ACCA Paper F7. Financial Management. theexpgroup.com

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1 Thank you for downloading this extract from our ExPedite notes to accompany your free online Course in a Coffee Break. To download a free complete set of our ExPress notes please visit Good luck with your F7 studies. ACCA Paper F7 Financial Management For exams in 2010

2 Chapter 2 IAS 1: Presentation of Financial Statements START The Big Picture IAS 1 is a cornerstone accounting standard that includes: Components of financial statements Core concepts True and fair override. It is virtually certain to be tested in the ACCA paper F7 exam. Page 2.1

3 Components of financial statements A full set of IFRS financial statements comprises the following primary statements (ie statements that must be shown with equal prominence as each other): Statement of financial position (previously called balance sheet) Statement of comprehensive income (comprising profit and loss statement and statement of other comprehensive income) Statement of changes in equity Statement of cash flows Comparative data for the previous year for each of the above. In addition, secondary statements are required being notes that explain the accounting policies and other significant explanations or useful drill down information. Question 2 of the F7 exam is likely to require presentation of financial statements from a trial balance with adjustments. A starting point in the exam is to be able to produce a skeleton set of which financial statements are required from memory. It s therefore necessary to memorise the formats on the following pages. Core concepts IAS 1 includes a number of core concepts, with some overlap with the Framework document. Fair presentation fair, neutral description of transactions. Going concern entity assumed to continue trading into the foreseeable future. Accruals (matching) basis of accounting match costs with associated revenues and items to the time period incurred. Consistency of presentation present similar transactions the same way within the current year and year by year. Page 2.2

4 Materiality and aggregation no need to present information about immaterial transactions, but aggregate transactions with similar characteristics instead. Offsetting - offset as little as possible. Frequency of reporting normally annually but can be shorter if necessary and certain disclosures made. Comparative information comparative information must be provided and presented in such a way as to make comparison easy (eg use the same accounting policies in both years. This is further developed in IAS 8). True and fair override Paragraph 23 of IAS 1 gives details of what to do in the extremely rare circumstance when compliance with IFRS will fail to give a true and fair view. This requires full disclosure of the particulars, reason and effect of the failure to follow all extant IFRS. Formats of financial statements The formats below give the minimum disclosures required on the face on the SOFP as required by IAS 1 paragraph 54. In practice, it s common to add other categories as well. IAS 1 is not too specific in the order of each of these headings, but it s normal to start with the least liquid and finish with the most liquid. ExP Group Statement of Financial Position at 31 March 20x4 ASSETS 20x4 20x3 (Note below) Non-current assets Property, plant and equipment Intangible assets 1 Investments in associates Biological assets 2 Page 2.3

5 Current assets Inventories Trade receivables Cash and cash equivalents Assets held for sale 3 Total assets EQUITY AND LIABILITIES Share capital 4 Revaluation reserve 5 Retained earnings Other reserves Non-controlling interests Total equity Non-current liabilities 6 Financial liabilities Deferred tax Provisions Total non-current liabilities Current liabilities Financial liabilities Page 2.4

6 Current tax Trade and other payables Total current liabilities Total liabilities Total equity and liabilities Notes 1. Many companies prefer to show goodwill separately to other intangibles on the face of the SOFP. 2. This is included for completeness only. Biological assets (IAS 41) are not within the F7 syllabus. 3. These relate specifically to assets held for sale under IFRS There are extensive disclosure requirements relating to share capital in IAS 1, but these are rarely tested in paper F7. 5. Each component of the parent company s reserves must be shown separately. It s conventional to start with the most regulated reserves and finish with retained earnings. 6. Current liabilities are ones that are expected to be settled within 12 months of the reporting date. All other liabilities are non-current. Some (eg finance lease liabilities and loans) are likely to be split between current and non-current components. Page 2.5

7 ExP Group Statement of Comprehensive Income for the year ended 31 March 20x4 The captions marked with * are the minimum disclosures required by paragraph 82 of IAS 1. In practice, it is common to add other captions where they would be useful to readers of the financial statements. 20x4 20x3 (Note below) Revenue* Cost of sales () () Gross profit Other income Share of profit of associates* Distribution costs () () Administrative expenses Other expenses () () Finance costs* () () Profit before tax Tax expense* () () Profit from discontinued operations, after tax* Profit for the period* Other comprehensive income, net of tax: 7 Property revaluation gains Other gains reported directly in equity Share of associates other comprehensive income Other comprehensive income for the period, net of Page 2.6

8 tax Total comprehensive income for the period Profit for the period attributable to: Non-controlling interests Owners of the parent Total comprehensive income for the period attributable to: Non-controlling interests Owners of the parent Notes 7. These items may be presented gross of tax, with a separate tax expense then within comprehensive income. ExP Group Statement of Changes in Equity for the year ended 31 March 20x4 Ordinary share capital Revaluation reserve Retained earnings Total equity $ 000 $ $ 000 At 1 April 20x2 Effect of changes in accounting polices At 1 April 20x2, restated Changes in year to 31 March 20x3: Page 2.7

9 Total comprehensive income Dividends () Issue of new shares for cash - - Transfers between reserves - () - At 31 March 20x3 Changes in year to 31 March 20x4: Total comprehensive income Dividends () Issue of new shares - - Bonus issue of shares () Transfers between reserves - () - At 31 March 20x4 To cross-refer to the SOFP in this chapter, the statement of changes in equity would also need a column for other reserves and non-controlling interests. These are omitted only due to space constraints. Note 8: Gains on revaluation of property, plant and equipment would be shown within retained earnings. All other elements of total comprehensive income are likely to be shown as a movement on retained earnings. Suggested approach to preparation questions (likely question 2 in the exam) Read through the question in full. If there is an adjustment that you don t understand after reading it three times, ignore it. Set up proformas for each financial statement that you are asked to produce. Use one page for each one. Cross-refer the adjustments to the relevant heading in the trial balance. Page 2.8

10 For each item in the trial balance that does not have a cross-reference next to it, cross it off and lift the relevant figure directly into your proforma answers. Work through the adjustments in order of which ones you find the most easy. Record your adjustments in workings and refer workings to your proforma answer. When you run out of time allocated to the question, move on! Do not expect to finish the question in full. Page 2.9

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