FR Study Text 2024-25 ACCA PDF

Valid for September 2024, ACCA (FR) December 2024, March 2025 and June 2025 Exam-focused...

Valid for September 2024, ACCA (FR) December 2024, March 2025 and June 2025 Exam-focused ACCA Kaplan’s vast classroom experience helps many students pass first time. The books are designed to cover the whole syllabus and they reflect how topics are taught in Reporting Financial the classroom, focusing on what will be required of you in the exam. Financial Student-friendly Using accessible language and engaging Reporting (FR) formats to help you understand more complex areas, Kaplan simplifies the learning process to make it easier for you to succeed. December 2024, March 2025 and June 2025 Valid for September 2024, Written by our expert tutors All Kaplan study materials are written by our subject specialists, experienced tutors who teach the paper so they know what works for students and how best to deliver it. Innovative solutions More than just books, our study materials are supported by a wealth of free online resources, including testing and course assessments. All accessible from our online learning environment MyKaplan. All the resources have been designed to keep you on your study plan and help you pass first time. Kaplan Publishing UK Study Text Study Text ISBN 978-1-83996-661-3 9 781839 966613  ACCA Applied Skills Financial Reporting (FR) Study Text  KAPLAN PUBLISHING’S STATEMENT OF PRINCIPLES LINGUISTIC DIVERSITY, EQUALITY AND INCLUSION We are committed to diversity, equality and inclusion and strive to deliver content that all users can relate to. We are here to make a difference to the success of every learner. Clarity, accessibility and ease of use for our learners are key to our approach. We will use contemporary examples that are rich, engaging and representative of a diverse workplace. We will include a representative mix of race and gender at the various levels of seniority within the businesses in our examples to support all our learners in aspiring to achieve their potential within their chosen careers. 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P.2 KAPLAN PUBLISHING  British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. Published by: Kaplan Publishing UK Unit 2 The Business Centre Molly Millar’s Lane Wokingham Berkshire RG41 2QZ ISBN: 978-1-83996-661-3 © Kaplan Financial Limited, 2024 The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials. Printed and bound in Great Britain. Acknowledgements This product contains copyright material and trademarks of the IFRS Foundation®. All rights reserved. Used under licence from the IFRS Foundation®. Reproduction and use rights are strictly limited. For more information about the IFRS Foundation and rights to use its material please visit www.ifrs.org. Disclaimer: To the extent permitted by applicable law the Board and the IFRS Foundation expressly disclaims all liability howsoever arising from this publication or any translation thereof whether in contract, tort or otherwise (including, but not limited to, liability for any negligent act or omission) to any person in respect of any claims or losses of any nature including direct, indirect, incidental or consequential loss, punitive damages, penalties or costs. Information contained in this publication does not constitute advice and should not be substituted for the services of an appropriately qualified professional. 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KAPLAN PUBLISHING P.3 P.4 KAPLAN PUBLISHING  Contents Page Chapter 1 Introduction to published accounts 1 Chapter 2 Tangible non-current assets 23 Chapter 3 Intangible assets 61 Chapter 4 Impairment of assets 75 Non-current assets held for sale and discontinued Chapter 5 97 operations Chapter 6 A conceptual and regulatory framework 115 Chapter 7 Conceptual framework: Measurement 143 Chapter 8 Other standards 157 Chapter 9 Foreign currency 179 Chapter 10 Revenue 189 Chapter 11 Leases 227 Chapter 12 Financial assets and financial liabilities 247 Chapter 13 Taxation 283 Chapter 14 Earnings per share 309 Chapter 15 IAS 37 and IAS 10 341 Chapter 16 Statement of cash flows 369 Chapter 17 Principles of consolidated financial statements 417 Chapter 18 Consolidated statement of financial position 429 Chapter 19 Consolidated statement of profit or loss 489 Chapter 20 Associates 525 Chapter 21 Group disposals 561 Chapter 22 Interpretation of financial statements 583 Chapter 23 Employability and technology skills 651 Chapter 24 Appendix 1: Published financial statements 661 Chapter 25 Appendix 2: Objective case questions 693 Chapter 26 References 727 Index I.1 KAPLAN PUBLISHING P.5 P.6 KAPLAN PUBLISHING  Introduction This document references IFRS® Accounting Standards and IAS® Accounting Standards, which are authored by the International Accounting Standards Board (the Board), and published in the 2023 IFRS Accounting Standards Red Book. KAPLAN PUBLISHING P.7  How to use the Materials These Kaplan Publishing learning materials have been carefully designed to make your learning experience as easy as possible and to give you the best chances of success in your examinations. The product range contains a number of features to help you in the study process. They include: 1 Detailed study guide and syllabus objectives 2 Description of the examination 3 Study skills and revision guidance 4 Study text 5 Question practice The sections on the study guide, the syllabus objectives, the examination and study skills should all be read before you commence your studies. They are designed to familiarise you with the nature and content of the examination and give you tips on how best to approach your learning. The Study Text comprises the main learning materials and gives guidance as to the importance of topics and where other related resources can be found. Each chapter includes:  The learning objectives contained in each chapter, which have been carefully mapped to the examining body's own syllabus learning objectives or outcomes. You should use these to check you have a clear understanding of all the topics on which you might be assessed in the examination.  The chapter diagram provides a visual reference for the content in the chapter, giving an overview of the topics and how they link together.  The content for each topic area commences with a brief explanation or definition to put the topic into context before covering the topic in detail. You should follow your studying of the content with a review of the illustration/s. There are worked examples which will help you to better understand how to apply the content to the topic.  Test your understanding sections provide an opportunity to assess your understanding of the key topics by applying what you have learned to short questions. Answers can be found at the back of each chapter.  Summary diagrams complete each chapter to show the important links between topics and the overall content of the paper. These diagrams should be used to check that you have covered and understood the core topics before moving on. P.8 KAPLAN PUBLISHING  Quality and accuracy are of the utmost importance to us so if you spot an error in any of our products, please send an email to [email protected] with full details, or follow the link to the feedback form in MyKaplan. Our Quality Coordinator will work with our technical team to verify the error and take action to ensure it is corrected in future editions. Icon Explanations Definition – Key definitions that you will need to learn from the core content. Key point – Identifies topics that are key to success and are often examined. Test your understanding – Exercises for you to complete to ensure that you have understood the topics just learned. Illustration – Worked examples help you understand the core content better. Supplementary reading – These sections will help to provide a deeper understanding of core areas. The supplementary reading is NOT optional reading. It is vital to provide you with the breadth of knowledge you will need to address the wide range of topics within your syllabus that could feature in an exam question. Reference to this text is vital when self- studying. Tutorial note – Included to explain some of the technical points in more detail. Footsteps – Helpful tutor tips. Links to other syllabus areas – This symbol refers to areas of interaction with other parts of the ACCA syllabus, subjects that you have either studied or may go on to study. KAPLAN PUBLISHING P.9  On-line subscribers Our on-line resources are designed to increase the flexibility of your learning materials and provide you with immediate feedback on how your studies are progressing. If you are subscribed to our on-line resources you will find: 1 On-line reference-ware: reproduces your Study Text on-line, giving you anytime/anywhere access. 2 On-line testing: provides you with additional on-line objective testing so you can practise what you have learned further. 3 On-line performance management: immediate access to your on-line testing results. Review your performance by key topics and chart your achievement through the course relative to your peer group. Syllabus Core areas of the syllabus  A conceptual framework for financial reporting.  A regulatory framework for financial reporting.  Financial statements.  Business combinations.  Analysing and interpreting financial statements. ACCA Performance Objectives In order to become a member of ACCA, as a trainee accountant you will need to demonstrate that you have achieved nine performance objectives. Performance objectives are indicators of effective performance and set the minimum standard of work that trainees are expected to achieve and demonstrate in the workplace. They are divided into key areas of knowledge which are closely linked to the exam syllabus. There are five Essential performance objectives and a choice of fifteen Technical performance objectives that are divided into five areas. The performance objectives which link to this exam are: 1 Ethics and professionalism (Essential) 2 Stakeholder relationship management (Essential) 6 Record and process transactions and events (Technical) 7 Prepare external financial reports (Technical) 8 Analyse and interpret financial reports (Technical) The following link provides an in-depth insight into all of the performance objectives: https://www.accaglobal.com/content/dam/ACCA_Global/Students/per/PER- Performance-objectives-achieve.pdf P.10 KAPLAN PUBLISHING  Progression There are two elements of progression that we can measure: first how quickly learners move through individual topics within a subject; and secondly how quickly they move from one course to the next. We know that there is an optimum for both, but it can vary from subject to subject and from learner to learner. However, using data and our experience of learner performance over many years, we can make some generalisations. A fixed period of study set out at the start of a course with key milestones is important. This can be within a subject, for example ‘I will finish this topic by 30 June’, or for overall achievement, such as ‘I want to be qualified by the end of next year’. Your qualification is cumulative, as earlier papers provide a foundation for your subsequent studies, so do not allow there to be too big a gap between one subject and another. We know that exams encourage techniques that lead to some degree of short-term retention, the result being that you will simply forget much of what you have already learned unless it is refreshed (look up Ebbinghaus Forgetting Curve for more details on this). This makes it more difficult as you move from one subject to another: not only will you have to learn the new subject, you will also have to relearn all the underpinning knowledge as well. This is very inefficient and slows down your overall progression which makes it more likely you may not succeed at all. In addition, delaying your studies slows your path to qualification which can have negative impacts on your career, postponing the opportunity to apply for higher-level positions and therefore higher pay. You can use the following diagram showing the whole structure of your qualification to help you keep track of your progress. KAPLAN PUBLISHING P.11  Syllabus objectives and chapter references We have reproduced ACCA’s syllabus from September 2023 to June 2024, showing where the objectives are explored within this book. Within each chapter we have broken down the extensive information found in the syllabus into easily digestible and relevant sections, called Content Objectives. These correspond to the objectives at the beginning of each chapter. Syllabus learning objective Chapter reference A THE CONCEPTUAL AND REGULATORY FRAMEWORK FOR FINANCIAL REPORTING 1 The need for a conceptual framework and the characteristics of useful information (a) Describe what is meant by a conceptual framework for 6 financial reporting. (b) Discuss whether a conceptual framework is necessary 6 and what an alternative system might be. (c) Discuss what is meant by relevance and faithful 6 representation and describe the qualities that enhance these characteristics. (d) Discuss whether faithful representation constitutes 6 more than compliance with IFRS® Accounting Standards. (e) Discuss what is meant by understandability and 6 verifiability in relation to the provision of financial information. (f) Discuss the importance of comparability and timeliness 6 to users of financial statements. (g) Discuss the principle of comparability in accounting for 8 changes in accounting policies. 2 Recognition and measurement (a) Define what is meant by ‘recognition’ in financial 6 statements and discuss the recognition criteria. (b) Apply the recognition criteria to: 6 (i) assets and liabilities. (ii) income and expenses. P.12 KAPLAN PUBLISHING  Syllabus learning objective Chapter reference (c) Explain and compute amounts using the following 7 measures: (i) historical cost (ii) current cost (iii) value in use/fulfilment value (iv) fair value (d) Discuss the advantages and disadvantages of 7 historical cost accounting. (e) Discuss whether the use of current value accounting 7 overcomes the problems of historical cost accounting. 3 Regulatory framework (a) Explain why a regulatory framework is needed, 6 including the advantages and disadvantages of IFRS Accounting Standards over a national regulatory framework. (b) Explain why accounting standards on their own are not 6 a complete regulatory framework. (c) Distinguish between a principles based and a rules 6 based framework and discuss whether they can be complementary. (d) Describe the standard setting process of the 6 International Accounting Standards Board (IASB®) including revisions to and interpretations of IFRS Accounting Standards. (e) Explain the relationship of national standard setters to 6 the IASB in respect of the standard setting process. (f) Explain the purpose and role of the International 6 Sustainability Standards Board (ISSB™). 4 The concepts and principles of groups and consolidated financial statements (a) Describe the concept of a group as a single economic 17 unit. (b) Explain and apply the definition of a subsidiary within 17 relevant IFRS Accounting Standards. (c) Using IFRS Accounting Standards and other 17 regulation, identify and outline the circumstances in which a group is required to prepare consolidated financial statements. KAPLAN PUBLISHING P.13  Syllabus learning objective Chapter reference (d) Describe the circumstances when a group may claim 17 exemption from the preparation of consolidated financial statements. (e) Explain the need for using coterminous year ends and 17 uniform accounting policies when preparing consolidated financial statements. (f) Explain why it is necessary to eliminate intra group 18 transactions. (g) Explain the objective of consolidated financial 17 statements. (h) Explain why it is necessary to use fair values for the 18 consideration for an investment in a subsidiary together with the fair values of a subsidiary's identifiable assets and liabilities when preparing consolidated financial statements. (i) Define an associate and explain the principles and 20 reasoning for the use of the equity method of accounting. B ACCOUNTING FOR TRANSACTIONS IN FINANCIAL STATEMENTS 1 Tangible non-current assets (a) Define and compute the initial measurement of a non- 2 current asset (including borrowing costs and an asset that has been self-constructed). (b) Identify subsequent expenditure that may be 2 capitalised, distinguishing between asset and expense items. (c) Discuss the requirements of relevant IFRS Accounting 2 Standards in relation to the revaluation of non-current assets. (d) Account for revaluation and disposal gains and losses 2 for non-current assets. (e) Compute depreciation based on the cost and 2 revaluation models and on assets that have two or more significant parts. (f) Discuss why the treatment of investment properties 2 should differ from other properties. (g) Apply the requirements of relevant IFRS Accounting 2 Standards to an investment property. P.14 KAPLAN PUBLISHING  Syllabus learning objective Chapter reference 2 Intangible non-current assets (a) Discuss the nature and accounting treatment of 3 internally generated and purchased intangible assets. (b) Distinguish between goodwill and other intangible 3 assets. (c) Describe the criteria for the initial recognition and 3 measurement of intangible assets. (d) Describe the subsequent accounting treatment of 3, 18 intangible assets. (e) Describe and apply the requirements of relevant IFRS 3 Accounting Standards to research and development expenditure. 3 Impairment of assets (a) Define, calculate and account for an impairment loss, 4 including the principle of impairment tests in relation to goodwill. (b) Account for the reversal of an impairment loss on an 4 individual asset. (c) Identify the circumstances that may indicate 4 impairments to assets. (d) Describe what is meant by a cash generating unit. 4 (e) State the basis on which impairment losses should be 4 allocated, and allocate an impairment loss to the assets of a cash generating unit. 4 Inventory and biological assets (a) Describe and apply the principles of inventory 8 valuation. (b) Apply the requirements of relevant IFRS Accounting 8 Standards for biological assets and agricultural produce. KAPLAN PUBLISHING P.15  Syllabus learning objective Chapter reference 5 Financial instruments (a) Explain the need for an accounting standard on 12 financial instruments. (b) Define financial instruments in terms of financial assets 12 and financial liabilities. (c) Explain and account for the factoring of receivables. 12 (d) Indicate for the following categories of financial 12 instruments how they should be measured and how any gains and losses from subsequent measurement should be treated in the financial statements: (i) amortised cost 12 (ii) fair value through other comprehensive income 12 (including where an irrevocable election has been made for equity investments that are not held for trading). (iii) fair value through profit or loss. 12 (e) Distinguish between debt and equity capital. 12 (f) Apply the requirements of relevant IFRS Accounting 12 Standards to the issue and finance costs of: (i) equity 12 (ii) redeemable preference shares and debt 12 instruments with no conversion rights (principle of amortised cost). (iii) convertible debt 12 6 Leasing (a) Account for right of use assets and lease liabilities in 11 the records of the lessee. (b) Explain the exemption from the recognition criteria for 11 leases in the records of the lessee. (c) Account for sale and leaseback transactions where 11 sales proceeds are equal to fair value. 7 Provisions and events after the reporting period (a) Explain why an accounting standard on provisions is 15 necessary. (b) Distinguish between legal and constructive 15 obligations. (c) State when provisions may and may not be made and 15 demonstrate how they should be accounted for. P.16 KAPLAN PUBLISHING  Syllabus learning objective Chapter reference (d) Explain how provisions should be measured. 15 (e) Define contingent assets and liabilities and describe 15 their accounting treatment and required disclosures. (f) Identify and account for: 15 (i) warranties/guarantees (ii) onerous contracts (iii) environmental, decommissioning and similar provisions (iv) restructuring (g) Events after the reporting period (i) distinguish between and account for adjusting and 15 non-adjusting events after the reporting period. (ii) identify items requiring separate disclosure, 15 including their accounting treatment and required disclosures. 8 Taxation (a) Account for current taxation in accordance with 13 relevant IFRS Accounting Standards. (b) Explain the effect of taxable and deductible temporary 13 differences on accounting and taxable profits. (c) Compute and record deferred tax amounts in the 13 financial statements. 9 Reporting financial and non-financial performance (a) Discuss the importance of identifying and reporting the 5 results of discontinued operations. (b) Define and account for non-current assets held for sale 5 and discontinued operations. (c) Indicate the circumstances where separate disclosure 1, 5 of material items of income and expense is required. (d) Account for changes in accounting estimates, changes 8 in accounting policy and correction of prior period errors. KAPLAN PUBLISHING P.17  Syllabus learning objective Chapter reference (e) Earnings per share (eps): (i) calculate the eps in accordance with relevant 14 IFRS Accounting Standards (dealing with bonus issues, full market value issues and rights issues). (ii) explain the relevance of the diluted eps and 14 calculate the diluted eps involving convertible debt and share options (warrants). (f) describe the objective, scope and core content of IFRS 6 Sustainability Standard 1 General Requirements for Disclosure of Sustainability-related Financial Information. 10 Revenue (a) Explain and apply the principles of recognition of revenue: (i) identification of contracts 10 (ii) identification of performance obligations 10 (iii) determination of transaction price 10 (iv) allocation of the price to performance obligations 10 (v) recognition of revenue when/as performance 10 obligations are satisfied (b) Explain and apply the criteria for recognising revenue 10 generated from contracts where performance obligations are satisfied over time or at a point in time. (c) Describe the acceptable methods for measuring 10 progress towards complete satisfaction of a performance obligation. (d) Explain and apply the criteria for the recognition of 10 contract costs. (e) Apply the principles of recognition of revenue, and 10 specifically account for the following types of transaction: (i) principal versus agent (ii) repurchase agreements (iii) bill and hold arrangements (iv) consignment arrangements P.18 KAPLAN PUBLISHING  Syllabus learning objective Chapter reference (f) Prepare financial statement extracts for contracts 10 where performance obligations are satisfied over time or at a point in time. 11 Government grants (a) Apply relevant IFRS Accounting Standards in relation 2 to accounting for government grants. 12 Foreign currency transactions (a) Explain the difference between functional and 9 presentation currency and explain why adjustments for foreign currency transactions are necessary. (b) Account for the translation of foreign currency 9 transactions and monetary/non-monetary foreign currency items at the reporting date. C ANALYSING AND INTERPRETING THE FINANCIAL STATEMENTS OF SINGLE ENTITIES AND GROUPS 1 Limitations of financial statements (a) Indicate the problems of using historic information to 22 predict future performance and trends. (b) Discuss how financial statements may be manipulated 22 to produce a desired effect. (c) Explain why figures in a statement of financial position may not be representative of average values throughout the period for example, due to: (i) seasonal trading (ii) major asset acquisitions near the end of the 22 accounting period. (d) Explain how the use of consolidated financial 22, 18, 19 statements might limit interpretation techniques. 2 Calculation and interpretation of accounting ratios and trends to address users’ and stakeholders’ needs (a) Define and compute relevant financial ratios. 22 (b) Explain what aspects of performance specific ratios are 22 intended to assess. (c) Analyse and interpret ratios to give an assessment of 22 an entity’s/group's performance and financial position in comparison with: (i) previous period’s financial statements KAPLAN PUBLISHING P.19  Syllabus learning objective Chapter reference (ii) another similar entity/group for the same reporting period (iii) industry average ratios. (d) Interpret financial statements (including statements of 22 cash flows) to give advice from the perspectives of different stakeholders. (e) Interpret financial statements (including statements of 22 cash flows) together with other financial and non- financial information to assess the performance and financial position of an entity and to give advice from the perspectives of different stakeholders. (f) Discuss how the use of current values affects the 22 interpretation of financial statements and how this would compare to using historical cost. (g) Indicate other information, including non-financial 22 information, that may be of relevance to the assessment of an entity’s performance and financial position. 3 Limitations of interpretation techniques (a) Discuss the limitations in the use of ratio analysis for 22 assessing performance and financial position. (b) Discuss the effect that changes in accounting policies 22 or the use of different accounting policies between entities can have on the ability to interpret performance and financial position. (c) Compare the usefulness of cash flow information with 16 that of a statement of profit or loss or a statement of profit or loss and other comprehensive income. (d) (i) explain why the trend of eps may be a more 14 accurate indicator of performance than a company's profit trend and the importance of eps as a stock market indicator. (ii) discuss the limitations of using eps as a 14 performance measure. 4 Specialised, not-for-profit and public sector entities (a) Explain how the interpretation of the financial statement 6, 22 of a not-for-profit or public sector organisation might differ from that of a profit-making entity by reference to the different aims, objectives and reporting requirements. P.20 KAPLAN PUBLISHING  Syllabus learning objective Chapter reference D PREPARATION OF FINANCIAL STATEMENTS 1 Preparation of single entity financial statements (a) Prepare an entity's statement of financial position and 1 statement of profit or loss and other comprehensive income in accordance with the structure and content prescribed within IFRS Accounting Standards and with accounting treatments as identified within syllabus areas A, B and C. (b) Prepare and explain the contents and purpose of the 1 statement of changes in equity. (c) Prepare extracts from a statement of cash flows for a 16 single entity (not a group) in accordance with relevant IFRS Accounting Standards using the indirect method only. 2 Preparation of consolidated financial statements including an associate (a) Prepare a consolidated statement of financial position 18, 20 for a simple group (parent and up to two subsidiaries controlled by the parent and one associate of the parent) dealing with pre- and post-acquisition profits, non-controlling interests and consolidated goodwill. (b) Prepare a consolidated statement of profit or loss and 19, 20, 21 consolidated statement of profit or loss and other comprehensive income for a simple group dealing with an acquisition or disposal in the period and non- controlling interest. (c) Explain and account for other components of equity 18 (e.g. share premium and revaluation surplus). (d) Account for the effects of intra-group transfer of assets 18, 19 and intra-group dividends. (e) Account for the effects of fair value adjustments 18, 19 (including their effect on consolidated goodwill) to: (i) depreciating and non-depreciating non-current assets (ii) inventory (iii) monetary liabilities (iv) assets and liabilities not included in the subsidiary’s own statement of financial position, including contingent assets and contingent liabilities KAPLAN PUBLISHING P.21  Syllabus learning objective Chapter reference (f) Account for goodwill impairment. 18, 19 (g) Describe and apply the required accounting treatment 18, 19 for consolidated goodwill. (h) Indicate why the fair value of purchase consideration 18 may be less than the fair value of the acquired identifiable net assets and how the difference (bargain purchase) should be accounted for. (i) Explain and illustrate the effect of a disposal of a 21 parent's investment in a subsidiary in the parent's individual financial statements and/or those of the group, including as a discontinued operation (restricted to disposals of the parent's entire investment in the subsidiary). E EMPLOYABILITY AND TECHNOLOGY SKILLS 1. Use computer technology to efficiently access and 23 manipulate relevant information. 2. Work on relevant response options, using available 23 functions and technology, as would be required in the workplace. 3. Navigate windows and computer screens to create and 23 amend responses to exam requirements, using the appropriate tools. 4. Present data and information effectively, using the 23 appropriate tools. The numbers in square brackets indicate the intellectual depth at which the subject area could be assessed within the examination. Level 1 (knowledge and comprehension) broadly equates with the Knowledge module, Level 2 (application and analysis) with the Skills module and Level 3 (synthesis and evaluation) to the Professional level. However, lower-level skills can continue to be assessed as you progress through each module and level. P.22 KAPLAN PUBLISHING  The Examination Examination format All questions are compulsory. The examination will contain both computational and discursive elements. Some questions will adopt a scenario/case study approach. Section A of the examination comprises 15 objective test (OT) questions of 2 marks each. Section B of the examination comprises three objective case questions (OT cases) worth 10 marks each. Each case has five objective test questions of 2 marks each. Section C of the examination comprises two constructed response (CR) questions, worth 20 marks each. The 20-mark questions will examine the interpretation and preparation of financial statements for either a single entity or a group. The section A and section B questions can cover any areas of the syllabus. An individual question may often involve elements that relate to different subject areas of the syllabus. For example, the preparation of an entity's financial statements could include matters relating to several accounting standards. Questions may ask candidates to comment on the appropriateness or acceptability of management's opinion or chosen accounting treatment. An understanding of accounting principles and concepts and how these are applied to practical examples will be tested. Questions on topic areas that are also included in Financial Accounting (FA) will be examined at an appropriately greater depth in this examination. Candidates will be expected to have an appreciation of the need for specific accounting standards and why they have been issued. For detailed or complex standards, candidates need to be aware of their principles and key elements. Number of marks Section A – Fifteen 2-mark objective test questions 30 Section B – Three 10-mark objective case questions, 30 comprising five 2-mark questions each Section C – Two 20-mark constructed response questions 40 –––– 100 –––– KAPLAN PUBLISHING P.23  Examination tips Individual learners will have different approaches to tackling the FR exam. The time allowed for the examination is 3 hours. For the examination, learners should allocate 1.8 minutes per mark, meaning that a 20-mark section C question should be completed in approximately 36 minutes, with a 10-mark section B question taking approximately 18 minutes. Unless you know exactly how to answer the question, spend some time planning your answer. Stick to the question and tailor your answer to what you are asked. Pay particular attention to the verbs in the question. If you get completely stuck with a question, take a guess, move on and return to it later. If you do not understand what a question is asking, state your assumptions. Even if you do not answer in precisely the way the examiner hoped, you should be given some credit if your assumptions are reasonable. You should do everything you can to make things easy for the marker. The marker will find it easier to identify the points you have made if your answers are well laid out. Short narrative response: Your answer should be concise but specific, explaining terms where required. Short narrative responses will often require comment on the correct accounting treatment of items, so an ability to discuss this is essential, rather than simply providing calculations. Computations: It is absolutely essential to include all your workings in your answers. Many computational questions require the use of a standard format. Be sure you know these formats thoroughly before the exam and use the layouts that you see in the answers given in this book and in model answers. Interpretation style response: Longer form responses are likely to contain some form of interpreting information. A good interpretation answer takes account of the information contained within the question and is well-structured, with good use of headings and sections. ACCA Support For additional support with your studies please also refer to the ACCA Global website. Study skills and revision guidance This section aims to give guidance on how to study for your ACCA exams and to give ideas on how to improve your existing study techniques. P.24 KAPLAN PUBLISHING  Preparing to study Set your objectives Before starting to study decide what you want to achieve – the type of pass you wish to obtain. This will decide the level of commitment and time you need to dedicate to your studies. Devise a study plan Determine which times of the week you will study. Split these times into sessions of at least one hour for study of new material. Any shorter periods could be used for revision or practice. Put the times you plan to study onto a study plan for the weeks from now until the exam and set yourself targets for each period of study – in your sessions make sure you cover the course, course assignments and revision. If you are studying for more than one examination at a time, try to vary your subjects as this can help you to keep interested and see subjects as part of wider knowledge. When working through your course, compare your progress with your plan and, if necessary, re-plan your work (perhaps including extra sessions) or, if you are ahead, do some extra revision/practice questions. Effective studying Active reading You are not expected to learn the text by rote, rather, you must understand what you are reading and be able to use it to pass the exam and develop good practice. A good technique to use is SQ3Rs – Survey, Question, Read, Recall, Review: 1 Survey the chapter – look at the headings and read the introduction, summary and objectives, so as to get an overview of what the chapter deals with. 2 Question – whilst undertaking the survey, ask yourself the questions that you hope the chapter will answer for you. 3 Read through the chapter thoroughly, answering the questions and making sure you can meet the objectives. Attempt the exercises and activities in the text, and work through all the examples. 4 Recall – at the end of each section and at the end of the chapter, try to recall the main ideas of the section/chapter without referring to the text. This is best done after a short break of a couple of minutes after the reading stage. 5 Review – check that your recall notes are correct. You may also find it helpful to re-read the chapter to try to see the topic(s) it deals with as a whole. KAPLAN PUBLISHING P.25  Note-taking Taking notes is a useful way of learning, but do not simply copy out the text. The notes must:  be in your own words  be concise  cover the key points  be well-organised  be modified as you study further chapters in this text or in related ones. Trying to summarise a chapter without referring to the text can be a useful way of determining which areas you know and which you don't. Three ways of taking notes: 1 Summarise the key points of a chapter. 2 Make linear notes – a list of headings, divided up with subheadings listing the key points. If you use linear notes, you can use different colours to highlight key points and keep topic areas together. Use plenty of space to make your notes easy to use. 3 Try a diagrammatic form – the most common of which is a mind-map. To make a mind-map, put the main heading in the centre of the paper and put a circle around it. Then draw short lines radiating from this to the main sub-headings, which again have circles around them. Then continue the process from the sub-headings to sub-subheadings, advantages, disadvantages, etc. Highlighting and underlining You may find it useful to underline or highlight key points in your study text – but do be selective. You may also wish to make notes in the margins. P.26 KAPLAN PUBLISHING  Revision The best approach to revision is to revise the course as you work through it. Try to leave four to six weeks before the exam for final revision. Make sure you cover the whole syllabus and pay special attention to those areas where your knowledge is weak. Here are some recommendations: Read through the text and your notes again and condense your notes into key phrases. It may help to put key revision points onto index cards to look at when you have a few minutes to spare. Review any assignments you have completed and look at where you lost marks – put more work into those areas where you were weak. Practise exam standard questions under timed conditions. If you are short of time, list the points that you would cover in your answer and then read the model answer, but do try to complete at least a few questions under exam conditions. Practise producing answer plans and comparing them to the model answer. If you are stuck on a topic find somebody (a tutor) to explain it to you. Read good newspapers and professional journals, especially ACCA's Student Accountant – this can give you an advantage in the exam. Ensure you know the structure of the exam – how many questions and of what type you will be expected to answer. During your revision attempt all the different styles of questions you may be asked. Examinable Documents This text has been updated to reflect Examinable Documents September 2024 to June 2025 issued by ACCA. KAPLAN PUBLISHING P.27 P.28 KAPLAN PUBLISHING Chapter 1 Introduction to published accounts Chapter learning objectives Upon completion of this chapter you will be able to:  prepare an entity’s statement of financial position and statement of profit or loss and other comprehensive income in accordance with the structure and content prescribed within IFRS Accounting Standards  prepare and explain the contents and purpose of the statement of changes in equity. This chapter provides a recap from Financial Accounting, reminding you of the format and content of financial statements, and the technique required to prepare them from a trial balance. One of the PER performance objectives (PO7) is to prepare external financial reports. You take part in preparing and reviewing financial statements – and all accompanying information – and you do it in accordance with legal and regulatory requirements. Working through this chapter should help you understand how to demonstrate that objective. KAPLAN PUBLISHING 1 Introduction to published accounts Preparation of single entity financial statements could be examined as one of the constructed response questions in section C of the FR examination. This chapter will look at the techniques and principles behind the construction of this. It is important to note that Chapters 2 to 15 contain information on specific accounting standards, any of which could be included within the construction of single entity financial statements. Once you have worked through these chapters, Chapter 23 provides practice for single entity financial statements with those standards incorporated into them. 1 Preparation of financial statements for companies IAS 1 Presentation of Financial Statements IAS 1 Presentation of Financial Statements states that a complete set of financial statements comprises:  a statement of financial position  either – a statement of profit or loss and other comprehensive income, or – a statement of profit or loss plus a statement showing other comprehensive income  a statement of changes in equity  a statement of cash flows  accounting policies and explanatory notes. IAS 1 (revised) does not require the above titles to be used by companies. It is likely in practice that many companies will continue to use the previous terms of balance sheet rather than statement of financial position, income statement instead of statement of profit or loss, and cash flow statement rather than statement of cash flows. 2 KAPLAN PUBLISHING  Chapter 1 Exceptional items Exceptional items is the name often given to material items of income and expense of such size, nature or incidence that disclosure is necessary in order to explain the performance of the entity. The accounting treatment is to:  include the item in the standard statement of profit or loss line  disclose the nature and amount in the notes. In some cases it may be more appropriate to show the item separately on the face of the statement of profit or loss. Examples include:  write down of inventories to net realisable value (NRV)  impairment of property, plant and equipment  restructuring costs  gains/losses on disposal of non-current assets  discontinued operations  litigation settlements  reversals of provisions Statement of financial position A recommended format is as follows: XYZ: Statement of financial position as at 31 December 20X8 Assets $ $ Non-current assets: Property, plant and equipment X Investments X Intangibles X ––– X Current assets: Inventories X Trade receivables X Cash and cash equivalents X Asset held for sale X ––– X ––– Total assets X ––– KAPLAN PUBLISHING 3 Introduction to published accounts Equity and liabilities Capital and reserves: Share capital X Retained earnings X Other components of equity X ––– X ––– Total equity X Non-current liabilities: Long-term borrowings X Deferred tax X ––– X Current liabilities: Trade and other payables X Short-term borrowings X Current tax payable X Short-term provisions X ––– X ––– Total equity and liabilities X ––– Note that IAS 1 requires an asset or liability to be classified as current if:  it will be settled within 12 months of the reporting date, or  it is part of the entity's normal operating cycle. Within the equity section of the statement of financial position, other components of equity include:  revaluation surplus  share premium  investment reserve (see financial instruments, Chapter 12). Statement of changes in equity (SOCIE) The statement of changes in equity provides a summary of all changes in equity arising from transactions with owners in their capacity as owners. This includes the effect of share issues and dividends. Other non-owner changes in equity, such as comprehensive income, are disclosed in aggregate only. 4 KAPLAN PUBLISHING  Chapter 1 XYZ Group Statement of changes in equity for the year ended 31 December 20X8 Share Share Revaluation Retained Total capital premium surplus earnings equity $ $ $ $ $ Balance at 31 December 20X7 X X X X X Prior year adjustment (IAS 8) (See Chapter 8) (X) (X) ––– ––– ––– ––– ––– Restated balance X X X X X Dividends (X) (X) Issue of share capital X X X Total comprehensive income X X X Transfer to retained earnings (See Chapter 2) (X) X – ––– ––– ––– ––– ––– Balance at 31 December 20X8 X X X X X ––– ––– ––– ––– ––– Statement of profit or loss and other comprehensive income Total comprehensive income is the realised profit or loss for the period, plus other comprehensive income. Other comprehensive income (OCI) is income and expenses that are not recognised in profit or loss (i.e. they are recorded in reserves rather than as an element of the realised profit for the period). For the purposes of FR, other comprehensive income includes any change in the revaluation of non-current assets (IAS 16, covered in Chapter 2) and fair value through other comprehensive income financial assets (IFRS 9, covered in Chapter 9). KAPLAN PUBLISHING 5 Introduction to published accounts Presentation of other comprehensive income The amendments to IAS 1 (revised) change how items of OCI are presented in the financial statements – they do not change which items should be presented in OCI. In principle, items of OCI must be classified as follows:  Items that might be reclassified (or recycled) to profit or loss in subsequent accounting periods – Foreign exchange gains and losses arising on translation of a foreign operation (IAS 21) (not on FR syllabus) – Effective parts of cash flow hedging arrangements (IAS 39) (not on FR syllabus) – Remeasurement of debt instruments designated to be classified as fair value through OCI (IFRS 9, Chapter 9)  Items that will not be reclassified (or recycled) to profit or loss in subsequent accounting periods – Changes in revaluation surplus (IAS 16, Chapter 2 & IAS 38, Chapter 3) – Remeasurement of equity instruments designated to be classified as fair value through OCI (IFRS 9, Chapter 9) IAS 1 Presentation of Financial Statements requires that you prepare either: 1 A statement of profit or loss and other comprehensive income showing total comprehensive income, or 2 A statement of profit or loss showing the realised profit or loss for the period PLUS a statement showing other comprehensive income. 6 KAPLAN PUBLISHING  Chapter 1 Statement of profit or loss and other comprehensive income A recommended format is as follows: XYZ: Statement of profit or loss and other comprehensive income for the year ended 31 December 20X8 $ Revenue X Cost of sales (X) ––– Gross profit X Distribution costs (X) Administrative expenses (X) ––– Profit from operations X Finance costs (X) Investment income X ––– Profit before tax X Income tax expense (X) ––– Profit for the year X Other comprehensive income Gain/loss on revaluation (IAS 16) X Gain/loss on fair value through other comprehensive income financial assets (IFRS 9) X ––– Total comprehensive income for the year X ––– KAPLAN PUBLISHING 7 Introduction to published accounts Alternative presentation Statement of profit or loss plus statement of comprehensive income A recommended format for the statement of profit or loss is as follows: XYZ Statement of profit or loss for the year ended 31 December 20X8 $ Revenue X Cost of sales (X) ––– Gross profit X Distribution costs (X) Administrative expenses (X) ––– Profit from operations X Finance costs (X) Investment income X ––– Profit before tax X Income tax expense (X) ––– Profit for the year X ––– A recommended format for the presentation of other comprehensive income is: XYZ Statement of other comprehensive income for the year ended 31 December 20X8 $ Profit for the year X Other comprehensive income Gain/loss on property revaluation X Gain/loss on fair value through other comprehensive income financial assets X ––– Total comprehensive income for the year X ––– 8 KAPLAN PUBLISHING  Chapter 1 2 Introduction to published accounts The following questions enable preparation of published accounts utilising knowledge gained at Financial Accounting (FA). In order to be able to complete an FR published accounts question these basic preparation techniques must be followed and the accounting standards in Chapters 2–15 must first be learned. Example 1 – Published accounts The following information has been extracted from the books of Picklette for the year to 31 March 20X9. $000 $000 Administrative expenses 170 Interest paid 5 Called up share capital (ordinary shares of $1 each) 200 Dividend 6 Cash at bank and in hand 9 Income tax (remaining balance from previous year) 10 Warranty provision 90 Distribution costs 240 Land and buildings: at cost (Land $110,000, Buildings $100,000) 210 accumulated depreciation (at 1 April 20X8) 48 Plant and machinery: at cost 125 accumulated depreciation (at 1 April 20X8) 75 Retained earnings (at 1 April 20X8) 270 10% Loan note (issued in 20X7) 80 Purchases 470 Sales 1,300 Inventory (at 1 April 20X8) 150 Trade payables 60 Trade receivables 728 ––––– ––––– 2,123 2,123 ––––– ––––– KAPLAN PUBLISHING 9 Introduction to published accounts Additional information 1 Inventory at 31 March 20X9 was valued at $250,000. 2 Buildings and plant and machinery are depreciated on a straight- line basis (assuming no residual value) at the following rates: On cost: Buildings 5% Plant and machinery 20% 3 There were no purchases or sales of non-current assets during the year to 31 March 20X9. 4 The depreciation charges for the year to 31 March 20X9 are to be apportioned as follows: Cost of sales 60% Distribution costs 20% Administrative expenses 20% 5 Income taxes for the year to 31 March 20X9 are estimated to be $135,000. 6 The 10% loan note was issued on 1 April 20X7 and is repayable five years from that date. 7 The year-end provision for warranty claims has been estimated at $75,000. Warranty costs are charged to administrative expenses. Required: Prepare Picklette’s statement of profit or loss for the year to 31 March 20X9 and a statement of financial position as at that date. Solution Picklette: Statement of profit or loss $000 Revenue 1,300 Cost of sales (470 + 150 (Op Inv) – 250 (Cl Inv) + (60% × 30 (W1))) (388) ––––– Gross profit 912 Distribution (240 + (20% × 30 (W1))) (246) Administration (170 + (20% × 30 (W1)) + – 15 (Warranty) (161) Profit from operations 505 Finance costs (80 × 10%) (8) ––––– Profit before tax 497 Income Tax (135 + 10) (145) ––––– Profit for the year 352 ––––– 10 KAPLAN PUBLISHING  Chapter 1 Statement of financial position $000 $000 Non-current assets Property, plant and equipment (W1) 182 Current assets Inventory 250 Receivables 728 Bank 9 ––––– 987 ––––– 1,169 ––––– Share capital 200 Retained earnings (W2) 616 ––––– 816 Non-current liabilities Loan 80 Provision for warranties (90 (TB) – 15) 75 ––––– 155 Payables (60 + 3 (accrued interest)) 63 Tax liability 135 ––––– 198 ––––– 1,169 ––––– KAPLAN PUBLISHING 11 Introduction to published accounts Working 1: Plant and Land Buildings machinery Total $000 $000 $000 $000 Cost b/f 110 100 125 335 Depreciation b/f – (48) (75) (123) Charge (5%/20% of cost) (5) (25) (30) –––– –––– –––– –––– Carrying amount c/f 110 47 25 182 –––– –––– –––– –––– Working 2: $000 Retained earnings b/f 270 Profit for the year 352 Dividends (6) –––– Retained earnings c/f 616 –––– 12 KAPLAN PUBLISHING  Chapter 1 Test your understanding 1 The following trial balance has been extracted from the books of Arran as at 31 March 20X7: $000 $000 Administration expenses 250 Distribution costs 295 Share capital $1 270 Share premium 80 Revaluation surplus 20 Dividend paid 27 Cash at bank and in hand 3 Receivables 233 Interest paid 25 Dividends received 15 Interest received 1 Land and buildings at cost (land 380, buildings 100) 480 Land and buildings: accumulated depreciation 30 Plant and machinery at cost 400 Plant and machinery: accumulated depreciation 170 Retained earnings account (at 1 April 20X6) 235 Purchases 1,260 Sales 2,165 Inventory at 1 April 20X6 140 Trade payables 27 Bank loan 100 ––––– ––––– 3,113 3,113 ––––– ––––– KAPLAN PUBLISHING 13 Introduction to published accounts Additional information 1 Inventory at 31 March 20X7 was valued at a cost of $95,000. Included in this balance were goods that had cost $15,000. These goods had become damaged during the year and it is considered that the goods could be sold for $5,500, less commission of $500. 2 Depreciation for the year to 31 March 20X7 is to be charged against cost of sales as follows: Buildings 5% on cost (straight line) Plant and machinery 30% on carrying amount (reducing balance) 3 Land is to be revalued upwards by $100,000. 4 Income tax of $165,000 is to be provided for the year to 31 March 20X7. 5 The bank loan is repayable in five years' time. Prepare the statement of profit or loss and other comprehensive income, statement of changes in equity and statement of financial position for year ended 31 March 20X7. Note: Show all workings, notes are not required. 3 Not-for-profit and public sector entities Not-for-profit and public sector entities Comparison of aims The main aims of not-for-profit and public sector entities are very different to those of profit-orientated entities: Profit-orientated sector Not-for-profit/public sector Financial aim is to make profit Financial aim is to achieve value and increase shareholder wealth. for money/provide service. Directors are accountable to Managers are accountable to shareholders. trustees/government/public. External finance freely available Finance generally limited to in the form of loans and share donations/ government subsidies. capital. 14 KAPLAN PUBLISHING  Chapter 1 Accounting standards and not-for-profit and public sector entities Accounting standards are designed to:  measure financial performance accurately and consistently  report the financial position accurately and consistently  account for the directors' stewardship of resources and assets. Not-for-profit and public sector organisations:  do not aim to achieve a profit but have to account for their income and costs  have to account for their effectiveness, economy and efficiency  do not have to produce financial statements for the public (but in many cases may do so). Some measurement accounting standards will be relevant such as those relating to inventory, non-current assets, leasing, etc. Others relating purely to reporting such as earnings per share (eps) will not be so relevant. Test your understanding 2 The following trial balance relates to P at 31 March 20X1: $000 $000 Revenue 5,300 Cost of sales 1,350 Dividends received 210 Administration expenses 490 Distribution costs 370 Interest paid 190 Prepayments 25 Dividends paid 390 Property, plant and equipment 4,250 Short-term investments 2,700 Inventory at 31 March 20X1 114 Trade receivables 418 Cash and cash equivalents 12 Trade payables 136 Long-term loans (repayable 20X9) 1,200 Share capital 1,500 Share premium 800 Retained earnings at 31 March 20X0 1,163 –––––– –––––– 10,309 10,309 –––––– –––––– KAPLAN PUBLISHING 15 Introduction to published accounts The following information should also be taken into account: 1 The tax charge for the year has been estimated at $470,000. 2 The directors declared a final dividend of $270,000 on 3 April 20X1. Required: Prepare, in a form suitable for publication, the statement of profit or loss and other comprehensive income, statement of financial position and statement of changes in equity for the year ended 31 March 20X1. 16 KAPLAN PUBLISHING  Chapter 1 4 Chapter summary KAPLAN PUBLISHING 17 Introduction to published accounts Test your understanding answers Test your understanding 1 Arran Statement of profit or loss and other comprehensive income for the year ended 31 March 20X7 $000 Revenue 2,165 Cost of sales (W1) (1,389) –––––– Gross profit 776 Administration (250) Distribution (295) –––––– Operating profit 231 Finance cost (25) Interest receivable 1 Investment income 15 –––––– Profit before tax 222 Income tax expense (165) –––––– Profit for the year 57 –––––– Other comprehensive income Gain on land revaluation 100 –––––– Total comprehensive income for the year 157 –––––– 18 KAPLAN PUBLISHING  Chapter 1 Arran Statement of changes in equity Share Share Revaluation Retained Total capital premium surplus earnings equity $000 $000 $000 $000 $000 B/f 270 80 20 235 605 Total comprehensive income 100 57 157 Dividends (27) (27) ––– ––– ––– ––– ––– C/f 270 80 120 265 735 –––