ACCA F7 (INT) Financial Reporting - Study text - 2010 - Emile Woolf Publishing
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Chapter 15: Reporting of non-group financial statements
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Adjustments for which specific information is given in the question: you will
need to consider the implications of each item of information provided, and its
effect on:
− valuations of assets and/or liabilities in the statement of financial position
− profit or loss
− other comprehensive income.
You will also need to remember that when you make any adjustments, you might
need to think about both:
income or expense (or gain or loss) and
the value of an asset or liability in the statement of financial position.
This chapter uses two examination-style questions as examples of the approach you
should take.
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Example 1: Preparing financial statements from a trial balance
The question
Preparing an answer: workings
Preparing a statement of comprehensive income
Preparing the statement of financial position
Preparing the statement of changes in equity
2 Example 1: preparing financial statements from a trial
balance
2.1 The question
This question is a bit longer than a normal examination question, because it includes
a requirement for a statement of comprehensive income and a SOCIE, as well as a
statement of financial position.
The following trial balance relates to Statis, a public listed company, at 30 June 2009.
$000 $000
Costofsales 148,000
Operatingexpenses 61,000
Loaninterestpaid(seenote(1)) 1,200
Rentalofvehicles(seenote(2)) 4,800
Revenue303,000
Investmentincome1,800
30‐yearleaseholdpropertyatcost(seenote(4)) 240,000
Plantandequipmentatcost 201,000
Accumulateddepreciationat1July2008:
‐leaseholdproperty32,000
‐plantandequipment81,000
Investments
atamortisedcost 36,000
Equitysharesof$1each,fullypaid150,000
Retainedearningsasat1July200865,600
3%loannotes(seenote(1))40,000
Deferredtaxbalanceat1July2008(seenote(5))13,500
Inventoryat30June2009 21,000
Tradereceivables 48,400
Tradepayables14,200
Bank2,300
Suspense
account(seenote(6))58,000
–
–––––––
–
–––––––
761,400 761,400
–
–––––––
–
–––––––
Chapter 15: Reporting of non-group financial statements
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The following notes are relevant.
(1) The 3% loan notes were issued on 1 July 2008. They are redeemable on 30 June
2013 at a large premium to nominal value. The large premium is due to the
fact that a low nominal rate of interest is payable on the notes. It has been
calculated that the effective interest rate on these loan notes is 5% per year.
(2) There are two separate contracts for rental of vehicles. Taking advice from the
external auditors, the finance director of Statis has agreed that some of rental
contracts should be treated as finance leases. Of the total rental cost of vehicles
in the trial balance, $4 million relates to a finance lease rather than an
operating lease or rental arrangement. The finance lease was entered into on 1
July 2008 which was when the $4 million was paid. The finance lease
agreement is for a four-year period in total, and there will be three more
annual payments in advance of $8 million, payable on 1 October in each year.
The vehicles in the finance lease agreement had a fair value of $24 million at 1
July 2008. The interest rate implicit in the lease is 10% per year. The other
contract for vehicle rental is an operating lease and the rental payment should
be charged to operating expenses. (Note: You are not required to calculate the
present value of the minimum lease payments for the finance lease.)
(3) Other plant and equipment is depreciated at 15% per year by the reducing
balance method.
All depreciation of property, plant and equipment should be charged to cost
of sales.
(4) On 30 June 2009 the leasehold property was re-valued to $250 million and the
directors wish to incorporate this re-valuation in the financial statements.
(5) The provision for income tax for the year ended 30 June 2009 has been
estimated at $27.5 million. At 30 June 2009 there are taxable temporary
differences of $110 million. Of these $50 million relate to the revaluation of the
leasehold property (see note (2) above). The rate of income tax on profits is
20%.
(6) The suspense account balance can be reconciled from the following
transactions.
The payment of a dividend in July 2008. This was calculated to give a 5%
yield on the company’s share price as at 30 June 2008. The share price as at
this date was $4.00.
The net receipts from a rights issue of shares in March 2009. The issue was of
one new share for every five held at a price of $3.00 per share. The issue was
fully subscribed. The expenses of the share issue were $2 million. These
should be charged against share premium.
Note that the cash entries for these transactions have already been fully
accounted for.
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Required
(a) Prepare a statement of comprehensive income for Statis for the year to 30 June
2009.
(b) Prepare a statement of financial position for Statis as at 30 June 2009
(c) Prepare a statement of changes in equity for the year to 30 June 2009.
(Total:30marks)
2.2 Preparing an answer: workings
To prepare the financial statements, several adjustments have to be made. You
should work through each item and try to identify the adjustments that are
required. Everything in this question has been covered by a previous chapter in this
study text.
Loan notes
The loan notes are a financial liability and loans should be valued at actuarial cost.
Although the nominal rate of interest is 3%, the effective rate of interest is 5% (given
in the question) because there will be a high premium payable at redemption.
The following calculation is required to establish the valuation of the loan notes in
the end-of-year statement of financial position (at amortised cost) and the full
finance charge for the loan notes for the year.
Liabilityat
beginningof
year
Finance
chargeat
5%
Interest
paid
Outstanding
liabilityatend
ofyear
$ $ $ $
Yearto30June2009 40,000,000 2,000,000 (1,200,000) 40,800,000
Vehicles: finance lease
One of the contracts for vehicle rental should be treated as a finance lease,
commencing on 1 July 2008. Rentals are payable in advance, with $4 million paid on
1 July 2008 and $8 million payable on 1 July 2009.
The vehicles should be included in the statement of financial position at cost ($24
million) less accumulated depreciation. The finance lease is for four years, and in the
absence of any other information it should be assumed that the cost of the vehicles
will be depreciated by the straight-line method over the term of the lease. Annual
depreciation for these vehicles is therefore $6 million per year.
Chapter 15: Reporting of non-group financial statements
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The liability for the finance lease obligation is calculated as follows, using the 10%
implicit rate of interest given in the question:
$
Initialliability 24,000,000
Less:Paymentinadvanceon1July2008 (4,000,000)
–
––––––––––
20,000,000
Interestto30June2009at10% 2,000,000
–
––––––––––
Liabilityincludinginterestat30June2009 22,000,000
–
––––––––––
Of this total liability, some will be repaid with the next lease payment of $8 million
on 1 July 2009. This payment of $8 million will include interest of $2 million
(calculated above), leaving a balance of $6 million that represents repayment of the
lease obligation. The total liability for the finance lease obligation can therefore be
separated into a current liability and a non-current liability as follows.
$ $
Totalliabilityincludinginterestat30June2009
(seeabove)
22,000,000
Less:Interestpayableon1July2009 (2,000,000)
Financeleaseobligationrepayableon1July2009 (6,000,000)
–
–––––––
–
–
Leasepaymentdueon1July2009(8,000,000)
–
–––––––––
Non‐currentliability:financeleaseogligationat
30June2009
14,000,000
–
–––––––––
The lease payment of $8 million due on 1 July 2009 is a current liability, but this
should be divided between interest payable ($2 million) and the finance lease
obligation repayable ($6 million).
Vehicles: operating lease
Total vehicle rentals were $4,800,000. Of this total, $4,000,000 relates to the finance
lease. The remaining $800,000 is for an operating lease, and this cost should be
treated as an expense for the year. In the absence of any other information in the
question, this operating lease rental will be included in other operating costs.
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Revaluation of leasehold property
$
Leaseholdpropertyatcost 240,000,000
Accumulateddepreciationat30June2008 (32,000,000)
–
–––––––––––
–
Carryingamountat30June2008 208,000,000
Depreciationinyearto30June2009($240million/30years) (8,000,000)
–
–––––––––––
–
Carryingamountat30June2008 200,000,000
Re‐valuedamountyoftheleasehold 250,000,000
–
–––––––––––
–
Revaluationgain(beforetax) 50,000,000
–
–––––––––––
–
The revaluation gain is an item of other comprehensive income, but this will be
reduced in the statement of comprehensive income by the amount of tax relating to
the gain. At a tax rate of 20%, the related deferred tax is $10 million.
The leasehold will be included in the statement of financial position at its revalued
amount ($250 million) with no accumulated depreciation.
Other plant and equipment: depreciation
$
Otherplantandequipmentatcost 201,000,000
Accumulateddepreciationat30June2008 (81,000,000)
––––––––––––
Carryingamount(netbookvalue)at30June2008 120,000,000
Depreciationinyearto30June2009(15%ofnetbookvalue) (18,000,000)
––––––––––––
Carryingamountat30June2008 102,000,000
––––––––––––
Non-current assets: summary
We now have all the information needed to calculate the cost, accumulated
depreciation and net book value of tangible non-current assets, and the depreciation
charge for the year. We need to remember that there is a depreciation charge for the
leasehold property, which was not revalued until 30 June 2009.
Leasehold
property
Leased
vehicles
Other
plantand
equipment
Total
$000 $000 $000 $000
Depreciationchargefortheyear 8,000 6,000 18,000 32,000
Cost 250,000 24,000 201,000 475,000
Accumulateddepreciation 0 6,000 99,000 105,000
–
–––––––
–
–––––––
–
–––––––
–
––––––
Netbookvalue 250,000 18,000 102,000 370,000
–
–––––––
–
–––––––
–
–––––––
–
––––––
Chapter 15: Reporting of non-group financial statements
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The total depreciation charge for the year is $32 million ($8m + $6m + $18m) and
this should be included in cost of sales, as stated in the question.
Tax
Total taxable temporary differences are $110 million, but $50 million of these relate
to the revaluation of the leasehold property (other comprehensive income). This
leaves $60 million of temporary differences that are relevant for the tax charge in
profit and loss.
$
Deferredtaxat30June2009relatingtproftandloss
($60million×20%) 12,000,000
Deferredtaxat30June2008(trialbalance) 13,500,000
–
–––––––––
Reductionindeferredtax 1,500,000
–
–––––––––
This reduction in deferred tax reduces the total tax charge in profit or loss for the
year.
$
Currenttax(estimate) 27,500,000
Reductionindeferredtax (1,500,000)
–
–––––––––––
Totaltaxchargeinprofitorloss 26,000,000
–
–––––––––––
In the statement of financial position, the liability for deferred tax should be for the
total taxable temporary differences of $110 million. Deferred tax liability = $110
million × 20% = $22 million.
Clearing the suspense account
The suspense account must be cleared, and the question provides the information
needed to do this.
Dividend paid
Dividend paid = 150 million shares × 5% of $4 = $30 million.
The dividend paid is reported in SOCIE.
They reduce retained earnings in the statement of financial position.
Rights issue of shares
Sharecapital Sharepremium
$000 $000
Trialbalance 150,000 0
Rightsissue(premium$2pershareissued) 30,000 60,000
Issueexpenses(2,000)
–
––––– ––––––
Asat30June2009 30,000 58,000
–
––––– ––––––
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Taken together, the increase in share capital and share premium ($88 million) less
the dividend payment of $30 million are sufficient to clear the suspense account
balance of $58 million.
These workings make all the adjustments necessary for preparing a statement of
comprehensive income for the year to 30 June 2009.
A statement of financial position cannot be prepared yet, because the amount of
profit for the year has not yet been established.
2.3 Preparing a statement of comprehensive income
To prepare a statement of comprehensive income quickly in an examination, you
need to know the format of the statement so that you can write it in your answer
paper quickly. Some minor calculations are needed to complete the figures, but the
relevant figures should be taken from the workings (above) and the trial balance.
Statis
Statement of comprehensive income for the year ended 30 June 2009
$000 $000
Revenue 303,000
Cost of sales: (148,000 + depreciation 32,000) (180,000)
––––––
Gross profit 123,000
Operating expenses: (61,000 + operating lease rental 800) (61,800)
Investment income 1,800
Finance costs: Loan notes (2,000)
Finance lease (2,000)
––––––
(4,000)
––––––
Profit before tax 59,000
Income tax expense (26,000)
––––––
Profit for the year 33,000
Other comprehensive income
Gain on leasehold revaluation 50,000
Related taxation (10,000)
––––––
Other comprehensive income 40,000
––––––
Total comprehensive income for the year 73,000
––––––
2.4 Preparing the statement of financial position
Having calculated the profit for the year, we can now calculated retained earnings
in the statement of financial position - not forgetting the dividend payment in the
year.
$000
Retainedearningsat30June2008 65,600
Profitfortheyearaftertax 33,000
Dividendspaid (30,000)
–
–––––
Retainedearningsat30June2009 68,600
–
–––––
Chapter 15: Reporting of non-group financial statements
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We now have all the information needed to prepare a statement of financial
position, using figures in the workings and the trial balance.
Statement of financial position as at 30 June 2009
$000 $000
Non-current assets
Property, plant and equipment: see workings 370,000
Investments at amortised cost 36,000
–––––––
406,000
Current assets
Inventory 21,000
Trade receivables 48,400
–
–––––
69,400
–––––––
Total assets 475,400
–––––––
Equity and liabilities
Capital and reserves
Equity shares of $1 each fully paid 180,000
Share premium 58,000
Revaluation reserve 40,000
Retained earnings 68,600
–
–––––
166,600
–––––––
346,600
Non-current liabilities
4% loan notes 40,800
Deferred tax 22,000
Finance lease obligation 14,000
–
–––––
76,800
Current liabilities
Bank overdraft 2,300
Trade payables 14,200
Accrued lease finance costs 2,000
Finance lease obligation 6,000
Income tax payable 27,500
–
–––––
52,000
–––––––
Total equity and liabilities 475,400
–––––––
2.5 Preparing the statement of changes in equity
The statement of changes in equity can also be prepared. Again, you need to be
familiar with the format of this statement so that you can write it down quickly in
your answer paper in the examination.
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Statis
Statementofchangesinequityfortheyearended30June2009
Share
capital
Share
premium
Revaluation
reserve
Retained
earnings Total
$000 $000 $000 $000 $000
Balanceat30June2008 150,000 0 0 65,600 215,600
Issueofsharecapital 30,000 58,000 88,000
Dividendpayments (30,000) (30,000)
Profitfortheyear 33,000 23,000
Revaluationof
leasehold
40,000 40,000
–––––––
–
–––––
–
––––– ––––––
–
––––––
Balanceat30June2009 180,000 58,000 40,000 88,600 346,600
–––––––
–
–––––
–
––––– ––––––
–
––––––