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Contents
A. REGULATORY ENVIRONMENT AND CORPORATE GOVERNANCE 3
1. Regulatory environment 3
2. External audit and the audit report 9
3. Corporate Governance 13
B. FINANCIAL ACCOUNTING AND REPORTING 15
4. Conceptual Framework for Financial Reporting 15
C. ACCOUNTING STANDARDS 19
5. IAS 1 Presentation of Financial Reporting 19
6. IAS 7 Statement of Cash Flows 23
7. IAS 16 Property, Plant and Equipment 31
8. IAS 23 Borrowing costs 37
9. IAS 20 Government Grants 39
10. IAS 40 Investment Properties 41
11. IAS 38 Intangible Assets 43
12. IAS 36 Impairment of Assets 45
13. IFRS 5 Non-current assets held for sale and discontinued operations 49
14. IAS 19 Employee Benefits 53
15. IAS 21 Foreign Currency Transactions 57
16. IAS 10 Events after the reporting period 59
17. IAS 2 Inventories 61
18. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors 63
19. IAS 12 Income Taxes 65
20. IFRS 8 Operating Segments 67
21. IAS 34 Interim financial Reporting 69
22. IFRS 13 Fair value Measurement 71
D. CONSOLIDATED FINANCIAL STATEMENTS (Group Accounts) 73
23. Consolidated Statement of Financial Position 73
24. Consolidated Statement of Profit or Loss 83
25. Associates 87
E. MANAGEMENT OF WORKING CAPITAL, CASH AND SOURCES OF SHORT-TERM FINANCE89
26. Cash Management 89
27. Short-term finance and cash investment 93
28. Working Capital 95
29. Working Capital Management 101
F. FUNDAMENTALS OF BUSINESS TAXATION 109
30. Taxation 109
31. Regulatory Environment and International Taxation Issues 119
Answers to Examples 125
2016 Examinations CIMA F1 1

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A. REGULATORY ENVIRONMENT AND
CORPORATE GOVERNANCE
Chapter 1
REGULATORY ENVIRONMENT
1. Regulation of financial reporting information
The financial performance (profit/loss) and position (assets/liabilities) of an incorporated
entity are essential parts of a business that need to be understood by the users of the
accounts, primarily the shareholders.
Shareholders will need to ensure that the financial performance and position of the entity
show useful information. Through regulation of the accounting standards the shareholders
will be confident that the information presented to them gives the information needed.
2. Regulatory environment
The key elements of the regulatory environment are
๏ Local corporate law – Accounting regulations must follow the legal requirement of the
country where it is registered
๏ Local and international conceptual frameworks – Accounting standards are driven by
conceptual frameworks, the fundamental principles/ideas that must be followed in
developing accounting standards.
๏ Local and international financial reporting standards – Accounting standards are
developed both locally and internationally. Companies will follow either local rules or
international rules depending on the local corporate laws.

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3. Sources of professional codes for ethics
Codes of ethics have developed in the accounting profession to ensure that their professional
reputation is upheld.
The key to a respected code of ethics is that it must evolve over time as beliefs and principles
change in society.
Sources of ethical codes are as follows:
๏ Law
๏ Religion
๏ Social attitudes
๏ Professional bodies
๏ Businesses
4. CIMA Code of Ethics for Professional Accountants
CIMA is a member of the International Federation of Accountants (IFAC), whose aim is to
develop a set of high quality principles-based ethical standards that govern ethical behaviour
within the accounting profession.
IFAC’s established an ethics committee (International Ethical Standards Board of Accountants
(IESBA), which has published the Code of Ethics for Professional Accountants.
CIMA and many other professional bodies have used the principles within this conceptual
framework to develop their own code of ethics.
The following are the fundamental principles contained in CIMA’s code of ethics:
1. Integrity
2. Objectivity
3. Professional competence and due care
4. Confidentiality
5. Professional behaviour
4.1. Integrity
A professional accountant should be straightforward and honest in all professional and
business relationships.
Integrity also implies fair dealing and truthfulness.
A professional accountant should not be associated with reports, returns, communications or
other information where they believe that the information:
๏ Contains a materially false or misleading statement;
๏ Contains statements or information furnished recklessly; or
๏ Omits or obscures information required to be included where such omission or
obscurity would be misleading.
4.2. Objectivity
A professional accountant should not allow bias, conflict of interest or undue influence of
others to override professional or business judgments.

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Relationships that bias or unduly influence the professional judgment of the professional
accountant should be avoided.
4.3. Professional Competence and Due Care
A professional accountant has a continuing duty to maintain professional knowledge and skill
at the level required to ensure that a client or employer receives competent professional
service based on current developments in practice, legislation and techniques. A professional
accountant should act diligently and in accordance with applicable technical and professional
standards when providing professional services.
The principle of professional competence and due care imposes the following obligations on
professional accountants to:
๏ Maintain professional knowledge and skill at the level required to ensure that clients or
Employers receive competent professional service; and
๏ Act diligently in accordance with applicable technical and professional standards when
providing professional services.
4.4. Confidentiality
A professional accountant should respect the confidentiality of information acquired as a
result of professional and business relationships and should not disclose any such
information to third parties without proper and specific authority unless there is a legal or
professional right or duty to disclose.
A professional accountants should therefore refrain from:
๏ Disclosing outside the firm or employing organization confidential information
acquired as a result of professional and business relationships without proper and spec
๏ Using confidential information acquired as a result of professional and business
relationships to their personal advantage or the advantage of third parties.
4.5. Professional behaviour
A professional accountant should comply with relevant laws and regulations and should
avoid any action that discredits the profession.
Example 1 – Ethics
Which ONE of the following is NOT a fundamental principle identified in CIMA’s code of
ethics?
A Professional competence
B Professional behaviour
C Integrity
D Independence

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5. Threats to ethical behaviour
The ethical code identifies five areas that provide a threat to the fundamental principles.
๏ Self-interest – a 'conflict of interest' which may inappropriately influence
judgement or behaviour.
๏ Self-review – When you are required to evaluate the results of a previous
judgement or service
๏ Advocacy threat – Arising if promoting a position or opinion to the point that your
subsequent objectivity is compromised.
๏ Familiarity – When you become so sympathetic to the interests of others as a
result of a close relationship that your professional judgement
becomes compromised.
๏ Intimidation – When you are deterred from acting objectively by actual or
perceived pressure or influence
6. Regulatory bodies
The regulatory bodies ensure that both local and international frameworks and standards are
upheld to take account of the ever changing nature of corporate business.
6.1. Financial reporting standards
๏ International Financial Reporting Standards (IFRSs) – A global set of accounting
standards that are prepared on international conceptual frameworks
๏ Local Generally Accepted Accounting Principles (Local GAAP) – Accounting
standards that are prepared following local conceptual frameworks.
6.2. Principles of financial reporting standards
๏ Principles based – the preparation of the accounting standards follows the principles/
idea laid out in the conceptual framework, which results in more judgement in the
preparation of the financial statements
๏ Rules based – the preparation of the accounting standards follows rules, as there are
no fundamental principles to follow.
6.3. Role and structure of regulatory bodies
IFRSs are developed and published by the International Accounting Standards Board (IASB).
The IASB has 14 members, 12 of whom are full-time employees. Appointment of members is
primarily based on their having suﬃcient technical expertise to ensure the IASB has the
experience to tackle the relevant business and economic issues.
Seven of the full-time members of staﬀ are responsible for liaising with national standard-
setters in order to promote the convergence of accounting standards.
The IASB has complete responsibility for all technical matters, including the preparation and
publication of international financial reporting standards (IFRS) and exposure drafts;
withdrawal of IFRSs and final approval of interpretations.

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IFRS Foundation oversees the processes of the IASB. Its objectives are:
๏ Develop a set of high, quality, understandable, enforceable and globally accepted
international accounting standards.
๏ Promote the use and application of those standards
๏ Take account of the financial reporting needs of emerging economies and small and
medium-sized entities
๏ Bring about convergence on national accounting standards and IFRSs
IFRS Advisory Council will consult with local standard setters, academics and other interested
parties to determine their views on a range of issues.
IFRS Interpretations Committee is responsible for reviewing new financial reporting issues
and issuing guidance on the application of IFRSs.
As well as the IASB and its associated bodies, other bodies can also influence the setting of
IFRSs.
International Organisation of Securities Commissions (IOSCO) – represent the worlds’
securities markets regulators
Financial Accounting Standards Board (FASB) – US accounting standards setting body
6.4. Standard setting process for IFRS
Since 2002 both the FASB and IASB have been working closely to bring together both US
GAAP and IFRSs, in what has been known as the Convergence Project.
This has led to the development of several new/updated IFRSs, notably IFRS 9 Financial
Instruments and IFRS 13 Fair Value.
The process of developing a new accounting standard follows a four step process.
1. Advisory Committee
2. Discussion Papers
3. Exposure Draft
4. Issue new IFRS
Example 2 – Regulatory bodies
Which ONE of the following would NOT be regarded as a responsibility of the IASB?
A Responsible for all IFRS technical matters
B Publish IFRSs
C Overall supervisory body of the IFRS organisations
D Final approval of interpretations by the IFRS Interpretations
Committee

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Chapter 2
EXTERNAL AUDIT AND THE AUDIT
REPORT
An audit is an independent review of a company’s financial statements by external auditors
The auditors produce a report to the shareholders that gives their opinion on the financial
statements.
1. Powers and duties of the external auditors
The primary duties of the external auditor are to report on truth and fairness and fair
presentation of the financial statements.
Fair presentation is taken as being factual, free from bias and reflecting the commercial
substance of the business’ transactions.
Auditors will express their opinion that the financial statements are free from material
misstatement in their audit report.
In preparing their report the auditors are required to consider the following:
๏ Compliance with legislation
๏ Truth and fairness of accounts
๏ Adequate records and returns
๏ Agreement of accounts to records
๏ Consistency of other information
In order to carry out the duties, the auditors have the following rights:
๏ Access to records
๏ Information and explanation
๏ Attendance at general meetings
๏ Right to speak at general meetings
๏ Rights in relation to written resolutions
๏ Right to require laying of accounts

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2. Content of the audit report
1. Title – addressing the report (usually the shareholders)
2. Introduction – identifying what has been audited. Accounts are often published as
part of a larger Annual Report, not all of which is subject to audit
3. Respective responsibilities of directors and auditors – making it clear that directors
are responsible for producing the Accounts, whilst auditors are responsible for forming
opinions on them
4. Basis of Opinion – explaining how the audit work was done and the opinions reached
5. Opinion – whether the Accounts are true and fair, and whether they have been
properly prepared
6. Date and Signature
3. Types of audit opinion
Unmodified
๏ True and fair
๏ Materiality
๏ Emphasis of matter paragraph
Modified
๏ Qualified opinion – arises when there is either a material misstatement of insuﬃcient
appropriate audit evidence but it is not pervasive
๏ Adverse opinion – financial statements are not free from material misstatement and
therefore do not give a true and fair view
๏ Disclaimer of opinion – insuﬃcient audit evidence and is pervasive.
Emphasis of matter paragraph
An emphasis of matter paragraph draws the attention of the shareholders to a specific event
that usually occurs before the end of the year that will not be resolved until after the date that
the audit report will be signed.
The event is important so the external auditor needs to highlight it by including an emphasis
of matter paragraph in the audit report. This usually goes before the opinion, refers to the
note prepared by the directors that is in the financial statement and states that the opinion is
not qualified in this respect.

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Example 1 – Audit opinion (1)
The external auditors of AB have completed their year-end audit and disagree with the accounting
treatment of a material item in the financial statements. They have concluded that the eﬀect of the
issue is material, but not pervasive to the financial statements.
Which ONE of the following audit opinion will the external auditors use for AB’s financial
statements?
A An unmodified opinion
B An adverse opinion
C An emphasis of matter
D A qualified opinion
Example 2 – Audit opinion (2)
If an external auditor does not agree with the directors’ accounting treatment of a material item in
the accounts, the first action they should take is to FORCE/PERSUADE the directors to change the
accounting treatment of the item in the accounts.
Delete as appropriate.

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Chapter 3
CORPORATE GOVERNANCE
Directors are acting as agents of the entity as they run the business on behalf of the
shareholders.
Shareholders need to ensure that the systems and processes that are in place to control the
running of the entity are regularly monitored and controlled.
Corporate governance is the process that ensures the systems and processes are monitored
and controlled.
Corporate Governance has come to the attention of many over recent years following major
corporate scandals.
๏ Enron
๏ WorldCom
๏ Co-Operative Group
๏ Volkswagen Group
All of the above corporate scandals came about due to inappropriate corporate governance
in place.
1. Approach to Corporate Governance
Principles based
๏ Focuses on the objectives
๏ Can be applied across diﬀerent legal jurisdictions
๏ Can stress areas where rules cannot easily be applied
๏ Puts the emphasis on investors making up their own minds.
Rules based
๏ Emphasises measurable achievements by companies
๏ Can easily be applied in jurisdictions where the letter of the law is stressed.
2. Corporate governance regulation in different markets
UK – voluntary code based upon principles of openness, integrity and accountability that has
developed to include some specific guidelines, whereby if there is no compliance then
explanations for non-compliance are required.
US – a rules based approach as the culture is on obeying the letter of the law and therefore
the code becomes part of legislation.

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B. FINANCIAL ACCOUNTING AND REPORTING
Chapter 4
CONCEPTUAL FRAMEWORK FOR
FINANCIAL REPORTING
1. The role of the framework
The role of the framework is to:
๏ Assist the IASB in its development of future accounting standards and in its review of
existing accounting standards
๏ Assist the IASB by providing a basis for reducing the number of alternative accounting
treatments permitted by law and accounting standards
๏ Assist preparers of financial statements in applying accounting standards and in dealing
with topics that do not form the subject of an accounting standard
๏ Assist auditors in forming an opinion as to whether financial statements conform with
accounting standards
๏ Help users of financial statements to interpret the information contained in financial
statements prepared in conformity with accounting standards
๏ Provide those who are interested in the work of the IASB with information about its
approach to the formulation of accounting standards.
The framework is not itself an accounting standard nor can it override the requirements of
any existing accounting standard.
2. The objective of financial statements
To provide information about the financial position, performance and changes in financial
position of an entity that is useful to a wide range of users in making decisions.
3. Underlying assumption
Going concern – the financial statements are prepared on the basis that an entity will
continue in operation for the foreseeable future.

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4. Fundamental qualitative characteristics of financial
statements
๏ Relevance – to be useful, information must be relevant to the decision making needs of
the user. Information is relevant if it is material (size and nature).
๏ Faithful Representation – to be useful must faithfully represent the phenomena that it
purports to represent, which is only possible if accounted for substance and economic
reality.
‣ Neutral – free from bias
‣ Complete – includes all necessary information, descriptions and explanations.
‣ Free from error – in the descriptions and processes the financial information is
produced
5. Enhancing qualitative characteristics
๏ Understandability – assuming users have a reasonable knowledge of business and a
willingness to study information with reasonable diligence, the financial statements
should be readily understandable to users.
๏ Comparability – users must be able to compare the financial statements of an entity
from period to period and from company to company
๏ Timeliness - Information produced quickly makes it more useful as a basis for current
decisions.
๏ Verifiability - Information needs to be supported by representation (either written or
verbal) to allow us to confirm its validity.
6. The elements of financial statements
๏ Asset is a resource controlled by the enterprise as a result of past events and from
which future economic benefits are expected to flow to the enterprise.
๏ Liabilities are an entity’s obligations to transfer economic benefits as a result of past
transactions or events.
๏ Equity is the residual amount found by deducting all liabilities of the entity from all of
the entity’s assets.
๏ Income is increases in economic benefits during the accounting period in the form of
inflows or enhancements of assets or decreases in liabilities that result in increases in
equity, other than those relating to contributions from equity participants.
๏ Expenses are decreases in economic benefits during the accounting period in the form
of outflows or depletions of assets or incurrences of liabilities that result in decreases in
equity, other than those relating to distributions to equity participants.

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7. Recognition of the elements of financial statements
To recognise an element of the financial statements it must meet all three of the following
criteria:
๏ Probable future economic benefit will flow to or from the entity
๏ The item can be measured reliably
8. Measurement of the elements of financial statements
๏ Historical cost – cash price or fair value at acquisition or obligation. Most commonly
used but widely criticised
๏ Current cost – what would be the cash price today
๏ Realisable value – what could be realised/satisfied today
๏ Present value – discounted future cash flows
Example 1 – Framework (1)
The International Accounting Standards Board (IASB) Framework for the Preparation and
Presentation of Financial Statements (Framework) is the IASB’s conceptual framework.
Which one of the following does the Framework not cover?
A The format of financial statements
B The objective of financial statements
C Concepts of capital maintenance
D The elements of financial statements
Example 2 – Framework (2)
The IASB’s Framework identifies faithful representation as one of its fundamental qualitative
characteristics of financial information.
Which one of the following is not an element of faithful representation?
A Information should be timely
B Information should be free from material error
C Information should be free from bias
D Information must be complete

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C. ACCOUNTING STANDARDS
Chapter 5
IAS 1 PRESENTATION OF FINANCIAL
REPORTING
IAS 1 sets out overall requirements for the presentation of financial statements, guidelines for
their structure and minimum requirements for their content.
Financial statements will present to the users of accounts:
๏ Statement of financial position
๏ Statement of profit or loss and other comprehensive income
๏ Statement of changes in equity
๏ Statement of cash flows
๏ Notes to the accounts
๏ Comparatives
Financial statements should provide a fair presentation of the results, which is achieved by
compliance with IFRSs.

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Statement of financial position as at [date]
$’000s $’000s
ASSETS
Non-current assets
Property, plant and equipment X
Intangibles X
Investments X
X
Current assets
Inventories X
Trade and other receivables X
Cash and cash equivalents X
X
Total assets X
EQUITY AND LIABILITIES
Equity
Equity shares ($1) X
Share premium X
Irredeemable preference share capital X
Revaluation surplus X
Retained earnings X
Total equity X
Non-current liabilities
Redeemable preference share capital X
Borrowings X
X
Current liabilities
Trade and other payables X
Dividends payable X
Overdraft X
Tax payable X
X
Total equity and liabilities X

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Statement of profit and loss and other comprehensive income for the year ended
[date]
$’000s
Revenue X
Cost of sales (X)
Gross profit X
Distribution expenses (X)
Administrative expenses (X)
Profit before interest and tax X
Finance costs (X)
Investment income X
Profit before tax X
Income tax expense (X)
Profit for the year X
Other comprehensive income
Gain on non-current asset revaluations X
Total comprehensive income for the period X

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Statement of changes in equity for the year ended [date]
Equity
shares
Share
premium
Revaluatio
n surplus
Retained
earnings
Total
$’000s $’000s $’000s $’000s $’000s
B/f X X X X X
Issue of share capital X X - - X
Dividends - - - (X) (X)
Total comprehensive income for the
year
- - X X X
Transfer to retained earnings - - (X) X -
C/f X X X X X

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Chapter 6
IAS 7 STATEMENT OF CASH FLOWS
Statement of cash flows for the year ended [date]
$m $m
Operating Activities
Profit before tax X
Depreciation X
Impairment X
Gain/loss on disposal of PPE (X)/X
Finance cost X
Inventory (X)/X
Receivables (X)/X
Payables X/(X)
Cash generated from operations X
Interest paid (X)
Tax paid (X)
Cash generated from operating activities X
Investing Activities
Proceeds from sale of PPE X
Purchase of PPE (X)
Dividends received X
Cash generated from investing activities X
Financing Activities
Proceeds from issue of shares X
Loan issue/repayment X/(X)
Dividend paid (X)
Cash generated from financing activities X
Change in cash and cash equivalents X/(X)
Opening cash and cash equivalents X
Closing cash and cash equivalents X

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1. Cash and cash equivalents
Cash – Cash on hand and demand deposits
Cash equivalents – Short term, highly liquid investments that are readily convertible to
known amounts of cash and which are subject to an insignificant risk of changes in value.
Example 1 – Cash and cash equivalents
Statement of financial position at 31 December 20X5 (extract)
20X5
$’000
20X4
$’000
Current assets
Government bonds 1,200 1,000
Cash 400 -
Current liabilities
Overdraft - 150
Calculate the movement in cash and cash equivalents

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2. Operating activities
The principal revenue producing activities of the entity and other activities that are not
investing or financing activities.
IAS 7 allows two methods to calculate the cash generated from operations.
๏ Direct method – using nominal ledger T-accounts
๏ Indirect method – using the financial statements
2.1. Direct method
$000
Cash received from customers X
Cash payments to suppliers and employees X
Cash from operating activities X
Example 2 – Direct method
Extracts from a company’s general ledger show the following information:
$’000
Sales for the year 4,700
Purchases for the year 3,300
Wages and salaries 580
Other operating expenses 430
Receivables @ start year 400
Receivable @ year-end 500
Payables @ start year 300
Payables @ year-end 450
Calculate the cash from operating activities to appear in the company’s statement of cash
flows.

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2.2. Indirect method
$000
Profit before taxation X
Depreciation X
Investment income (X)
Finance cost X
Increase in inventories (X)
Increase in receivables (X)
Increase in payables
X
Cash from operating activities X
Example 3 – Indirect method
Statement of profit or loss (extract) for the year-ended 31 December 20X5
$’000
Profit before interest and tax 3,200
Finance cost (500)
Investment income 150
Profit before tax 2,850
Income tax (350)
Profit for the year 2,500
Statement of financial position (extract) as at 31 December 20X5
20X5 20X4
$’000 $’000
Current assets
Inventory 6,500 7,200
Receivables 4,300 3,900
Cash 250 500
Current liabilities
Trade payables 5,200 6,500
Depreciation for the year was $850,000.
Calculate the cash from operating activities to appear in the company’s statement of cash
flows.

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2.3. Interest and tax paid
Interest payableInterest payableInterest payableInterest payableInterest payableInterest payableInterest payable
B/f X
Bank (β) X Finance cost (SPL) X
C/f X
X X
Tax payableTax payableTax payableTax payableTax payableTax payableTax payable
B/f – current tax X
Bank (β) X Tax expense (SPL) X
C/f – current tax X
X X
Example 4 – Interest/tax paid
Statement of profit or loss (extract) for the year-ended 31 December 20X5
$’000
Profit before interest and tax 3,200
Finance cost (500)
Profit before tax 2,850
Income tax (350)
Profit for the year 2,500
20X5
$’000
20X4
$’000
Current liabilities
Trade payables 5,200 6,500
Tax payable 180 210
Interest payable 120 90
Calculate the interest paid and tax paid to appear in the company’s statement of cash flows.

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3. Investing activities
The acquisition and disposal of non-current assets (PPE, intangibles and investments)
3.1. Disposal of PPE
Profit/loss on disposal = Proceeds − Carrying value
Example 5 – Profit or loss on disposal
DBA disposed of a piece of plant and equipment in the year for $250,000 with a carrying value of
$225,000.
Show how this would be presented in the statement of cash flows for DBA.
3.2. Acquisition of PPE
PPE (CV)PPE (CV)PPE (CV)PPE (CV)PPE (CV)PPE (CV)PPE (CV)
B/f X
Depreciation X
Revaluation X
Disposal X
Cash - additions (β)
C/f X
X X
Example 6 – Acquisition of PPE
20X5
$’000
20X4
$’000
Non-current assets
Property, plant and equipment 13,200 12,500
Equity
Revaluation surplus 500 150
Additional information:
1. Depreciation of $850,000 has been charged in the year
2. An item of machinery was disposed of for $120,000 with a carrying value of $100,000
Calculate the cash outflow for the purchase of property, plant and equipment to appear in
the statement of cash flows.

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3.3. Interest received
Interest receivableInterest receivableInterest receivableInterest receivableInterest receivableInterest receivableInterest receivable
B/f X
Interest income (SPL) X Bank (β) X
C/f X C/f X
X X
4. Financing activities
Activities that result in changes in the size and composition of the contributed equity and
borrowings of the entity
Debt
Issue of debt = increase in borrowings
Repayment of debt = decrease in borrowings
Equity
Issue of shares = movement in share capital and share premium
Dividend paid
Retained earningsRetained earningsRetained earningsRetained earningsRetained earningsRetained earningsRetained earnings
B/f X
Dividend paid (β) X PFY (SPL) X
C/f X
X X

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Example 7 – Statement of cash flows
Statement of profit or loss for the year ended 31 December 20X5
$000
Revenue 360
Cost of sales and other expenses 150
Profit from operations 210
Finance costs 14
Profit before tax 196
Income tax expense 62
Profit after tax 134
Statement of financial position as at 31 December 20X5
31 December 20X531 December 20X5 31 December 20X431 December 20X4
$000 $000 $000 $000
Non-current assets
Cost 798 780
Depreciation 159 112
639 668
Current assets
Inventory 12 10
Trade receivables 34 26
Bank 24 70 28 64
709 732
Share capital 180 170
Share premium 18 12
Retained earnings 343 245
541 427
Non-current liabilities
Bank loan 100 250
Current liabilities
Trade payables 21 15
Income tax 47 68 40 55
709 732
1. During the year, the company paid a dividend of $36,000
2. Included within expenses are a loss on disposal of $9,000 and depreciation of $59,000
3. Property, plant and equipment includes $45,000 for the purchase of a new piece of
machinery
Prepare a statement of cash flow for the year ended 31 December 20X5 in accordance with
the requirements of IAS 7.

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Chapter 7
IAS 16 PROPERTY, PLANT AND
EQUIPMENT
Property plant and equipment are tangible items that are:
๏ Held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes, and
๏ Expected to be used during more than one period.
1. Initial Recognition
The cost of an item of property, plant and equipment is made up of:
๏ Purchase price, including irrecoverable taxes and after deducting trade discounts (not
cash/settlements discounts)
๏ Costs directly attributable to bringing the asset to the location and condition necessary
for it to be capable of operating in the manner intended by management (e.g. site
preparation, delivery and handling costs, installation and assembly, testing, professional
fees)
Note: Initial estimate of the costs of dismantling and removing the item and restoring
the site on which it is located where a present obligation exists are included in the
cost of the asset at present value.
The following costs are not included in the cost of an item of property, plant and
equipment:
๏ Costs that are incidental to the construction (e.g. errors)
๏ Start-up costs
๏ General overhead costs
๏ Initial losses before the asset reaches its intended use

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Example 1 – Initial recognition
Jones purchases a machine that had a list price of $100,000 but was offered a trade discount of
10%.
A further settlement discount of 5% is available if payment is made within 15-days.
Jones also incurred the following charges in getting the asset ready for its intended use:
$
Shipping & handling charges 3,500
Pre-production testing 12,000
Site preparation costs 17,000
General overheads 4,500
Included in the site preparation costs is $3,000 which is as a result of Jones providing incorrect
requirements for the asset.
Calculate the initial cost of the machine to be recorded in accordance with IAS 16 Property,
plant and equipment.
2. Subsequent Expenditure
Subsequent expenditure on property, plant and equipment should only be capitalised if it
improves the asset beyond its originally assessed standard of performance e.g. faster
production or higher quality output. All other subsequent expenditure should be written off.
Separate components, inspection and overhaul costs
If items of property, plant and equipment comprise separate components with different
useful lives the separate components should be capitalised as separate assets and each
depreciated over their useful lives.
Normally all inspection and overhaul costs are expensed as they are incurred. However, to the
extent that they satisfy the IAS 16 rules for separate components, such costs should be
capitalised separately as a non-current asset and depreciated over their useful lives.

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3. Depreciation
๏ Straight line
๏ Reducing balance
Depreciation starts when the asset is ready for its intended use and not from when it starts to
be used.
Any change in estimate is applied prospectively by applying the new estimates to the
carrying value of the PPE at the date of change.
Example 2 – Change in useful life
Ecuador bought an item of property, plant and equipment for $25 million on 1 January 2012 and
depreciated over its useful life of 10 years.
On 31 December 2014, the assets remaining life was estimated as 5 years.
Calculate the amounts to shown in the financial statements of Ecuador for the year-ended 31
December 2015.
Example 3 – Change in method
A lorry was purchased for $80,000 on 1 January 20X4 when its useful life was estimated to be ten
years with a residual value of $10,000. The depreciation policy of 20% reducing balance was
selected.
On 1 January 20X9 the directors have now decided that to give a fair presentation a depreciation
policy of straight line over the useful economic life should be followed. There has been no change
in the estimated useful economic life of the asset as a result.
What would be the depreciation charge for the year ended 31 December 20X9?

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4. Subsequent measurement
Revaluations
Cost Model
Carried at cost less
accumulated depreciation
and impairment losses
Revaluation Model
Carried at revalued amount
(fair value less accumulated
depreciation and impairment
losses)
๏ Review periodically and keep revaluations up to date
๏ Consistent policy for each class of asset (avoids cherry-picking of assets)
๏ Revalue at fair value
๏ Depreciate the revalued asset less residual value over its remaining useful life
5. Accounting for a revaluation
Dr Non-current assets cost/valuation
Dr Accumulated depreciation
Cr Other comprehensive income
The figure posted to the revaluation surplus can be calculated quickly as follows:
Note: A company has the option to make an annual reserve transfer for any excess
depreciation charged as a result of the revaluation.
Dr Revaluation surplus
Cr Retained earnings
Example 4 - Revaluation
Charlie bought a building on 1 January 20X5 for $500,000 with an estimated useful economic life of
twenty five years and no residual value. A straight line method of depreciation was adopted.
On 1 January 20X7 Charlie decided to revalue all non- current assets in line with IAS 16. The
building was revalued at $600,000. The useful economic life is unchanged.
Show how the revaluation would be accounted for in the financial statements for the year
ended 31 December 20X7.

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6. Disposal of a previously revalued asset
The profit or loss on disposal is calculated as previously and any gains held in reserves are
transferred to retained earnings in the statement of changes in equity.
Dr Revaluation surplus
Cr Retained earnings
Example 5 – Disposal of revalued asset
William bought a building on 1 January 20X5 for $400,000 with an estimated useful economic life
of twenty five years and no residual value. A straight line method of depreciation was adopted.
On 1 January 20X7 William decided to revalue all non-current assets in line with IAS 16. The
building was revalued at $500,000. The useful economic life is unchanged.
On 1 January 20X9 William disposed of the oven for $550,000.
Calculate the profit or loss on disposal of the building at 1 January 20X9 and record the
journal entry for the previously held gains to be transferred within reserves.

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Chapter 8
IAS 23 BORROWING COSTS
Borrowing costs, net of income received from the investment of the money borrowed, on a
qualifying asset must be capitalised over the period of construction.
Capitalisation starts when:
๏ Expenditure on the asset commences
๏ Borrowing costs are being incurred
๏ Activities necessary to prepare the asset are in progress
Capitalisation must stop when the asset is ready for its use (whether or not it is being used) or
when there is no active construction.
Capitalisation for specific borrowings is capitalised using the eﬀective rate of interest.
Example 1– Specific borrowings
Columbia commenced the construction of an item of property, plant and equipment on 1 March
2015 and funded it with a $10 million loan. The rate of interest on the borrowings was 5%.
Due to a strike no construction took place between 1 October and 1 November.
Calculate the amount of interest to be capitalised as part of the non-current assets.
Example 2 – General borrowings
Venezuela had the following bank loans in issue during 2015.
$m
4% bank loan 25
3% bank loan 40
Venezuela commenced the construction of an item of property, plant and equipment on 1 January
2015 for which it used its existing borrowings. $10 million of expenditure was used on 1 January
and $15 million was used on 1 July.
Calculate the amount of interest to be capitalised as part of the non-current assets.

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Chapter 9
IAS 20 GOVERNMENT GRANTS
Recognise the grant when the:
๏ Entity will comply with the conditions attached to the grant
๏ Entity will actually receive the grant
Grants should be recognised according to the deferred income approach, using a systematic
basis. This spreads the income over the period in which the related expenditure is recognised.
If the grant is used to buy depreciating assets, the grant must be spread over the same life
and using the same method.
Example 1 – Grants and depreciable assets
Tweddle bought an item of property, plant and equipment for $10 million and received a
government grant of $2 million. The PPE has a useful life of 10 years and has no residual value.
Explain how the purchase of the property, plant and equipment and government grant
would be dealt with in the financial statements of Tweddle.
Note: If a government grant becomes repayable, it is treated as a change in accounting
estimate. The payment is first shown against any remaining deferred income balance. If the
payment exceeds the deferred income balance then the excess payment is treated as an
expense.

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Chapter 10
IAS 40 INVESTMENT PROPERTIES
Investment property is property (land or a building – or part of a building – or both) held) to
earn rentals or for capital appreciation or both, rather than for:
๏ Use in the production or supply of goods and services or for administrative purposes
(IAS 16); or
๏ Sale in the ordinary course of business (IAS 2); or
๏ Future use as an investment property (IAS 16 until completed)
Initial measurement
Investment properties should initially be measured at cost plus directly attributable costs.
Subsequent measurement
Fair value model Cost model
๏ The investment properties are revalued
to fair value at each reporting date
๏ Gains or losses on revaluation are
recognised directly through profit or
loss
๏ The properties are not depreciated
๏ The investment properties are held
using the benchmark method in IAS 16
(cost)
๏ The properties are depreciated like any
other asset
Transfers into and out of investment property should only be made when supported by a
change of use of the property.
๏ IP to owner occupied (IAS 16) – Fair value at date of change
๏ IP to inventory (IAS 2) – Fair value at date of transfer
๏ Owner occupied (IAS 16) to IP – Revalue under IAS 16 and then treat as IP
๏ Inventory (IAS 2) to IP – Fair value on change and gain/loss to profit or loss
Example 1 – Investment property and change of use
Addlington owns a property that it is using as its head oﬃce. At 1 January 2015, its carrying value
was $20 million and its remaining useful life was 20 years. On 1 July 2015 the business was
reorganised cheaper premises were found for use as a head oﬃce. It was therefore decided to
lease the property under an operating lease.
The property was valued by a qualified professional, who assessed the property’s value as $21
million on 1 July and $21.6 million on 31 December 2015.
Explain the accounting treatment of the property in the financial statements for the year-
ended 31 December 2015.

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Chapter 11
IAS 38 INTANGIBLE ASSETS
An identifiable, non-monetary asset with no physical substance but has value to the business.
๏ patents
๏ brand names
๏ licences
3 factors to consider
Identifiability
i.e. can sell separately
RecognitionControl
Framework
IAS 38
Separate acquisition
Capitalise at cost (purchase price, import duties and non-refundable purchase taxes less any
trade discounts) plus any directly attributable costs (e.g. legal fees, testing costs).
Amortisation is charged over the useful life of the asset, starting when it is available for use.
Research
Research expenditure is charged immediately to profit or loss in the year in which it is
incurred.
Development
Development expenditure must be capitalised when it meets all the criteria.
๏ Sell/use
๏ Commercially viable
๏ Technically feasible
๏ Resources to complete
๏ Measure cost reliably (expense)
๏ Probable future economic benefits (overall)
Internally generated
Internally generate brands, mastheads cannot be capitalised as their cost cannot be
separated from the overall cost of developing the business.

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Revaluations
An intangible asset can only be revalued if there exists an active market.
An active market is one where the following conditions are all met:
๏ The items traded are homogenous
๏ Willing buyers and sellers can normally be found at any time
๏ Prices are available to the public
Amortisation
If an intangible has a finite life then it should be amortised over its useful economic life.
Residual value is normally assumed to be zero unless there is a commitment from a buyer or
an active market exists.
An intangible could be considered to have an indefinite useful life if there is no foreseeable
limit to the period over which the asset is expected to generate net cash flows for the entity.
It will therefore be subject to annual impairment reviews.
Example 1 – Intangibles
GKS is a large pharmaceutical business involved in the research and development of viable new
drugs. It commenced initial investigation into the viability of a new drug on 1 February 20X5 at a
cost of $40,000 per month. On 1 August 20X5 GSK were able to demonstrate the commercial
viability of the new drug and intend to sell it on the open market once fully complete.
Costs subsequent to 1 August 20X5 remained at $40,000 per month. At 31 December 20X5, GSK’s
reporting date, the drug was not yet complete but it is believed that by mid-20X6 the drug will be
available for sale.
The finance director is confident of the success of the drug’s sales that he wishes to revalue the
intangible at the reporting date, using a discounted future cash flow model to establish the fair
value.
Explain the treatment of the above costs in GSK’s financial statements for the year-ended 31
December 20X5.
Intangibles and business combinations
If an intangible asset is acquired in a business combination (i.e. acquisition of a subsidiary,
that has a previously unrecognised internally generated brand), the cost of that intangible
asset is recognised at fair value in the consolidated financial statements.
If a fair value cannot be established the intangible is not recognised separately and becomes
part of the overall goodwill established on acquisition of the subsidiary..

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Chapter 12
IAS 36 IMPAIRMENT OF ASSETS
1. Identify possible impairments (external vs. internal)
2. Perform impairment review (if identified possible impairments)
3. Record the impairment
1. Indicators of Impairment
External sources
๏ A significant decline in the asset’s market value more than expected by normal use or
passage of time
๏ A significant adverse change in the technological, economic or legal environment
Internal sources
๏ Obsolescence or physical damage
๏ Significant changes, in the period or expected, in the way the asset is being used e.g.
asset becoming idle, plans for early disposal or discontinuing/ restructuring the
operation where the asset is used
๏ Evidence that asset’s economic performance will be worse than expected
๏ Operating losses or net cash outflows for the asset
๏ Loss of key employee

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2. Impairment review
If the carrying value of the asset is greater than its recoverable amount, it is impaired and
should be written down to its recoverable amount.
Recoverable amount - the greater of fair value less cost to sell and value in use.
Fair value less costs to sell - the amount receivable from the sale of the asset less the costs
of disposal.
Value in use - the present value of the future cash flows from the asset.
Example 1 - Impairment
A machine was acquired on 1 January 20X5 at a cost of $50,000 and has a useful economic life of
ten years.
At 31 December 20X9 an impairment review was performed. The fair value of the machine is
$26,000 and the selling costs are $2,000.
The expected future cash flows are $5,000 per annum for the next five years. The current cost of
capital is 10%. An annuity factor for this rate over this period is 3.791
Prepare extract from the financial statement for the year-ended 31 December 20X9.
3. Record the impairment
Individual asset
The reduction in carrying value is taken through profit or loss unless related to a revalued
asset, in which case it is taken to any revaluation surplus first.
Once the impairment has been accounted for the recoverable amount is then depreciated
over the remaining useful economic life.
Cash generating unit (CGU)
It is not always possible to allocate cash flows to an individual asset. To overcome this
problem a cash generating unit can be used.
A cash generating unit is the smallest identifiable group of assets that cash flows can be
allocated to. This could include intangible assets like goodwill as well as tangible and other
assets.
1. Specific assets
2. Goodwill
3. Remaining assets (pro-rata)
Note: No single asset in the CGU should be reduced below its recoverable amount.

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Example 2 – Impairment (GCU)
Siobhan fully owns a company called Harry. Extracts from Siobhan’s statement of financial position
relating to Harry are as follows:
$000
Goodwill 90,000
Franchise costs 50,000
Restored furniture (at cost) 90,000
Buildings 100,000
Other net assets 50,000
370,000
The restored furniture has an estimated realisable value of $115 million. The franchise agreement
contains a ‘sell back’ clause, which allows Harry to cease using the franchise and receive a
repayment of $30 million from the franchisor. An impairment review at 31 March 20X5 has
estimated that the value of Harry as a going concern is only $250 million.
Demonstrate how the impairment would be accounted for in the financial statements.

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Chapter 13
IFRS 5 NON-CURRENT ASSETS HELD
FOR SALE AND DISCONTINUED
OPERATIONS
1. Non-current assets held for sale
Must be available for immediate sale and sale must be highly probable (sell < 1 year, active
programme to locate buyer, actively marketing).
Non-current asset held for sale is valued at the lower of the carrying value and fair value less
costs to sell. Any reduction in value is recorded as an impairment through profit or loss.
IFRS 5
Cost Model Revaluation Model
Asset is revalued to fair value
immediately before
classification as held for sale
๏ Once classified as a non-current asset held for sale it is no longer depreciated.
๏ The subsequent sale of the asset will give rise to a profit/loss on disposal.
Example 1 – NCA-HFS
At 1 January 2014, Namibia carried a property in its statement of financial position at its revalued
amount of $14 million in accordance with IAS 16 Property, Plant and Equipment. Depreciation is
charged at $300,000 per year on the straight line basis.
In April 2014, the management decided to sell the property and it was advertised for sale. By 31
April 2014, the sale was considered to be highly probable and the criteria for IFRS 5 Non-current
Assets Held for Sale and Discontinued Operations were met at this date. At that date, the asset’s fair
value was $15·4 million. Costs to sell the asset were estimated at $300,000.
On 31 January 2015, the property was sold for $15·6 million.
Explain how the above transaction should be dealt with in the financial statements of
Namibia for the year-ended 31 December 2014 and 31 December 2015.

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2. Discontinued operations
Disclosure
P or L
PFY → face
Revenue, expenses, pre-tax
proﬁt, tax expense → face
or notes
SFP
Fully disposed of → none
Not fully disposed of → ‘assets
held for sale’
SCF
Net cash ﬂows → face or notes
Discontinued
Disposed of in the
year
Held for sale
Disclose in year of
disposal
Disclose in year
held for sale
Definition
๏ Disposed of, or
๏ Held for sale, and:
Separate major line of
business or geographical
area of operations
Is a subsidiary
acquired exclusively
with a view to re-sale
Single co-ordinated
plan to dispose of a
separate line of
business/geographical
area
IFRS 5
Discontinued Operations
Definition DisclosureWhen discontinued

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Statement of profit or loss for the year-ended [date]
$’000
Continuing operations
Revenue X
Cost of sales (X)
Gross profit X
Distribution costs (X)
Administration expenses (X)
Operating profit X
Finance costs (X)
Profit before tax X
Income tax expenses (X)
Profit for the period from continuing operations X
Discontinued operations
Profit for the period from discontinued operations* X
Total profit for the period X
* Detail given in the notes
Example 2 – Discontinued operations
Angola’s car manufacturing operation has been making substantial losses. Following a meeting of
the board of directors, it was decided to close down the car manufacturing operation on 31 March
20X6. The company’s reporting date is 31 December and the car manufacturing operation is
treated as a separate operating segment.
Explain how the decision to close the car manufacturing operation should be treated in
Angola’s financial statements for the years ending 31 December 20X5 and 20X6.

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Chapter 14
IAS 19 EMPLOYEE BENEFITS
๏ Short-term benefits
๏ Long-term benefits
๏ Post-employment benefits
1. Pensions
๏ Defined Contribution Scheme (money purchase)
This does not present any accounting problems as the income statement charge will
equal the contributions payable into the scheme.
Contributions are accrued in the financial statements with an expense recognised in
profit or loss.
๏ Defined Benefit Scheme (final salary)
At any point in time (usually each year) we need to know the value of the scheme so
that we can decide whether or not it is worth enough (i.e. the assets will be enough to
cover the liabilities.)
Statement of financial position (extract)
$m
Fair value of scheme assets X
Fair value of scheme liabilities (X)
Net pension asset/(liability) X/(X)
The valuation of a defined benefit scheme will be carried out by an actuary who will decide if
the scheme is in surplus (net pension asset) or deficit (net pension liability)
This is done by making a number of assumptions:
๏ Level of investment return
๏ Number of leavers
๏ Number of new members
๏ Number of people who die
As time goes by the actual outcome will not be the same as the assumed outcome.
The diﬀerences are known as actuarial diﬀerences (remeasurement component).

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Statement of profit or loss and other comprehensive income (extract)
$m
Profit or loss
Operating costs
Current service costs (X)
Past service costs (X)
Financing costs
Interest expense (X)
Return on investment X
Other comprehensive income
Re-measurement gain/(loss) (W) X/(X)
๏ Current service cost – increase in the value of the scheme liabilities as a result of
employee service during the period.
๏ Past service cost – increase in the value of the scheme liabilities as a result of employee
service in previous periods.
๏ Interest cost – represents the unwinding of the discount factor- the nearer you get to
paying oﬀ a liability the bigger it gets.
๏ Return on investment – this is the interest or dividends receivable on the pension fund
assets.
Note: Actuarial diﬀerences are recognised in other comprehensive income, hence no impact
on profit or loss.
Workings
Assets $m Liabilities $m
Opening X Opening X
Return on investment X Interest X
Contributions paid in X Service costs X
Benefits paid out (X) Benefits paid out (X)
Expected X Expected X
Re-measurement component (β) X/(X) Re-measurement component (β) X/(X)
Closing (per actuary) X Closing (per actuary) X

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Example 1 – Defined benefit scheme
Finland operates a defined benefit pension scheme for all of its employees. The closing balances on
the scheme assets and liabilities, at 31 December 2014, were $60 million and $64 million
respectively.
Finland’s actuary has provided the following information that has yet to be accounted for in the
year-ended 31 December 2015.
$m
Current service cost 9
Past service cost 8
Contributions paid in 5
Benefits paid out 6
Fair value of plan asset 66
Fair value of plan liabilities 75
Yield on high quality corporate bonds 5%
Calculate the amounts that will appear in the financial statements of Finland for the year-
ended 31 December 2015.
2. Curtailment
A curtailment occurs when there are a significant number of employees who leave the
scheme, commonly seen if there is a re-organisation of the business or change in scheme
from defined benefit to defined contribution.
The asset and liability are re-measured to fair value and any change is taken to profit or loss.
Example 2 – Curtailment
Flannagan announces the re-organisation of its business, resulting in the loss of jobs within the
business.
The fair value of the plan assets and liabilities, immediately before the re-organisation, were $48
million and $60 million respectively.
The plan assets do not change following the curtailment but the pension liabilities are measured at
$55 million.
Explain the accounting treatment of the curtailment in the financial statements.

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3. Asset ceiling
If a company has an overall pension asset on its statement of financial position then the asset
can only be recognised up to the level of the asset ceiling. The asset ceiling is the present
value of any future cash savings of not having to contribute to the scheme as it is in surplus. If
the asset needs to be reduced to the asset ceiling limit then the reduction in the asset is
shown as an expense in profit or loss.
Example 3 – Asset ceiling
Brannagan has a net pension asset in its statement of financial position of $30 million. It therefore
anticipates that it will not have to pay its usual contributions into the scheme for the next few
years. It is estimated that the present value of the future reduction in contributions will be $26
million.
Explain how the net pension asset will be treated in the financial statements.

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Chapter 15
IAS 21 FOREIGN CURRENCY
TRANSACTIONS
If an entity has foreign currency transactions then the amount will need to be translated into
the functional currency before it is recorded within the general ledger.
The functional currency is the currency of the primary economic environment in which the
entity operates. This is deemed to be where the entity generates and expends cash.
Management should consider the following factors in determining the functional
currency:
๏ The currency that dominates the determination of the sales prices
๏ The currency that most influences operating costs
๏ The currency in which an entity’s finances are denominated is also considered.
Individual company accounts
Record the transaction at the exchange rate in place on the date the transaction occurs.
Monetary assets and liabilities are retranslated using the closing rate at the reporting date,
with any gains or losses going through profit or loss.
Non-monetary assets and liabilities are not retranslated at the reporting date, unless carried
at fair value, whereby translate at the rate when fair value was established.
Note: No specific guidance is given as to where any exchange diﬀerences are recorded within
profit or loss. The general accepted practice is:
๏ Trading transaction – operating costs
๏ Financing transaction – financing costs
Example 1 – Functional currency
Jones Inc. has its functional currency as the $USD. It trades with several suppliers overseas and
bought goods costing 400,000 Dinar on 1 December 20X5. Jones paid for the goods on 10 January
20X6. Jones’s year-end is 31 December. The exchange rates were as follows:
1 December 20X5 4.1 Dinar : $1USD
31 December 20X5 4.3 Dinar : $1USD
10 January 20X6 4.4 Dinar : $1USD
Show how the transaction would be recorded in Jones’s financial statements.

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Chapter 16
IAS 10 EVENTS AFTER THE REPORTING
PERIOD
IAS 10
Adjusting
Information relating to a condition that existed
at the reporting date
๏ Settlement of outstanding court case
๏ Bankruptcy of a customer
๏ Sale of inventory at below cost
๏ Determination of purchase/sale price of
PPE
Non-adjusting
Doesn’t reflect conditions that existed at the
reporting date
๏ Fall in value of investments
๏ Major purchase of assets
๏ Announcing a discontinued operation
๏ Announcing a restructuring
Disclose nature and financial eﬀect if MATERIAL
Example 1 – Events after the reporting period
The following events took place between the 31 December 20X5 reporting date and the date the
financial statements were authorised for issue.
1. The company makes an issue of 100,000 shares which raises $200,000 shortly after the
Statement of Financial Position date.
2. A legal action had been brought against the company for breach of contract prior to the year
end. The outcome was decided shortly after the Statement of Financial Position date, and as a
result the company will have to pay costs and damages totalling $80,000. No provision has
currently been made for this event.
3. Inventory included in the accounts at the year end at cost $25,000 was subsequently sold for
$15,000.
4. A building in use at the Statement of Financial Position date and valued at $500,000 was
completely destroyed by fire. Unfortunately, only half of the value was covered by insurance.
The insurance company has agreed to pay $250,000 in accordance with the company’s
policy.
Explain how each of the above items should be treated in the financial statements for the
year ended 31 December 20X5.

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Chapter 17
IAS 2 INVENTORIES
Measure @ lower of
Cost
Costs incurred in bringing inventory
to its present condition and location
๏ Materials
๏ Labour
๏ Manufacturing overheads (based
on normal output)
๏ Transport costs
๏ Irrecoverable taxes
Costs specifically excluded include:
๏ Abnormal costs
๏ Storage costs
๏ Administration costs
๏ Selling expenses
NRV
Selling price X
Less:
Costs to complete (X)
Costs of selling (X)
NRV X
Line-by-line basis
Example 1 – Inventory Valuation
Neil paid $3 per unit for the raw materials of its products. To complete each unit incurred $2 per
unit in direct labour.
Production overheads for the year based on normal output of 12,000 units was $72,000.
Due to industrial action only 10,000 units were produced and 1,000 units were in inventory at the
end of the year.
As a result of the industrial action some units were badly stored and became damaged. It’s is
estimated that 200 of the units will now only be sold for $12 each after minor repairs of $2 each
What figure for closing inventory would be shown in the Statement of Financial Position?

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Chapter 18
IAS 8 ACCOUNTING POLICIES, CHANGES
IN ACCOUNTING ESTIMATES AND
ERRORS
IAS 8
Accounting Estimates Prior Period ErrorsAccounting Policies
1. Accounting policies
The specific principles, bases, conventions, rules and practices applied by an entity in
preparing and presenting the financial statements.
Selection
Apply the standard that
specifically deals with the
transaction
Apply a policy that gives relevant
and reliable information
๏ Standard of a similar item
๏ IASB Framework definitions
Change in accounting policy
New IFRS Apply a new policy that gives more
relevant and reliable information
Follow treatment given in new IFRS Voluntary change
Retrospective application
๏ Adjust b/f figures
๏ Restate comparatives

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2. Accounting estimates
Changes in accounting estimate are recognised prospectively:
๏ Period of change
๏ Period of change and future periods
Example 1 – Accounting Estimates
If a company decides to change its method of depreciation from straight line method to reducing
balance method.
If a company decides to change from capitalising finance costs to immediate write oﬀ.
Would the following be a change in accounting policy or revision of an estimate?
3. Prior period error
Accounting errors (omissions and misstatements) include:
๏ Errors in applying accounting policies
๏ Oversights
๏ Fraud and the eﬀects of fraud
Material errors are corrected retrospectively, the same as for a change in accounting policy.

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Chapter 19
IAS 12 INCOME TAXES
1. Current tax
Current tax is the amount of income taxes payable (recoverable) in respect of the taxable
profit (tax loss) for a period.
2. Recognition
Current tax should be recognised based on the year-end estimate of the tax payable.
The income tax expense though profit or loss is adjusted for any under/over provision from
the prior year.
Example 1 – Current tax
The following trail balance (extract) relates to Claire as at 31 December 20X5:
$’000 $’000
Current tax 500
The following notes are also relevant:
1. A provision for current tax for the year ended 31 December 20X5 of $4.2 million is required.
2. The balance on current tax in the trial balance represents the under/over provision of the tax
liability for the year ended 31 December 20X4.
Prepare extracts from the statement of profit or loss for Claire for the year ended 31
December 20X5 and from the statement of financial position as at the same date with
regards tax.

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Chapter 20
IFRS 8 OPERATING SEGMENTS
IFRS 8 Operating segments aims to assist users to:
๏ Understand past performance
๏ Understand the risk and returns of each segment
๏ Make better informed judgements
An operating segment is one whose results are regularly reviewed by the chief operating
decision maker (CODM), thus giving the users of the accounts an internal view of the
company and how the results are reviewed.
Operating segments can be aggregated where they have similar economic characteristics
and are similar in each of the following:
๏ the nature of the products or services;
๏ the nature of the production process;
๏ the type of customer for the products or services;
๏ the methods used to distribute the products or services;
๏ the nature of the regulatory environment (banking, insurance, etc.).
1. Disclosure
An operating segments results must be disclosed if:
๏ Segment revenue is greater than 10% of the total revenue (internal and external)
๏ Segment profits are greater than 10% of the total profits (excluding losses)
๏ Segment assets are greater than 10% of total assets
If the total reportable segment revenue does not make up at least 75% of external revenue
then additional segment will need to be disclosed.
Two or more operating segments may be combined if they have similar economic
characteristics with regards to the following:
๏ The nature of the products or services
๏ The nature of the production process
๏ The type or class of customer
๏ The methods used to distribute the products/services
๏ The nature of the regulatory environment

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Each reportable segment should then disclose:
๏ Segment revenue
๏ Segment results
๏ Segment assets
๏ Segment liabilities
๏ Capital expenditure
๏ Depreciation/amortisation
๏ Other non-cash expenses
General disclosures are:
๏ How the operating segments have been identified
๏ The products and services that the group provides
๏ Reliance on major customers
๏ Geographical information (limited to revenue and non-current assets)
Example 1 – Operating segments
Gulf is preparing is operating segment disclosure note for the first time following its listing on the
local stock exchange during the year. Its chief operating decision maker (CODM) regularly reviews
the results of its three separate divisions:
• Domestic railway operations
• International railway operations
• Railway construction
Gulf is intending to report two operating segments in its disclosure note as opposed to the three
reviewed by the CODM. The domestic and international operations are to be combined because it
is felt that they have similar economic characteristics due to the services that they oﬀer.
The domestic operations involve a competitive tender process to run the railway service, which is
then awarded by the local transport authority. The local transport authority then sets the ticket
prices and collects the fares which are then distributed amongst the various operators running the
contracts.
The international operations’ ticket prices are set by Gulf, who collects the fares from the
passengers directly.
Advise Gulf as to whether the proposed combination of the two operating segments is
appropriate.

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Chapter 21
IAS 34 INTERIM FINANCIAL REPORTING
IAS 34 requires only condensed financial statements (headings and sub-totals) and selected
explanatory note disclosures, with particular focus on new events, activities and
circumstances. The minimum content specified is as follows:
๏ Statement of financial position at interim date and previous reporting date.
๏ Statement of profit or loss and other comprehensive income for both interim/
cumulatively to date for the year and previous interim/cumulatively to date for previous
year (incl. EPS and diluted EPS)
๏ Statement of changes in equity cumulatively to interim date and direct comparative
๏ Statement of cash flows cumulatively to date and comparable period.

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Chapter 22
IFRS 13 FAIR VALUE MEASUREMENT
Definition
The price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
The IFRS says that you should always use market value wherever possible and gives more
detailed guidance on measurement of items that do not have a readily available market price.
Level one inputs: quoted prices
If there is an active market then the market price should be used.
Level two inputs: similar quoted prices
If there is no quoted price available then market data should be used to find a similar
estimated market value.
Level three inputs: unobservable inputs
I neither of the first two work then financial modelling( such as discounted present value)
should be used to obtain an estimated market value.

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D. CONSOLIDATED FINANCIAL STATEMENTS
(GROUP ACCOUNTS)
Chapter 23
CONSOLIDATED STATEMENT OF
FINANCIAL POSITION
1. Introduction to Group Accounts
P
100%
S
๏ P Ltd and S Ltd – separate legal
entities
๏ P Group Ltd – one single entity,
prepare accounts using substance
Control and ownership
๏ Control (power to direct activities) –
100%P + 100%S
๏ Ownership – Non-controlling interest
(NCI%)
Basic principles
A parent is an entity that has one or more subsidiaries.
A subsidiary is an entity which is controlled by another entity (known as the parent).
The key concept in determining whether or not an investment constitutes a subsidiary is that
of control.

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Control is the power to govern the financial and operating policies of an entity so as to
obtain benefit from its activities.
Control is usually achieved by the purchase of more than 50% of a company’s equity share
capital.
2. Basic consolidation
2.1. Basic steps
100% P + 100% S assets and liabilities, ignoring the investments in subsidiary
100% P share capital and share premium only (reporting to parent’s shareholders)
Retained earnings (balancing figure)
Example 1 – Basic consolidation
Peter acquired 100% of the equity share capital of Steven on 31 December 20X4 for $1,000,000.
The financial statements of the two companies at that date were as follows:
Peter
$000
Steven
$000
Investment in Steven Co 1,000 -
Other assets 1,500 1,200
Total assets 2,500 1,200
Equity share capital 1,000 250
Retained earnings 1,100 750
2,100 1,000
Liabilities 400 200
Total equity and liabilities 2,500 1,200
Prepare the consolidated statement of financial position for the Peter Group at 31 December
20X4.

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Example 2 – Basic consolidation (continued)
Following Peter’s acquisition of the 100% of Steven’s equity share capital of Steven on 31
December 20X4, both companies continued to trade. The financial statements of the two
companies at the end of the following year 31 December 20X5 were as follows:
Peter
$000
Steven
$000
Investment in Steven Co 1,000 -
2,400 1,150
Liabilities 500 300
Prepare the consolidated statement of financial position for the Peter Group at 31 December
20X5.
2.2. Non-controlling interest
Control is exerted through a shareholding of greater than 50%, so therefore it is not always
necessary to fully own a subsidiary.
Shareholdings of 75% will still give the parent the power to direct the activities of the
subsidiary and therefore it must prepare consolidated financial statements.
As the parent’s 75% holding still maintains control, the assets and liabilities of the subsidiary
are consolidated 100% on a line-by-line basis.
It is necessary to account for 25% ownership interest in the subsidiary which is referred to as
the non-controlling interest. It is shown in the equity section of the consolidated statement of
financial position.
The non-controlling interest is measured using either of the following methods:
๏ Proportionate share of net assets
๏ Fair value

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Example 3 – Non-controlling interest
Pierre acquired 80% of Stefan’s equity share capital on 31 December 20X4 when Stefan’s retained
earnings were $750,000. The financial statements of the two companies at the end 31 December
20X5 were as follows:
Pierre
$000
Stefan
$000
Investment in Stefan Co 800 -
2,200 1,150
Liabilities 500 300
Prepare the consolidated statement of financial position for the Pierre Group at 31 December
20X5 assuming the non-controlling interest is measured using the proportionate share of net
assets method
2.3. Goodwill
On acquisition of a subsidiary, the parent will usually pay more for the subsidiary than the
value of the net assets (assets less liabilities). Why?
๏ Customer loyalty
๏ Good reputation
The diﬀerence between what the parent pays and what the net assets are truly worth is
referred to as goodwill.
Example 4 - Goodwill
A parent company buys 75% of the equity shares in a subsidiary company for $156,000.
The remaining shares were valued at $56,000 and the net assets at acquisition were $170,000.
Calculate the goodwill arising on acquisition assuming that:
1. Non-controlling interest is measured using the proportionate share of net assets method
2. Non-controlling interest is measured using the fair value method.

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2.4. Other reserves (e.g. revaluation reserve)
Each reserve has a separate calculation still based on ownership so the calculation is the same
as for group retained earnings
Group revaluation reserve
100% P X
Add: P’s % of S’s post acqn revaluation reserve X
X
Workings
W1) Group Structure
P
S
>50%
A
20-50%
W2) Net assets of subsidiary
At reporting
date
At
acquisition
Post
acquisition
Equity shares X X
SP X X
Ret. earnings X X
X X X
W3) Goodwill
FV of consideration (shares/cash) X
NCI at acquisition X
X
FV of net assets at acquisition (W2) (X)
Goodwill at acquisition X
W4) Non-controlling interests
NCI @ acquisition (W3) X
Add: NCI% x S’s post-acqn profits (W2) X
X
W5) Group retained earnings
100% P X
Add: P’s % of S’s post acqn retained earnings (P’s% x (W2)) X
X

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Example 5 - Workings
Matthews purchased 80% of Jones for $600,000 two years ago when Jones’s retained earnings
showed a balance of $100,000.
Matthews
$000
Jones
$000
Non-current assets 1,000 500
Investment in Jones 600 -
Current assets 800 600
Equity share capital ($1) 500 200
1,300 600
Liabilities 1,100 500
Matthews measures the non-controlling interest using the fair value method.
The fair value of Jones’s equity shares was $200,000 at acquisition
Prepare the consolidated statement of financial position for the Matthews group for the
year-ended 31 December 20X5.
2.5. Mid-year acquisition
If a subsidiary is acquired mid-year the issue revolves around calculating the retained
earnings at the acquisition date. To calculate the retained earnings figure at the acquisition
date we assume, unless told otherwise, that the profits for the year made by the subsidiary
have accrued evenly and adjust either the opening or closing retained earnings figure.
Illustration – Mid-year acquisition
Richard acquired 80% of Andy’s equity share capital on 1 August 20X5. Both have a year end
of 31 December 20X5.
Andy’s retained earnings at the end of the year were $600,000 and its profit for the year was
$120,000.
Assuming the profit accrued evenly during the year then the Andy’s retained earnings figure
at 1 August 20X5 is calculated as follows:
$600,000 − (5/12 x $120,000) = $540,000

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3. Adjustments – Group
3.1. Intra-company balances
The intragroup receivable balance and intragroup payable balance should not be shown in
the consolidated accounts as we treat the group as a single entity.
๏ Remove the payable
๏ Remove the receivable
3.2. Cash in transit
The intragroup receivable and intragroup payable balance should be equal. If they are not
then it will be due to cash in transit.
Illustration – Cash in transit
P has an intra-company trade receivable of $1,500 at the year-end due form S. This does not
agree with the corresponding $1,000 trade payable in S due to a cheque of $500 sent by S
immediately prior to the year-end, which P did not receive until after the start of the new
accounting year.
To account for the cash in transit and intra-company balances we need to:
1. Record the cash in transit in the group accounts
DR Bank $500
CR Receivables $500
2. Eliminate the equal intra-company balances
DR Payables $1,000
CR Receivables $1,000

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3.3. Unrealised profits
Inventory PUP - Need to remove the intra-group profit included in inventory held @ year-end (cost
structures)
Cr Inventory (CSFP) X
Dr Retained earnings (of seller) X
๏ If S is seller → Adjust (W2)
๏ If P is seller → Adjust (W5)
Illustration – Unrealised profits
P sells $100 goods to S at $125 and S has not sold the goods on by the end of the year.
Example 6 – Unrealised profits
Statements of financial position as at 31 December 20X5
James Molly
$’000 $’000
Non-current assets
PPE 900 500
Investment in Molly 800 -
Current Assets 700 600
2,400 1,100
Share Capital 500 200
Current liabilities 1,100 500
2,400 1,100
1. James bought 80% of the equity shares in Molly for $800,000 when the retained earnings
were $150,000.
2. Non-controlling interest is measured using the fair value method.
3. During the year Molly sold goods to James at $120,000 based on a mark-up of 20%. Half of
the goods remain in inventory at the year-end.
Prepare the James Group consolidated statement of financial position as at 31 December
20X5.

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3.4. Consideration
A parent may acquire a controlling interest in a subsidiary in other fashions as opposed to just
a cash payment.
Other considerations are as follows:
๏ Share for share exchange
๏ Deferred cash consideration
๏ Contingent consideration
Share for share exchange
1. Calculate the number of subsidiary shares acquired
2. Calculate the number of P shares issued
3. Value the P shares issued
4. Record the journal entry
Example 7 – Share exchange
Harry acquired 80% of the 10 million ordinary $1 shares of Sally by oﬀering a share exchange of one
for every four shares acquired. The fair value of Harry’s shares is $3 per share.
Calculate the cost of investment for the acquisition and prepare the journal entry to record
the share issue.

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3.5. Deferred consideration
A parent may agree to pay cash in the future following the acquisition of the subsidiary. This
deferred consideration is recorded on acquisition at present value.
Example 8 – Deferred consideration
Pony acquired 80% of the 30 million $1 equity shares of Star on 1 January 20X5. The consideration
was through the oﬀer of a share exchange of two shares issued for every three shares acquired and
a cash payment of $1 per share payable on 31 December 20X5. The fair value of the Pany’s equity
shares was $2 at 1 January 20X5.
The present value of $1 received in one year’s time is $0.91 at a rate of 10%.
Calculate the cost of the investment in Star at 1 January 20X5
The deferred consideration needs to be unwound to its final value and is done so using the
interest rate originally applied to discount back the original entry and is recorded as follows:
Dr Finance cost
Cr Deferred consideration liability
NOTE: The adjustment does not impact the fair value of consideration.

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Chapter 24
CONSOLIDATED STATEMENT OF
PROFIT OR LOSS
X/12
P S Adj. Group
Revenue X X (X) X
COS (X) (X) X
-PUP (Inventory ) (X) (X) (X)
Gross profit X
Dist costs (X) (X) (X)
Admin exp. (X) (X) (X)
Finance cost (X) (X) X (X)
Investment income X X (X) X
-Dividend from S (X)
Profit before tax X
Taxation (X) (X) (X)
PFY X X
Parent (β)Parent (β) X
NCI = NCI% x S’s PFYNCI = NCI% x S’s PFY X

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Example 1 – Basic consolidation
Statements of profit or loss for the year-ended 31 December 20X5
Vader
$’000
Maul
$’000
Revenue 1,645 1,280
Cost of sales (1,205) (990)
Gross profit 440 290
Distribution costs (100) (70)
Administrative expenses (90) (50)
Profit before interest and tax 250 170
Finance costs (55) (30)
Profit before tax 205 140
Taxation (35) (28)
Profit for the year 170 112
1. On 1 July 20X5, Vader acquired 80% of the equity shares of Maul. It is the group policy to
measure the non-controlling interest at acquisition at fair value.
2. Maul declared a dividend during the year of $10,000.
3. Assume that profits accrue evenly during the year.
Prepare a consolidated statement of profit or loss for the Vader group for the year-ended 31
December 20X5

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1. Adjustments
1.1. Intra-group trading transactions
E.g. sales, loans/debenture interest and management charges
Remove the expense – adjustment column
Remove the income – adjustment column
1.2. Unrealised profits
PUP adjustment on goods unsold at year-end (cost structures) by increasing C’o’S in seller’s
column.
Example 2 – Unrealised profits
Statement of profit or loss for the year ended 31 December 20X5
Gary Nick
$000 $000
Revenue 120,000 90,000
Cost of sales (70,000) (40,000)
Gross profit 50,000 50,000
Operating expenses (20,000) (35,000)
Profit from operations 30,000 15,000
Finance cost (2,000) (500)
Profit before tax 28,000 14,500
Income tax expense (6,000) (3,000)
Profit for the year 22,000 11,500
Additional information
1. Gary acquired 80% of Nick on 1 January 20X5. Goodwill on acquisition has been impaired by
$1m during the year and should be charged to operating expenses.
2. During the year Nick sold $10m goods to Gary at a mark-up of 25% on cost. One quarter of
those goods are in inventory at the year end.
Prepare the Gary Group consolidated statement of profit or loss for the year to 31 December
20X5.

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IFRS 10 Consolidated Financial Statements defines control and tells us how to consolidate.
A parent/subsidiary relationship can exist even where the parent owns less than 50% of the
voting power of the subsidiary since the key to the relationship is control and the power to
direct the activities.
The following instances are where control is exerted:
๏ power over more than half of the voting rights by virtue of an agreement with other
investors;
๏ power to govern the financial and operating policies of the entity under a statute or
agreement;
๏ power to appoint or remove the majority of the members of the board of directors or
equivalent governing body and control of the entity is by that board or body; or
๏ power to cast the majority of votes at meetings of the board of directors or equivalent
governing body and control of the entity is by that board or body.

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Chapter 25
ASSOCIATES
A shareholding of between 20% and 50% is assumed to give the investing company
significant influence over its investment.
This means it is treated as an associate and is equity accounted for in accordance with IAS 28
1. Group Statement of financial position – ‘Investment in
associate’
The investment in associate is calculated as follows:
$
Cost of investment in A X
Add: % of A’s post acquisition reserves X
Less: impairment of goodwill (X)
X
Example 1 – Associate (SFP)
Penny bought 30% of the equity share capital of Alex on 1 January 20X5 for $250,000. Alex’s profits
for the year were $170,000.
An impairment review was carried out at the end of the year and the investment in Alex was found
to be impaired by $20,000.
Calculate the investment in associate to appear in Penny’s financial statements at 31
December 20X5.

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2. Group Statement of profit or loss – ‘Share of profit of
associate’
A share of profit of associate is calculated as shown below and shown immediately before
profit before tax.
% of A’s profit for the year X
Less: goodwill impaired during the year (X)
X
IAS 28 Investment in Associates evidences the following additional ways in which significant
influence can arise:
๏ Representation on the board of directors
๏ Participation in the policy making decision
๏ Material transaction between the investor and investee
๏ Interchange of managerial personnel
๏ Provision of essential technical maintenance

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E. MANAGEMENT OF WORKING CAPITAL, CASH
AND SOURCES OF SHORT-TERM FINANCE
Chapter 26
CASH MANAGEMENT
A business can be profitable whilst at the same time be losing cash. It is vitally important for a
business therefore to ensure that it does not just focus on profitability but also manage its
cash position.
To ensure that the business can determine if it is generating or spending cash overall it will
need to prepare cash flow forecasts.
A cash flow forecast will identify exactly when the cash inflows and outflows will arise which
can then help identify when the business will have either cash surpluses or cash deficits.
1 2 3
Inflows
Cash sales X X X
Cash from credit customers X X X
Outflows
Cash purchases (X) (X) (X)
Cash payments to credit suppliers (X) (X) (X)
Cash expenses (X) (X) (X)
Capital expenditure (X) - -
Interest (X) (X) (X)
Taxation (X) (X) (X)
Net movement X/(X) X/(X) X/(X)
Opening balance X X X
Closing balance X X X

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