year-end receivable of $10m based on total sales for the year of $42m. Any increase in the
receivables is financed from an overdraft carrying an interest rate of 10%.
EFG oers a discount of 2% for payment within 10 days.
Using the compound interest method, calculate the eective annualised cost of oering the
discount.
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Example 5 Annual interest

Dorys customers all pay their accounts at the end of 60 days. To try and improve its cash flow, Dory
is considering oering all customers a 1.5% discount for payment within 14 days. Assume overdraft
interest is 15%.
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Calculate the implied annual (interest) cost to Dory of oering the discount, using compound
interest methodology and assuming a 365 day year and an invoice value of $500.
6. Factoring
6.1. CIMA Ocial Definition
The sale of debts to a third party (the factor) at a discount, in return for prompt cash. A
factoring service may be with recourse, in which case the supplier takes the risk of the debt
not being paid, or without recourse, when the factor takes the risk.
Advantages
Saving in internal administration costs.
Reduction in the need for day to day management control.
Particularly useful for small and fast growing businesses where the credit control
department may not be able to keep pace with volume growth.
Disadvantages
Should be more costly than an eciently run internal credit control department.
Factoring has a bad reputation associated with failing companies, using a factor may
suggest your company has money worries.
Customers may not wish to deal with a factor.
Once you start factoring it is dicult to revert easily to an internal credit control.
The company may give up the opportunity to decide to whom credit may be given.
6.2. Invoice discounting

Selected invoices are used as security against which the company may borrow funds. This is a
temporary source of finance repayable when the debt is cleared. The key advantage of
invoice discounting is that it is a confidential service, the customer need not know about it.
The service is also provided by a factoring company.
Example 6 - Factoring
Coral limited currently has turnover of $25m. Receivables turnover is currently 40 days. Interest is
charged on the overdraft at 12%.
A factoring company has oered its services for an annual fee of 1% of turnover. The factoring
company can reduce receivables turnover to 15 days.
The factor will also generate an admin saving for the company of $15,000.
Should Coral limited accept the factors oer?
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7. Payables
Payables may be used as a source of short-term finance. If a company delays payment by a
further month then they now have a further months use of the cash.
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However, delaying payment may lose the company its credit status with the supplier and
could result in supplies being stopped.
Additionally, the company could lose the benefit of any settlement discount offered by the
supplier for early payment.
In exactly the same way as for receivables, we can calculate the annual effective cost of
refusing any settlement discount offered, and compare this with the cost of financing
working capital.
Example 4
A supplier offers a 2% discount if invoices are paid within 10 days of receipt. Currently we take 30
days to pay invoices and therefore do not receive the discount.
Calculate the annual % effective cost of refusing the discount.
Example 5
A company currently takes 40 days credit from suppliers on the basis that this is free finance.
Annual purchases are $100,000 and the company pays overdraft interest of 13%.
Payment within 15 days would attract a 1.5% quick settlement discount.
Should the company pay sooner in order to take advantage of the discount?
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8. Overtrading
Overtrading is the term applied to a company which rapidly increases its turnover without
having sucient capital backing, hence the alternative term under-capitalisation.
Output increase are often obtained by more intensive utilisation of existing fixed assets, and
growth tends to be financed by more intensive use of working capital.
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Overtrading companies are often unable or unwilling to raise long-term capital and thus tend
to rely more heavily on short-term sources such as overdraft and trade creditors. Debtors
usually increase sharply as the company follows a more generous trade credit policy in order
to win sales, while stock tends to increase as the company attempts to produce at a faster
rate ahead of increase demand.
Overtrading is thus characterised by rising borrowings and a declining liquidity position in
terms of the quick ratio, if not always according to the current ratio.
Symptoms of overtrading
Rapid increase in turnover
Fall in liquidity ratio or current liabilities exceed current assets
Sharp increase in the sales-to-fixed assets ratio
Increase in the trade payables period
Increase in short term borrowing and a decline in cash balance
Fall in profit margins.
Overtrading is risky because short-term finance may be withdrawn relatively quickly if

creditors lose confidence in the business, or if there is general tightening of credit in the
economy resulting to liquidity problems and even bankruptcy, even though the firm is
profitable.
The fundamental solution to overtrading is to replace short-term finance with long-term
finance such as term loan or equity funds.
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CIMA F1 109
F. FUNDAMENTALS OF BUSINESS TAXATION
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Chapter 30
TAXATION
1. What is Taxation?
Taxation is a contribution by individuals, property or businesses to state revenue. It can be
collected by the state/government either directly or indirectly and is the main way in which it
raises money to fund its expenditure.
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.
Note: Specific tax rules in dierent countries are not required in F1. Exam questions are
focused on fictitious countries and so it is only important to understand the general principles
of how taxation works.
Principles of taxation
The general principles of good taxation (Adam Smith) are that it should show:
Equity
Fair to dierent individuals, reflecting their ability to pay
Ecient
Cheap and easy to administer with regards collection and

timing
Economic eects
Consideration to dierent business sectors should be

considered in tax policies
2. Direct Taxation vs. Indirect Taxation

Direct Taxes
These are taxes which fall directly on the person or entity who is expected to pay it .
Tax on trading income the tax paid by a company based on its taxable profits.
Capital taxes a tax paid by a company based on taxable gains made on disposing of
an asset at above its original cost.
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. sales tax.
Taxable Person
This is the person accountable for the payment of a tax. It could be a business entity or an
individual.
Incidence
Incidence of tax is the distribution of the tax burden and can be divided into two elements
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Formal incidence the person or business having direct contact with the tax
authorities.
Eective (or actual) incidence the person or business which actually ends up bearing
the cost of the tax.
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Competent Jurisdiction
An authority whose tax laws apply to an individual or a company is referred to as a competent
jurisdiction.
Example 1 Good taxation
Which one of the following is not one of Adam Smiths characteristics of good tax?
A
Certainty
B
Equity
C
Simplicity
D
Eciency
Example 2 Indirect tax

An indirect tax is a tax that:
A
B
C
D
Is levied on an individual
Is based on earnings of an individual
Is paid indirectly to the tax authorities
Is levied on one person with the intention that it is passed on to another
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3. Types of taxation
Progressive taxes
these take an increasing proportion of income as income

rises.
Proportional taxes
these take the same proportion of income as income rises.
Regressive taxes
these take a decreasing proportion of income as income

rises.
Example 3 Types of taxation

ABC and XYZ are two businesses that are resident in the same tax jurisdiction.
ABC has taxable profits of $45,000 and has a tax liability of $4,500.
XYZ has taxable profits of $70,000 and has a tax liability of $8,750.
What type of tax could this be said to be?
4. Indirect taxation
Unit taxes
based on either a number or weight of items, e.g. import/

excise duties
Ad valorem taxes
based on the value of the items, e.g. sales tax
Excise duties
a tax charged on the amount of commodity (alcohol,

tobacco, oil products and motor vehicles)
Property taxes
a tax charged on the value of an individuals or companys

property (land and buildings)
Wealth taxes
a tax charged on the value of an individuals or companys

wealth (asset value)
Consumption taxes
a tax charged on the purchase of goods or services by

either an individual or a company.
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5. Value added tax - VAT

The mechanism of VAT is that it is an indirect, consumption tax that is collected in stages
along the supply chain.
VAT is applied on the purchase of goods and services (taxable supplies) and is a tax on the
final consumer of the goods.
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5.1. VAT rates

Each supply of goods or services in the course of business falls into one of the following types
of supply:
Standard rated taxed at the standard rate
Higher rated taxed at the appropriate higher rate
Zero rated taxed at the zero rate
Exempt not taxed
Although it may not be obvious there is a dierence 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.
5.2. 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 oset input tax is restricted.
It can reclaim input tax relating to all standard rated and zero rated supplies. It cannot
reclaim input tax relating to exempt supplies.
Other input tax incurred in the production of all supplies e.g. heat/light expenses, is reclaimed
on a pro-rata basis.
Example 4 VAT
AB is resident in County X, where monthly VAT returns are required. At the end of each month, AB
pays the net VAT due to the local tax authorities.
In the last month, AB purchase raw material costing $120,000, excluding VAT which is chargeable at
the standard rate of 15%.
The raw materials were converted into two products X and T. Produt X is zero rated and product t
is standard rated for VAT purposes.
Product X was sold for $90,000 and product T for $130,000, both excluding VAT.
Calculate the amount of VAT that AB should pay, assuming there to be no other VAT-related
transactions.
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6. Direct taxation
6.1. Corporate income tax and capital tax computations
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Companies pay corporate tax on the following:
Profits from trade and other activities
Gains on the sale of investments and assets
Other non-business income
6.2. Tax on profits from trade and other activities
Taxable profit
The profits calculated by the tax authorities using their

rules, on which they will apply the specific rate of tax to
calculate the income tax liability.
Accounting profit
The profits calculated under accounting rules using IFRS or

local GAAP, which follow accounting conventions (accruals,
substance) and are very subjective.
To calculate the corporate income tax liability it will be first necessary to calculate the taxable
trading profit from the accounting profit.
Income and expenses for non-trading activities are ignored in the computation.
Accounting profit
Less: non-trading income
$
X
(X)
X
Add: disallowable expenditure

Adjusted trading profit
Less capital allowances
X
X
(X)
Taxable trading profit
6.3. Non-trading income

The following are classified as non-trading income:
Rental income (taxable under Schedule A)
Interest receivable (taxable under Schedule DIII)
Dividends
Capital profit (e.g. on the sale of an asset)
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6.4. Disallowable expenditure

Items of expenditure incurred by the business that are not allowed as a taxable
deduction:
Entertaining (except sta entertaining)
Depreciation and amortisation
Taxes paid to other public bodies
Donations to political parties
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6.5. Allowable Expenditure

The following items of expenditure are often allowed:
Interest paid for trading purpose
Sta wages and employer national insurance contributions
Legal expenses
Advertising
Audit and accountancy costs
Trade subscriptions
Repairs
Taxes paid to lower levels of government
Example 5 Income tax computation (1)

Company M is resident in Country X and makes an accounting profit of $350,000 during the year.
This included depreciation of $45,000 and disallowable expenses of $20,000.
If the tax allowable depreciation totals $30,000, what is the tax payable?
Example 6 Income tax computation (2)

Company B is resident in Country X and makes accounting profit of $360,000 during the year. This
includes non-taxable income of $35,000 and depreciation of $40,000. In addition, $10,000 of the
expenses are disallowable for tax purposes.
If the tax allowable depreciation totals $30,000, what is the tax payable?
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CIMA F1 115
6.6. Accounting Depreciation vs. Tax Depreciation

Accounting depreciation and amortisation are subjective being applied using straight line or
reducing balance methods as well as at dierent rates.
Accounting depreciation and amortisation are therefore both disallowable trading expense.
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Tax depreciation follows the same principles as accounting depreciation but specific rules are
laid out by the tax authorities to remove any subjectivity.
Example 7 Tax depreciation
SunJones commenced business on 1 January 20X7 and entered into the following transactions for
plant and machinery:
Purchases
1 June 20X7
1 June 20X7
31 May 20X9
Sales
1 Jun 20X9
Industrial Building
Stitching machine (plant)
Packing machine (plant)
Machine bought on 1 June 20X7
$
260,000
47,000
58,000
9,500
SunJones qualifies for accelerated tax depreciation in the first-year on the plant at the rate of 50%.
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.
Calculate SunJoness tax depreciation for the three years ended 31 December 20X7, 20X8
and 20X9.
6.7. Trading Losses

If a business makes a trading loss instead of a trading profit no tax is payable in that year. The
loss is then allowed to be oset and loss relief claimed. The methods of loss relief include:
Carry forward of trading loss to oset against future trading income
Oset against other income and gains of the same accounting period
Oset against other income and gains of one or more previous accounting period
Group relief (see later)
2016 Examinations
CIMA F1
7. Gains on the sale of assets and investments (capital taxes)

Taxable capital gains of a company are subject to corporate tax. A capital gain is the taxable
profit on the disposal of an asset or investment.
Most assets or investments being disposed of are chargeable assets, however, some key
exemptions exist:
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)
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Some disposals are also exempt from tax:
Gifts to charities of land, buildings and certain works of art
Gifts of any type of asset to government institutions and museums
Capital tax computations

Capital gain
= Disposal proceeds less cost of the asset
Note: Some tax jurisdictions

allow the initial cost to be
adjusted up to its current cost
(indexation)
less allowable costs
Initial purchase costs

incurred
Improvements and
enhancements (not repairs)
Costs incurred to sell the
asset
Example 8 Capital tax computation

A company resident in Country X purchases land and buildings in January 20X5 for $155,000, of
which $55,000 was attributable to the land. The company incurred in the same month $55,000 for
refurbishment of the building, which was classified as capital expenditure according to local tax
regulators.
The land and buildings were sold for $425,000 in January 20X9, $100,000 of this price was
attributable to the land. The company paid $8,000 in disposal costs which were allowable for tax
purposes.
Local tax regulations allow for indexation of the purchase and refurbishment costs of the building.
The index has increased by 35% between January 20X5 and January 20X9. Capital gains are taxed
at the corporate income tax rate applicable in Country X.
Calculate the taxable gain arising on the sale of the land and buildings and the tax payable.
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CIMA F1 117
Rollover relief
Countries may allow for capital gains to be deferred where a business asset has been sold and
subsequently replaced.
Deferral is allowed as businesses often use the cash from the sale of the asset to buy the
replacement one thus leaving no cash available to pay any tax liability.
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The company is allowed to roll the gain arising on the sale against the base cost of the
replacement asset.
The eect 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, eectively deferring the tax due on the
original gain.
Capital Losses
Capital losses are calculated in the same way as capital gains. In most countries capital losses
are only ever oset against capital gains arising in the same accounting period or are carried
forward and oset against capital gains arising in future accounting period(s). Capital losses
are never carried back or oset against other income.
Example 9 Capital losses

Country X 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 oset against trading gains/losses or visa versa.
JKL is resident in Country X and has no brought forward losses as 1 January 20X7. JKL has the
following results for 20X7 to 20X8:
20X7
20X8
20X9
Trading profit / (loss) $000

(300)
550
700
Capital profit/(loss) $000

400
0
(150)
Calculate JKLs corporate income tax due for each of the years ended 31 December 20X7 to
20X9.
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CIMA F1
118
2016 Examinations
CIMA F1 119
Chapter 31
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REGULATORY ENVIRONMENT AND

INTERNATIONAL TAXATION ISSUES
1. Sources of taxation 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 dierent, 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.
2. Administration of Taxation
2.1. Principles of record keeping
Tax legislation usually required businesses to retain records. Records will usually be kept for:
Corporate tax
VAT or sales tax
Excise duties
Employee taxes
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.
2016 Examinations
CIMA F1
Sales Tax
In many countries adequate records must be kept including business documentation such as:
Orders and delivery notes
Purchases and sales books
Cash books and other account books
Invoices
Bank statements
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Excise duties
If a business has an overseas subsidiary, it will also need to retain records relating to transfer
pricing policy between the two entities.
Employee Taxes and Social Security
Employers keep detailed records of employees pay and amounts of tax and social security
deductions.
2.2. Deadlines and Penalties

Deadlines are set by tax authorities, to ensure that taxpayers submit tax returns and pay
outstanding tax on time.
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.
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.
3. Powers of tax authorities

Revenue authorities generally have powers to inflict penalties for various oences related to
corporation tax and sales tax/VAT. In addition to this they have the following powers:
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
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CIMA F1 121
4. Tax Evasion and Avoidance

4.1. 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.
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4.2. Tax Avoidance

Tax avoidance is tax planning to minimise the tax liability. It is strictly legal but usually
exploits loopholes in legislation.
4.3. Anti-Avoidance Provisions

As well as legislating, tax authorities use other administration methods to minimise evasion
and avoidance.
Reducing the opportunity by deducting tax at source and simplifying the tax structure.
Increasing the perceived risk by auditing tax returns and payments.
Reducing the overall gain by regularly reviewing the penalty structure.
Changing social attitudes towards evasion and avoidance by developing an honest,

equitable and customer friendly tax administration.
4.4. Ethical considerations

Ethical considerations can arise when businesses try to reduce their tax liability through use
of tax legislation.
It is felt that businesses may pursue an aggressive form of tax avoidance to try and reduce
their tax liability to amounts that public opinion may consider to be unfair.
Recent examples can be looked at with regards Google, Facebook and Starbucks in the UK.
2016 Examinations
CIMA F1
5. International Taxation Issues

5.1. Concept of Corporate Residence and Determining 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:
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Place of eective management and control the country from where control of the group is
exercised is deemed to be the country of residence for tax purposes.
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.
Place of permanent establishment (trade carried out or decisions made) if a business wholly
or partly conducts business through a fixed place of business
Permanent establishment includes:
A place of management
A branch
An oce
A factory
A workshop
A mine, oil or gas well
A building or construction site
It is therefore possible for an entity to be resident for tax purposes in more than one country
which will lead to the problem of double taxation. It is possible that an entity has income
taxed in the country it was earned and also in a dierent company where the company is
resident.
5.2. Double Taxation

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.
The OECD has suggested a model tax convention which states can adopt in their dealings
with each other for tax purposes.
The OECD model suggests that business profits of an enterprise can only be taxed in a
country where permanent establishment is apparent.
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CIMA F1 123
5.3. Foreign Taxation

Withholding 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.
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Double taxation treaties between countries aim to reduce or eliminate withholding taxes and
double taxation.
Underlying Tax
Dividends are paid out of post-tax profits. If a company in Country A 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.
The overseas dividend would be included as income for corporate tax purposes in the
receiving companys tax computation and would therefore be taxed again. This leads to
double taxation.
Example 1 Withholding and underlying tax (CIMA P7 5/06)

CW owns 40% of the equity share in Z, an entity resident in a foreign country.
CW receives a dividend of $45,000 from Z; the amount received after deduction of withholding tax
of 10%. Z had before tax profits for the year of $500,000 and paid corporate income taxes of
$100,000
Required
(a) Calculate the amount of withholding tax paid by CW.
(b) Calculate the amount of underlying tax that relates to CWs dividend
5.3. Branch vs. Subsidiary
Branch
Same legal entity
Branch profits liable in main entitys tax
computation
Branch taxable gains liable in main
entitys tax computation
Losses can be set o in main entitys tax
return
Transfer of assets is not usually subject to
tax on capital gains
Subsidiary
Separate legal entity
Parent liable to tax on foreign dividends
received
Parent not subject to capital gains made
by subsidiary
Losses cannot usually be set o against
the parents profits
Transfer of assets may become subject to
tax on capital gains
Transfer pricing issues may arise
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124
2016 Examinations
CIMA F1 125
ANSWERS TO EXAMPLES
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A. Regulatory environment and corporate governance

Chapter 1
Regulatory environment
Answer 1 Ethics
D
Independence is not one of the fundamental principles in CIMAs code of ethics.
Answer 2 Regulatory bodies

C
The IASB is not responsible for overall supervisory body of the IFRS organisations, this is the
responsibility of the IFRS Foundation
Chapter 2
External audit and the audit report
Answer 1 Audit opinion (1)

D
A qualified opinion is issued when there is either a material misstatement of insucient

appropriate audit evidence but it is not pervasive
Answer 2 Audit opinion (2)

If an external auditor does not agree with the directors accounting treatment of a mterial item in
the accounts, the first action they should take is to FORCE/PERSUADE the directors to change the
accounting treatment of the item in the accounts.
Chapter 3
Corporate Governance
No examples
2016 Examinations
CIMA F1
B. Financial Accounting and Reporting

Chapter 4
Conceptual Framework for Financial Reporting
Answer 1 Framework (1)
The format of financial statements is covered in IAS 1 Presentation of Financial Statements
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Answer 2 Framework (2)
Timely information is not an element of reliability.
Chapter 5
IAS 1 Presentation of Financial Reporting

No examples
Chapter 6
IAS 7 Statement of Cash Flows

Answer 1 Cash and cash equivalents
Government bonds
Cash
Overdraft
Total
20X5
$000
1,200
400
20X4
$000
1,000
-
(150)
1,600
850
Movement
$000
750
Increase
Answer 2 Direct Method

$000
Cash received from customers
(400 + 4,700 500)
Cash payments to suppliers
(300 + 3,300 450)
Cash payments to employees
Cash payments for operating expenses
4,600
(3,150)
(580)
(430)
440
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CIMA F1 127
Answer 3 Indirect Method

$000
Profit before tax
Depreciation
Finance cost
2,850
850
500
700
400
(1,300)
4,000
(500)
(350)
Inventory
Receivables
Payables
Interest paid
Tax paid
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$000
3,150
Answer 4 Interest/tax paid

Interest paid (W)
Tax paid (W)
X
(470)
(380)
X
Workings Interest paid

Interest payable
B/f
90
Bank ()
470
500
C/f
120
Finance cost (SPL)
590
590
Workings Tax paid

Tax payable
B/f current tax
Bank ()
380
C/f current tax
180
560
Tax expense (SPL)
210
350
560
2016 Examinations
CIMA F1
Answer 5 Profit or loss on disposal

$
Operating Activities (extract)
Gain/loss on disposal of PPE
(25,000)
(Profit = 250,000 225,000)
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Investing Activities (extract)

Proceeds from sale of PPE
250,000
Answer 6 Acquisition of PPE

B/f
Revaluation
(500 150)
Cash - additions ()
PPE (CV)
12,500
Depreciation
350
Disposal
850
100
1,350
C/f
14,150
13,200
14,150
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CIMA F1 129
Answer 7 Statement of cash flows
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Statement of cash flows for the year ended 31 December 20X5

$000s
Profit before tax
196
Depreciation
59
Loss on disposal of PPE
9
Finance cost
14
(2)
Inventory
(8)
Receivables
6
Payables
274
Interest paid
(14)
Tax paid (= 40 + 62 47)
(55)
Investing Activities
Proceeds from sale of PPE (W)
6
Purchase of PPE
(45)
Cash generated from investing activities
Financing Activities
Proceeds from issue of shares
16
= (180 + 18) (170 + 12)
Loan issue/repayment
(150)
Dividend paid
(36)
Cash generated from financing activities
Change in cash and cash equivalents
Opening cash and cash equivalents
Closing cash and cash equivalents
$000s
205
(39)
(170)
(4)
28
24
Workings
Profit/loss on disposal = Proceeds
Carrying value
(9,000)
= Proceeds
(27,000 12,000)
Proceeds
= 15,000
9,000
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B/f
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Cash - additions ()
Disposal ()
C/f
CIMA F1
PPE (Cost)
780
Disposal ()
27
C/f
798
45
825
825
PPE (Acc depn)

B/f
112
Depreciation
59
12
159
171
171
130
2016 Examinations
CIMA F1 131
Chapter 7
IAS 16 Property, plant and equipment
Answer 1 Initial Recognition
$
90,000
3,500
12,000
14,000
119,500
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Purchase price (net of trade discount)

Shipping & handling charges
Pre-production testing
Site preparation costs (excl. error)
Total
Answer 2 Change in useful life

To calculate the new depreciation charge under the change in usefule life we apply the new life to
the carrying value at the date of change.
$25,000,000
Annual depreciation (old) =
= $2,500,000 per annum
10 years
Carrying value @ 31 December 2014
Annual depreciation (new) =
=
=
$25,000,000
$17,500,000
(3 x $2,500,000)
$17,500,000
= $3,500,000 per annum
5 years
Carrying value @ 31 December 2015
=
=
$17,500,000
$14,000,000
$3,500,000
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CIMA F1
Answer 3 Change in method

To calcualte the new deprecition charge the new method is applied to the carrying value at the
date of change.
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Cost (1 Jan X4)

Depn (X4)
= 80,000 x 20%
Carrying value (31 Dec X4)
Depn (X5)
= 64,000 x 20%
Depn (X6)
= 51,200 x 20%
Depn (X7)
= 40,960 x 20%
Depn (X8)
= 32,768 x 20%
Annual depreciation (new) =
$
80,000
(16,000)
64,000
(12,800)
51,200
(10,240)
40,960
(8,192)
32,768
(6,554)
26,214
$26,214
5 years
= $5,243
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CIMA F1 133
Answer 4 Revaluation
SFP (extract)
SPLOCI(extract)
$
Non-current assets
PPE (W)
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Equity
Revaluation surplus
573,913 Depreciation (PL)
(26,087)
Revaluation gain (OCI)
140,000
133,913
SOCE (extract)
B/F
Revaluation in the year
Reserve transfer
C/F
Retained
earnings
$
X
6,087
Revaluation
surplus
$
140,000
(6,087)
133,913
Workings
Cost (1.1.X5)
(=500,000/25 x 2 years)
Carrying value (31.12.X6)
Dereciation
(=600,000/23)
$
500,000
460,000
600,000
140,000
(20,000)
(26,087)
(6,087)
573,913
133,913
(40,000)
2016 Examinations
CIMA F1
Answer 5 Disposal of a revalued asset

SPLOCI(extract)
$
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Profit on disposal
(=550,000 456,522 (W))
93,478
SOCE (extract)
B/F
Reserve transfer
C/F
Retained
earnings
$
X
Revaluation
surplus
$
120,522
120,522
(120,522)
Workings
Cost (1.1.X5)
(=400,000/25 x 2 years)
Dereciation
(=500,000/23 x 2 years)
$
400,000
368,000
500,000
132,000
(32,000)
(43,478)
(11,478)
456,522
120,522
(32,000)
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CIMA F1 135
Chapter 8
IAS 23 Borrowing costs
Answer 1 Specific borrowing
Borrowing costs = $10 million x 5% x 9/12
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= $375,000
Answer 2 General borrowing

%
4%
3%
4% bank loan
3% bank loan
Weighted average
Capitalised
Ave.
1
1.2
2.2
2.2
65
3.38%
=
=
=
=
$m
25
40
65
x 100%
($10m x 3.38%)
$0.59m
($15m x 3.38% x 6/12)
Chapter 9
IAS 20 Government grants
Answer 1 Grants and depreciable assets
The property, plant and equipment will be capitalised on the statement of financial position as a
non-current asset at its cost of $10 million.
It will be depreciated over its 10 year useful life and therefore $1 million of depreciation will be
charged through profit or loss each year. The carrying value of the PPE will be reduced by the same
amount each year.
The government grant is for a depreciable asset and so the $2 million will be spread over the same
life as the PPE.
As Tweddle has met the conditions for the grant the $2 million will be recognised as deferred
income on the statement of financial position.
It will be spread/amortised over 10 years and therefore $0.2 million income will be shown in profit
or loss each year, with the deferred income being reduced by the same amount each year.
Tweddle will also split the deferred income at the reporting date between current and non-current
liabilities.
The statement of cash flows will show a payment to acquire PPE of $10 million and grant income of
$2 million in investing activities.
The depreciation and amortisation of government grants are both non-cash items in profit or loss
and will need adjusting in operating activities if using the indirect method.
2016 Examinations
CIMA F1
Chapter 10
IAS 40 Investment Properties
Answer 1 Investment property and change of use
Addlington will treat the property using IAS 16 for the first six-months of the year before applying
IAS 40 once the change in use of the property took place.
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The property will be depreciated for the first six-months of the year resulting in a depreciation
expense through profit or loss of $0.5 million ($20 million/20 years x 6/12), thus reducing the
carrying value to $19.5 million ($20 million - $0.5 million).
The property is revalued to its fair value of $21 million on 1 July 2015 under IAS 16, giving a gain
through other comprehensive income of $1.5 million ($21 million - $19.5 million).
The property is now classified as investment property and no longer depreciated.
It is revalued to a fair value of $21.6 million at the reporting date with the gain of $0.6 million going
through profit or loss.
Chapter 11
IAS 38 Intangible Assets

Answer 1 Intangibles
The purchase of the patent should be capitalised at $15 million and amortised over its useful life.
The $6 million spent on the investigative phase is essentially research and should be expensed
through profit or loss as incurred.
The $8 million subsequently spent after completion of the research phase is development
expenditure and is capitalised as an intangible non-current asset on the statement of financial
position.
It is not yet amortised as the project is not yet complete but an impairment review should be
carried out to see if the asset has lost value.
The $1.5 million spent on marketing and training should both be expensed through profit or loss
immediately.
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CIMA F1 137
Chapter 12
IAS 36 Impairment of Assets
Answer 1 Impairment
SFP (extract)
SPLOCI(extract)
$
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Non-current assets
PPE (W)
18,995 Depreciation (W)
5,000
Impairment (W)
6,045
Workings
Annual depreciation
$50,000
10 years
Carrying value @ 31 December 20X9
= $5,000 per annum
=
=
$50,000
$25,000
$24,000
Value in use
=
=
$5,000 X
$18,995
Recoverable amount (lower)
$18,995
Fair value less costs to sell

($26,000 - $2,000)
Impairment
=
=
$25,000
$6,045
($5,000 x 5 years)
3,791
$18,995
Answer 2 Impairment (CGU)

Goodwill
Franchise costs
Restored furniture (at cost)
Buildings
Other net assets
$000
90,000
50,000
90,000
100,000
50,000
370,000
$000
(90,000) 2
(20,000) 1
3
(6,667)
(3,333) 3
(120,000)
$000
30,000
90,000
93,333
46,667
250,000
1The
franchise is specifically impaired
2The
goodwill is fully impaired
3The
remaining impairment is allocated to the other assets on a pro-rata basis.
2016 Examinations
CIMA F1
Chapter 13
IFRS 5 Non-current assets held for sale and discontinued operations
Answer 1 NCA-HFS
SFP
$000
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Current assets
NCA-HFS
Depreciation
SPLOCI
$000
100
15,100
OCI
Gain on revaluation
1,400
Workings
Historic cost
$000s
Revalued amount
Depreciation 300 x 4/12
Revaluation
model
$000s
Revaluation
reserve
14,000
(100)
13,900
15,100
(=15,400 300)
1,400
Answer 2 Discontinued operations
31 December 2015
The operation is not being sold so cannot be classified as held for sale and neither is it a
discontinued operation as it is still operating until 31 March 2016. Angola is firmly committed to
the closure but it hasnt taken place and so is included in continuing operations. A disclosure in the
notes can be made of the intention to close the operation in the following year.
31 December 2016
The operation is now classified as a discontinued operation as it has now ceased operating.
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2016 Examinations
CIMA F1 139
Chapter 14
IAS 19 Employee benefits
Answer 1 Defined benefit scheme
Statement of financial position (extract)
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Fair value of scheme assets

Fair value of scheme liabilities
Net pension asset/(liability)
$000
66,000
(75,000)
(9,000)
Statement of profit or loss and other comprehensive income (extract)

$000
Profit or loss
Operating costs
Current service costs
(9,000)
Past service costs
(8,000)
Financing costs
Interest expense
(3,200)
3,000

Re-measurement gain
(= 4,000 + 3,200) (W)
7,200
Workings
Assets
Opening
(5% x 60,000)
$000
60,000
5,000
Benefits paid out

Expected
Re-measurement gain ()
( asset)
3,000
(6,000)
62,000
4,000
66,000
Liabilities
Opening
Interest
(5% x 64,000)
Service costs
(9,000 + 8,000)
Benefits paid out
Expected
Re-measurement gain ()
( liability)
$000
64,000
3,200
17,000
(6,000)
78,200
(3,200)
75,000
Answer 2 Curtailment
The re-organistion has led to redundancies and therefore a significant number of employees will
have left the scheme as they are no longer entitled to earn nay future pension benefits.
The net liability on the statement of financial position will be $7 million ($48 million - $55 million)
and a gain will be shown through profit or loss of $5 million, being the reduction in the liability ($60
million - $55 million).
2016 Examinations
CIMA F1
Answer 3 Asset ceiling

The asset ceiling is the present value of the reductions in future contributions, above which the
value of the net pension asset cannot be recognised above.
The pension asset is currently above the asset ceiling so must be reduce to $26 million and the
reduction in value of $4 million ($30 million - $26 million) shown as a loss through profit or loss.
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Chapter 15
IAS 21 Foreign currency transactions

Answer 1 Functional currency
1 December 2015
DR
Purchases
CR
Payables
$97,561
$97,561
400,000 Dinar
= $97,561
4.1
31 December 2015
Retranslate the monetary balance (payable) at the closing rate (4.3 Dinar:$1)
400,000 Dinar
= $93,023
4.3
Reduction in payables = $97,561 - $93,023 = $4,538

DR
CR
Payables
Profit or loss
$4,538
$4,538
Do not retranslate the non-monetary balance (inventory), and leave it at $97,561 at the reporting
date.
10 January 2016
Translate the payment at the exchange rate on the day of the transaction
400,000 Dinar
= $90,909
4.4
=
DR
CR
CR
Payables
Bank
Profit or loss
$93,023
$90,909
$2,114
140
2016 Examinations
CIMA F1 141
Chapter 16
IAS 10 Events after the reporting period
Answer 1 Events after the reporting period
Non-adjusting events as the issue of shares does not give evidence of a condition that existed
at the year-end. The company would use the issue of shares in its calculation of basic EPS.
(ii)
An adjusting event as the legal action and its outcome give evidence of a condition the
existed at the reporting date. A provision of $80,000 would be made.
(iii)
An adjusting event that reduces the value of year-end inventory by $10,000 as it gives
evidence of the fall in value of the inventory held at the reporting date. Inventory included in
the accounts at the year-end would now be included at $15,000.
(iv)
A non-adjusting event as the condition did not exist at the reporting date. As the item is
material a disclosure of its nature and financial impact would be made in the notes.
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(i)
Chapter 17
IAS 2 Inventories
Answer 1 Inventory valuation
Material cost
Labour cost
Overheads
(=72,000/12,000)
Total cost
$/unit
3
2
6
11
NRV = $12 - $2 = $10

Total inventory valuation = (800 undamaged units x $11) + (200 damaged units x $10) = $10,800
Chapter 18
IAS 8 Accounting policies, changes in accounting estimates and errors
Answer 1 Accounting estimates
The change in method is a change in accounting estimate.
The changing of the capitalisation of finance costs is a change in accounting policy.
2016 Examinations
CIMA F1
Chapter 19
IAS 12 Income taxes
Answer 1 Current tax
SFP
SPL
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$000
Current liabilities
Tax payable
Profit before tax

Income tax (W)
Profit for the year
4,200
$000
X
(3,700)
X
Workings
C/f
Tax payable
B/f
SPL - Tax
500
3,700
4,200
4,200
4,200
Chapter 20
IFRS 8 Operating Segments

Answer 1 Operating Segments
An operating segment is one whose results are regularly reviewed by the chief operating decision
maker (CODM). The three segments reviewed by the CODM are therefore three operating
segments.
Two or more operating segments may be combined if they have similar economic characteristics.
So to combine the domestic operations and the international operations the two segments would
need to have similar levels of risk.
The biggest risk that is faced by Gulf within the two segments is the price risk. The revenue from
the domestic railways is regulated by the transport authority, so is subject to a dierent risk from
the international railways where it is determined by Gulf itself.
The other risk is from the oering of the contracts. The domestic railway contracts are awarded
from the transport authority whereas the international railway contracts are not awarded by any
authority and so both are subject to dierent levels of risk.
The operating segment disclosure note should therefore disclose the three segments separately
within the notes to the accounts.
Chapter 21
IAS 34 Interim financial Reporting
No examples
142
2016 Examinations
CIMA F1 143
Chapter 22
IFRS 13 Fair value Measurement
No examples
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Chapter 23
Consolidated Statement of Financial Position
Answer 1 Basic consolidation
Other assets
(1,500 + 1,200)
Total assets
Peter Group
$000
2,700
2,700

Retained earnings
1,000
1,100
2,100
Liabilities
(400 + 200)
600
2,700
Answer 2 Basic consolidation (continued)
Other assets
(1,900 + 1,450)
Total assets
Retained earnings
(=1,400 + (100% x (900 750))
Peter
Group
$000
3,350
3,350
1,000
1,550
2,550
Liabilities
(500 + 300)
800
3,350
2016 Examinations
CIMA F1
Answer 3 Non-controlling interest
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Other assets
(1,900 + 1,450)
Total assets
Pierre Group
$000

Retained earnings
(1,200 + (80% x (900 750))
3,350
3,350
1,000
1,320
2,320
Non-controlling interest
(25% x (250 + 750)) + (25% x (900 750))
230
2,550
Liabilities
(500 + 300)
800
3,350
Answer 4 Goodwill
(i)
Proportionate share of net assets method
FV of consideration
NCI at acquisition
(25% x 170,000)
FV of net assets at acquisition
(ii)
$
156,000
42,500
(170,000)
28,500
Fair value method
FV of consideration
NCI at acquisition
$
156,000
36,000
(170,000)
22,000
144
2016 Examinations
CIMA F1 145
Answer 5 Workings
Matthews
Group
$000
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Non-current assets
(1,000 + 500)
Goodwill (W3)
Current assets
(800 + 600)
Total assets
1,500
500
1,400
3,400
Equity share capital ($1)

Retained earnings (W5)
Non-controlling interest (W4)
Liabilities
(1,100 + 500)
500
1,040
1,540
260
1,800
1,600
3,400
Workings
W1)
Group Structure
Matthews
80%
Jones
W2)
W3)
Net assets of subsidiary

At reporting
date
Equity shares
200
Ret. earnings
400
600
Goodwill
NCI at acquisition (FV)
At
acquisition
200
100
300
Post
acquisition
300
600
200
800
(300)
500
2016 Examinations
CIMA F1
W4) Non-controlling interests

NCI @ acqn (W3)
Add: 20% x 300 (W2)
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100% P
Add: 80% x 300 (W2)
200
60
260
800
240
1,040
Answer 6 Unrealised profits

James
Group
$000
Non-current assets
PPE
(900 + 500)
Goodwill (W3)
1,400
Current Assets
(700 + 600 10 (PUP))
1,290
650
3,340
Share Capital
Retained earnings (W5)
Non-controlling interest (W4)
Current liabilities
(1,100 + 500)
500
992
248
1,600
3,340
Workings
W1)
Group Structure
James
80%
Molly
146
2016 Examinations
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W2)
W3)
W4)
CIMA F1 147
Net assets of subsidiary

At reporting
date
Equity shares
Ret. earnings
PUP
(20/120 x 120 x )
At
acquisition
200
400
Post
acquisition
200
150
(10)
590
350
240
Goodwill
NCI at acquisition (FV)
800
200
1,000
(350)
650

Non-controlling interests
NCI @ acqn (W3)
Add: 20% x 240 (W2)

100% P
Add: 80% x 240 (W2)
200
48
248
800
192
992
Answer 7 Share exchange

1.
No. S shares acquired = 80% x 10,000,000 = 8,000,000
2.
No. P shares issued = 8,000,000 x 1 / 4 = 2,000,000
3.
Value of P shares issued = 2,000,000 x $3 = $6,000,000 (cost of invrestment)
4.
Journal entry
Dr Investment
$6,000,000
Cr Share capital
$2,000,000
Cr Share premium () $4,000,000
2016 Examinations
CIMA F1
Answer 7 Deferred consideration

Share exchange
No. S shares acquired = 80% x 30,000,000 = 24,000,000
2.
No. P shares issued = 24,000,000 x 2 / 3 = 16,000,000
3.
Value of P shares issued = 16,000,000 x $2 = $32,000,000 (cost of investment)
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1.
Deferred consideration
PV of consideration = 24,000,000 x $1 x 0.91 = 21,840,000
Total consideration
= 32,000,000 + 21,840,000 = $53,840,000
Chapter 24
Consolidated Statement of Pro t or Loss

Answer 1 Basic consolidation
Revenue
(1,645 + (6/12 x 1,280))
Cost of sales
(1,205 + (6/12 x 990))
Gross profit
Distribution costs
(100 + (6/12 x 70))
(90 + (6/12 x 50))
Finance costs
(55 x (6/12 x 30))
Investment income
(10 (80% x 10))
Profit before tax
Taxation
(35 + (6/12 x 28))
Profit for the year
Profit attributable to:
Equity shareholders ()
Non-controlling interest
(20% x (6/12 x 112)
Vader
$000
2,285
(1,403)
882
(135)
(115)
632
(70)
2
564
(49)
515
503.8
11.2
148
2016 Examinations
CIMA F1 149
Answer 2 Unrealised profits

P
120,000
(70,000)
Revenue
COS
S
90,000
(40,000)
Adj.
(10,000)
10,000
Group
200,000
(100,500)
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PU
P
(25/125 x 10,000 x )
Gross profit
Op exp.
-Impairment
Finance cost
Profit before tax
Taxation
PFY
(500)
99,500
(20,000)
(2,000)
(6,000)
(35,000)
(1,000)
(500)
(56,000)
(2,500)
41,000
(9,000)
32,000
30,000
2,000
(3,000)
10,000
Parent ()
NCI = 20% x 10,000
Chapter 25
Associates
Answer 1 Associate
Cost of investment in A
Add: 30% x 170,000
Less: impairment of goodwill
$
250,000
51,000
(20,000)
281,000
2016 Examinations
CIMA F1
E. Management of working capital, cash and sources of short-term

finance
Chapter 26
Cash Management
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Answer 1 Cash inflows

January
February
1,100
9,540
10,640
1,210
10,494
11,704
Inflows
Cash sales
Cash from credit customers
Workings
Sales
Cash sales
Credit sales
Cash receipts
December
10,000
1,000
(10% x 10,000)
9,000
(90% x 10,000)
5,400
(60% x 9,000)
January
11,000
(10,000 x 1.1)
1,100
(10% x 11,000)
February
12,100
(11,000 x 1.1)
1,210
(10% x 12,100)
9,900
(90% x 11,000)
5,940
(60% x 9,900)
3,600
(40% x 9,000)
9,540
10,890
(90% x 12,100)
6,534
(60% x 10,890)
3,960
(40% x 9,900)
10,494
Answer 2 Cash outflows

December
January
February
March
12,100
(11,000 x 1.1)
7,260
13,310
(12,100 x 1.1)
7,986
2,662
2,420
7,502
6,820
7,502
Cost of sales (60%)
6,000
11,000
(10,000 x 1.1)
6,600
Closing inventory
Opening inventory
Purchases
Payment
2,200
2,000
6,200
-
2,420
2,200
6,820
6,200
Sales
10,000
150
2016 Examinations
CIMA F1 151
Answer 3 Cash flow forecasts

Cash flow forecast January March 20X5
Feb
March
Inflows
Cash sales
Credit sales
Total receipts
45,000
105,000
150,000
49,500
105,000
154,500
54,000
115,500
169,500
Outflows
Material
Labour
Direct expenses
Fixed overheads
Advertising
Interest
Total payments
48,960
16,320
14,280
22,000
101,560
48,960
17,920
15,680
22,000
95,000
199,560
53,760
19,520
17,080
22,000
12,500
124,860
48,440
50,000
98.440
(45,060)
98,440
53,380
44,640
53,380
98,020
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Jan
Net receipts/(payments)
B/f balance
C/f balance
Workings
Sales (units)
Sales ($)
Cash sales
Credit sales
December
January
February
10,000
10,000
11,000
150,000
150,000
165,000
45,000
45,000
49,500
(30% x 150,000) (30% x 150,000) (30% x 165,000)
March
12,000
180,000
54,000
(30% x 180,000)
105,000
105,000
115,500
(70% x 150,000) (70% x 150,000) (70% x 165,000)
126,000
(70% x 180,000)
Production (units)
Materials ($)
(x 2kg/unit x $2.40/kg)
Labour
(x $1.60/unit)
Direct expenses
( x $1.40/unit)
December
10,200
January
10,200
February
11,200
March
12,200
48,960
48,960
53,760
58,560
16,320
16,320
17,920
19,520
14,280
14,280
15,680
17,080
2016 Examinations
CIMA F1
Chapter 27
Short-term nance and cash investment
Answer 1 Short-term cash investment
In general terms, the company should carefully consider the following criteria:
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Risk as these funds can only be invested for 3 months, it would be inappropriate to consider high
risk investments.
Return clearly, the company will wish to maximize return. However, high returns can usually only
be achieved with high risk. As noted above, it is therefore likely that only relatively low returns will
be possible.
Liquidity the company needs to consider how easily the funds can be withdrawn. This will
depend on: the terms of the investments (ie how long are the funds tied up for?), what penalties
are there for early withdrawal and can the investment be sold on before maturity date?
Applying these principles to the specific investments:
Investment 1
Assuming the company is in a country with a stable economy, treasury bills are likely to be very low
risk. They are also highly liquid, as they can be readily sold on the money markets. The price
achieved would depend on general interest rates at the time of sale.
No interest is paid on bills, so the return will be earned purely by buying at a discount to the
redemption value. In this sense, the return is fixed (if held to redemption).
The annualised return = (1 + 5/1000)4 - 1 = 2.02%
Investment 2
A bank deposit is also likely to be very low risk, though maybe slightly higher than the treasury bill.
It is probably less liquid, as there will be penalty charges, and possible loss of interest, for early
withdrawal. Also, the deposit cannot be sold on.
The return can vary, which increases risk.
The eective annual rate, if the 2.5 % rate does not vary is:
(1 + 2.5/4)4 1 = 2.52%
This is higher than the return on the treasury bill.
At the end of the 30 day period, the company will then need to review its investment again.
152
2016 Examinations
CIMA F1 153
Chapter 28
Working Capital
Answer 1 Liquidity ratios
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Current ratio =
(50,000 + 70,000 + 10,000)

(88,000 + 7,000)
= 1.37:1
(70,000 + 10,000)
(88,000 + 7,000)
= 0.84:1
Quick ratio =
Answer 2 Eciency ratios

Inventory days =
220
1,800
x 365 = 44.6 days
Receivable days =
350
0.85 x 2,600
x 365 = 57.8 days
Payable days =
260
0.90 x 1,650
x 365 = 63.9 days
Answer 3 Working capital requirement

Working capital investment = $20,493 + $60,274 - $64,356 = $145,123
Payables =
114 days
365 days
x 110,000 = $64,356
Receivables =
88 days
365 days
x 250,000 = $60,274
Inventory =
68 days
365 days
x 110,000 = $20,493
2016 Examinations
CIMA F1
Chapter 29
Working Capital Management
Answer 1 EOQ
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2 x $15 x 32,000
$1.20
894 units
Answer 2 Bulk discounts

Ordering cost
Co x D
Q
Holding cost
Ch x Q
2
Purchase Cost
Total Cost
6,000
30 x 120,000
6,000
20 x 600
1,200,000
120,000 x 10.00
1,212,000
600
3,600
30 x 120,000
10,000
20 x 1,000
1,189,600
1,000
1,176,000
120,000 x 9.80
(9,800 / 1,000)
720
30 x 120,000
50,000
20 x 5,000
1,190,720
5,000
1,140,000
120,000 x 9.50
(47,500 / 5,000)
600*
1,000
5,000
*EOQ = (2 x 30 x 120,000) / 20 = 600 units

Therefore the company should choose a reorder quantity of 1,000 as this minimizes the total cost.
Answer 3 Interest cost
Receivable days =
10
x 365 = 86.9 days
42
Interest cost = 10% x $10 million = $1 million
Answer 4 Settlement discounts

Eective annual cost = (1 + 2.5/97.5) 365/( 87 10) - 1 = 12.8%
Oering the discount costs 12.8% and reduces the investment in receivables but these are financed
at a cost of 10%, which is cheaper and therefore the discount should not be oered.
154
2016 Examinations
CIMA F1 155
Answer 5 Annual interest

(1 + 0.02)365/(60 14)
1 = 0.188 = 18.8%
0.985
Therefore Dory should not oer the customers the discount as it is more expensive than the
overdraft at 15%.
r=
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Answer 6 Factoring
Reduction in Receivables
=
Sales x (Days / 365)
$25m x (40-15) / 365
$1,712,329
$
Reduction in overdraft interest

$1,712,329 x 12%
205,479
Admin Saving
Fee
15,000
(250,000)
(26,521)
Therefore Coral Limited should not accept the factors oer.

Answer 7 Yield to maturity
T
CF
0
14
4
(92)
5
100
IRR = 0.07 +
DF
(7%)
1
3.387
0.763
1.2
(1.2 + 1.9)
PV
(92)
16.9
76.3
1.2
DF
(8%)
1
3.312
0.735
PV
(92)
16.6
73.5
(1.9)
x (0.08 0.07) = 7.4%
Answer 8 Bond valuation

T
15
5
CF
6
100
DF @ 10%
3.791
0.621
PV
22.7
62.1
84.8
Bond value = 84.8/100 x $10,000 = $8,480
2016 Examinations
CIMA F1
D. Fundamentals of business taxation

Chapter 30
Taxation
Answer 1 Good taxation
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Answer 2 Indirect taxes
Answer 3 Types of taxation
Progressive tax
Answer 4 VAT
Input VAT = 15% x $120,000 = $18,000

Output VAT = 15% x $130,000 = $19,500
VAT payable = $1,500
Answer 5 Income tax computation (1)
Accounting profit
Depreciation
Disallowable expenses
Less: tax allowable depreciation
Tax payable @ 25%
$
350,000
45,000
20,000
(30,000)
315,000
78,750
Answer 6 Income tax computation (2)

Accounting profit
Less: non-trading income
Depreciation
Disallowable expenses
Less: tax allowable depreciation
Tax payable @ 25%
$
360,000
(35,000)
40,000
10,000
(30,000)
345,000
86,250
156
2016 Examinations
CIMA F1 157
Answer 7 Tax depreciation

Building
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Cost (1.1.X7)
260,000Cost (1.1.X7)
Tax depreciation
Tax depreciation
(13,000)
@ 5% cost (X7)
@ 50% (X7)
247,000
Tax depreciation
Tax depreciation
(13,000)
(X8)
@ 25% (X8)
234,000
Stitching
machine
47,000
Packing
machine
(23,500)
Tax depreciation
Balancing
(13,000)
(X9)
allowance ()
221,000Proceeds
Total
36,500
23,500
(5,875)
18,875
58,000
17,625Cost (1.1.X9)
Tax
(9.500)depreciation (29,000)
(X9)
9,500
29,000
51,500
Answer 8 Capital tax computation

Land
Cost = $55,000
Buildings
Cost = 155,000 55,000 = 100,000
Refurbishment = $55,000
Total building cost = $155,000
Indexed cost = 155,000 x 1.35 = 209,250
Capital gain
Capital gain = 425,000 (209,250 + 55,000) 8,000 = 152,750
Tax payable = 25% x 152,750 = $38,187.5
Answer 9 Capital losses
20X7
nil
nil
400
400
20X8
550
(300)
nil
250
20X9
700
nil
Nil
700
Tax @ 25%
100
62.50
175
Capital losses c/f
150
Trading profit
Loss relief
Capital gains
Taxable profit
2016 Examinations
CIMA F1
Chapter 31
Regulatory Environment and International Taxation Issues
Answer 1 Withholding and underlying tax
Withholding tax
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Dividend received
Withholding tax
(45,000/90 x 10)
Underlying tax =
$
45,000
5,000
50,000
50,000
(500,000 100,000)
x 100,000 = 12,500
158

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The best things

IMPORTANT!!! PLEASE READ CAREFULLY

A. REGULATORY ENVIRONMENT AND CORPORATE GOVERNANCE

B. FINANCIAL ACCOUNTING AND REPORTING

D. CONSOLIDATED FINANCIAL STATEMENTS (Group Accounts)

E. MANAGEMENT OF WORKING CAPITAL, CASH AND SOURCES OF SHORT-TERM FINANCE89

A. REGULATORY ENVIRONMENT AND

Local and international conceptual frameworks Accounting standards are driven by

Local and international financial reporting standards Accounting standards are

3. Sources of professional codes for ethics

Sources of ethical codes are as follows:

4. CIMA Code of Ethics for Professional Accountants

Professional competence and due care

Contains a materially false or misleading statement;

Contains statements or information furnished recklessly; or

Omits or obscures information required to be included where such omission or

4.3. Professional Competence and Due Care

Disclosing outside the firm or employing organization confidential information

Using confidential information acquired as a result of professional and business

4.5. Professional behaviour

5. Threats to ethical behaviour

a 'conflict of interest' which may inappropriately influence

When you are required to evaluate the results of a previous

Arising if promoting a position or opinion to the point that your

When you become so sympathetic to the interests of others as a

When you are deterred from acting objectively by actual or

6.1. Financial reporting standards

International Financial Reporting Standards (IFRSs) A global set of accounting

Local Generally Accepted Accounting Principles (Local GAAP) Accounting

6.2. Principles of financial reporting standards

6.3. Role and structure of regulatory bodies

Develop a set of high, quality, understandable, enforceable and globally accepted

Promote the use and application of those standards

Bring about convergence on national accounting standards and IFRSs

6.4. Standard setting process for IFRS

Issue new IFRS

Example 2 Regulatory bodies

Responsible for all IFRS technical matters

EXTERNAL AUDIT AND THE AUDIT

1. Powers and duties of the external auditors

Compliance with legislation

Truth and fairness of accounts

Adequate records and returns

Agreement of accounts to records

Consistency of other information

Information and explanation

Attendance at general meetings

Right to speak at general meetings

Rights in relation to written resolutions

Right to require laying of accounts

2. Content of the audit report

Respective responsibilities of directors and auditors making it clear that directors

Date and Signature

3. Types of audit opinion

True and fair

Emphasis of matter paragraph

Qualified opinion arises when there is either a material misstatement of insucient

Disclaimer of opinion insucient audit evidence and is pervasive.

Emphasis of matter paragraph

Example 1 Audit opinion (1)