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further details BPP Learning Media is grateful to the IASB for permission to reproduce extracts from the International Financial Reporting Standards including all International Accounting Standards, SIC and IFRIC Interpretations (the Standards) The Standards together with their accompanying documents are issued by: The IFRS Foundation logo, the IASB logo, the IFRS for SMEs logo, the “Hexagon Device”, “IFRS Foundation”, “eIFRS”, “IAS”, “IASB”, “IFRS for SMEs”, “IASs”, “IFRS”, “IFRSs”, “International Accounting Standards” and “International Financial Reporting Standards”, “IFRIC” “SIC” and “IFRS Taxonomy” are Trade Marks of the IFRS Foundation The International Accounting Standards Board (IASB) 30 Cannon Street, London, EC4M 6XH, United Kingdom Email: info@ifrs.org Web: www.ifrs.org Further details of the Trade Marks including details of countries where the Trade Marks are registered or applied for are available from the Licensor on request Disclaimer: The IASB, the International Financial Reporting Standards (IFRS) Foundation, the authors and the publishers not accept responsibility for any loss caused by acting or refraining from acting in reliance on the material in this publication, whether such loss is caused by negligence or otherwise to the maximum extent permitted by law © BPP Learning Media Ltd 2016 ii ii http://accountingpdf.com/ Contents Page Introduction Helping you to pass v Studying F7 vii The exam paper viii Syllabus and study guide ix 10 11 12 13 14 15 16 17 18 19 20 21 22 23 The conceptual framework The regulatory framework 19 Tangible non-current assets 31 Intangible assets 57 Impairment of assets 71 Revenue 81 Introduction to groups 107 The consolidated statement of financial position 117 The consolidated statement of profit or loss and other comprehensive income 153 Accounting for associates 171 Financial instruments 185 Leasing 205 Provisions and events after the reporting period 217 Inventories and biological assets 233 Taxation 247 Presentation of published financial statements 267 Reporting financial performance 293 Earnings per share 313 Calculation and interpretation of accounting ratios and trends 329 Limitations of financial statements and interpretation techniques 359 Statements of cash flows 367 Accounting for inflation 389 Specialised, not-for-profit and public sector entities 401 Practice question bank 411 Practice answer bank 447 Index 499 Review form iii http://accountingpdf.com/ iv http://accountingpdf.com/ Helping you to pass BPP Learning Media – ACCA Approved Content Provider As an ACCA Approved Content Provider, BPP Learning Media gives you the opportunity to use study materials reviewed by the ACCA examination team By incorporating the examination team's comments and suggestions regarding the depth and breadth of syllabus coverage, the BPP Learning Media Study Text provides excellent, ACCA-approved support for your studies The PER alert Before you can qualify as an ACCA member, you not only have to pass all your exams but also fulfil a three year practical experience requirement (PER) To help you to recognise areas of the syllabus that you might be able to apply in the workplace to achieve different performance objectives, we have introduced the 'PER alert' feature You will find this feature throughout the Study Text to remind you that what you are learning to pass your ACCA exams is equally useful to the fulfilment of the PER requirement Your achievement of the PER should now be recorded in your online My Experience record Tackling studying Studying can be a daunting prospect, particularly when you have lots of other commitments The different features of the Study Text, the purposes of which are explained fully on the Chapter features page, will help you whilst studying and improve your chances of exam success Developing exam awareness Our Study Texts are completely focused on helping you pass your exam Our advice on Studying F7 outlines the content of the paper, the necessary skills you are expected to be able to demonstrate and any brought forward knowledge you are expected to have Exam focus points are included within the chapters to highlight when and how specific topics were examined, or how they might be examined in the future Using the syllabus and study guide You can find the syllabus and study guide on pages ix–xx of this Study Text Testing what you can Testing yourself helps you develop the skills you need to pass the exam and also confirms that you can recall what you have learnt We include Questions – lots of them – both within chapters and in the Practice Question Bank, as well as Quick Quizzes at the end of each chapter to test your knowledge of the chapter content Introduction http://accountingpdf.com/ v Chapter features Each chapter contains a number of helpful features to guide you through each topic Topic list Topic list Syllabus reference Tells you what you will be studying in this chapter and the relevant section numbers, together with ACCA syllabus references Introduction Puts the chapter content in the context of the syllabus as a whole Study Guide Links the chapter content with ACCA guidance Exam Guide Highlights how examinable the chapter content is likely to be and the ways in which it could be examined Knowledge brought forward from earlier studies What you are assumed to know from previous studies/exams FAST FORWARD Summarises the content of main chapter headings, allowing you to preview and review each section easily Examples Demonstrate how to apply key knowledge and techniques Key terms Definitions of important concepts that can often earn you easy marks in exams Exam focus points Tell you when and how specific topics were examined, or how they may be examined in the future Formula to learn Formulae that are not given in the exam but which have to be learnt This is a new feature that gives you a useful indication of syllabus areas that closely relate to performance objectives in your Practical Experience Requirement (PER) vi Question Give you essential practice of techniques covered in the chapter Case Study Provide real world examples of theories and techniques Chapter Roundup A full list of the Fast Forwards included in the chapter, providing an easy source of review Quick Quiz A quick test of your knowledge of the main topics in the chapter Practice Question Bank Found at the back of the Study Text with more comprehensive chapter questions Cross referenced for easy navigation Introduction http://accountingpdf.com/ Studying F7 F7 is a demanding paper covering all the fundamentals of financial reporting It has five main sections: The conceptual framework of accounting The regulatory framework Preparation of financial statements which conform with IFRS Preparation of consolidated financial statements Analysis and interpretation of financial statements All of these areas will be tested to some degree at each sitting Sections and are the main areas of application and you must expect to have to produce consolidated and single company financial statements in your exam Some of this material you will have covered at lower level papers You should already be familiar with accounting for inventories and non-current assets and preparing simple statements of profit or loss, statements of financial position and statements of cash flows You should know the basic ratios F7 takes your financial reporting knowledge and skills up to the next level New topics are consolidated financial statements, long-term contracts, biological assets, financial instruments and leases There is also coverage of creative accounting and the limitations of financial statements and ratios New topics from September 2016 are foreign currency and disposals of subsidiaries These will be examined at only a very basic level If you had exemptions from lower level papers or feel that your knowledge of lower level financial reporting is not good enough, you may want to get a copy of the Study Text for F3 Financial Accounting and read through it, or at least have it to refer to You have a lot of new material to learn for F7 and basic financial accounting will be assumed knowledge The way to pass F7 is by practising lots of exam-level questions, which you will when you get onto revision Only by practising questions you get a feel for what you will have to in the exam Also, topics which you find hard to understand in the Study Text will be much easier to grasp when you have encountered them in a few questions So don't get bogged down in any area of the Study Text Just keep going and a lot of things you find difficult will make more sense when you see how they appear in an exam question Introduction http://accountingpdf.com/ vii The exam paper Format of the paper Question – 15 MCQs Question – three case questions – 10 marks each Question Question Marks 30 30 20 20 100 From September 2016, the exam will be hours and 15 minutes in duration The exam paper is divided into three sections Section A consists of 15 multiple choice questions of marks each Section B consists of 15 mini scenario based multiple choice questions of marks each Section C consists of constructive response questions of 20 marks each In Section C, answers to the questions will require a mixture of calculations and discussion All questions are compulsory The exam will cover as much of the syllabus as possible Computer Based Examination ACCA have announced that they intend to commence the launch of computer based exams (CBEs) for F5– F9 towards the end of 2016 At the time of going to print the exact details had not been confirmed Paper based examinations will be run in parallel while the CBEs are phased in and BPP materials have been designed to support you, whichever exam option you choose viii Introduction http://accountingpdf.com/ 33 CPP and CCA Tutorial note It is unlikely that a detailed computation will be asked for, but you must have an understanding of the principles of CPP and CCA, the differences between them and the ways in which they try to improve on HCA (a) In accounting, the value of income and capital is measured in terms of money In simple terms, profit is the difference between the closing and opening statement of financial position values (after adjustment for new sources of funds and applications such as dividend distribution) If, because of inflation, the value of net assets in the closing statement of financial position is shown at a higher monetary amount than net assets in the opening statement of financial position, a profit has been made In traditional accounting, it is assumed that a monetary unit of $1 is a stable measurement; inflation removes this stability CPP accounting attempts to provide a more satisfactory method of valuing profit and capital by establishing a stable unit of monetary measurement, $1 of current purchasing power, as at the end of the accounting period under review A distinction is made between monetary items, and non-monetary items In a period of inflation, keeping a monetary asset (eg trade receivables) results in a loss of purchasing power as the value of money erodes over time Non-monetary assets, however, are assumed to maintain 'real' value over time, and these are converted into monetary units of current purchasing power as at the year end, by means of a suitable price index The equity interest in the statement of financial position can be determined as a balancing item The profit or deficit for the year in CPP terms is found by converting sales, opening and closing inventory, purchases and other expenses into year-end units of $CPP In addition, a profit on holding net monetary liabilities (or a loss on holding net monetary assets) is computed in arriving at the profit or deficit figure CPP arguably provides a more satisfactory system of accounting since transactions are expressed in terms of 'today's money' and similarly, the statement of financial position values are adjusted for inflation, so as to give users of financial information a set of figures with which they can: (i) (ii) (b) Decide whether operating profits are satisfactory (profits due to inflation are eliminated) Obtain a better appreciation of the size and 'value' of the entity's assets CPP and CCA accounting are different concepts, in that CPP accounting makes adjustments for general inflationary price changes, whereas CCA makes adjustments to allow for specific price movements (changes in the deprival value of assets) Specific price changes (in CCA) enable a company to determine whether the operating capability of a company has been maintained; it is not a restatement of price levels in terms of a common unit of money measurement The two conventions use different concepts of capital maintenance (namely operating capability with CCA, and general purchasing power with CPP) In addition CPP is based on the use of a general price index In contrast, CCA only makes use of a specific price index where it is not possible to obtain the current value of an asset by other means (eg direct valuation) (c) 494 In CCA, holding gains represent the difference between the historical cost of an asset and its current cost If the asset is unsold, and appears in the statement of financial position of a company at current cost, there will be an 'unrealised' holding gain, which must be included in a current cost reserve When the asset is eventually sold, the profit (equal to the sale price minus the historical cost) may be divided into: (i) An operating profit which would have been made if the cost of the asset were its current value (ii) A realised holding gain which has arisen because of the appreciation in value of the asset between the date of its acquisition and the date of its sale Practice answer bank http://accountingpdf.com/ 34 Not-for-profit There are two main areas in which the Department would be expected to monitor the performance of the school Although the school is a not-for-profit organisation, it still has to account for the funding it receives It is spending taxpayers money so the government has a duty to ensure that it is delivering value for money This is particularly important in the light of the criticisms that have been made The accounts kept by the school should be regularly audited to ensure that no financial mismanagement has occurred and it will be expected to prepare and implement budgets The school should be expected to show some excess of income over expenditure, which will give it a surplus for emergencies, even if this will be lower than in a profit-making entity, and a number of accounting ratios can be use to monitor its performance Investor ratios such as ROCE will not be particularly appropriate but working capital ratios, such as payables days, will be important, as will liquidity ratios The school may not be expected to make a profit, but it will be expected to remain solvent Additional ratios, such as expenditure per pupil, can be calculated and compared to the same ratio for other schools in the area Value for money is composed of three elements – economy, efficiency and effectiveness Financial performance can be monitored to assess economy and efficiency but in the case of a school the government will be most interested in effectiveness This requires looking at the non-financial indicators The mission of the school, however it is worded, will be to maximise the educational attainment of its pupils and it will need to demonstrate that it is making progress in this direction The basic measure of this is the external exam scores of its pupils and this can be directly compared to the performance of other schools, such as percentage of pupils achieving grade A–C in maths, etc However, these scores need to be weighted to take account of the number of pupils from deprived backgrounds, such as those eligible for free school meals, and the number of pupils with English as a second language More subjective measures could also be used, such as feedback from pupils and parents Practice answer bank http://accountingpdf.com/ 495 496 Practice answer bank http://accountingpdf.com/ Index 497 http://accountingpdf.com/ 498 http://accountingpdf.com/ Note Key Terms and their page references are given in bold Accelerated depreciation, 255 Accounting policies, 294, 362 Accounting profit, 248 Accounts payable payment period, 344 Accounts receivable collection period, 342 Accruals basis, Accrued expenses, 252 Accrued income, 252 Accumulated depreciation, 257 Acid test ratio, 341 Actuarial method, 209 Adjusting, 227 Advantages and disadvantages of CPP accounting, 395 Advantages and disadvantages of current cost accounting, 397 Advantages of cash flow accounting, 385 Advantages of historical cost accounting, 390 Agricultural activity, 239 Agricultural produce, 239, 242 Amortisation period, 63 Amortised cost, 197 Amortised cost of a financial asset or financial liability, 197 Asset, 10 Asset turnover, 334 Assets held for sale, 300 Associate, 109, 172 Associate's losses, 178 Basic EPS, 315 Benefits of cash flow information, 369 Bill-and-hold arrangements, 91 Biological assets, 239, 240 Biological transformation, 239 Bonus issue, 318 Borrowing costs, 50 Business model test, 194 Calculating ratios, 331 Capital, 392 Capital employed, 333 Capital gearing ratio, 337 Capital maintenance, 392, 395 Capitalisation/bonus issue, 318 Carrying amount, 33, 47, 72, 239 Cash, 369 Cash and cash equivalents, 369 Cash cycle, 341 Cash equivalents, 369 Cash flow ratio, 340 Cash flows, 369 Cash flows from operating activities, 371 Cash generating units, 74 Cash-generating unit, 74, 300 CCA profits, 396 Change in accounting estimate, 294 Changes in accounting estimates, 297 Changes in accounting policies, 296 Changes in accounting policy, 362 Changes in equity, 283 Characteristics of Not-for-profit entities, 404 Classification of financial assets, 193 Classification of financial liabilities, 196 Closing rate, 305 Comparability, Complex assets, 38 Component of an entity, 303 Components of cost, 34 Compound financial instruments, 189 Conceptual Framework for Financial Reporting, 2, Consolidated financial statements, 111 Consolidated statement of profit or loss, 154 Consolidated statement of profit or loss and other comprehensive income, 161, 164 Constraints on useful information, Constructive obligation, 219 Contingent asset, 224 Contingent consideration, 130 Contingent liability, 147, 224 Contract asset, 83 Contract liability, 84 Contract with a call option, 90 Contract with a put option, 90 Contracts where performance obligations are satisfied over time, 93 Contractual cash flow test, 194 Control, 109 Conversion, 306 Cost, 33, 46 Cost model, 35, 49 Costs of disposal, 301 Costs to sell, 301 CPP, 394 CPP accounting, 393 Creative accounting, 361 Current asset, 273 Current cost, 14 Current cost accounting (CCA), 395 Current IFRSs, 24 Current liability, 273 Current purchasing power (CPP) accounting, 394 Index http://accountingpdf.com/ 499 Expected value, 220 Expenses, 12 Current ratio, 341 Current tax, 248 Current value accounting, 391 Customer, 84 F Debt and gearing ratios, 336 Debt ratio, 336 Debt/equity ratio, 338 Decommissioning, 222 Deductible temporary differences, 251, 253, 256 Deferred consideration, 131 Deferred tax, 250 Deferred tax assets, 250, 251, 255, 257, 258 Deferred tax liabilities, 250, 251, 254, 255, 256 Depreciable amount, 41 Depreciable assets, 41 Depreciation, 37, 41, 253 Deprival value, 395 Derecognition, 38 Development costs, 253, 255 Diluted EPS, 321 Dilutive potential ordinary shares, 324 Direct method, 372 Disadvantages of historical cost accounting, 390 Disclosure of financial instruments, 192 Discontinued operation, 303 Discounting, 259 Disposal group, 300 Dividend cover, 347 Dividend per share and dividend cover, 346 Dividend yield, 347 Dividends, 279 Dividends paid by a subsidiary, 124 Due process, 23 Earnings per share, 314, 346 Economic value (EV), 396 Effective interest method, 197 Effective interest rate, 197 Efficiency ratios, 342 Elements of financial statements, 10 Entity specific value, 33 Environmental contamination, 222 Equal to its tax base, 252 Equity, 10 Equity instrument, 187, 314 Equity method, 172, 173 Events occurring after the reporting period, 227 Exchange difference, 305, 308 Exchange rate, 305 Exclusion of a subsidiary from consolidation, 111 Exemption from preparing group accounts, 111 500 air presentation, 15 Fair value, 33, 46, 100, 143, 187, 235, 239, 301 Fair value adjustment, 144 Fair value model, 48 Fair value through profit or loss, 197 Faithful representation, Finance lease, 206, 207 Financial asset, 187 Financial asset or liability at fair value through profit or loss, 197 Financial capital maintenance, 392 Financial concept of capital, 392 Financial instrument, 186, 187, 314 Financial liability, 187 Financing activities, 369, 371 Fixed production overheads, 236 Foreign currency, 305 Forgivable loans, 100 Framework, 82 Functional currency, 305 Future economic benefit, 10, 33 Future operating losses, 221 GAAP, Gain on a bargain purchase, 130 Gains, 12 Gearing ratio, 337 General price inflation, 394 Going concern, 7, 228 Goodwill, 65, 66, 143 Goodwill and pre-acquisition profits, 125 Goodwill arising on consolidation, 124 Government, 99 Government assistance, 99, 100 Government grants, 99 Grants related to assets, 99 Grants related to income, 100 Gross profit margin, 335 Group, 109 Group of biological assets, 239 Harvest, 239 Historical cost, 14 Historical vs current cost, 336 IAS Presentation of financial statements, 268 IAS Inventories, 234 IAS Statement of cash flows, 368 IAS Accounting policies, changes in accounting, 294 Index http://accountingpdf.com/ IAS 10 Events after the reporting period, 227 IAS 12 Income taxes, 248 IAS 16 Property, plant and equipment, 32 IAS 17 Leases, 206 IAS 20 Accounting for government grants and disclosure of government assistance, 99 IAS 23 Borrowing costs, 50 IAS 27 Separate financial statements, 112 IAS 28 Investments in associates, 172, 183 IAS 32 Financial instruments: presentation, 187 IAS 33 Earnings per share, 314 IAS 36 Impairment of assets, 72 IAS 37 Provisions, contingent liabilities and contingent assets, 218 IAS 38 Intangible assets, 58 IAS 40 fair value model, 47 IAS 40 Investment property, 46 IAS 41 Agriculture, 238 IFRS Business combinations, 66 IFRS Fair values, 146 IFRS Non-current assets held for sale and discontinued operations, 227, 300 IFRS Financial instruments, 187, 192 IFRS 10 Consolidated financial statements, 111 IFRS 15 Revenue from contracts with customers, 83 IFRS Interpretations Committee, 25 Impairment, 72 Impairment loss, 33, 76 Impairment of goodwill, 129 Implications of high or low gearing, 338 Impracticable, 295 Income, 12, 83 Indirect method, 372 Intangible asset, 58 Interest cover, 339 Interest rate implicit in the lease, 207 Interest received, 255 Interest revenue, 253 Internally generated goodwill, 60 Internally generated intangible assets, 61 International Public Sector Accounting Standards, 403 International Public Sector Accounting Standards Board, 403 Interpretation of statements of cash flows, 381 Intra-group dividends, 156 Intra-group sales of non-current assets, 138 Intra-group trading, 134, 155 Inventories, 235 Inventories and short-term WIP, 234 Inventory turnover period, 343 Investing activities, 369, 370 Investment property, 46, 47 Investments in associates, 110 Lease, 206 Lease term, 207 Lessees, 209 Leverage, 337 Liabilities and equity, 189 Liability, 10, 219, 252 Liability method, 258 Limitations of ratio analysis, 362, 363 Liquidity, 336, 340, 341 Loan, 254 Loan payable, 252 Long-term solvency, 336 Losses, 12 Major repairs, 222 Material, 294 Materiality, Measurement, 14 Measurement of financial instruments, 196 Measurement of intangible assets, 62 Measurement of provisions, 219 Minimum lease payments, 207 Monetary items, 305 Net profit margin, 335 Net realisable value, 235, 237 Net realisable value (NRV), 257, 396 Net replacement cost (NRC), 396 Non-adjusting, 227 Non-controlling interest, 113, 122 Non-controlling interest at fair value, 127 Non-current assets, 273 Notes to the financial statements, 284 Not-for-profit and public sector entities, 402 Obligation, 11 Onerous contract, 221 Operating activities, 369, 370 Operating cycle, 273 Operating lease, 47, 206, 207 Options, 323 Options, warrants and their equivalents, 314 Ordinary shares, 314 Overhauls, 38 Owner-occupied property, 46 P /E ratio, 347 Parent, 109 Part cancellation, 120 PBIT, profit before interest and tax, 332 Performance obligation, 84 Performance obligation satisfied over time, 88 Index http://accountingpdf.com/ 501 Performance obligations satisfied at a point in time, 88 Permanent and temporary differences, 253 Permanent differences, 253 Physical capital maintenance, 392 Physical concept of capital, 392 Potential ordinary share, 314 Power, 109 Pre-acquisition profits, 140, 157 Prepaid expenses, 253 Present value, 14 Presentation currency, 305 Price/Earnings (P/E) ratio, 347 Primary profitability ratio, 334 Principles-based system, 20 Prior period errors, 294, 298 Problems of historical cost information, 360 Profit, 392 Profit analysis, 335 Profit before interest and tax, 332 Profit margin, 334 Property, plant and equipment, 32 Prospective application, 295 Provision, 11, 219 Public sector entities, 402 Purchased goodwill, 66 Q ualifying asset, 50 Quick ratio, 341 Ratio analysis, 330 Realisable value, 14 Receivable, 83 Recognition, 13, 33 Recognition criteria, 256 Recover or settle the carrying amount, 250 Recoverable amount, 73, 257, 301 Recoverable amount of an asset, 73 Relationships between profit and cash, 381 Relevance, Reporting period, 269 Research and development (R&D) costs, 257 Research and development costs, 60 Residual value, 33, 42 Restructuring, 222 Restructuring and future losses, 147 Retirement benefit costs, 256 Retrospective application, 295 Retrospective restatement, 295 Return on capital employed (ROCE), 332, 333 Return on equity (ROE), 334 Revaluation model, 35 Revaluation surplus, 35 Revalued assets, 255 Revenue, 83 502 Rights issue, 318 ROCE, 333 ROE, 334 Rules-based system, 20 Sale and leaseback transactions, 212 Sale of goods revenue, 253 Secondary ratios, 334 Self insurance, 222 Settlement value, 14 Share exchange, 131 Share split/reverse share split, 318 Short-term solvency, 340 Significant influence, 109, 172 Specific price inflation, 394 Spot exchange rate, 305 Stand-alone selling price, 84 Statement of financial position, 269 Statement of profit or loss and other comprehensive income, 274 Subsidiary, 109 Substance over form, Sufficient future taxable profits, 258 T ax base, 251, 253 Tax expense, 248 Tax payments, 254 Taxable profit, 252 Taxable profit (tax loss), 248 Taxable temporary differences, 251, 253, 254 Temporary differences, 251, 253 Temporary tax differences, 257 Timeliness, Timing differences, 255, 256 Transaction price, 84 Translation, 307 Understandability, Unrealised profit, 134 Unwinding of the discount, 221 Upstream and downstream transactions, 178 Useful life, 41, 63 Users and their information needs, Value in use, 73, 301 Value to the business (deprival value), 395 Variable production overheads, 236 Verifiability, Warranties, 221 Warrants or options, 314 Working capital, 273 Index http://accountingpdf.com/ Notes http://accountingpdf.com/ Notes http://accountingpdf.com/ Notes http://accountingpdf.com/ Notes http://accountingpdf.com/ Review Form– Paper F7 Financial Reporting (02/16) Please help us to ensure that the ACCA learning materials we produce remain as accurate and user-friendly as possible We cannot promise to answer every submission we receive, but we promise that it will be read and taken into account when we update this Study Text Name: Address: During the past six months you recall seeing/receiving any of the following? 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Studying F7 F7 is a demanding paper covering all the fundamentals of financial reporting It has five main sections: The conceptual framework of accounting The regulatory framework Preparation of financial