Download - AAT Financial Statements

BPP PROFESSIONAL EDUCATIONBPP PROFESSIONAL EDUCATION

AAT Financial Statements

Revision Tutorial2013

Kiran Sagoo 0121 237 3818

[email protected]

BPP PROFESSIONAL EDUCATION

It is assessed by a 2 1/2 hour exam.

The exam is in two sections:

—Drafting of financial statements (60% of the assessment)

—Analysis and interpretation* (40% of the assessment)

* Also the IASB’s Framework for the Preparation and Presentation of Financial Statements and legal and regulatory framework

How will the paper be assessed?


—Section 1 (Drafting)—Part A – Construction of the financial statements of single

companies—Part B – International Financial Reporting Standards

(IFRSs)—Part C – Construction of consolidated financial statements

—Section 2—Part A – Analysis and interpretation of financial statements—Part B – Framework for the Preparation and Presentation

of Financial Statements

How will the paper be assessed?


K&U (2)Understand the key features of a published set of accounts

1. Describe the key components and the purpose of a statement of financial position

2. Describe the key components and the purpose of a statement of comprehensive income.

3. Describe the key components and the purpose of a statement of cash flows.

4. Explain the content and purpose of disclosure notes to the accounts.5. Identify accounting standards and the effect of these on the

preparation of the financial statements.

Assessment Criteria (Extract)


Overview of Session

—Revision through the main accounting standards—Examples of how to answer written questions—Good answers vs. poor answer—Basic exam techniques


Types of Written Questions

—Could be:—Knowledge based questions—Scenario based questions

See examples later


The Accounting Equation

ASSETS = LIABILITIES + EQUITY

Assets – CONTROLLED by entity as a result of PAST events, resulting in an INFLOW of ECONOMIC BENEFITS

Liabilities – PRESENT OBLIGATION arising from PAST EVENTS, resulting in an OUTFLOW of ECONOMIC BENEFITS

Equity – Owners RESIDUAL INTEREST in the assets of the entity after deducting all liabilities


—Relevance - if information is capable of making a difference in the decision made by users

—Faithful Representation – information represents the commercial substance of economic transactions and events. Information is complete, neutral and free from error.

Fundamental Characteristics


IAS 16 – Property Plant and Equipment

•Cost + directly attributable costsMeasurement AT recognition

•Cost less accumulated depreciation OR•Fair value less accumulated

depreciationMeasurement AFTER

recognition

•Improvements = capital expenditure•Maintenance = expenseSubsequent

Costs


•Property held for rent or capital appreciation

Definition

•Hold at cost less accumulated depreciationMeasurement AT recognition

•Cost less accumulated depreciation OR

•Fair value – no deprecationMeasurement AFTER

recognition

IAS 40 – Investment Properties


•Lease where risks and rewards of ownership are not transferred to the lessee

•Payments are charged to the income statement on a straight line basis

Operating Leases

•Lease where substantially all of the risks and rewards incidental to ownership are transferred to the lessee

•Recognise as an asset, and a corresponding liability on the SFP

Finance Leases

IAS 17 Leases


Test each period. Lower:

Recoverable Amount. Higher:

Value in use (PV of future

CF)

Fair value less costs to

sell

Carrying Value (Cost

less Acc Dep)

IAS 36 - Impairments

If the carrying value exceeds the recoverable

amount then write down to the recoverable amount. Loss recognised in the

Income Stmt


IAS 37 – Provisions, Contingent Liabilities & Contingent Assets

•Virtually certain – recognise as asset on SFP

•Probable – disclose a note in the FSContingent Asset

•Possible obligation arising from past events, but cannot measure reliably

•Disclose a note in the FSContingent Liability

•Present obligation arising from past events•Probable and measure reliably•Recognise as a liability in the SFP

Provision


a) Define the terms ‘finance lease’ and ‘operating lease’ in accordance with IAS 17 Leases.

b) Explain how operating leases are accounted for in the financial statements of the lessee

c) Explain how finance leases are accounted for in the financial statements of the lessee

Example of a “knowledge based” question


a) Operating lease – A lease other than a finance lease. Lease where risks and rewards of ownership are not transferred to the lessee.

Finance lease – A lease where substantially all of the risks and rewards incidental to ownership of an asset are transferred to the lessee.

b) Treatment of an operating lease Payments in relation to the lease of the asset are charged to the

income statement on a straight line basis. The leased asset is NOT recognised in the statement of financial position.

c) Treatment of a finance leaseThe lease will be recognised as an ASSET on the statement of financial position. A LIABILITY will also be recognised for the outstanding lease payment, which is measure at the fair value of the asset or the present value of the minimum lease payments (if lower).

Model Answer – “knowledge based” question


During the year the board of Morel Ltd decided to close down a division of the company and developed a detailed plan for implementing the decision. Morel Ltd wrote to customers warning them to seek an alternative source of supply. Redundancy notices were sent to the staff of the division. The board has a reliable estimate that the cost of closing the division would be £1,854,000.

During the year three people were seriously injured as a result of food poisoning. It was claimed that the food poisoning came from products sold by Morel Ltd. Legal proceedings have started seeking damages from the company of £2,000,000. Lawyers working for Morel Ltd have advised that it is probable that the company will not be found liable.

Prepare notes for a meeting with the directors to answer the following questions.

(a) What is meant by a ‘provision’, according to IAS 37 Provisions, contingent liabilities and contingent assets?

(b) When should a provision be recognised?

(c) How should Morel Ltd treat the two matters set out in the data above in its financial statements?

Example of a “scenario based” question


(a)IAS 37 Provisions, contingent liabilities and contingent assets defines a provision as a liability of uncertain timing or amount. A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of economic benefits.

(b) A provision should be recognised when:• An entity has a present obligation as a result of a past event. The obligation can be either legal or constructive; and• It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and• A reliable estimate can be made of the amount of the obligation.

Model Answer – “scenario based” question


(c) Accounting treatment of matters arising during the financial year(i) Closure of a divisionMorel Ltd has a constructive obligation to carry out the closure because it has communicated the decision to the people who will be affected: its customers and its employees. This communication appears to have taken place before the year end. It is probable that there will be an outflow of resources embodying economic benefits: the company will incur costs as a result of closing the division. A reliable estimate has been made of the costs. Therefore the company should recognise a provision of £1,854,000 at its year end.

(ii) Legal proceedingsAs the company will probably not be liable it is unlikely that there is a present obligation or that there will be an outflow of resources embodying economic benefits. Therefore no provision should be made. However, the company does have a contingent liability (unless the chances of its being found liable for damages are remote). Details of the claim should be disclosed in the notes to the financial statements.

Model Answer – “scenario based” question


Good vs. Poor Answer

Prepare brief notes to answer the following points for the directors:(a) State how, according to IAS 36 Impairment of assets, an impairment loss iscalculated and which two figures are needed.(b) Explain what is meant by each of these figures.(c) State how an impairment loss is to be treated in the financial statements.


a) IAS 36 states that if an assets carrying value exceeds the recoverable amount then the asset is impaired. The difference between the two is the impairment amount

b) The carrying amount is the value recognised in the SFP after deducting accumulated depreciation and impairment losses. The recoverable amount is the higher of the fair value less costs to sell and the value in use, which is the present value of future cashflows

c) Impairments are recognised in the income statement unless the asset was previously re-valued upwards in other comprehensive income. In this case the revaluation will be reversed and any excess losses remaining will be recognised in the income statement

Good Answer


a) The calculation of impairment is the difference between the asset in the statement of financial position and the sale value

—NO mention of appropriate terminology, didn’t answer question fully.

b) The asset is the cost less depreciation, the sale price is what the asset could be sold for

—NOT well explained. No use of appropriate terminologyc) Impairments are written off to the income statement—NOT enough detail

Poor Answer


—Need to be able to apply knowledge to scenario’s in order to achieve full marks.—Must write in sufficient detail.—No bullet pointing—Cover all “buzz words” in the standard, it will help you write about it

Basic Exam Technique

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