Teacher Resource Bank

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1 Teacher Resource Bank GCE Accounting Other Guidance: ACCN2 Update on IAS ACCN3 Updates on IAS (July 2012). The Assessment and Qualifications Alliance (AQA) is a company limited by guarantee registered in England and Wales (company number ). Registered address: AQA, Devas Street, Manchester M15 6EX.

2 Teacher Resource Bank / GCE Accounting / Other Guidance: ACCN2 Update on IAS / Version 1.2 AQA GCE Accounting specification 2120 Support for Teachers - ACCN2 and ACCN3 update on IAS The revised Accounting specification introduced in 2007 saw the introduction of International Accounting Standards in A2 unit ACCN3. Included in these is IAS 1 which specifies the presentation of accounts and introduced new terminology, together with a different treatment of proposed dividends. At the time these standards applied only to the published accounts of publicly quoted companies and as a result were included in unit ACCN3. However, it has become clear that many other businesses are adopting this approach and so it is felt that to make the specification as relevant to practice as possible then this presentation should be introduced for the AS in unit ACCN2. The details of the changes to the presentation of limited company accounts are as follows: Current New Trading and profit and loss account Profit and loss appropriation account Proposed dividends Balance sheet Income statement There is no appropriation account this is partly replaced by the statement of changes in equity. Only dividends that have been approved are included in the accounts therefore proposed dividends are no longer shown. Balance sheet is similar but with new terminology 2

3 Teacher Resource Bank / GCE Accounting / Other Guidance: ACCN2 Update on IAS / Version 1.2 ACCN2: Examples of internal limited company financial statements Presentation of internal financial statements of limited companies. Candidates can be expected to be familiar with and be able to prepare: income statements statements of changes in equity balance sheets. Whenever a candidate is required to prepare one of these statements they should always provide a title. A correct title may be rewarded with Quality of Presentation marks. This will include the business name, the title of the financial statement and the date without any abbreviations. Income statement Below is a suggested layout for an income statement for a limited company. Please note that the names of expenses and information provided could differ. Candidates could be provided with the gross profit and asked to prepare the remainder of the income statement. Candidates should include the following headings as they can be rewarded with quality of presentation marks: cost of sales gross profit profit from operations profit for the year before tax profit for the year after tax. The suggested layouts show the use of brackets for negative items. This is optional. 3

4 Teacher Resource Bank / GCE Accounting / Other Guidance: ACCN2 Update on IAS / Version 1.2 Example Ltd Income statement for the year ended 30 November 2011 Revenue Opening inventory Purchases Closing inventory (50 450) Cost of sales ( ) Gross profit Other income Rent receivable Discount received Expenses Wages Insurance Rates Electricity Accountancy and audit Increase in provision for doubtful debts 846 Directors remuneration Depreciation ( ) Profit from operations Interest (finance costs)* (1 200) Profit for the year before tax Taxation (income taxes)* (24 000) Profit for the year after tax *Finance costs and income taxes are the international terms; if they are used in ACCN2 then they will be as shown, together with the traditional term. 4

5 Teacher Resource Bank / GCE Accounting / Other Guidance: ACCN2 Update on IAS / Version 1.2 Balance sheet Candidates will be expected to include the following headings to gain quality of presentation marks: non-current assets current assets current liabilities net current assets or net current liabilities non-current liabilities Example Ltd Balance Sheet (Statement of financial position) at 30 September 2011 Non-current assets Cost or Valuation Depreciation to date Net Book Value Premises Fittings Motor vehicles Current assets Inventory Trade receivables Less provision for doubtful debts (1 660) Prepayments Cash and cash equivalents Current liabilities Trade payables (Creditors) Accruals Taxation (46 900) Net current assets Non-current liabilities 6% Debentures ( ) (20 000) NET ASSETS Equity Ordinary shares of 1 each Share premium account Revaluation reserve Retained earnings

6 Teacher Resource Bank / GCE Accounting / Other Guidance: ACCN2 Update on IAS / Version 1.2 Statement of changes in equity The statement of changes in equity connects the opening and closing balance sheets and shows what has happened to the equity section of the balance sheet during the year. Example Ltd Statement of Changes in Equity for the year ended 30 November 2011 Ordinary shares Share premium Revaluation reserve Retained earnings Total At 1 December Shares issued Profit for the year Equity dividends (5 897) (5 897) At 30 November The example given is a full statement of the changes in equity. Candidates could be asked to prepare this or an extract, eg just showing the changes in retained earnings. In the statement shown above, the company has made a share issue during the year at a premium. The nominal value of the share issue is shown in the ordinary shares column and the premium in the share premium column. The company has also made a profit of and paid dividends of Please note: (1) Only equity dividends actually paid during the accounting period are included in the statement of changes in equity. This means that any proposed final dividend for the year in question is not recorded and thus does not appear as a current liability on the balance sheet. In practice, any proposed dividend would be shown as a note to the financial statements. However, notes to financial statements will not be examined in ACCN2. (2) Preference share dividends paid are recorded as part of finance costs in the income statement. They should not be recorded in the statement of changes in equity. 6

7 Teacher Resource Bank / GCE Accounting / Other Guidance: ACCN3 Update on IAS / Version 1.2 ACCN3: Example financial statements for Public Limited Companies Candidates are not required to prepare financial statements for public companies suitable for publication. However, they will need to interpret and use them, for example when preparing statements of cash flows. Candidates should be familiar with the annual reports of public companies and thus will be aware of the variety of acceptable layouts. In the examination we will use the layouts from ACCN2 or the summarised layout shown below. Example plc Income statement for the year ended 30 November 2011 m Revenue Cost of Sales (55 871) Gross profit Distribution costs (480) Administrative expenses (1 196) Profit from operations Finance income 150 Finance costs (483) Profit before tax Taxation (162) Profit for the year

8 Teacher Resource Bank / GCE Accounting / Other Guidance: ACCN3 Update on IAS / Version 1.2 Example plc Balance sheet (Statement of financial position) at 30 November m m Non-current assets Property, plant and equipment Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets Equity and liabilities Equity Share capital Share premium Revaluation reserve Retained earnings Total equity Non-current liabilities Mortgage Current liabilities Trade and other payables Tax payable Total current liabilities Total liabilities Total equity and liabilities

9 Teacher Resource Bank / GCE Accounting / Other Guidance: ACCN3 Update on IAS / Version 1.2 A note to the accounts referring to property, plant and equipment may also be given, for example Property, plant and equipment Cost m At 1 December Additions Disposals (10 564) At 30 November Depreciation At 1 December Charge for the year Disposals (8 552) At 30 November Net book value At 1 December At 30 November You should be familiar with the statement of changes in equity from ACCN2. Example plc Statement of changes in equity for the year ended 30 November 2011 Issued share capital Share premium account Revaluation reserve Retained earnings Total m m m m m At 1 December Issue of shares Profit for the year Equity dividends paid in year ( 800) ( 800) At 30 November

10 Teacher Resource Bank / GCE Accounting / Other Guidance: ACCN3 Update on IAS / Version 1.2 Example plc Statement of cash flows for the year ended 30 November 2011 m m Profit from operations Depreciation Increase in inventories (398) Decrease in trade receivables 883 Increase in trade payables Cash from operations Interest paid (483) Tax paid (82) Net cash from operations Cash flows from investing activities Purchase of non-current assets (14 660) Proceeds from sale of non-current assets Net cash used in investing activities (12 498) Cash flow from financing activities Proceeds from issue of share capital Repayment of long term borrowings (4 000) Dividends paid (800) Net cash from financing activities Net decrease in cash and cash equivalents (600) Cash and cash equivalents at the beginning of the year 685 Cash and cash equivalents at the end of the year 85 10

11 Teacher Resource Bank / GCE Accounting / Other Guidance: ACCN3 Update on IAS / Version 1.2 The introduction of the revised IAS terminology (see Teacher Resource Bank - IAS Terminology) affects the ratio analysis section of the specification. There is no change to the gross profit margin and mark-up; return on capital employed; net current asset ratio (current ratio); liquid capital (acid test ratio); gearing. The ratios affected are: Rate of stock turnover Current terminology Overheads in relation to turnover Net profit in relation to turnover (net profit margin) Debtor collection period Creditor payment period New IAS terminology Rate of inventory turnover Overheads in relation to revenue Profit in relation to revenue Note: this ratio can be calculated using profit for the year or operating profit: either will be rewarded provided the correct formula is given. Receivable days Payable days It is anticipated that the use of new terminology and the presentation of accounts will also apply to any questions set on sole trader accounts and cash budgets. However, candidates using the traditional approach and terminology in these questions will be rewarded. 11