F7 Acca

E
PL
ACCA F7 M
SA
Financial Reporting
For exams in June 2014
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Key to Icons
Syllabus Real world example
E
Technical content Diagram
PL
Question to consider Key model
Answer
M Tackling the exam
SA
Past exam question Summary
Answer to past exam Case study

question
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• Conceptual framework and GAAP
Chapter 1
• The IASB’s Conceptual Framework
• The objective of general purpose
The conceptual financial reporting
framework • Underlying assumption
E
• Qualitative characteristics of financial
PL
statements
• The elements of financial statements
• Recognition and measurement of the
M elements of financial statements

• Fair presentation and compliance with
SA
IFRS
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Syllabus Guide detailed outcomes 1
• Describe what is meant by a conceptual framework of

accounting
E
• Discuss whether a conceptual framework is necessary and
what an alternative system might be
PL
• Discuss what is meant by relevance and faithful
representation and describe the qualities that enhance
M
these characteristics
• Discuss whether faithful representation constitutes more
SA
than compliance with accounting standards
• Indicate the circumstances and required disclosures where
a ‘true and fair’ override may apply
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• Discuss what is meant by understandability and verifiability

in relation to the provision of financial information
E
• Discuss the importance of comparability and timeliness to
users of financial statements
PL
M
SA
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• Define what is meant by ‘recognition’ in financial

statements and discuss the recognition criteria
E
• Apply the recognition criteria to assets and liabilities and
income and expenses
PL
• Discuss revenue recognition issues and indicate when
income and expense recognition should occur
M
• Demonstrate the role of the principle of substance over
form in relation to recognising sales revenue
SA
• Explain the measurement bases of historical cost, fair
value / current cost, net realisable value and the present
value of future cash flows and compute amounts using
these bases
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Chapter summary diagram
Need for a Generally accepted

Advantages and
conceptual accounting practice
disadvantages
framework (GAAP)
E
PL
Conceptual framework and
GAAP
M
SA
The conceptual
True and fair view
framework
The IASB’s conceptual

framework
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Conceptual Framework and GAAP 1
What is a conceptual framework?

• A statement of generally accepted theoretical principles
E
which form a frame of reference for financial reporting.
PL
• These provide a basis for developing new accounting
standards and a platform to evaluate those already in
existence.
M
SA
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Advantages of a conceptual framework

• Having a consistent conceptual base should avoid
E
contradictions and inconsistencies in basic concepts
and so produce standardised consistent accounting
PL
practices.
• The development of standards is less subject to
political pressure.
M
• A consistent statement of financial position driven or
SA
profit or loss driven approach is used.
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Disadvantages of a conceptual framework

• Financial statements have many users all with differing
E
needs.
PL
– A single framework cannot satisfy the needs of all
users.
– There may be a need for a variety of accounting
M
standards, each produced for a different purpose
with different conceptual bases.
SA
• Having a conceptual framework may not make it any
easier to prepare accounting standards.
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Generally accepted accounting practice (GAAP)
• Comprises the rules, from all sources, which govern
accounting.
E
• The major components include:
PL
– National accounting standards, for example the Financial
Accounting Standards Board (FASB) in the USA
– National company law, for example the Companies Act in
the UK
M
– Local stock exchange requirements
SA
– Regional bodies, such as the European Union. For
example, an Accounting Directive issued by the EU now
requires companies listed on an EU stock exchange to
prepare their consolidated financial statements using
IFRSs.
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The IASB’s Conceptual Framework 1
• Published in September 2010 to update the IASB

Framework for the Preparation and Presentation of
E
Financial Statements which was issued in 1989.
• Joint project by the IASB and FASB to be completed in
PL
two phases.
M
SA
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• Currently comprises four chapters:

– Chapters 1 – 3 are from the new Conceptual
E
Framework for Financial Reporting.
PL
– Chapter 4 consists of the parts of the former 1989
Framework which will be updated in phase 2 of the
project.
M
SA
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• Chapter 1
– The objective of general purpose financial reporting
E
• Chapter 2
PL
– The reporting entity (still to be issued)
• Chapter 3
M
– Qualitative characteristics of useful financial
information
SA
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• Chapter 4
– Remaining text of the 1989 Framework
E
– Underlying assumption
PL
– The elements of financial statements
– Recognition of the elements of financial statements
M
– Measurement of the elements of financial
statements
SA
– Concepts of capital and capital maintenance.
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The objective of general purpose financial reporting 1
Chapter 1: The objective of general purpose financial

reporting
E
• To provide information about the reporting entity that is
useful to existing and potential investors, lenders and other
PL
creditors in making decisions about providing resources to
the entity
M
• Such decisions are likely to include:
– Decisions to buy, hold or sell equity investments
SA
– Assessment of management stewardship and
accountability
– Assessment of the entity’s ability to pay employees
– Assessment of the security of amounts lent to the entity
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The objective of general purpose financial reporting 2
Chapter 1: The objective of general purpose financial

reporting (cont.)
E
• The information required therefore relates to:
PL
– The economic resources of the entity
– The claims against the entity and
– Changes in the entity’s economic resources and claims
M
• This information should be prepared on an accruals
SA
basis.
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Underlying assumption
Chapter 4: The Framework (1989) remaining text

Underlying assumption
E
• Going concern:
PL
– The financial statements are normally prepared on the
assumption that the entity is a going concern and will
continue to trade for the foreseeable future.
M
• It is assumed that the entity has neither the intention not
the need to liquidate the business or curtail major
SA
operations.
• If it did the financial statements would be prepared on a
different basis and this basis would be disclosed.
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Qualitative characteristics of financial information 1
Chapter 3: Qualitative characteristics of useful financial

information
E
• These describe the attributes that information needs to
have in order for it to be most useful for existing and
PL
potential investors, lenders and other creditors for making
decisions about the reporting entity.
M
• They are categorised into two categories:
– Fundamental qualitative characteristics
SA
– Enhancing qualitative characteristics
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Fundamental qualitative characteristics
E
Relevance Faithful representation
PL
Relevant financial information is To be useful, financial information
capable of making a difference in the must faithfully represent the
decisions made by users, ie if it has phenomena it purports to represent.
• Predictive value, and/or A perfect faithful representation
• Confirmatory value
M would be:
• Complete
• Neutral
SA
Materiality • Free from error
Information is material if omitting it

or misstating it could influence
decisions that users make on the
basis of financial information.
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Enhancing qualitative characteristics
E
Comparability Verifiability Timeliness Understandability
PL
Information is more Assures users that Having information Classifying,
useful if it can be information faithfully available to characterising and
compared with similar represents the decision-makers in presenting
information about economic phenomena time to be capable information clearly
• Other entities, and it purports to of influencing their and concisely
• Other periods
Consistency helps
achieve comparability M
represent
Verification can be
direct or indirect
decisions
SA
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The elements of financial statements 1

The elements of financial statements
E
• An item can only be recognised in the financial
PL
statements if it can be defined as one of the following
elements:
– Asset
– Liability M
SA
– Equity
– Income
– Expense
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ASSET A resource controlled by an entity as a result of past

events and from which future economic benefits are
expected to flow to the entity
E
PL
LIABILITY A present obligation of the entity arising from past
events, the settlement of which is expected to result in
an outflow of resources embodying economic benefits
EQUITY
M
The residual interest in the assets of an entity after
SA
deducting its liabilities
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INCOME Increases in economic benefits during the period other

than contributions from equity participants
E
PL
EXPENSE Decreases in economic benefits during the period
other than distributions to equity participants
M
SA
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Recognition and measurement of the elements of fs 1

Recognition of the elements of financial statements
E
• Recognition is the process of recording or showing an
PL
item in the financial statements.
• An item can only be recognised in the financial statements
when it satisfies the recognition criteria.
M
SA
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Recognition of the elements of financial statements
E
• Recognition criteria:
PL
– An item meets the definition of an element of the
financial statements; and
– It is probable that any future economic benefit
M
associated with the item will flow to or from the entity;
and
SA
– The item has a cost or value that can be measured with
reliability.
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Case study: Footballers 1
Are transfer fees paid for footballers an asset?
E
PL
M
SA
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Are the recognition criteria satisfied?
E
• Firstly, is there an asset?
– Control
PL
– Past event
– Expected generation of future economic benefit
M
SA
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• Asset?
– Control: the football club has purchased the right to
E
use the player for match fixtures/ training and
merchandising (player rights)
PL
– Past event: the transaction to purchase the player
– Future economic benefits
M
SA
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E
What are the future economic benefits?
PL
M
SA
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• Asset?
– Yes, an intangible asset
E
• Secondly, is there probable future economic benefit?
– Yes as discussed above
PL
• Thirdly, can the amount be measured with reliability?
– Fee paid → yes
– Value of future ticket sales and merchandising → no
M
• Capitalise only the transfer fee paid as an intangible
SA
non-current asset
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Measurement of the elements of financial statements
E
• The process of determining the monetary amounts at
PL
which the elements of the financial statements are to be
recognised and carried in the statement of financial
position and the statement of profit or loss.
M
• There are four choices available:
– Historical cost
SA
– Realisable value
– Current cost
– Present value
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Measurement Definition
basis
E
Historical cost Assets are recorded at the amount of cash or
cash equivalents paid or the fair value of the
PL
consideration given to acquire them at the time of
their acquisition.
Liabilities are recorded at the amount of proceeds
received in exchange for the obligation.
Realisable value M
The amount of cash or cash equivalents that
could currently be obtained by selling an asset in
SA
an orderly disposal.
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Measurement Definition
basis
E
Current cost Assets are recorded at the amount of cash or
cash equivalents that would have to be paid if the
PL
same or an equivalent asset was acquired at the
current time.
Liabilities are carried at the undiscounted amount
of cash or cash equivalents that would be
M
required to settle the obligation at the current
time.
SA
Present value A current estimate of the present discounted value
of the future net cash flows in the normal course
of business.
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Fair presentation and compliance with IFRS 1
• Financial statements should present fairly the financial

position, financial performance and cash flows of an entity.
E
• It is presumed that this fair presentation will be achieved
where an entity complies with both the Conceptual
PL
Framework and IFRSs.
• Fair presentation also requires an entity to:
M
– Select and apply appropriate accounting policies
– Present information in a manner that provides relevance
SA
information and which is a faithful representation
– Provide additional disclosures where further information
is required to enable users to understand the impact of
transactions
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Fair presentation and compliance with IFRS 2
• In extremely rare cases management may decide that

compliance with an IFRS would make the financial
E
statements misleading.
• Here departure from the IFRS is required in order for fair
PL
presentation to be achieved.
• Such departures must be disclosed in full including the
M
reason for the departure and the financial impact of the
departure on the financial statements.
SA
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Recent exam questions
Nature of question Exam details

Discuss the meaning of understandability Q4 (a) Dec 2012
E
and comparability and the role of
consistency when preparing financial
PL
statements
Use specific examples to show how IFRS Q4 (a) June 2011
disclosure can assist the predictive nature
M
of historic financial statements
SA
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Chapter 2 • The need for a regulatory
framework
• The International Accounting
The regulatory Standards Board (IASB)
framework • Setting of International Financial
E
Reporting Standards
PL
M
SA
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• Explain why a regulatory framework is needed, also

including the advantages and disadvantages of IFRS over
E
a national regulatory framework
• Explain why accounting standards on their own are not a
PL
complete regulatory framework
• Distinguish between a principles based and a rules based
M
framework and discuss whether they can be
complementary
SA
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• Describe the structure and objectives of the IFRS

Foundation, the International Accounting Standards Board
E
(IASB), the IFRS Advisory Council (IFRS AC) and the
IFRS Interpretations Committee (IFRS IC)
PL
• Describe the IASB’s Standard setting process including
revisions to and interpretations of Standards
M
• Explain the relationship of national standard setters to the
IASB in respect of the standard setting process
SA
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The regulatory framework
The IASB's
E
The need for a
regulatory relationship with
The IASB
framework other standard
PL
setters
The IASB’s
Principles- M structure
SA
based versus
rules-based
approach
The standard
setting process
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The need for a regulatory framework 1
• A regulatory framework is required for two main

reasons:
E
– To act as a central source of reference of generally
accepted accounting practice (GAAP) in a given
PL
market
– To designate a system of enforcement of that GAAP
M
to ensure consistency between companies
• Its aim is to narrow the areas of difference and choice
SA
in financial reporting and to improve comparability.
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Principles-based vs. rules-based systems

• A principles-based system works within a set of laid
E
down principles.
PL
• International Financial Reporting Standards use a
principles-based system: they are written based on the
definitions of the elements of financial statements and
M
the recognition and measurement principles as detailed
in the Conceptual Framework for Financial Reporting.
SA
• These principles are designed to cover a wide range of
scenarios without the need for a set of rules which
govern every eventuality.
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Principles-based vs. rules-based systems

• A rules-based system regulates for issues as they
E
arise, this means that accounting standards contain
rules which apply to specific scenarios.
PL
• US GAAP has historically used a rules-based system
however many of the recent corporate accounting
M
scandals have arisen as a direct result of companies
acting in a way that avoids rules.
SA
• Consequently the US is moving towards a more
principles-based system.
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There are both advantages and disadvantages of a principles vs.

rules-based system:
E
• Advantages:
– A principles-based approach on a single conceptual
PL
framework ensures that standards are consistent with each
other.
– Rules can be broken and ‘loopholes’ found whereas
M
principles are more likely to offer a ‘catch all’ scenario.
– Principles reduce the need for excessive detail in
SA
standards.
• Disadvantages:
– Principles can become out of date and can be overly
flexible and therefore subject to manipulation.
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The IASB 1
• The International Accounting Standards Board (IASB) is an

independent accounting standard setter established in 2001.
E
• It has three formal objectives:
– To develop, in the public interest, a single set of high quality,
PL
understandable and enforceable global accounting standards
that require high quality, transparent and comparable
information in general purpose financial statements
M
– To promote the use and vigorous application of those
standards
SA
– To work actively with national accounting standard setters to
bring about convergence of national accounting standards
and IFRS to high quality solutions
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The IASB 2
IFRS Foundation
E
PL
Trustees
International
Accounting
M IFRS
IFRS Advisory
SA
Interpretations
Standards Board Council
Committee
(IASB)
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The IASB 3
The IFRS Foundation

• The IFRS Foundation is the parent entity of the IASB.
E
• Its trustees appoint:
PL
– The IASB’s Chairman and members of its Board;
– The members of the IFRS Interpretations Committee
– The members of the IFRS Advisory Council
M
• It also seeks to raise funds for the organisations’
SA
activities.
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The IASB 4
The IFRS Advisory Council

• The IFRS Advisory Council’s objective is to give advice
E
to the IASB on areas of work it should prioritise and on
major standard setting projects.
PL
M
SA
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The IASB 5
The IFRS Interpretations Committee

• The IFRS Interpretations Committee prepares
E
interpretations of IFRSAs for approval by the IASB.
PL
• It also provides guidance on financial reporting issues
not specifically addressed by IFRSs.
M
SA
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Setting of IFRS 1
Below are the key steps in the process used to issue an International Financial
Reporting Standard:
Issues Paper IASB staff prepare an issues paper including studying the
E
approach of national standards setters.
The IFRS Advisory Council is consulted about the
PL
advisability of adding the topic to the IASB’s agenda.
Discussion Paper A Discussion Paper may be published for public comment.
Exposure Draft M
An Exposure Draft is published for public comment.
SA
International After considering all comments received, and IFRS is
Financial Reporting approved by a majority of the IASB. The final standard
Standard includes both a basis for conclusions and any dissenting
opinions.
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Setting of IFRS 2
• For the IASB to achieve its objective in relation to the

harmonisation of accounting standards it is important
E
that it works closely with other national standard setters.
• The IASB is trying to co-ordinate its work plan with
PL
national standard setters such that when it adds an item
to its agenda that national standard setters do the same
thing so that a standard can be agreed which has
M
international consensus.
SA
• There are also plans to review all standards where there
are significant differences between IFRS and national
standards.
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Setting of IFRS 3
Current standards examinable in paper F7 are:

• IAS 1 (revised)
E
• IAS 2
• IAS 7
PL
• IAS 8
• IAS 10
• IAS 11
• IAS 12 M
SA
• IAS 16
• IAS 17
• IAS 18
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Setting of IFRS 4

• IAS 20
E
• IAS 21
• IAS 23
PL
• IAS 24
• IAS 27 (revised)
• IAS 28
• IAS 32 M
SA
• IAS 33
• IAS 34
• IAS 36
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Setting of IFRS 5

• IAS 37
E
• IAS 38
• IAS 39
PL
• IAS 40
• IFRS 1
• IFRS 3 (revised)
• IFRS 5
• IFRS 7
M
SA
• IFRS 9
• IFRS 10
• IFRS 13
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Explain the difference between a Q5 (a) June 2012
E
principles-based and a rules-based
PL
system and state which system is used
by International Financial Reporting
Standards.
M
SA
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Chapter 3 • IAS 1 (revised) Presentation of
financial statements
• Statement of financial position
Presentation of • The current/ non-current distinction
published financial
E
• Statement of profit or loss and
statements other comprehensive income
PL
• Changes in equity
• Notes to the financial statements
• Revision of basic accounts
M
SA
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• Describe the structure (format) and content of financial

statements presented under IFRS
E
• Prepare any entity’s financial statements in accordance
with the prescribed structure and content
PL
• Prepare and explain the contents and purpose of the
statement of changes in equity
M
• Describe and prepare a statement of changes in equity
SA
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Presentation of published
E
PL
IFRS financial Financial statement
Formats
statements
M preparation questions
SA
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IAS 1 (revised) 1
IAS 1 applies to the preparation and presentation of general

purpose financial statements in accordance with IFRSs and
E
states that a complete set of financial statements comprises:
• A statement of financial position at the end of the period
PL
• A statement of profit or loss and other comprehensive
income for the period
• A statement of changes in equity for the period
M
• A statement of cash flows for the period
SA
• Notes to the financial statements including a summary of
significant accounting policies an other explanatory information
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IAS 1 (revised) 2
• Financial statements should also disclose:

– The name of the reporting entity
E
– Whether the accounts relate to the single entity only or a group
of entities
PL
– The date of the end of the reporting period or the period
covered by the financial statements
M
– The presentation currency
– The level of rounding used in presenting amounts in the
SA
• Financial statements must be prepared on a timely basis in order to
provide useful information to users.
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Statement of financial position 1
XYZ GROUP – STATEMENT OF FINANCIAL POSITION FOR THE YEAR ENDED 31
DECEMBER 20X2
20X2 20X1
$’000 $’000
E
ASSETS
Non-current assets
PL
Property, plant and equipment X X
Goodwill X X
Other intangible assets X X
Investments in associates X X
M
Investments in equity instruments X
X
X
X
SA
Current assets
Inventories X X
Trade receivables X X
Other current assets X X
Cash and cash equivalents X X
X X
Total assets X X
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$’000 $’000
EQUITY AND LIABILITIES
Equity
Share capital X X
E
Retained earnings X X
Other components of equity X X
PL
X X
Total equity X X
M
SA
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$’000 $’000
Non-current liabilities
Long-term borrowings X X
Deferred tax X X
E
Long-term provisions X X
Total non-current liabilities X X
PL
Current liabilities
Trade and other payables X X
Short-term borrowings X X
Current tax payable

Short-term provisions
M
Current portions of long-term borrowings X
X
X
X
X
X
SA
Total current liabilities X X
Total liabilities X X
Total equity and liabilities X X
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• The following items must be presented on the face of the

statement of financial position (minimum disclosure)
E
– Property, plant and equipment
– Investment property
PL
– Intangible assets
– Financial assets
– Investments accounted for using the equity method
(associates) M
SA
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– Biological assets (not in syllabus)

– Inventories
E
– Trade and other receivables
– Cash and cash equivalents
PL
– Assets classified as held for sale under IFRS 5
– Trade and other payables
– Provisions
M
– Financial liabilities
SA
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– Current tax liabilities and assets as in IAS 12

– Deferred tax liabilities and assets
E
– Liabilities included in disposal groups under IFRS 5
– Non-controlling interests
PL
– Issued capital and reserves
• Other items can be presented in the notes to the financial
M
statements unless they need to be disclosed on the face of the
statement of financial position in order for users to properly
understand the entity’s financial position.
SA
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• Further sub-classification of the above items should be made either

on the face of the statement of financial position or in the notes.
•
E
The degree of further sub-classification depends on the requirements
of IFRSs and the nature of the business.
PL
• They include:
– Property, plant and equipment classified by class of asset
– Receivables analysed between amounts receivable from trade
M
customers, other group members, related parties, prepayments
and other amounts
SA
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• They include cont.:

– Inventories sub-classified into materials, work in progress and
E
finished goods
– Provisions
PL
– Equity capital and reserves classified into classes of capital, share
premium and reserves
Additional specific disclosures must be made:
• M
Share capital disclosures:
SA
– Authorised share capital and issued share capital (issued and fully
paid and issued but not fully paid)
– Par value of each share
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• Share capital disclosures cont.:

– Reconciliation of the number of shares outstanding at the
E
beginning and the end of the year
– Rights, preferences and restrictions attaching to the class of
PL
shares (including restrictions on distributing dividends and the
repayment of capital)
– Shares in the entity held by itself or by related group companies
•
M
– Shares reserved for issuance under options and sales contracts
A description of the nature and purpose of each reserve within
SA
owners’ equity.
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The current/ non-current distinction
• Assets and liabilities should be classified as either current or non-

current on the face of the statement of financial position.
E
• Current assets and liabilities comprise assets and liabilities which
relate to the operating cycle of the entity.
PL
• The operating cycle of an entity is the time between the acquisition of
assets for processing and their realisation in cash and cash
equivalents.
•
M
Non-current assets and liabilities are used in the long term operations
of the entity and will typically be recovered or settled after more than
SA
twelve months.
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The statement of profit or loss and OCI 1
IAS 1 (revised) allows income and expense items to be presented either:

• In a single statement of profit or loss and other comprehensive
E
income
• In two statements: a separate statement of profit or loss and a
PL
statement of other comprehensive income
M
SA
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XYZ GROUP – STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20X2
20X2 20X1
$’000 $’000
E
Revenue X X
Cost of sales (X) (X)
Gross profit X X
PL
Other income X X
Distribution costs (X) (X)
Administrative expenses (X) (X)
Other expenses (X) (X)
Finance costs (X) (X)
Profit before tax
Income tax expense
X
M X
(X) (X)
SA
PROFIT FOR THE YEAR X X
Other comprehensive income:
Gains on property revaluation X X
Investments in equity instruments (X) X
Income tax relating to components of other comprehensive
income (X) X
Other comprehensive income for the year, net of tax X (X)
TOTAL COMPREHENSIVE INCOME FOR THE YEAR X X
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XYZ GROUP – STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED
31 DECEMBER 20X2 20X2 20X1
$’000 $’000
E
Revenue X X
Cost of sales (X) (X)
PL
Gross profit X X
Other incomeX X
Distribution costs (X) (X)
Administrative expenses M
(X) (X)
SA
Profit before tax X X
Income tax expense (X) (X)
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XYZ GROUP – STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20X2
20X2 20X1
E
$’000 $’000
Profit for the year X X
PL
Gains on property revaluation X X
M
Investments in equity instruments (X) X
Income tax relating to components of other comprehensive
SA
income (X) X
Other comprehensive income for the year, net of tax X (X)
TOTAL COMPREHENSIVE INCOME FOR THE YEAR X X
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• IAS 1 offers two formats for the statement of profit or

loss.
E
• The most common format is to classify income and
expenses by function as above.
PL
• Income and expenses can also be classified by
nature as detailed on the next slide:
M
SA
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XYZ GROUP – STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31
DECEMBER 20X2 20X2 20X1
$’000 $’000
Revenue X X
E
Other operating income X X
PL
Changes in inventories of FG and WIP (X) X
Work performed by the entity and capitalised X X
Raw material and consumables used (X) (X)
Employee benefits expense
M
(X) (X)
Depreciation and amortisation expense (X) (X)
SA
Impairment of property, plant and equipment (X) (X)
Profit before tax X X
Income tax expense(X) (X)
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• IAS 1 (revised) also requires the following items to be disclosed

on the face of the statement of profit or loss (minimum
disclosure)
E
– Revenue
PL
– Finance costs
– Tax expense
– Profit or loss
• M
Note that dividends do not meet the IASB Conceptual Framework
definition of an expense and so are not included in the statement
SA
of profit or loss and other comprehensive income.
• Rather they are shown as a deducted from retained earnings in
the statement of changes in equity.
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Changes in equity
Share Ret’d Revaluation Total

capital earnings surplus equity
$’000 $’000 $’000 $’000
E
Balance at 1 January 20X1 X X X X
Changes in accounting policy - (X) - (X)
PL
Restated balance X X X X
Changes in equity for 20X1
Dividends - (X) - (X)
Total comprehensive income - X (X) X
M
Balance at 31 December 20X1
Changes in equity for 20X2
X X X X
SA
Issue of share capital X - - X
Dividends (X) (X)
Total comprehensive income - X X X
Transfer to retained earnings - X (X) -
Balance at 31 December 20X2 X X X X
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Notes to the financial statements
Notes to the accounts amplify the information given in the

financial statements.
E
Notes perform the following functions:
PL
• Provide information about the basis on which the financial
statements were prepared and which specific accounting
policies were chosen.
M
• Disclose information required by IFRSs which has not
been disclosed elsewhere in the financial statements.
SA
• Show any additional information relevant to understanding
the financial statements.
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Revision of basic accounts 1
• In the exam you will be required to prepare a basic set of

company accounts from a trial balance incorporating
E
additional information provided in the question.
• To be successful in these questions you must
PL
– Practice as many examples of these questions as you
can
M
– Adopt a methodical approach to completing them
SA
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1. Read the requirements and scan the information in the question.

2. Set up four pages as necessary:
E
• Proforma statement of profit or loss and other comprehensive
income
PL
• Proforma statement of financial position
• Proforma statement of changes in equity
•
M
A page for workings
3. Read the additional information given and make a mark by each
SA
caption in the trial balance that is going to change.
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4. Transfer the figures from the trial balance:

• Unaffected figures may be entered directly on your proforma
E
• Figures requiring adjustment can either be put into a working or
brackets opened up on the face of your proforma solution
PL
5. Work through the adjustments in the additional information dealing
with both sides of the double entry. Once you have attempted all
adjustments, balance off your workings and transfer the final figures
to your proforma.
M
SA
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Question: AZ Co
AZ Co is a quoted manufacturing company. Its finished products are

stored in a nearby warehouse until ordered by customers. AZ Co has
performed very well in the past, but has been in financial difficulties in
E
recent months and has been reorganising the business to improve
performance.
PL
The trial balance for AZ Co at 31 March 20X3 was as follows:
M
SA
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Question: AZ Co
TRIAL BALANCE AT 31 MARCH 20X3 $'000 $'000
Sales 124,900
Cost of goods manufactured in the year to
31 March 20X3 (excluding depreciation) 94,000
Distribution costs 9,060 SPLOCI
E
Administrative expenses 16,020
Restructuring costs 121
Interest received 1,200
Debenture interest paid 639
PL
Land and buildings (including land $20,000,000) 50,300
Plant and equipment 3,720
Accumulated depreciation at 31 March 20X2:
Buildings 6,060
Plant and equipment 1,670
Investment properties (at market value) 24,000
Inventories at 31 March 20X2
Trade receivables
Bank and cash
Ordinary shares of $1 each, fully paid
M 4,852
9,330
1,190
20,000
SOFP
SA
Share premium 430
Revaluation surplus 3,125
Retained earnings at 31 March 20X2 28,077
Ordinary dividends paid 1,000
7% debentures 20X7 18,250
Trade payables 8,120
Proceeds of share issue 2,400
214,232 214,232
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Question: AZ Co
Additional information provided:

i. The property, plant and equipment are being depreciated as follows:
E
• Buildings: 5% per annum straight line
• Plant and equipment: 25% per annum reducing balance
PL
• Depreciation of buildings is considered an administrative cost
while depreciation of plant and equipment should be treated as a
cost of sale.
M
ii. On 31 March 20X3 the land was revalued to $24,000,000.
SA
iii. Income tax for the year to 31 March 20X3 is estimated at $976,000.
Ignore deferred tax.
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Question: AZ Co
iv. The closing inventories at 31 March 20X3 were $5,180,000. An

inspection of finished goods found that a production machine had
been set up incorrectly and that several production batches, which
E
had cost $50,000 to manufacture, had the wrong packaging. The
goods cannot be sold in this condition but could be repacked at an
PL
additional cost of $20,000. They could then be sold for $55,000.
the wrongly packaged goods were included in closing inventories at
their cost of $50,000.
v.
M
The 7% loan notes are ten year loans due for repayment by 31
March 20X7. Interest on these loan notes needs to be accrued for
SA
the six months to 31 March 20X3.
vi. The restructuring costs in the trial balance represent the cost of a
major restructuring of the company to improve competitiveness and
future profitability.
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Question: AZ Co
vii. No fair value adjustments were necessary to the investment

properties during the period.
E
viii. During the year the company issued 2 million new ordinary shares
for cash at $1.20 per share. The proceeds have been recorded as
PL
‘proceeds of share issue’.
M
SA
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Question: AZ Co
Required
Prepare the statement of profit or loss and other
E
comprehensive income and statement of changes in equity
for AZ for the year to 31 March 20X3 and a statement of
PL
financial position at that date.
Notes to the financial statements are not required, but all
M
workings must be clearly shown.
SA
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Answer: AZ Co
AZ STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 20X3
$'000
Revenue 124,900
E
Cost of sales
Gross profit
PL
Distribution costs
Administrative expenses
Other expenses
Finance income
Finance costs
Profit before tax
Income tax expense
M
SA
PROFIT FOR THE YEAR
Gain on property revaluation
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
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Answer: AZ Co
1 Expenses
Cost of sales Distribution Admin Other
$’000 $’000 $’000
E
$’000 94,000 9,060 16,020 121
Per question
PL
M

SA
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Answer: AZ Co
$'000
Revenue 124,900
E
Cost of sales
Gross profit
PL
Distribution costs
Other expenses
Finance income 1,200
Finance costs
Profit before tax
Income tax expense
(639)
M
SA
PROFIT FOR THE YEAR
Gain on land revaluation
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Answer: AZ Co
2 Property, plant and equipment

Land Buildings Plant & Total
E
equipment
$’000 $’000 $’000 $’000
PL
Cost 20,000 30,300 3,720
Accumulated depreciation b/d - (6,060)
(1,670)

Carrying amount b/d
Charge for year
M -
SA
Revaluation (balancing figure)
Carrying amount c/d
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Answer: AZ Co
Non-current assets
Property, plant and equipment
Investment properties 24,000

Current assets
E
Inventories
Trade receivables
Cash and cash equivalents
PL

Equity
Share capital
Share premium
Retained earnings
Revaluation surplus
M

SA
7% loan notes 20X7
Current liabilities
Trade payables
Income tax payable
Interest payable

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Answer: AZ Co
1 Expenses
$’000 $’000 $’000 $’000
E
Per question 94,000 9,060 16,020 121
PL
Opening inventories 4,852
M

SA
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Answer: AZ Co
Non-current assets
Property, plant and equipment

Current assets
E
Inventories
Trade receivables 9,330
Cash and cash equivalents 1,190
PL

Equity
Share capital (20,000
Share premium (430
Retained earnings (28,077 – 1,000
Revaluation surplus (3,125
M

SA
7% loan notes 20X7 18,250
Current liabilities
Income tax payable
Interest payable

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Answer: AZ Co

E
equipment
$’000 $’000 $’000 $’000
PL
Cost 20,000 30,300 3,720
(1,670)

Carrying amount b/d 20,000 24,240 2,050
Charge for year 30,300 x 5% (1,515) (1,515)
M
2,050 x 25% - (513) (513)
SA
Revaluation (balancing figure)
Carrying amount c/d
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Answer: AZ Co
1 Expenses
$’000 $’000 $’000 $’000
E
Per question 94,000 9,060 16,020 121
PL
Depreciation - Buildings (W2) 1,515
- P&E (W2) 513
M

SA
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Answer: AZ Co

E
equipment
$’000 $’000 $’000 $’000
PL
Cost 20,000 30,300 3,720 54,020
(1,670)
(7,730)
Carrying amount b/d 20,000 24,240 2,050 46,290
Charge for year 30,300 x 5%
M
2,050 x 25% -
20,000
(1,515)

22,725
(513)
(1,515)
(513)
1,537 44,262
SA
Revaluation (balancing figure) 4,000 - - 4,000
Carrying amount c/d 24,000 22,725 1,537 48,262
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Answer: AZ Co
Non-current assets
Property, plant and equipment (W2) 48,262

Current assets
E
Inventories

PL

Equity
Share premium (430
M
Revaluation surplus (3,125 + (W2) 4,000) 7,125

SA
Current liabilities
Income tax payable
Interest payable

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Answer: AZ Co
$'000
124,900
E
Revenue
Cost of sales
Gross profit
PL
Distribution costs
Other expenses
1,200
Finance income
Finance costs
Profit before tax
(639
M (976)
SA
Income tax expense
PROFIT FOR THE YEAR
Gain on land revaluation (W2) 4,000
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Answer: AZ Co
Non-current assets

Current assets
E
Inventories
PL

Equity
Share premium (430
M

SA
Current liabilities
Income tax payable 976
Interest payable

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Answer: AZ Co
3 Inventories $’000 $’000
E
Defective batch
Selling price 55
PL
Costs to complete - repackaging (20)
 NRV 35
Cost (50)
 Write-off required (15)
M
SA
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Answer: AZ Co
Non-current assets

Current assets
E
Inventories (5,180 – (W3) 15) 5,165
PL

Equity
Share premium (430
M

SA
Current liabilities
Interest payable

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Answer: AZ Co
1 Expenses
$’000 $’000 $’000 $’000
E
Per question 94,000 9,060 16,020 121
PL
- P&E (W2) 513
Closing inventories
(5,180 – (W3) 15)
M (5,165)

SA
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Answer: AZ Co
$'000
Revenue 124,900
E
Cost of sales
Gross profit
PL
Distribution costs
Other expenses
Profit before tax

Income tax expense
M
Finance costs (639 + ((18,250 x 7%) – 639) (1,278)
(976)
SA
PROFIT FOR THE YEAR
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Answer: AZ Co
Non-current assets

Current assets
E
Inventories (5,180 – (W3) 15) 5,165
PL

Equity
Share capital (20,000 + (2m x $1)) 22,000
Share premium (430 + (2m x $0.20)) 830
M

SA
Current liabilities
Interest payable (1,278 – 639) 639

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Answer: AZ Co
1 Expenses
$’000 $’000 $’000 $’000
E
Per question 94,000 9,060 16,020 121
PL
- P&E (W2) 513
Closing inventories
(5,180 – (W3) 15)
M (5,165)

94,200

9,060
17,535

121
SA
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Answer: AZ Co
$'000
Revenue 124,900
E
Cost of sales (W1) (94,200)
Gross profit 30,700
PL
Distribution costs (W1) (9,060)
Administrative expenses (W1) (17,535)
Other expenses (W1) (121)
Profit before tax

Income tax expense
M
Finance costs (639 + (18,250 x 7%) – 639) (1,278)
3,906
(976)
SA
PROFIT FOR THE YEAR 2,930
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 6,930
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Answer: AZ Co
Non-current assets
72,262
Current assets
E
Inventories (5,180 – (W3) 15) 5,165
PL
15,685
87,947
Equity
Share capital (20,000 + (2m x $1)) 22,000
Share premium (430 + (2m x $0.20)) 830
M
Retained earnings (28,077 – 1,000 + 2,930)
Revaluation surplus (3,125 + (W2) 4,000)
30,007
7,125
59,962
SA
18,250
Current liabilities
Interest payable (1,278 – 639) 639
9,735
87,947
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Answer: AZ Co
AZ
STATEMENT OF CHANGES IN EQUITY
Share Share Ret’d Rev’n Total
E
capital premium earnings surplus
PL
$’000 $’000 $’000 $’000 $’000
Balance at 1 April 20X2 20,000 430 28,077 3,125 51,632
Issue of share capital 2,000 400 2,400
Dividends (1,000) (1,000)
Balance at 31 March 20X3

M
Total comprehensive income
22,000 830
2,930
30,007
4,000 6,930
7,125 59,962
SA
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The financial statement preparation Q2 in all past
question is tested in Question 2 of exams
E
the ACCA F7 exam.
PL
You should expect to see the
following requirement:
i. Prepare the statement of profit or
income; M
loss and other comprehensive
ii. Prepare the statement of changes

SA
in equity
iii. Prepare the statement of financial
position.
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F7 Acca

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Syllabus Real world example

Answer to past exam Case study

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M elements of financial statements

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• Describe what is meant by a conceptual framework of

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• Discuss what is meant by understandability and verifiability

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• Define what is meant by ‘recognition’ in financial

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Need for a Generally accepted

The IASB’s conceptual

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What is a conceptual framework?

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Advantages of a conceptual framework

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Disadvantages of a conceptual framework

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• Published in September 2010 to update the IASB

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• Currently comprises four chapters:

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Chapter 1: The objective of general purpose financial

Chapter 1: The objective of general purpose financial

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Chapter 4: The Framework (1989) remaining text

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Chapter 3: Qualitative characteristics of useful financial

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Fundamental qualitative characteristics

Information is material if omitting it

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Enhancing qualitative characteristics

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Chapter 4: The Framework (1989) remaining text

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ASSET A resource controlled by an entity as a result of past

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INCOME Increases in economic benefits during the period other

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Chapter 4: The Framework (1989) remaining text

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Chapter 4: The Framework (1989) remaining text

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Are transfer fees paid for footballers an asset?

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Are the recognition criteria satisfied?

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Chapter 4: The Framework (1989) remaining text

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• Financial statements should present fairly the financial

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