Exercises

An extract from the solution is provided in the Appendix at the end of the text for exercises marked with an asterisk (*). The following five-year summary relates to Wandafood Products pic and is based on financial statements prepared under the historical cost convention Net operating assets Interest and dividend cover Net borrowings Shareholders' funds plus minority interests Current assets less stock Current liabilities Earnings per - pre-tax basis p 23.62 21.25 17.96 17.72 15.06 share - net...

Review Questions

1 (a) Name the user groups and information needs of the user groups identified by the IASC Framework for the Presentation and Preparation of Financial Statements. (b) Discuss the effect of the Framework on current financial reporting practice. 2 Give a brief synopsis of the ICAS Making Corporate Reports Valuable. 3 R. MacVe in A Conceptual Framework for Financial Accounting and Reporting The Possibilities for an Agreed Structure suggested that the search for a conceptual framework was a...

Empirical inductive approach

The empirical inductive approach looked at the practices that existed and attempted to generalise from them. This tended to be how the technical departments of accounting firms operated. By rationalising what they did, they ensured that the firm avoided accepting different financial reporting practices for similar transactions, e.g. accepting unrealised profit appearing in the income statement of one client and not in another. The technical department's role was to advise partners and staff,...

The liability for pension and other postretirement costs

The liability for pension costs is made up from the following amounts (a) the present value of the defined benefit obligation at the balance sheet date (b) plus any actuarial gains (less actuarial losses) not yet recognised (c) minus any past service cost not yet recognised (d) minus the fair value at the balance sheet date of plan assets (if any) out of which the obligations are to be settled directly. If this calculation comes out with a negative amount the company should recognise a pension...

Between companies reporting under different reporting regimes

Companies may provide reconciliation statements between their national standards and either US or IASC standards. The following statement shows the type of reconciliations necessary for listing purposes in some countries. These reconciliations highlight and explain the different accounting treatments that can be adopted and the impact on the figures in the financial statements. They are taken from Nokia reconciling IFRS requirements to US GAAP. The principal differences between IAS and US GAAP...

Total owners equity an overview

Total owners' equity consists of the issued share capital stated at nominal (or par) value, non-distributable and distributable reserves. Here we comment briefly on the main constituents of total shareholders' funds. We go on to deal with them in greater detail in subsequent sections. Companies incorporated under the Companies Act 1985 are able to raise capital by the issue of shares and debentures. There are two main categories of company private limited companies and public limited companies....

Solution For Andrew Jacobson Financial Income Statement

An extract from the solution is provided in the Appendix at the end of the text for exercises marked with an asterisk (*). In your capacity as chief assistant to the financial controller, your managing director has asked you to explain to him the differences between tax planning, tax avoidance and tax evasion. He has also asked you to explain to him your feelings as a professional accountant about these topics. Write some notes to assist you in answering these questions. A fixed asset (a...

Introduction

In the previous chapter we considered the application of IFRS 3 Business Combinations when preparing a consolidated balance sheet at the date of acquisition. We also considered the provisions of IAS 27 Consolidated and Separate Financial Statements1 in relation to the scope of consolidated financial statements. In this chapter we consider the application of IAS 27 when preparing a consolidated balance sheet at the end of the first financial year - the principles, however, are also applicable to...

Question

a Discuss why IAS 40 Investment Property was produced. b Universal Entrepreneurs plc has the following items on its PPE list i 1,000,000 - the right to extract sandstone from a particular quarry Geologists predict that extraction at the present rate may be continued for ten years. ii 5,000,000 - a freehold property let to a subsidiary on a full repairing lease negotiated on arm's-length terms for 15 years. The building is a new one, erected on a greenfield site at a cost of 4,000,000. iii A...

Capitalisation of borrowing costs

Where an asset takes a substantial period of time to get ready for its intended use or sale then the entity may incur significant borrowing costs in the preparation period. Under the accruals basis of accounting there is an argument that such costs should be included as a directly attributable cost of construction. IAS 23 Borrowing Costs was issued to deal with this issue. The benchmark treatment4 laid out in IAS 23 is that borrowing costs should be recognised as an expense in the period in...

Contract Price 240000 Progress Payments 150000

An extract from the solution is provided in the Appendix at the end of the text for exercises marked with an asterisk . MACTAR have a series of contracts to resurface sections of motorways. The scale of the contract means several years' work and each motorway section is regarded as a separate contract. From the following information, calculate for each contract the amount of profit or loss you would show for the year and show how these contracts would appear in the balance sheet with all...

Uniform accounting policies and reporting dates

Consolidated financial statements should be prepared using uniform accounting policies. If it is not practicable then disclosure must be made of that together with details of the items involved.4 The financial statements of the parent and subsidiaries used in the consolidated accounts are usually drawn up to the same date but IAS 27 allows up to three months' difference providing that appropriate adjustments are made for significant transactions outside the common period.5 The following is an...

How are individual standards dealt with in the FRSSE

Standards have been dealt with in seven ways as explained in a to g below FRSSE adopted certain standards and UITFs without change, e.g. SSAP 17 Accounting for Post Balance Sheet Events. Certain standards were not addressed in the FRSSE, e.g. FRS 1 Revised 1996 Cash Flow Statements. c Statements relating to groups are cross-referenced If group accounts are to be prepared the FRSSE contains the cross-references required, e.g to FRS 2 Accounting for Subsidiary Undertakings. d Disclosure...

IAS 32 Financial Instruments Disclosure and Presentation1

The dynamic nature of the international financial markets has resulted in a great variety of financial instruments from traditional equity and debt instruments to derivative instruments such as futures or swaps. These instruments are a mixture of on balance sheet and off balance sheet instruments, and they can significantly contribute to the risks that an enterprise faces. IAS 32 was introduced to highlight to users of financial statements the range of financial instruments used by an...

The character of the national legal system

There are two major legal systems, that based on common law and that based on Roman law. It is important to recognise this because the legal systems influence the way in which behaviour in a country, including accounting and financial reporting, is regulated. Countries with a legal system based on common law include England and Wales, Ireland, the USA, Australia, Canada and New Zealand. These countries rely on the application of equity to specific cases rather than a set of detailed rules to be...

Income Statement Exercises

An extract from the solution is provided in the Appendix at the end of the text for exercises marked with an asterisk . Springtime Ltd is a UK trading company buying and selling as wholesalers fashionable summer clothes. The following balances have been extracted from the books as at 31 March 20X4 Income tax based on the accounting profit Overprovision for the year to 31 March 20X3 Delivery expenses including 300,000 overseas Dividends final proposed - to be paid 1 August 20X4 Dividend income...

Subjective judgements required in accrual accounting adjusting cash receipts in accordance with IAS

In Figure 2.1 we assumed that revenue was derived simply by adding unpaid invoices to the cash receipts. In practice, however, this is influenced by the commercial facts underlying the transactions. For example, if the company is a milk producer, the point at which it should report the milk production as revenue will be influenced by the existence of a supply contract. If there is a contract with a buyer, the revenue might be recognised immediately on production. So that financial statements...

Unrealised profit on intercompany sales

Where sales have been made between two companies within the group, there may be an element of profit that has not been realised by the group if the goods have not then been sold on to a third party before the year-end. We will illustrate with the Many Group which consists of a parent, Many plc, and a subsidiary, Few plc. Intra-group sales realised by sale to a third party not a group member Assume, for example, that Many plc buys 1,000 worth of goods for resale and sells them to Few plc for...

Pre and postacquisition profitslosses Preacquisition profits

Any profits or losses made before the date of acquisition are referred to as pre-acquisition profits losses. These are represented by net assets that exist in the subsidiary as at the date of acquisition and, as we have seen in Chapter 20, the fair values of these net assets will be dealt with in the goodwill calculation. Any profits or losses made after the date of acquisition are referred to as postacquisition profits. Because these will have arisen whilst the subsidiary was under the control...

Statements making up the financial statements published for external users

The IASB states6 that the financial statements published by a company for external users should consist of the following a statement of changes in equity, notes comprising a summary of significant accounting policies and other explanatory notes. In this chapter we consider two of the conventions under which the income statement and balance sheet are prepared the historical cost convention and the accrual accounting concept.

Inventory valuation

The valuation rule outlined in IAS 2 is difficult to apply because of uncertainties about what is meant by cost with some methods approved by IAS 2 and others not and what is meant by net realisable value. 18.5.1 Methods acceptable under IAS 2 The acceptable methods of inventory valuation include FIFO, AVCO and standard cost. Inventory is valued at the most recent 'cost', since the cost of oldest inventory is charged out first, whether or not this accords with the actual physical flow. FIFO is...

Consolidated accounts and some reasons for their preparation

In most cases a parent company is required by IAS 27 to prepare consolidated financial statements. These show the accounts of a group as though that group were one enterprise. The net assets of the companies in a group will therefore be combined and any inter-company profits and balances eliminated. Why are groups required to prepare consolidated accounts i To prevent the preparation of misleading accounts by such means as inflating the sales through selling to another member of a group. ii To...

Recognition of contract revenue and expenses

IAS 11 states that the revenue and costs associated with a construction contract should be recognised in the income statement as soon as the outcome of the contract can be estimated reliably. This is likely to be possible when the total contract revenue can be measured reliably and it is probable that the related economic benefits will flow to the enterprise the total contract costs both those incurred to date and those expected to be incurred in the future can be measured reliably the stage of...

Ias

Government grants should be recognised in the income statement so as to match the expenditure towards which they are intended to contribute. If this is retrospective, they should be recognised in the period in which they became receivable. Grants in respect of PPE should be recognised over the useful economic lives of those assets, thus matching the depreciation or amortisation. IAS 20 outlines two acceptable methods of presenting grants relating to assets in the balance sheet a The first...

Accrual accounting is a better indicator than cash flow accounting of ability to generate cash

The accounting profession generally supports the view expressed by the Financial Accounting Standards Board FASB in the USA that accrual accounting provides a better indication of an enterprise's present and continuing ability to generate favourable cash flows than information limited to the financial aspects of cash receipts and payments.9 The IASC supported the FASB view in 1989 when it stated that financial statements prepared on an accrual basis inform users not only of past transactions...

Need for mandatory standards

Mandatory standards are needed to define the way in which accounting numbers are presented in financial statements, so that their measurement and presentation are less subjective. It had been thought that the accountancy profession could obtain uniformity of disclosure by persuasion but, in reality, the profession found it difficult to resist management pressures. During the 1960s the financial sector of the UK economy lost confidence in the accountancy profession when internationally known...

IAS 19 revised Employee Benefits

After a relatively long discussion and exposure period IAS 19 revised was issued in 1998 and it redefined how all employee benefits were to be accounted for. IAS 19 has chosen to follow a 'balance sheet' approach to accounting for the pension scheme contributions by the employer and, therefore, it defines how the balance sheet asset or liability should be built up. The income statement charge is effectively the movement in the balance sheet asset or liability. The pension fund must be valued...

The fundamental accounting principles underlying the published income statement and balance sheet

IAS 1 paras. 23-31 requires compliance with the fundamental accounting principles of accruals, materiality and aggregation, going concern and consistency of presentation. A concept not specifically stated in IAS 1 is prudence, which is an important principle in the preparation of financial statements. The Framework states that reliable information in the financial statements must be prudent16 and this implies that a degree of caution should be exercised in making judgements or estimates....

A critique of deferred taxation

It could be argued that deferred tax is not a legal liability until it accrues. The consequence of this argument would be that deferred tax should not appear in the financial statements, and financial statements should present the tax expense for the year equal to the amount of income taxes that has been levied based on the income tax return for the year accrue as a receivable any income refunds that are due from taxing authorities or as a payable any unpaid current or past income taxes...

Nature of economic income

Economics is concerned with the economy in general, raising questions such as how does it function how is wealth created how is income generated why is income generated The economy as a whole is activated by income generation. The individual is motivated to generate income because of a need to satisfy personal wants by consuming goods and services. Thus the economist becomes concerned with the individual consumer's psychological state of personal enjoyment and satisfaction. This creates a need...

Discontinued operations disclosure in the income statement

IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations is one of the outcomes of the joint short-term project to reduce differences between IFRSs and US GAAP. It follows the IASB's consideration of FASB Statement No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets SFAS 144 which deals with the classification and presentation of discontinued operations. The objective is2 to help users evaluate the financial effects of discontinued operations, e.g. when making...

ED IAS 37 approach to contingent liabilities

Now considering contingent liabilities, old IAS 37 para. 10 defines these as a a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity or b a present obligation that arises from past events, but is not recognised because i it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation...

The future

Financial reporting is clearly in a period of transition. When the US energy giant Enron collapsed in 2001, a number of important issues were raised regarding the conduct of directors and auditors. More importantly in the context of this chapter, the collapse of Enron highlighted a number of deficiencies in financial reporting. The application of US GAAP had led to a lack of transparency regarding matters including revenue recognition, valuation of intangible assets, so-called Special Purpose...

Writing off part of capital which has already been lost and is not represented by assets

This situation normally occurs when a company has accumulated trading losses which prevent it from making dividend payments under the rules relating to distributable profits. The general approach is to eliminate the debit balance on retained earnings by setting it off against the share capital and non-distributable reserves. 10.12.1 Accounting treatment for a capital reduction to eliminate accumulated trading losses The accounting treatment is straightforward. A capital reduction account is...

Creditor protection why capital maintenance rules are necessary

It is helpful at this point to review the position of unincorporated businesses in relation to capital maintenance. 10.6.1 Unincorporated businesses An unincorporated business such as a sole trader or partnership is not required to maintain any specified amount of capital within the business to safeguard the interests of its creditors. The owners are free to decide whether to introduce or withdraw capital. However, they remain personally liable for the liabilities incurred by the business, and...

Provisions

Ias Decision Tree

The IAS is mainly concerned with provisions. It defines a provision as 'a liability of uncertain timing or amount'. In particular it targets 'big bath' provisions that companies have been able to make. These are the type of provisions that it has been tempting for directors to make in order to smooth profits without any reasonable certainty that the provision would actually be required in subsequent periods. Sir David Tweedie, the chairman of the IASB, has said A main focus of IAS 37 is...

W1 Property Plant and Equipment

The CCA valuation at 31 December 20X4 shows a net increase in terms of numbers of pounds sterling of 38,675,000. The 59,500,000 in the HCA balance sheet will be replaced in the CCA balance sheet by 98,175,000. Figure 4.3 Economica plc HCA balance sheets Figure 4.3 Economica plc HCA balance sheets Balance sheets as at 31 December on the basis of HCA Figure 4.4 Index data relating to Economica plc Figure 4.4 Index data relating to Economica plc Index numbers as prepared by the Central Statistical...

ICAS Making Corporate Reports Valuable

In 1988, following a major research project by its Research Committee, the Institute of Chartered Accountants of Scotland ICAS published the Making Corporate Reports Valuable MCRV 16 report. The general objective of MCRV was to stimulate discussion that would lead to improvements in corporate reporting. The long-term purpose was that reports should be produced that would be better able to assist the user in gauging management performance and assessing an entity's prospects reports that were...

Items requiring separate disclosure

When making their future predictions investors need to be able to identify that part of the net income that is likely to be maintained in the future. IAS 1 provides assistance to users in this by requiring that certain items are separately disclosed. These are items within the ordinary activities of the enterprise which are of such size, nature or incidence that their separate disclosure is required in the financial statements in order for the financial statements to show a fair view. These...

The wider reach of IFRS

At the same time as listed EU companies are making the transition to IFRS, similar developments are taking place in other important markets, such as those in the Asian Pacific Region. While the IFRS label is being widely used, the following examples demonstrate that not all financial statements will be directly comparable. This is a concern, because it might lead to a false sense of security among users of annual reports. Large firms of accountants have prepared detailed comparisons between...

Distributable profits general considerations

We have considered capital maintenance and non-distributable reserves. However, it is not sufficient to attempt to maintain the permanent capital accounts of companies unless there are clear rules on the amount that they can distribute to their shareholders as profit. Without such rules, they may make distributions to their shareholders out of capital. The question of what can legitimately be distributed as profit is an integral part of the concept of capital maintenance in company accounts. In...

The impact of changing to IFRS

Making the transition to IFRS is no trivial task for companies, as comparative figures must also be restated as if IFRS had always been used and it may not be easy to backtrack to obtain all the information necessary to record earlier transactions in accordance with IFRS. National and international regulators have issued recommendations or requirements to ensure users of financial statements are kept informed of arrangements for the transition and the likely effect on reported figures. As the...

AICPA Improving Business Reporting A Customer Focus Meeting the Information Needs of Investors and Creditors

This was a study carried out by AICPA in the USA over a three-year period and published in 1994.15 It resulted in a number of interesting recommendations to improve business reporting. A major recommendation was that standard setters should develop a comprehensive model of business reporting, focusing on factors that create longer-term value and including financial and non-financial measures to cope with rapid changes, e.g. in technology and competition. The committee identified that users had...

ASB Statement of Principles 19995

The Statement fleshes out the ideas contained in the Framework. As Sir David Tweedie, Chairman of the ASB, commented, 'The Board has developed its Statement of Principles in parallel with its development of accounting standards It is in effect the Board's compass for when we navigate uncharted waters in the years ahead. This is essential reading for those who want to know where the Board is coming from, and where it is aiming to go.' The Statement contains eight chapters dealing with key...

Fair view treatment IAS 1 provisions

IAS 1 requires financial statements to give a fair presentation of the financial position, financial performance and cash flows of an enterprise.17 In para. 15 it states that In virtually all circumstances, a fair presentation is achieved by compliance with applicable IFRSs. A fair presentation also requires an entity a to select and apply accounting policies in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. IAS 8 sets out a hierarchy of authoritative...

Phoenix Plc Trial Balance At 30 June 20x7 Answer

An extract from the solution is provided in the Appendix at the end of the text for exercises marked with an asterisk . The following trial balance was extracted from the books of Old NV on 31 December 20X1. plant 738 vehicles 375 Rent receivable 100 Trade payables 738 Debentures 250 Issued share capital - ordinary 1 shares 3,125 - preference shares treated as equity 625 Share premium 250 Retained earnings 875 Inventory 825 Purchases 6,263 Returns inwards 350 Carriage inwards 13 Carriage...

W6 Monetary working capital adjustment MWCA

The objective is to transfer from the income statement to CC reserve the amount by which the need for monetary working capital MWC has increased due to rising price levels. The change in MWC from one balance sheet to the next will be the consequence of a combination of changes in volume and escalating price movements. Volume change may be segregated from the price change by using an average index. The MWC is now adjusted by the average index for the year. This adjustment will reveal the change...

Operating capital maintenance concept

Under this concept capital is only maintained if sufficient income is retained to maintain the business entity's physical operating capacity, i.e. its ability to produce the existing level of goods or services. Profit is, therefore, the residual after increasing the cost of sales to the cost applicable at the date of sale. Basically, only two adjustments are involved the additional replacement cost of inventory consumed and holding gains on closing inventories. However, in a comprehensive...

The Financial Reporting Council FRC

Financial Reporting Council Structure

The FRC was set up in 1990 as an independent regulator to set and enforce accounting standards. It operated through the Accounting Standards Board ASB and the Financial Reporting Review Panel FRRP to encourage high-quality financial reporting. Due to its success in doing this, the government decided, following corporate disasters such as Enron in the USA, to give it a more proactive role from 2004 onwards in the areas of corporate governance, compliance with statutes and accounting and auditing...

Critique of CCA statements

Considerable effort and expense are involved in compiling and publishing CCA statements. Does their usefulness justify the cost CCA statements have the following uses 1 The operating capital maintenance statement reveals CCA profit. Such profit has removed inflationary price increases in raw materials and other inventories, and thus is more realistic than the alternative HCA profit. 2 Significant increases in a company's buying and selling prices will give the HCA profit a holding gains...

Current purchasing power accounting CPPA

The CPP model measures income and value by adopting a price index system. Movements in price levels are gauged by reference to price changes in a group of goods and services in general use within the economy. The aggregate price value of this basket of commodities-cum-services is determined at a base point in time and indexed as 100. Subsequent changes in price are compared on a regular basis with this base period price and the change recorded. For example, the price level of our chosen range...

Neutrality characteristic

Financial statements are not neutral if, by their selection or presentation of information, they influence the making of a decision in order to achieve a predetermined result or outcome. With cash flow accounting, the information is not subject to management selection criteria. Cash flow accounting avoids the tension that can arise between prudence and neutrality because, whilst neutrality involves freedom from deliberate or systematic bias, prudence is a potentially biased concept that seeks...

Financial reporting evolution of international

6.2 National differences 137 6.3 Reasons for differences in financial reporting 138 6.4 Classification of national accounting systems 143 6.5 Attempts to reduce national differences 143 6.6 The work of international bodies in harmonising and standardising financial reporting 145 6.7 US GAAP 156 Summary 158 Review questions 159 Exercises 159 References 160 7 Conceptual framework 161 7.2 Historical overview of the evolution of financial accounting theory 162 7.3 IASC Framework for the...