Advanced Reporting and Performance Study Guide 2024 Modules 4-9 PDF

 **Advanced Reporting and Performance** Contents [Module 4 -- Income & Expenses 2](#module-4-income-expenses) [Module 5 -- Financial Instruments 18](#module-5-financial-instruments) [Module 6 -- Consolidation 32](#module-6-consolidation) [Module 7 -- Statement of Cash Flow...

 **Advanced Reporting and Performance** Contents [Module 4 -- Income & Expenses 2](#module-4-income-expenses) [Module 5 -- Financial Instruments 18](#module-5-financial-instruments) [Module 6 -- Consolidation 32](#module-6-consolidation) [Module 7 -- Statement of Cash Flows 52](#module-7-statement-of-cash-flows) [Module 8 -- Non-financial Reporting: Sustainability Disclosures 60](#module-8-non-financial-reporting-sustainability-disclosures) [Module 9 -- The Relationship between financial and non-financial reporting 81](#module-9-the-relationship-between-financial-and-non-financial-reporting) Module 4 -- Income & Expenses ============================= **Introduction** Welcome to the study guide for Module 4 of the Advanced Reporting and Performance course. This study guide will help you prepare for the assessment. **Syllabus Learning Outcomes** **Module Learning Outcomes** By completing this module, you will have worked towards the following module learning outcomes: 1.1 Construct, with appropriate workings, the financial statements for an individual company This will be achieved by working towards the following performance indicators: 1.1.6 Advise on disclosure notes in accordance with IFRS Accounting Standards for: - Revenue - Share-based payments - Employee benefits - Revenue - Share-based payments - Employee benefits You will be 'assessment ready' for questions in Module 4 when you can confidently complete each set of the learning outcomes above. **What is the IFRS 15 five-step approach to revenue recognition?** Refer to RP2 Module 4 study guide for the IFRS 15 5 step approach to revenue recognition. **When is a contract within the scope of IFRS 15?** 5 Criteria to be in scope of IFRS 15: **Approval:** The parties to the contract have approved it and are committed to performing their respective obligations under the contract. **Rights**: The entity can identify each party's rights regarding the goods or services to be transferred. **Payment terms:** The entity can identify the payment terms for goods or services to be transferred. **Commercial Substance:** The contract has commercial substance. This is the case if the risk, amount or timing of the company's cash flows is expected to change as a result of the contract. **Consideration:** It is probable that the entity will collect the consideration that it will be contractually entitled to. In evaluating probability, the entity should consider only the customer's ability and intention to pay the consideration when it falls due. The evaluation is not affected by the fact that variable consideration in the contract may reduce the amount of consideration to be received. **Unperformed contracts (IFRS 15.12)** IFRS 15 does not apply to a wholly unperformed contract that any party can terminate without paying compensation to the other party. A contract is wholly unperformed if no goods or services have been transferred to the customer and the customer has not paid any consideration. **When is a promise in a contract a distinct performance obligation?** **Refer to RP2 Module 4 Study guide for definition of performance obligation.** In the Advanced Reporting and Performance assessment, you may be required to analyse more complex scenarios to determine the number of performance obligations in a contract and therefore it is important that you understand this definition in full. For a good or service to be distinct, it must meet two criteria; 1. The customer must be able to **benefit from the good or service** either on its own or together with other readily available resources; and 2. The promise to transfer the good or service must be **separately identifiable** from other promises in the contract. **How is the transaction price in a contract determined?** **Refer to RP2 Module 4 Study guide for transaction price.** 1. Exclude amounts collected for other parties 2. Adjust contract price if there is a significant financing component 3. Only include variable elements if it is highly probable that they will be reflected in the consideration received **How is variable consideration reflected in the transaction price?** Variable consideration is included in the transaction price (and so recognised as part of revenue) only if it is highly probable that a significant amount will not be reversed in the future when any uncertainty associated with the variable consideration is resolved. This assessment requires a degree of judgement. Both the likelihood that variable consideration will be reversed and the magnitude of any reversal should be considered. Reversal is more likely if: - The amount of consideration is highly susceptible to factors outside the entity's control, e.g. - Uncertainty about consideration is not expected to be resolved for a long time - The entity\'s experience with similar contracts has limited predictive value - The entity has a practice of offering a broad range of price concessions or changing the payment terms and conditions of similar contracts in similar circumstances - The contract has a large number and a broad range of consideration amounts Variable consideration should be reassessed at each period end until it is settled, taking into account any changes to expectations. If the transaction price changes, this is accounted for as a change in accounting estimate. Therefore, previously recognised revenue is not restated. **Refund liabilities (IFRS 15.55, B21, B24)** The expected level of refunds should be reflected in the measurement of revenue. Any amount received from customers that is not recognised as revenue, because it is expected to be refunded, is instead recognised as a refund liability. A refund liability should be updated at the end of each reporting period for changes in circumstances. Where refunds relate to customer returns (rather than a price rebate), an adjustment for returns is made to cost of sales as well as revenue. **How are revenue contracts that include non-cash consideration accounted for?** 'Exchange transaction' is only within the scope of IFRS 15 if the goods or services exchanged have different risks and cash flows, i.e., has commercial substance. Where consideration is not in the form of cash, the transaction price is determined using the following hierarchy: Use the fair value of non-cash consideration provided by the customer, if it can be reasonably estimated. 1. If not, use the stand-alone selling price of goods or services provided by the seller, if it can be reasonably measured. 2. If not, no revenue or cost of sales is recognised. **How is the transaction price allocated to performance obligations?** **Stand-alone selling price (IFRS 15.79)** In RP2, it was assumed that stand-alone selling prices for goods and services provided in a contract would be available. This is not always true, and you may be required to estimate the stand-alone selling price. +-----------------------+-----------------------+-----------------------+ | **Adjusted market | | **Expected cost plus | | assessment** Estimate | | margin** | | the amount that a | | | | customer in that | | | | market would be | | | +-----------------------+-----------------------+-----------------------+ **When should revenue be recognised over time?** **How is revenue recognised over time?** **Recognition over time: input and output methods (IFRS 15.40-41, B17-B19)** +-----------------------+-----------------------+-----------------------+ | **Input methods** | | **Output methods** | | | | | | There may not be a | | Outputs used to | | direct relationship | | measure progress may | | between the seller's | | not be directly | | inputs to the | | observable | | satisfaction of a | | | | | | and the information | | | | required to | +-----------------------+-----------------------+-----------------------+ **When does control pass to the customer?** Often control is transferred when goods are delivered to the customer, but in more complex scenarios judgement may be required to determine at which point in time control is passed. Some indicators of transfer of control: 1. The seller has a present right to payment for the asset 2. The customer has legal title to the asset 3. The seller has transferred physical possession of the asset to the customer 4. The entity has transferred the significant risks and rewards of ownership of the asset to the customer 5. The customer has accepted the asset In an assessment question, in which you are required to provide advice on a judgemental issue, make sure that you do not jump to the conclusion, even if you think it is obvious. Marks will be available for walking through your thought process by stating the requirements of the IFRS Accounting Standard and then applying them to the scenario before reaching a conclusion. **How are non-refundable up-front fees accounted for?** ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- If the up-front fee relates to the transfer of a promised good or service, and that good or service is a distinct performance obligation, revenue should be recognised when the performance obligation is satisfied. If the up-front fee does not relate to a distinct performance obligation, it is a prepayment for the goods or services provided throughout the contract period and should be recognised as revenue over that period. ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- **When is revenue recognised in a bill and hold transaction?** In a **bill-and-hold arrangement**, the selling company takes payment for goods from a customer but it holds the goods at its own premises until the customer requires them. Revenue is recognised when the customer obtains control of the goods. In a bill-and-hold arrangement, this is the case only if ALL of the following conditions are met: - The reason for the bill-and-hold arrangement is substantive (ie there is a genuine business reason for the arrangement) - The goods are labelled as belonging to the customer - The goods are ready for immediate transfer to the customer - The selling company cannot use the goods or sell them to another party **When is revenue recognised on a consignment sale?** A manufacturer of goods may transfer them to a retailer who displays them with the aim of selling them to the final customer. This is known as a **consignment sale**. The manufacturer can only recognise revenue when it transfers control of its goods to another party. If goods are held 'on consignment' by the retailer or dealer, the manufacturer has not transferred control of the goods to them as the goods may be returned. In this case, the manufacturer can only recognise revenue when the goods are sold to the final customer. **Consignment arrangements and agency** There is a secondary issue in an arrangement in which a retailer or dealer sells goods on a manufacturer's behalf. If the retailer is acting as an agent on behalf of the manufacturer and is paid a commission: **Manufacturer** **Retailer** ------------- ----------------------------------------------------- ------------------------------ **Revenue** Price charged to the final customer Commission from manufacturer **Expense** Manufacturing cost plus commission paid to retailer \- If the retailer is the principal in the transaction with the final customer: ------------- -- ---------------------------- **Revenue** **Expense** Price paid to manufacturer ------------- -- ---------------------------- **When does a warranty form a separate performance obligation?** Whilst IAS 37 applies to a standard warranty, IFRS 15 applies to an extended warranty. **Extended warranty** A promise over and above the promise made under the standard warranty, for example, to correct problems for an additional 2 years after the standard warranty expires, or to correct problems not covered by the standard warranty. This type of warranty may be sold to the customer or provided free of charge. The extended warranty is a separate performance obligation in the contract and is allocated some of the transaction price in the contract. Revenue in relation to the extended warranty is recognised over the extended warranty period. Any costs of extended warranty repairs are costs to fulfil the contract with the customer and should be recognised as incurred. **How is a sale and repurchase transaction accounted for?** Here are three types of repurchase agreement: - A **forward** option, in which the company that sold the asset is obliged to repurchase it at a later date - A **call** option, in which the company that sold the asset can choose to repurchase it at a later date, however, is under no obligation to do so - A **put** option, in which the party that bought the asset can require the selling company to repurchase it at a later date A sale is only recognised if control of the asset has passed from the selling company to the other party. IFRS 15 provides guidance on whether control passes where the repurchase agreement takes the form of a **forward or a call option** and a different set of requirements where the agreement takes the form of a **put** option. Only **forward** and **call** options will be assessed in Advanced Reporting and Performance. You will not be expected to account for sale and repurchase transactions which involve a **put** option. -- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ IFRS 16 *Leases* is applied to the sale and leaseback element of the transaction first (see the previous module on liabilities). As a result of the repurchase option, the transfer of the asset is not a sale. Therefore, IFRS 16 requires that this is recognised as a **financing arrangement** and IFRS 9 applies. -- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ **Example** Broderick Creamery Ltd (Broderick) manufactures and sells cheese, including its award-winning 10year old vintage Cheddar cheese. On 8 April 20X2, it sold 50,000kg of Cheddar to Northern Bank for £500,000. The sales contract stipulated that Broderick must repurchase all 50,000kg of Cheddar on 8 April 20X8 for £580,000. The sale contains a **forward** and Broderick is obligated to repurchase the Cheddar. How would this transaction be accounted for? **Solution** Since the repurchase price of £580,000 exceeds the selling price of £500,000, this is accounted for as a financing transaction. The cheese remains in Broderick\'s accounts as inventory and the following journal entry is made to record the sale contract: **Account name** -- ------------------------------------------------------- --------- -- Bank 500,000 Loan Being the recognition of proceeds from Northern Bank. Over the 6-year period to 8 April 20X8, the finance cost is recognised by: **Account name** ---- ---------------------------------------- -------- -- Dr Finance cost 80,000 Cr Loan Being the recognition of finance cost. On the repurchase date, the payment is recognised by: **Account name** ---- ---------------------------------------------------------------------- --------- -- Dr Loan 580,000 Cr Bank Being the repurchase / repayment of the amount due to Northern Bank. The IFRS 9 effective interest method is applied and the finance cost accrues to the loan at a constant rate over the 6-year period. If the contract had contained a **call** option rather than a forward, and Broderick had not exercised its option, the loan would have been derecognised and revenue recognised instead. **What accounting treatment is applied to costs to obtain a contract?** **What accounting treatment is applied to costs to fulfil a contract?** **Some costs to fulfil a contract are always recognised as expenses when incurred. They are:** - General and administrative costs (unless rechargeable to the customer) - The cost of wasted materials and resources that were not reflected in the contract price **What accounting treatment is applied to a loss-making contract?** A onerous contract is **A contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.** In this case, IFRS 15 is applied to measure and recognise revenue and costs incurred, and then IAS 37 is applied to ensure that the overall expected loss is recognised. **Example** Bolling Ltd (Bolling) has entered into a non-cancellable contract to construct a series of log cabins for a holiday park. The customer will control the log cabins as they are created. The transaction price is £5 million and future unavoidable costs of the contract are estimated to be £3.85 million due to unexpected increases in the price of timber. There is no contract clause to pass this increase back to the customer. The contract started in the year ended 31 December 20X6 and Bolling has applied IFRS 15 and recognised revenue of £2 million and costs of £1.2 million in the year. **Required** What further accounting entries are required to reflect the fact that the contract is expected to make a loss? **Solution** Overall the contract is expected to make a loss, calculated as follows: £'000 Transaction price 5,000 Costs incurred to date (1,200) Future expected costs Loss To date a profit of £800 has been recognised, calculated as: -------------------- -- Revenue recognised -------------------- -- Costs recognised Therefore a provision for £850,000 should be recorded to reflect future expected losses, which can be calculated as: £'000 Transaction price 5,000 Revenue recognised to date [(2,000)] Future revenue 3,000 Future expected costs [(3,850)] Future expected losses 850 This reverses the previously recognised profit of £800,000 and recognises the overall expected loss of £50,000. It is recognised by: **Account name** -- --------------------------------------------------------------- --------- -- Cost of sales 850,000 Provision for onerous contract Being the recognition of a provision for the onerous contract In the ARP assessment, you will not necessarily be told that a contract is onerous. Instead, you must use the scenario to calculate the expected profit or loss, and if loss-making, account for an onerous contract. **How is revenue presented and disclosed in the financial statements?** **What are monetary items?** **How are a foreign currency transaction and its subsequent settlement recognised?** **Foreign currency transactions settled BEFORE the reporting date.** **When and how are foreign currency balances in the SOFP remeasured?** **Foreign currency transactions settled AFTER the reporting date.** **How are foreign currency transactions disclosed?** IAS 21 requires that the following are disclosed: 1. The amount of exchange differences recognised in profit or loss (except for those arising on financial instruments measured at fair value through profit or loss in accordance with IFRS 9). 2. Net exchange differences recognised in other comprehensive income and accumulated in a separate component of equity. 3. A reconciliation of exchange differences accumulated in a separate component of equity at the beginning and end of the period. **How are short-term benefits and defined contribution pension plans accounted for?** Refer to RP2 Module 4 study guide for short-term benefits and defined contribution pension plans. **How are defined benefit pension plans accounted for?** Refer to RP2 Module 4 study guide for defined benefit pension plans. **What are amendments, curtailments and settlements and how are they accounted for?** Refer to RP2 Module 4 study guide for curtailments and settlements. **How are employee benefits presented and disclosed?** +-----------------------+-----------------------+-----------------------+ | **Short-term employee | | - IAS 1 | | benefits** | | *Presentation of | | | | Financial | | | | Statements* | | | | requires the | | | | disclosure of | | | | total employee | | | | expense | | | | | | | | - IAS 24 *Related | | | | Party | | | | Disclosures* | | | | requires the | | | | disclosure of key | | | | management | | | | personnel | | | | remuneration. | +-----------------------+-----------------------+-----------------------+ | **Defined | | | | contribution pension | | | | plans** | | | +-----------------------+-----------------------+-----------------------+ | **Defined benefit | - Presented as an | - Explanation of | | pension plans** | asset or | characteristics | | | liability in the | of plans and | | | SOFP | associated risks | | | | | | | - Current service | - Explanation of | | | cost and past | amounts in | | | service cost are | financial | | | presented as | statements | | | operating | (including | | | expenses in SPL | separate | | | (within staff | reconciliations | | | costs) | for pension | | | | assets and | | | - Net interest | pension | | | presented as | obligations) | | | finance | | | | cost/finance | - Description of | | | income in SPL | effect on amount, | | | | timing and | | | - Remeasurements | uncertainty of | | | presented as OCI- | future cash flows | | | Retained Earnings | | +-----------------------+-----------------------+-----------------------+ | | | | +-----------------------+-----------------------+-----------------------+ | | | - Related party | | | | transactions with | | | | pension plans and | | | | | | | | - Pension benefits | | | | for key | | | | management | | | | personnel | +-----------------------+-----------------------+-----------------------+ **What are share-based payments?** A share based payment is: **A transaction in which an entity makes payment to a supplier or employee in the form of its own equity instruments (shares or share options) or a cash amount related to the value of those instruments.** -- -- -- -- -------------------------------------------------------------------------------------------------------------------------------------------------------------- **Share-based payments with a choice of settlement** Payment is either equitysettled or cash-settled at the option of either the entity or the counterparty. -- -- -- -- -------------------------------------------------------------------------------------------------------------------------------------------------------------- **How are equity and cash-settled share-based payments recognised?** **Dr Expense / asset Cash settled share-based payment** **Cr Equity** Being the recognition of an equity-settled **Dr Expense/asset** share-based payment. **Cr Liability** Being the recognition of a cash-settled The asset or expense account used share-based payment. inventory, property, plant and equipment. depends on the nature of goods or services acquired, e.g. staff costs, purchases, - If shares are issued immediately, you The liability represents the obligation to pay should use share capital/share cash at a future date. You should use the premium. 'other payables' account. - If share options are issued, you should use retained earnings. A share-based payment transaction is recognised when goods or services are received from the supplier or employee. This may be at **a point in time or over a period of time.** **The impact on distributable reserves** Although a credit entry is made to retained earnings where payment is in the form of share options, this does not affect distributable reserves and no adjustment is required because the credit entry is legally considered to be distributable. **How are equity and cash-settled share-based payments measured?** **What are grant dates, vesting periods and vesting dates?** **Grant date** -------------------- **Vesting period** **Vesting date** **How are equity-settled share-based payment transactions with suppliers recognised?** Equity-settled share-based payments with suppliers are: - Usually recognised immediately (because they vest immediately) - Measured at the fair value of goods or services supplied, assuming these can be measured reliably **How are equity-settled share-based payment transactions with employees recognised?** Equity-settled share-based payments with employees: - Are measured at the fair value of instruments granted at the grant date - Usually require a period of service to be completed (vesting condition) The equity instruments are provided as consideration for work performed during the required period of service and the transaction is therefore recognised over this period. **What are vesting conditions and how do they affect accounting for share-based payment transactions?** Vesting conditions are: **The conditions that must be met during the vesting period in order for the counterparty to become entitled to equity instruments (or cash) in a share-based payment transaction.** **Service conditions Performance conditions related to share price** instruments granted to them. service to the company, e.g. share price must exceed leavers. No adjustment is made to the measurement of the share- Performance conditions unrelated to share price ----------------------------------------------- **What accounting treatment applies to share options after the vesting date?** After the vesting date, employees may **exercise** their share options (i.e. buy shares at the option price), or they may let them **lapse** (i.e. fail to exercise the options within the allowed timeframe). +-----------------------------------+-----------------------------------+ | **Options are exercised** | **Options lapse** | | | | | Dr Bank | No accounting entry is required. | | | | | Cr Share capital | Can transfer cumulative credit | | | made to retained earnings | | Cr Share premium | throughout the vesting period to | | | another balance within equity. | | Can transfer cumulative credit | | | made to retained earnings | | | throughout the vesting period to | | | another balance within equity. | | +-----------------------------------+-----------------------------------+ **How are cash-settled share-based payments recognised and measured?** Cash-settled share-based payments are usually a form of reward provided to employees in exchange for their services. They may take the form of: - Share appreciation rights (SARs), which grant employees a right to a future cash payment that is based on an increase in share price over a defined period - A right to shares that are redeemable In Advanced Reporting and Performance, cash-settled share-based payments will take the form of share appreciation rights (SARs). +-----------------------------------+-----------------------------------+ | **Recognition** | **Measurement** | +===================================+===================================+ | - Recognise as a liability: Dr | **Measurement** | | Expense / asset | | | | - Measure at the fair value of | | Cr Other payables | the liability | | | | | - Recognise when goods or | - Remeasure at each reporting | | services are provided. | date and the settlement date | +-----------------------------------+-----------------------------------+ | Any remeasurement gains or losses | | | are recognised in profit or loss. | | | This is the case even if the | | | share-based payment qualifies for | | | recognition as an asset. | | +-----------------------------------+-----------------------------------+ **How do vesting conditions affect accounting for cash-settled sharebased payments?** Vesting conditions are reflected in the measurement of cash-settled share-based payments in the same way as equity-settled. **How are share-based payments disclosed in the financial statements?** +-----------------+-----------------+-----------------+-----------------+ | | Information | | - The total | | | should be | | expense in | | | provided that | | the period, | | | allows users to | | including | | | understand the | | separate | | | nature and | | disclosure | | | extent of | | of the | | | sharebased | | expense | | | payment | | arising | | | arrangements in | | from | | | the period. | | equity-sett | | | | | led | | | s includes: | | share-based | | | | | payments | | | A description | | | | | of each type of | | - The | | | arrangement, | | carrying | | | including | | amount of | | | vesting | | share-based | | | conditions. The | | payment | | | number and | | | | | weighted | | | | | average | | | | | exercise price | | | | | of share | | | | | options that | | | | | were: | | | | | | | | | | outstanding at | | | | | the start and | | | | | end of the | | | | | period granted | | | | | during the | | | | | period lapsed | | | | | during the | | | | | period | | | | | exercised | | | | | during the | | | | | period expired | | | | | during the | | | | | period | | | | | exercisable at | | | | | the end of the | | | | | period | | | +-----------------+-----------------+-----------------+-----------------+ **How is deferred tax calculated in relation to cash-settled sharebased payments?** A cash-settled share-based payment results in the recognition of a liability at the reporting date and therefore deferred tax should be considered. +-----------------------------------+-----------------------------------+ | **Carrying amount** | | | | | | The carrying amount should be | | | calculated in accordance with | | | IFRS 2, as described in Lesson 9. | | +===================================+===================================+ | **Temporary difference** | | | | | | The amount of the temporary | | | difference is the carrying amount | | | of the share-based payment | | | liability due in more than nine | | | months. | | | | | | It is a deductible temporary | | | difference because tax relief | | | will be given equal to the | | | carrying amount in the future. | | +-----------------------------------+-----------------------------------+ In the Advanced Reporting and Performance assessment, you should treat any non-current sharebased payment liability as a deductible temporary difference unless more specific information is provided (i.e. the liability is due in more than 9 months). As mentioned above, only consider the deferred tax consequences of share-based payments if the requirement asks you to do so. Have you completed reading module 4? ------------------------------------------------------------------------------------ -- Have you completed the skills checkers and skills builders? Can you confidently complete the module learning outcomes listed on this module? Can you confidently answer the guiding questions? Have you completed the assessment practice questions? Have you used the discussion board to ask questions on areas you are unsure about? Module 5 -- Financial Instruments ================================= **Introduction** Welcome to the study guide for Module 5 of the Advanced Reporting and Performance course. This study guide will help you prepare for the assessment. **Syllabus Learning Outcomes** **Module Learning Outcomes** By completing this module, you will have worked towards the following module learning outcomes: 1.1 Construct, with appropriate workings, the financial statements for an individual company This will be achieved by working towards the following performance indicators: 1.1.6 Advise on disclosure notes in accordance with IFRS Accounting Standards for: - Financial instruments - Share capital - Distributable profits - Financial instruments - Share capital - Distributable profits You will be 'assessment ready' for questions in Module 5 when you can confidently complete each set of the learning outcomes above. **What are financial instruments, financial assets and financial liabilities?** Refer to RP2 Module 5 study guide for definition of financial instruments, financial assets and financial liabilities. **How are preference shares classified?** **Refer to RP2 Module 5 study guide for how preference shares are classified.** In Advanced Reporting and Performance, you will not be required to account for redeemable preference shares with a discretionary dividend that is classified as a compound instrument. **\ ** **How does IAS 32 extend the definitions of financial asset and financial liability?** IAS 32 extends the definitions of financial asset and financial liability beyond those that you encountered in RP2. +-----------------------------------+-----------------------------------+ | **Financial Asset** | **Financial Liability** | +===================================+===================================+ | A contract that will or may be | A contract that will or may be | | settled in the entity's own | settled in the entity's own | | equity instruments and is one of | equity instruments and is one of | | the following: | the following: | | | | | - A non-derivative for which | - A non-derivative for which | | the entity is or may be | the entity may be obliged to | | obliged to receive a variable | deliver a variable number of | | number of its own equity | its own equity instruments | | instruments | | | | - A derivative that will or may | | - A derivative that will or may | be settled other than by the | | be settled other than by the | exchange of a fixed amount of | | exchange of a fixed amount of | cash or another financial | | cash or another financial | asset for a fixed number of | | asset for a fixed number of | the entity's own equity | | the entity's own equity | instruments. | | instruments. | | +-----------------------------------+-----------------------------------+ If a contract will or may be settled in a **fixed** number of a company's own equity instruments, it is an **equity instrument** (a decrease to equity if shares will be received and an increase to equity if shares will be issued). In the Advanced Reporting and Performance assessment, you will not be required to account for a financial asset or a financial liability that is settled in a variable number of a company's own equity instruments, but you may be expected to identify and explain whether such transactions are financial assets or financial liabilities. **When are convertible instruments classified as compound instruments?** **Refer to RP2 Module 5 study guide for compound instruments.** In Advanced Reporting and Performance, you will not be required to account for convertible instruments that are financial liabilities in their entirety. In Advanced Reporting and Performance, you can assume that any convertible instruments that you are required to account for are classified as compound instruments. **How are compound instruments presented in the financial statements?** Financial liability component The financial liability component is initially measured at the fair value of a similar instrument with no conversion rights.   This is calculated as the present value of future cash flows associated with the debt on the assumption that it will be redeemed. The discount rate to be used is that applicable to similar debt without conversion rights.   Subsequently, IFRS 9 applies Equity component The equity instrument is measured as the balance of the proceeds. Subsequently, it is not remeasured.     This accounting treatment reflects the definition of equity as the residual interest in the assets of an entity (in this case, the cash proceeds) after deducting liabilities. In this lesson, you have learnt that convertible instruments are financial liabilities if they fail the 'fixed for fixed' test; otherwise, they are compound instruments. Refer to RP2 Module 5 study guide for how to determine the liability and equity elements of compound instruments. **How are compound instruments accounted for at maturity?** **How is an issue of equity shares, including bonus and rights issues, recognised?** +-----------------------+-----------------------+-----------------------+ | **Issue of shares for | | A listed company must | | cash** | | have the non-cash | | | | consideration valued | | Cr Share premium | | independently. | | account (balance) | | | | | | Cr Share premium | | | | account (balance) | +-----------------------+-----------------------+-----------------------+ **Rights Issue** **A rights issue of shares is an issue of shares to existing shareholders in proportion to their existing shareholding in exchange for consideration.** The issue price in a rights issue is usually below market price in order to incentivise shareholders to take up their rights and buy the offered shares. Since a rights issue is for consideration, the journal entry is the same as that for a cash issue of shares at market price:   **Account name**  ----- -------------------------------- -- -- Dr   Bank Cr   Share capital Cr Share premium    Being the issue of new shares **How are distributable profits calculated?** *In Advanced Reporting and Performance, you need to understand what distributions are and how distributable profits are calculated in accordance with the Companies Act.* **Distributions (CA06, s829)** A distribution is any transfer of company assets to shareholders other than: - An issue of bonus shares - A distribution of assets on a winding up - The redemption or purchase of a company's own shares out of capital or unrealised profits - A reduction of share capital to extinguish share capital not paid up or to repay paid-up share capital. **Distributable profits (CA06, s830)** Companies pay distributions out of retained earnings rather than current-year profits. The balance of retained earnings is not necessarily distributable in full. **Private limited companies** **Listed companies** Tutor tip: In an assessment question, the calculation of distributable profits is likely to involve adjusting retained earnings. **How do we distinguish between realised and unrealised profits and losses?** Realised and unrealised profits An item of income (or a gain) is realised when it arises from a transaction in which the consideration received is a qualifying consideration. The types of qualifying consideration are: Cash An asset that is readily convertible into cash, if a value can be obtained for the asset in its current state and the asset can be sold Amounts to be settled in cash or amounts that are readily convertible into cash, if the debtor can settle within a reasonable period, eg most sales on credit. **Realised and unrealised profits and losses (CA06, s853(4))** Realised income/gains --------------------- - A gain from remeasuring an item to fair value if that item is readily convertible to cash, e.g. a gain on the remeasurement of a derivative which is measured at fair value through profit or loss (FVTPL) - An exchange gain on the settlement of a monetary item or the retranslation of a monetary item, e.g. the settlement or remeasurement of a foreign currency receivable amount - The reversal of an impairment loss previously regarded as realised, e.g. an impairment loss on property, plant and machinery measured using the cost model - A gain previously considered to be unrealised that becomes realised due to sale, e.g. a revaluation surplus on property becomes realised when the property is sold - For a revalued asset, the excess of depreciation based on revalued amount over depreciation based on historic cost. This is regardless of whether a reserves transfer is made from the revaluation surplus to retained earnings for the excess depreciation **Unrealised income/gains** **Realised and unrealised losses** - Fair value gains on investment properties Almost all losses are realised. - An exception is a revaluation decrease that cancels a previous revaluation increase. In the ARP assessment, you could be asked to calculate distributable profits and/ or explain whether a gain or loss is realised or unrealised. **How do directors decide whether to pay dividends?** Equity dividends are paid at the discretion of directors. In deciding whether to pay a dividend and how much to pay, directors should consider their fiduciary duty and the volatility of profits. **How is a repurchase of ordinary shares recognised?** **Refer to RP2 Module 5 study guide for steps for repurchase of ordinary shares including maintenance of permanent capital.** Remember: there are strict limits on what items can be charged (debited) to the share premium account. The following are allowed: - A bonus issue of shares - A write-off of expenses relating to the share issue that gave rise to the premium A write-off of the premium on certain purchases or redemptions of equity shares. **When is a financial asset classified as measured at amortised cost, fair value through other comprehensive income (FVTOCI) or FVTPL?** **Refer to RP2 Module 5 study guide for financial asset classification.** In Advanced Reporting and Performance, you must be able to analyse a given scenario and decide whether a financial asset should be classified as measured at amortised cost, FVTOCI or FVTPL, before applying the appropriate accounting treatment. **What are the exceptions to the classification guidance?** There are two exceptions to the general IFRS 9 classification guidance. In each case, the exception is: - Available at initial recognition only - Irrevocable, and - Available on an asset-by-asset basis **Traded debt** Traded debt is debt instruments such as bonds that are bought and sold on organised markets. - The loan's fair value changes if market interest rates change; and - The traded debt's fair value changes as market prices change  +-----------------------+-----------------------+-----------------------+ | | **Equity | **Debt investments** | | | investments** | | +=======================+=======================+=======================+ | **Initial | At fair value | | | measurement** | (transaction price) | | | | plus transaction | | | | costs | | +-----------------------+-----------------------+-----------------------+ | **Measurement at | At fair value | | | reporting date** | | | +-----------------------+-----------------------+-----------------------+ | **Recognition of | All recognised in OCI | Finance income using | | change in measurement | (Revaluation Reserve) | the effective | | in the year** | | interest method is | | | | recognised in SPL. | | | | | | | | Any further | | | | adjustment (to fair | | | | value) is recognised | | | | in OCI (Revaluation | | | | Reserve). | +-----------------------+-----------------------+-----------------------+ | **Classification of | OCI will not be | OCI may be | | OCI** | reclassified to | reclassified to | | | profit or loss. | profit or loss. | +-----------------------+-----------------------+-----------------------+ Use the FV as B/f balance for calc but still use c/f bal to work out effective interest. In your Advanced Reporting and Performance assessment, you may be required to analyse a given scenario in order to determine at what stage of the IFRS 9 ECL model a financial asset is, before going on to provide accounting advice. - When there is a **significant increase in credit risk**, meaning that a financial asset moves from stage 1 to stage 2 of the general approach, and - When there is **objective evidence of impairment**, meaning that a financial asset has reached stage 3 of the general approach. +-----------------------------------+-----------------------------------+ | **Significant increase in credit | **Objective evidence of | | risk (IFRS** | impairment (IFRS** | | | | | **9.B5.5.17, 5.5.11)** | **9.Appendix A)** | | | | | List of factors that may be | Evidence that a financial asset | | relevant. These include: | is credit-impaired includes | | | observable data about events such | | - An actual or expected | as: | | significant decline in the | | | operating results of the | Significant financial | | borrower | difficulty of the borrower | | | | | - Existing or forecast adverse | - A breach of contract, such as | | changes in business, | a default (nonpayment of | | financial or economic | contractual amount) | | conditions | | | | - It becoming probable that the | | - An actual or expected | borrower will enter | | downgrade in the borrower's | bankruptcy or other financial | | credit rating | reorganisation. | | | | | - Actual or expected | | | significant adverse changes | | | in the regulatory, economic | | | or technological environment | | | of the borrower. | | | | | | - IFRS 9 contains a rebuttable | | | presumption that the credit | | | risk of a financial asset has | | | increased significantly when | | | contractual payments are more | | | than 30 days late | | +-----------------------------------+-----------------------------------+ 1. Calculate the separate ECL for each possible credit losses outcome: **£** Present value of contractual cash flows from the financial asset X Present value of expected cash flows from the asset (X) ECL X 2. Loss allowance is calculated as the weighted average of possible credit loss outcomes. 3. **Recognise the change in loss allowance in SPL** 4. **Presented as net in Financial statements** **When calculating expected cash shortfalls for a debt instrument at FVTOCI, the present value of contractual cash flows is equal to the amortised cost of the asset rather than the fair value.** In Advanced Reporting and Performance, you may be required to analyse a scenario and decide whether derecognition is appropriate. It is therefore important that you understand the detail of the IFRS 9 financial asset derecognition requirements. +-----------------------+-----------------------+-----------------------+ | **Contractual cash | | **Asset is | | flows expire** | | transferred (IFRS | | | | 9.3.2.4)** | | | | | | | | An asset is | | | | transferred if | | | | substantially all | | | | risks and rewards | | | | associated with the | | | | financial asset are | | | | transferred **and** | | | | either: | | | | | | | | the contractual | | | | rights to receive | | | | cash flows | +-----------------------+-----------------------+-----------------------+ 1. Finance income up to the disposal date should be accrued to the carrying amount of the financial asset 2. The difference between the carrying amount and proceeds (net of transaction costs) is a gain or loss in profit or loss. 1. Remeasure the financial asset to fair value at the derecognition date 2. Recognise proceeds, derecognise the asset and recognise any gain or loss on disposal 3. For equity investments at FVTOCI, transfer the balance on the FVTOCI revaluation reserve to retained earnings - Accrue interest to the disposal date using the effective interest method. - Remeasure the asset to fair value, recognising the gain or loss in OCI. - Recognise net proceeds and derecognise the asset. - Recognise any difference as a gain or loss in profit or loss. **Step 3** - Reclassify the balance on the FVTOCI revaluation reserve related to the financial asset to profit or loss. - Recognise **the reclassification adjustment as part of the profit or loss on disposal**. In the ARP assessment, you could be faced with a scenario in which, for example, the financial controller has determined that a financial asset should be derecognised, but analysis of the scenario indicates that the criteria have not been satisfied. You need to be able to explain any errors made by the financial controller with reference to the derecognition criteria and prepare any adjusting journal entries. \- It is issued with the intention of repurchasing it in the short term, or \- It is part of a group of identical liabilities for which there is a recent pattern of short-term profit-taking, or \- It is a derivative. \- It eliminates an accounting mismatch, or \- A group of financial instruments are managed on a fair value basis. - The equity investment (financial asset) is classified as FVTPL - The bank loan (financial liability) is ordinarily classified as amortised cost. - Risks associated with financial instruments - These disclosures can be made either on the face of the statement of financial position or in the notes to the financial statements. - For financial assets and liabilities at FVTPL, the total carrying amount should be split between: − instruments designated as measured at FVTPL − instruments that are required to be measured at FVTPL. **Additional disclosures related to the statement of financial position** - Which investments are measured at FVTOCI and why - The fair value of each investment at the reporting date - Dividends recognised in the reporting period - The gain or loss on any equity investments at FVTOCI that are disposed of in the period and the fair value prior to disposal. +-----------------------------------+-----------------------------------+ | **Financial assets** | - Net gains and losses on | | | financial assets at amortised | | | cost, FVTOCI, FVTPL | | | | | | - Total finance income on | | | financial assets at amortised | | | cost | | | | | | - Impairment losses on | | | financial assets at amortised | | | cost and FVTOCI | +===================================+===================================+ | **Financial liabilities** | - Net gains and losses on | | | financial liabilities at | | | amortised cost, FVTPL | | | | | | - Total finance cost on | | | financial liabilities at | | | amortised cost | +-----------------------------------+-----------------------------------+ - These disclosures can be made either on the face of the statement of profit or loss and OCI or in the notes to the financial statements - Net gains or losses on equity investments at FVTOCI should be disclosed separately from those relating to other financial assets - Amounts reported in OCI in relation to debt investments measured at FVTOCI should be split between gains and losses in the period and reclassification adjustments on disposal - For financial assets and liabilities at FVTPL total net gains and losses should be split between: − instruments designated as measured at FVTPL − instruments that are required to be measured at FVTPL. +-----------------------+-----------------------+-----------------------+ | **Credit risk** | | **Liquidity risk** | | | | | | The risk that one | | be able to pay cash | | party in a financial | | due to settle | | instrument will cause | | financial | | a | | liabilities. For | | | | example, where a | | | | company has no cash | | | | to repay a loan that | | | | is due. | +-----------------------+-----------------------+-----------------------+ Disclosures may be: Quantitative, for example an explanation of how risks are managed Qualitative, for example, a table indicating when obligations fall due helps to explain liquidity risk.  In Advanced Reporting and Performance, you will not be required to prepare disclosures related to risk; however, you should be prepared to advise an entity that disclosures should be prepared for inclusion in the financial statements. Study guide checklist  ---------------------- Have you completed reading module 5? ------------------------------------------------------------------------------------ -- Have you completed the skills checkers and skills builders? Can you confidently complete the module learning outcomes listed on this module? Can you confidently answer the guiding questions? Have you completed the assessment practice questions? Have you used the discussion board to ask questions on areas you are unsure about? Module 6 -- Consolidation ========================= SLO 1 Advise on the requirements for financial reporting and performance in accordance with relevant standards 1.2 Construct, with appropriate workings, the consolidated financial statements for a group. 1.3 Advise on the effect of transactions and adjustments on the financial statements of an individual company and of a group. 1.2.1 Consider the appropriate accounting treatment of changes in group structure: - A business combination achieved in stages. - A complete disposal. - A partial disposal (still with a controlling stake). 1.2.2 Advise on the disclosure requirements of IFRS 12 Disclosure of Interests in Other Entities for subsidiaries, associates and joint ventures. 1.2.3 Consider whether other entities require consolidation and explain the accounting treatment required. 1.2.4 Construct consolidated financial statements including adjustments for intercompany transactions and balances, fair values, goodwill and gain from bargain purchase. 1.2.5 Construct consolidated financial statements for the following situations: - A business combination achieved in stages. - A partial disposal. - A complete disposal. - A foreign subsidiary 1.2.6 Advise on disclosure notes in accordance with IFRS Accounting Standards for consolidated accounts. 1.2.7 Advise on the treatment required where a company has an associate or a joint venture but does not prepare consolidated financial statements. 1.3.2 Consider alternative methods of accounting for interests in other entities in the consolidated financial statements. 1.3.3 Advise on the effect of transactions and adjustments related to consolidation on the financial statements of a group. 1.3.4 Advise on the impact of fair value adjustments necessary on the acquisition of a subsidiary on consolidated and individual accounts.  - Power over the investee (subsidiary); - exposure, or rights, to variable returns from its involvement with the investee (subsidiary); - the ability to use its power over the investee (subsidiary) to affect the amount of the investor's returns.  Where power is not determined by voting rights, other rights must be considered. IFRS 10 gives examples of other rights, including: Rights to appoint, reassign or remove key management personnel who have the ability to direct relevant activities Rights to direct the investee to enter into, or veto any changes to, transactions for the benefit of the investor Decision-making rights specified in a management contract **Ability to use power to affect returns:** When determining whether an entity that has the power to make decisions about relevant activities is a principal or an agent, it is important to consider whether the entity uses its power to affect returns for its **own benefit or that of others.** When assessing control, delegated power is treated as being held by the investor directly; therefore, the: Investor (principal) has control and the investee is its subsidiary Agent does not have control and the investee is not its subsidiary  Investor can be principal or agent as shown below:  In the ARP assessment, subject to any additional information, you should assume that a shareholding of more than 50% represents control. In narrative questions you may be required to advise on the **IFRS 10 definition of control.** **Exemptions from preparing group financial statements** An entity that is a parent shall prepare consolidated financial statements (ie including its subsidiaries) but there are limited cases where exemptions apply   As a result, a number of intangible assets may be recognised in consolidated financial statements on acquisition, even though they are not recognised in the subsidiary's individual financial statements. Examples may include: Trademarks  Copyrights  Planning permission  Trade secrets Brands Franchise agreements *Provisions, Contingent Liabilities and Contingent Assets* does not apply. The definition of a contingent  Shares acquired over time: **Use the FV of shares bought as part of the investment in sub (consideration paid)** **Changes in proportion held by non-controlling interests (IFRS 10.B96)** When the proportion of the entity held by non-controlling interests changes, an entity shall adjust the** carrying amounts of the controlling and non-controlling interests.**\ \ The entity shall** recognise directly in equity **any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid.\ \ Goodwill is **not **recalculated -- it is calculated** only at the point where control is obtained.** Any additional shares bought are delt with by: DR SFP -- NCI (amount of net assets (% of shares) bought by company) DR RE- (balancing) CR Investment in Mist- (consideration paid) **Tutor tip:** If the additional shares had been acquired during the year, we would have needed to apportion profits and apply the relevant non-controlling interests (NCI) percentages at different points during the year. You should assume that profits arise evenly th[r]oughout the year, unless otherwise stated. Disposal of Sub: **Process and journal entries for Full Disposal** The process for Full Disposal is summarised as follows: 1. Consolidate results of subsidiary to disposal date (Consolidation steps 1-6) 2. Calculate and recognise profit or loss on disposal (new step 7):   £\'000  £\'000  -------------------------------------------- --------- --------- Proceeds on disposal    X  Net assets of subsidiary at disposal date  X    NCI at disposal date  (X)    Goodwill at disposal date  X        (X)  Gain/loss    X/(X)    **Journal entry:** Dr  Bank  ----- ---------------------------------------- Dr  SOFP -- NCI (if applicable)  Cr Goodwill  Cr Net assets disposed (100%)  Cr SPL -- gain on disposal (Dr if a loss) 3. Consider:  - Whether consolidated financial statements are still required   - Whether disposed of subsidiary is discontinued operation **Tutor tip:** In the assessments, the credit to net assets entry is likely to be split into a number of debit entries to eliminate the subsidiary's liabilities and credit entries to eliminate the subsidiary's assets. Note that the debit entry to 'Bank' assumes that the parent company has not recorded the proceeds in its individual financial statements and, therefore, still has the investment in the subsidiary on its individual statement of financial position. Read the question carefully in the assessment to ascertain whether proceeds have been posted. **Partial disposal of an interest but control is retained** A parent can dispose of part of its interest in a subsidiary and still retain control. For example, lower its ownership from 80% to 70% but maintaining control. Under IFRS 10, the parent is required to apply the economic entity model for its transaction with the NCI. Since the parent company disposes of a partial interest in a subsidiary but retains control over the subsidiary, the transaction is accounted for as an equity transaction between the parent and its shareholders. This means that the **difference between the carrying amount of the subsidiary interest disposed of and the consideration received (including any related transaction costs) is recognised directly in the parent's equity. No gain or loss** is recognised in profit or loss as a result of such transactions.\ \ A couple of notes: - NCI must be recalculated to reflect the change in the ownership interest of the subsidiary. The NCI share is adjusted based on the current ownership interest after the partial disposal, reflecting the new proportion of the subsidiary\'s net assets attributable to the NCI. - Since control is retained, goodwill is not remeasured or allocated to the transaction. **Accounting methods for joint ventures** In general, the accounting methods for parties to a joint arrangement are not the same for all. It is different for the parties that are sharing joint control (joint operators or joint venturers) compared to those parties that participate but are not having joint control (other parties). In the case of joint ventures: A joint venturer should account for its interest using the equity method under IAS 28, unless exempted from applying the equity method. Other parties that participate but do not have joint control should account for their interest in accordance with IFRS 9 Financial Instruments. Where they have significant influence, they could use the equity method under IAS 28. Tutor tip: Accounting for joint operations is not within the Advanced Reporting and Performance syllabus.  +-----------------------+-----------------------+-----------------------+ | **Separate financial | | **Uniform accounting | | statements** | | policies** | | | | | | Where an investor | | | | does not prepare | | | | consolidated | | | | financial statements, | | | | it should incorporate | | | | its | | | | | | | | investment in an | | | | associate or joint | | | | venture in its | | | | | | | | At cost; or | | | | | | | | In accordance with | | | | IFRS 9; or | | | | | | | | Using the IAS 28 | | | | equity method | | | +-----------------------+-----------------------+-----------------------+ ### Coterminous year-end dates a. A list of joint arrangements that are material for the entity, including the names of joint arrangements, the nature of the entity's relationship with them, the principal place of business, and the proportion of ownership interest. b. Accounting method used and summarised financial information for the joint ventures that are material to the firm. c. the nature and extent of any significant restrictions (e.g. resulting from borrowing arrangements, regulatory requirements or contractual arrangements between investors with joint control of or significant influence over a joint venture or an associate) on the ability of joint ventures or associates to transfer funds to the entity in the form of cash dividends, or to repay loans or advances made by the entity. d. Risks associated with an entity's interests in joint ventures, namely commitments that it has relating to its joint ventures and contingent liabilities incurred relating to its interests in joint ventures. Fog purchased shares in Mist as follows: ------------------------------------------ --------------------------------------- *Retained earnings of Mist* **£'000** 1 January 20X2 15 60 150 30 June 20X6 40 320 400 ***Step 2*** £'000 £'000 ------------------------------------------------------------------- ------- ------- Investment in Mist (£85k + £320k) Non-controlling interests' share of net assets (45%\* (400K+100K) Share capital Retained earnings **Goodwill** Additional investment in Mist 270 Net assets acquired from non-controlling interests (20% x \[£100k + £900k\]) **Loss to retained earnings** +-----------------------------------+-----------------------------------+ | Dr SFP -- non-controlling | | | interests 200 | | +===================================+===================================+ | Dr Retained earnings 70 | | +-----------------------------------+-----------------------------------+ | Cr Investment in Mist being | 270 | | elimination of additional | | | investment and reduction in | | | non-controlling interests | | | | | | ***Step 3 -- Recognise any | | | impairment of goodwill*** | | | | | | N/A -- goodwill is not impaired | | +-----------------------------------+-----------------------------------+ ***Step 4 -- Allocate share of subsidiary's historical profit/ loss and other gains/ losses to noncontrolling interests*** Retained earnings at 30 June 20X9 900 Profit for the year ended 30 June 20X9 [(150)] Retained earnings at 30 June 20X8 750 Retained earnings at 30 June 20X6 Increase **Non-controlling interests' share of historical profit (45%)** Dr Retained earnings 158 ***Step 5 -- Allocate share of subsidiary's current year profit/ loss and other gains/ losses to noncontrolling interests*** ***Step 6 -- Eliminate intercompany transactions and balances and allocate share of adjustments to subsidiary's profit/ loss to non-controlling interests*** ***Final step -- Transfer adjustments in the consolidated statement of profit or loss to the consolidated statement of financial position*** Dr Retained earnings 68 **[Full disposal]** £\'000 £\'000 Proceeds on disposal X Net assets of sub at disposal date X NCI at disposal date (X) Goodwill at disposal date X [(X]) Gain/loss X/(X) Dr Bank ---- ------------------------------------------- Dr SOFP -- NCI (if applicable) Cr Goodwill Cr Net assets disposed Cr SPL -- gain on disposal (Dr if a loss) a. Whether consolidated financial statements are still required b. Whether disposed of subsidiary is discontinued operation In the assessment, the credit to net assets entry is likely to be split into a number of debit entries to eliminate the subsidiary's liabilities and credit entries to eliminate the subsidiary's assets. Note that the debit entry to 'Bank' assume that the parent company has not recorded the proceeds correctly in its individual financial statements and, therefore, still has the investment in the subsidiary on its individual statement of financial position. Read the question carefully in the assessment to ascertain whether proceeds have been posted. **[Partial disposal of an interest but control is retained.]** [Parent company accounts] [Consolidated accounts] 1. **The identifiable net assets and goodwill remains unchanged.** 2. **The difference between the sale proceeds and increase in NCI is directly recognised in equity (NOT in SPLOCI), together with the increase in NCI.** Dr Bank 300,000 Cr SOFP -- NCI 140,000 Cr SOFP - Equity 160,000  All questions in the ARP exam will be based on a UK group with sterling as its presentation currency. *Pre-consolidation: Step 1 -- Translate the financial statements to presentation currency* *Pre-consolidation: Step 2 -- Calculate and recognise exchange differences on translation*  **Maple Ltd** **Statement of financial position (extracts)** **As at 1 January 20X3** \$'000 ------------------- -------- **Equity** Share capital Retained earnings **Total equity** **Statements of financial position (abbreviated)** ---------------------------------------------------- -- ------------------ **As at 31 December 20X3** *Maple* Non-current assets 170 Investment in Maple \- Other net assets Share capital 100 Retained earnings **Statements of profit or loss (extracts)** **For the year ended 31 December 20X3** *Maple* **Profit before tax** 86 Taxation **PROFIT FOR THE YEAR** - 1 January 20X3 -- \$1.60:£1 - Average for 20X3 -- \$1.63:£1 - 31 December 20X3 -- \$1.65:£1 ***Pre-consolidation: Step 1** -- Translate the financial statements to presentation currency **Pre-consolidation: Step 2** -- Calculate and recognise exchange differences on translation* Retained profit for the year = \$65k - \$25k = \$40k ------------------------------------------------------ ---------------- ---------------- -------------------- *Closing rate* *Opening rate* £'000 61 (2) (11) *Closing rate* \$40k/1.65 \$40k/1.63 24 [(1)] [(14)] **JE 1** Dr Translation reserve 14 Cr Share capital Cr Retained earnings ***Consolidation:** Step 1 -- Add financial statements together* ***Consolidation:** Step 2 -- Recognise goodwill and non-controlling interests at the date of acquisition* +-----------------------+-----------------------+-----------------------+ | Shareholding = | | | | 75k/100k = 75% (25% | | | | non-controlling | | | | interests) | | | +=======================+=======================+=======================+ | \$'000 | | £'000 | +-----------------------+-----------------------+-----------------------+ | Investment in Maple | | 360 | | 576 | | | +-----------------------+-----------------------+-----------------------+ | Non-controlling | | | | interests' share of | | | | net assets | | | | | | | +-----------------------+-----------------------+-----------------------+ | | | | +-----------------------+-----------------------+-----------------------+ | Share capital 100 | | 63 | +-----------------------+-----------------------+-----------------------+ | Retained earnings | | | | | | | +-----------------------+-----------------------+-----------------------+ | | | | +-----------------------+-----------------------+-----------------------+ | **Goodwill at 1 | | 50 | | January 20X3** 81 | | | +-----------------------+-----------------------+-----------------------+ | Impairment of | | (10) | | goodwill (20% x | | | | \$81k) | | | | [(16)] | | | +-----------------------+-----------------------+-----------------------+ | Exchange loss | | [(1)] | +-----------------------+-----------------------+-----------------------+ | **Goodwill at 31 | | | | December 20X3** | | | | | | | +-----------------------+-----------------------+-----------------------+ | **JE 2** Dr Share | | | | capital | | | +-----------------------+-----------------------+-----------------------+ | Dr Retained earnings | 350 | | +-----------------------+-----------------------+-----------------------+ | Dr Goodwill | | | +-----------------------+-----------------------+-----------------------+ | Cr Investment in | | 360 | | Maple | | | +-----------------------+-----------------------+-----------------------+ | Cr SFP -- | | 103 | | non-controlling | | | | interests | | | +-----------------------+-----------------------+-----------------------+ | **JE 3** Dr | | | | Translation reserve 1 | | | | | | | | Cr Goodwill 1 | | | | | | | | ***Consolidation:** | | | | Step 3 -- Recognise | | | | any impairment of | | | | goodwill* | | | | | | | | **JE 4** Dr SPL -- | | | | impairment loss 10 | | | +-----------------------+-----------------------+-----------------------+ ***Consolidation:** Step 4 -- Allocate share of subsidiary's historical profit/ loss and other gains/ losses to non-controlling interests* ***Consolidation:** Step 5 -- Allocate share of subsidiary's current year profit/ loss and other gains/ losses to non-controlling interests* **JE 5** Dr SPL -- non-controlling interests 10 Cr Translation reserve 4 Cr SFP -- non-controlling interests 6 ***Consolidation:** Step 6 -- Eliminate intercompany transactions and balances and allocate share of adjustments to profit/ loss to non-controlling interests* +-----------------------+-----------------------+-----------------------+ | Group share of | | 11 | | dividend (75% x £15k) | | | +-----------------------+-----------------------+-----------------------+ | Non-controlling | | | | interests' share of | | | | dividend (25% x £15k) | | | +-----------------------+-----------------------+-----------------------+ | **Dividend** | | | +-----------------------+-----------------------+-----------------------+ | **JE 6** Dr SPL -- | 11 | | | finance income | | | +-----------------------+-----------------------+-----------------------+ | Dr SFP -- | | | | non-controlling | | | | interests | | | +-----------------------+-----------------------+-----------------------+ | Cr Retained earnings | | 15 | +-----------------------+-----------------------+-----------------------+ ***Consolidation:** Final step -- Transfer adjustments in the consolidated statement of profit or loss to the consolidated statement of financial position* +-----------------------+-----------------------+-----------------------+ | | | £'000 | +=======================+=======================+=======================+ | Current year | | 10 Dr | | impairment of | | | | goodwill (JE 4) | | | +-----------------------+-----------------------+-----------------------+ | Non-controlling | | 10 Dr | | interests' share of | | | | current year profit | | | | (JE 5) | | | +-----------------------+-----------------------+-----------------------+ | Elimination of | | Dr | | intercompany dividend | | | | (JE 6) | | | +-----------------------+-----------------------+-----------------------+ | **Total** | | Dr | +-----------------------+-----------------------+-----------------------+ | **JE 7** Dr Retained | 31 | | | earnings | | | +-----------------------+-----------------------+-----------------------+ | Cr SPL | | 31 | +-----------------------+-----------------------+-----------------------+ Study guide checklist --------------------- Have you completed reading module 6? ------------------------------------------------------------------------------------ -- Have you completed the skills checkers and skills builders? Can you confidently complete the module learning outcomes listed on this module? Can you confidently answer the guiding questions? Have you completed the assessment practice questions? Have you used the discussion board to ask questions on areas you are unsure about? Module 7 -- Statement of Cash Flows =================================== SLO1 Advise on the requirements for financial reporting and performance in accordance with relevant standards. 1.1 Construct, with appropriate workings, the financial statements for an individual company. 1.2 Construct, with appropriate workings, the consolidated financial statements for a group. 1.3 Advise on the effect of transactions and adjustments on the financial statements of an individual company and of a group. 1.1.4 Construct a statement of cash flows for an individual company in accordance with IAS 7 Statement of Cash Flows. 1.2.4 Construct consolidated financial statements including adjustments for intercompany transactions and balances, fair values, goodwill and gain from bargain purchase. 1.3. 1.3.1 Advise on the effect of transactions and adjustments on the financial statements of an individual company and of a group. 1.3.3 Advise on the effect of transactions and adjustments related to consolidation on the financial statements of a group. - Changes in the net assets of an entity - The financial structure of an entity (including its liquidity and solvency) - The ability of an entity to adapt to changing circumstances and opportunities - Interest paid as a cash flow from operating activities - Interest received as a cash flow from investing activities - Dividends paid as a cash flow from financing activities - Dividends received as a cash flow from investing activities In the ARP assessment, you need to read the requirement carefully to identify which sections or extracts from the statement of cash flows are required. The scenario may contain more information than is needed for that section or extract, so you need to be confident in identifying which cash flows are presented under each section. +-----------------------------------+-----------------------------------+ | +------------------------------+ | +------------------------------+ | | | **Elimination of intra-group | | | **Equity method of | | | | transactions** | | | consolidation** | | | | | | | | | | | It is essential to eliminate | | | initially recognised at cost | | | | transactions occurring | | | and adjusted thereafter for | | | | within the group to avoid | | | the post-acquisition change | | | | any duplication in the | | | in the investor's share of | | | | | | | the | | | | consolidated statement. As | | | | | | | we use the CSFP and CSPLOCI, | | | investee's net assets. The | | | | these will have been | | | investor's profit or loss | | | | removed. | | | includes | | | +------------------------------+ | | | | | | | its share of the investee's | | | | | profit or loss, and the | | | | | investor's other | | | | | comprehensive income | | | | | includes its share of the | | | | | investee's other | | | | | comprehensive income. (IAS | | | | | 28, 3) | | | | +------------------------------+ | +===================================+===================================+ | +------------------------------+ | +------------------------------+ | | | **Dividends to | | | **Acquisition/disposal of | | | | non-contro