Financial Reporting

Week 1 Class 1

IMPORTANT!
Week 1 Class 2

Decision-usefulness vs. stewardship

Decision-usefulness
- Ability to generate cash flows of prime importance in capital markets
- More US- oriented view
- Prospective performance

Stewardship
- Primary objective of financial reporting before growth in capital markets
- More European-oriented view
- Retrospective accountability

Conceptual framework
This does not create standards – high quality financial reporting standards are part of process of
providing (CONTINUA DALLE SLIDE)

Difference between IFRS and IAS? Nothing, they’re exactly the same thing, IFRS sono più recenti di
IAS siccome è stato creato nel 2001  IASPlus takes all the standards and provides a 2 pages
summary of everyone of them

GAAP every country will have its own accounting policies, in example in UK small and medium
businesses don’t have to follow the IFRS

If there’s a conflict between the standard and the conceptual framework, we would choose the
standard one since it is based on the conceptual framework already

Week 2 class 2

Any item or disclosure in financial statements is considered material when it impacts our decision
making (shareholders’ view or investors’ view)

Analysing the income statements  la depreciation va messa in base a costa stai deprezzizzando

If there’s a change in accounting policies that you’ll have to change it also in the opening accounts
for the year  you can choose between 2 of them, but then you’ll have to stick to it
- Inventory valuation (LIFO; FIFO; …)
- Revenue recognitions (it changes with the type of industries, like derivatives, edge
accounts)

Accouting Estimate: estimate management judgment, things can change from an year to another,
you don’t change the past datas, you just change the ones for the next years
Week 3 class 1

Discussion: The requirement to standardise the CFS format indicates a lack of trust in
management

Cash flow is all about payments and receivables

Interests expense and interests liability possono non essere uguali perciò si mettono in due parti
diverse  esempio: molti italiani sanno di dover pagare le tasse ma non le pagano, quindi hanno
tanta liabilities

Opening tax liability 320

+ tax espense 520
paid 560
closing tax liability 280

week 4 class 1

Ratio Analysis

Needs of users

- Financial status – can the business pay its way, is it in fact liquid?
- Performance – how successful is the business, is it making a reasonable profit, is it utilizing
its assets to the fullest, is it in fact profitable and efficient?
- Investment – is the business a suitable investment for shareholders or would returns be
greater if they invested elsewhere, is it a good investment?

Horizontal analysis
How do you compare figures to previous years in a useful way?
Example (figures in £m)
Profit YR 2 250 YR 1 235
Profit increased by 15 – useful ? much more meaningful that % increase

ROCE = PBIT / Capital Employed

1. Net profit margin = PBIT / Revenue [Gross Profit / Revenue - GP %] – [Expenses /
Revenue – Expenses %]
2. Asset turnover = Revenue / capital employed
3. Fai Net Profit margin*Asset turnover

Question 2 – 4 – 7&8

Week 4 class 2

M&S Report Discussion

Revenue expenditure directly relates in supporting the business operation, rent, operating, lease,
admin expensive, and it is immediately recognized as an expense in income statement
PPE – an asset is a resource controlled by the entity as a result of past transactions and from which
economic benefits are expected to flow to the entity
PPE are tangible

Discount formula (1+rate%)^number of years

Revaluation model

No cherry-picking permitted – if an item of PPE is revalued, the entire class of PPE to which the
item belongs is revalued
Revaluations must be made with sufficient regularity

- If the revaluation model is chosen it should be conducted in every 3 to 5 years by external

values
- In revaluation model company can bring up the cost of the non-current asset to market
value, it is an expensive process because of having those value and keeping the
adjustments

Week 5 class 1

Impairment and revaluation

When do I conduct impairment? In events which may indicate that assets may be impaired

(subsidiaries, branches) a total impairment cost should be allocated as follows:

1. Full goodwill amount should be impaired (goodwill is only recognised when a company
purchases or buys another company)
2. Deal with individual assets (if assets faire value is more than the carrying value, the asset
cannot be impaired, some assets may be fully impaired due to loss of value of damage)
3. Any remaining impairment loss could be allocated to other assets on a pro-
rata/proportional basis

Exercises in class

1.
Carrying value 350,000
Present value 320,000
Sold for 275,000

Recovable amount 320,00 since the carrying is higher, there’s an impairment of 30,000

2.
Carrying value 500
Fair value 300
Value in use 347
500- 347, gives me the impairment of 153 k

3. Carrying amount 20,000

Depreciated historical cost 10,000
Impairment loss 12,000

Dr I/S expense 2,000

Dr Rev reserve 10,000
Cr PPE 12,000

We need to reduce any surplus from revaluation

The loss or the profit from the sale of the property, plant or equipment goes added or deducted
from the operating income and expenses in the income statement. Moreover, the asset carrying
value has to be reported in the balance sheet to the fair value calculated (current carrying value –
impairment loss).

4. Impairment loss £41m

Carrying amount £150m
Recoverable amount £109m
Assets £m Impairment Recoverable amount
(Carrying value)
Goodwill 13 (13) -
Property 20 - 20
Machinery 49 (14) 35
Vehicles 35 (10) 25
Patents 14 (4) 10
Net monetary assets 19 - 19
150 41 109

49 + 35 + 14 = 98 : 100%

Machinery 49 50% 14 35
Vehicles 35 35.7% 10 25
Patents 14 13.3% 4 10

5. Exercise 5
CV= 2,600 k
FV= 1,200 k
Value in use= 1,950 k
Impairment 2,600 – 1,950 = 650 K

How do we take the balance and allocate the assets?

Goodwill 100 (100) -

Patents 200 (200) -
M 300 (150) 150
Computer 500 (50) 450
Buildings 1,500 (150) 1,350
Total 2,600 (650) 1,950

500 25%
1,500 75%
2,000

6. Historical price 20,000

Life 10 years  depreciation is 2,000 per year
Revaluation at 2011: £18,000
Cost 1 Jan 2007 20,000

Depreciation 2007 (2,000)

Depreciation 2008 (2,000)

Depreciation 2009 (2,000)

Depreciation 2010 (2,000)

Net book Value 1 Jan 2011 12,000

Revalued amount 1 Jan 2011 18,000

Surplus on revaluation 6,000

Factor: 18,000/12,000: 1.5

20,000*1.5: 30,000
depreciation 2,000*1.5: 3,000

7. Selling price 14,000

Cost 1 Jan 2007 20,000

Depreciation 2007 (2,000)

Depreciation 2008 (2,000)

Depreciation 2009 (2,000)

Depreciation 2010 (2,000)
Depreciation 2011 (2,000)
Depreciation 2012 (2,000)

Net book Value 1 Jan 2013 8,000

Revalued amount 1 Jan 2013 12,000

Surplus on revaluation 4,000
 The sale has a profit of £2,000
This profit goes deducted from the operating activities and expenses of the income
statement and the net book value of 8,000 has to be deducted from the non-current assets
of the balance sheet.

8. Selling price 10,000

The sale has a loss of 2,000, therefore the loss had to be added to the operating activities
and expenses of the income statement and the net book value of 8,00 has to erased from
the non-current assets of the balance sheet.

9. Exercise 11
Carrying amount x Y
Goodwill 8,000 1,000
Ppe 36,000 10,000
Inventories and receiv. 9,000 8,000
53,000 19,000

Cashflow x Factor x Discont. Cashflow y Factor y Discont.

cash x Cash y

2002 8,000 1/12 7,143 3,200 1/1.1 2,909

2003 9,000 1/12^2 7,175 2,400 1/1.1^2 1,983
2004 7,200 1/12^3 5,125 3,600 1/1.1^3 2,705
2005 9,600 1/12^4 6,101 4,000 1/1.1^4 2,732
2006 6,000 1/12^5 3,405 4,500 1/1.1^5 2,794
2007 12,000 1/12^6 6,080 4,800 1/1.1^6 2,709
35,029 15,832

Fair value less cost to sell 28,000 20,000

Recoverable amount ?

Imparement of x 53 – 35,029= 17.971

Carrying amount Carrying amount Imparement Revised balance

Goodwill 8,000 (8,000) -
Ppe 36,000 (9,971) 26,029
Inventories and receiv. 9,000 - 9,000
53,000 (17,971) 35,029

Cose da controllare a casa: Borrowing cost and government grants

Deferred income approach: it’s the cash that you are receiving but it doesn’t belong to you,
Assets held for sale: if their carrying value will be recovered principally through a sale transaction
rather than continued use in the business

Investment properties: how are they different from PPE? It is a property that you have, but it is not
directly generating cash flow, example if you have a building with an empty floor, you can rent that
floor out and earn from it, but it is not generating cash directly. It has nothing to do with day-to-day
operations.

Cose che abbiamo fatto in classe:

Revaluation – impairment of the assets – impairment of CGU – investing properties

Chap 10 exercise 8

A.
Non-current assets Land and buildings Plant and machinery Office equipment
Cost/valuation 1 feb 1,800,000 1,531,800 427,680
20x8
Machinery held for (60,000)
sale
At 31 Jan 20x9 1,800,000 1,471,8000 427,680
Accumulated depr 1 378,000 1,055,160 252,480
feb 20x8
Impairment 1 (122,250)
Impairment 2 (37,500)
Depreciation 15,810 38,450 85,536
At 31 jan 20x9 271,560 1,056,110 338,016
NBV at 31 jan 20x9 1,528,440 73,690 89,664

1. Impairment

Value at 31 jan 20x6 252,000

Acc. Depr. (252,000/48 * 3) (15,750)
Carrying amount 31 jan 20x9 236,250
Recoverable amount (120,000 – 6,000) 114,000
Impairment loss 122,250

2. Impairment

Cost at 1 June 20x6 60,000

Acc depr 31 jan 20x8 (1^8/12*25%*60,000) (25,000)
Depr 1 feb – 1 dec 20x8 (10/12*25%*60,000) (12,500)
Carrying amount 1 dec 20x8 22,500
60,000 – 22,500 = 37,500

3. Depreciation
 Land & building
Value at 1 feb 20x8 (1,800,000 – 1,020,000) 780,000
Less: workshop (252,000)
528,000
Annual depreciation (528,000/50) 10,560
Depreciation on workshop (252,000/48) 5,250
Total depreciation 15,810

Plant & machinery

Cost at 1 feb 20x8 1,531,800
Less: machinery held for sale (60,000)
Actual cost 1,471,800
Annual depreciation (1,471,800*0.25) 367,950
Depreciation impairment 2 12,500
Total depreciation 380,450

Office equipment
Cost at 1 feb 20x8 427,680
Annual depreciation (427,680*0.20) 85,536

Review questions
1. Intangible asset-is an asset that is not physical in nature. Corporate intellectual property,
including items such as patents, trademarks, copyrights and business methodologies, are
intangible assets, as are goodwill and brand recognition.
Intangible assets meeting the relevant recognition criteria are initially measured at cost,
subsequently measured at cost or using the revaluation model, and amortised on a
systematic basis over their useful lives (unless the asset has an indefinite useful life, in which
case it is not amortised).
2.
3. IAS 38 was revised in March 2004 and applies to intangible assets acquired in business
combinations occurring on or after 31 March 2004, or otherwise to other intangible assets
for annual periods beginning on or after 31 March 2004.
4. goodwill is an intangible asset associated with a business combination. Goodwill is recorded
when a company acquires (purchases) another company and the purchase price is greater
than the combination or net of
o the fair value of the identifiable tangible and intangible assets acquired
o the liabilities that were assumed.

Week 6 class 2

6 CRITERIA TO CAPITALISE:
1. technical visibility
2. intention to complete it
3. ability to use or sell the intangible asset
4. there has to be external market for the intangible asset
5. technical financial other resources to do it
6. measure reliable cost spend on it
 Exercises from the paper

Exercise 4
Expenditure at 31 July 2014: £830,000  di questi:
- £370,000 were spent on an unsuccessful attempt
- £460,000 were spent on development of cosmetics

£370,000 is an expense
dr development expense 370,000
cr bank 370,000
£460,000 are treated as an intangible asset since they actually provided a product

dr. intangible asset 460,000

cr. Bank 460,000

this intangible asset will be amortised

Q.2

a. the full amount will be amortised over 6 years. Include residual value if relevant.
b. amortise over 30 years, since after will be of no further use
c. amortise over 3 years. Include residual value if relevant.

Exercises end of chap 11

2. 1 July 20x3 Fraser acquired Warmington £50 million

KidZtoys valued at £15 million  useful life 5 years
Net assets fair value of £25 milion
Goodwill: £50 – (15+25): £10  consolidated account

£15 million/ 5 years = depreciation (lui la chiama amortisation) £3 million per year £12 million

if we couldn’t have recognised the brand, then we would have had a goodwill of 25 million and
subjected them at impairment checks every year

6.January £175,000 salaries  expenses

March £250,000 incurred in the developing  expenses
June£300,000 for revising  expense
August £80,000 develop the first model  expenses, you cannot capitalised it yet because you’re
still building the product
October £50,000 conference  expenses, because it’s money spent on training or educating stuff
December £900,000 net profit of the year  we met the technical visibility and we are doing a
projecting of what we can earn from it.

7.31 December 20x6 Jolyon acquired Gillet for £10 million

profit and loss total from research £500,000
fair value of the project £800,000  to be capitalised
Further cost £900,000 (20x7)  expenses (no criteria met)
Further cost £1,000,000 (20x8)  on 31 march was approved by authorities, so 7 months capitalised
and 3 months expenses (700,000 capitalised; 300,000 expenditure).

Week 9 Class 2

IAS 11 – Construction contracts

Contracts that a business have that lasts more than one financial year, the contract negotiated for
the construction of an asset or a combination of assets that are closely interrelated or
interdepended in terms of their design, technology and function or their ultimate purpose or use.

2 types:
1. Fixed price contract: the price is agreed at the beginning
2. Cost plus price: the price is based on the costs incurred during the production, this is the
most used
Key accounting issues
- Project where activity falls into different accounting periods
- Key issue: allocation of revenues and costs (therefore profit) to the appropriate accounting
periods – income statement approach
- Relevant concepts:
o Accruals: match revenues and costs to period in which they are earned and incurred
o Prudence: defer recognition

2 methods to calculate it:

1. work certified method (sales basis): work certified to date/contract price
2. cost method: costs incurred to date/total contract costs

construction contracts usually are for more than one year and the key challenge is recognition of
the revenue to match against the costs incurred on an annual basis, IAS 11 allows the company to
recognise the revenue on the basis of stage of completion of the contract, in terms of the stage of
completion there are 3 accepted alternative methods:
1. proportion of costs incurred for work performed in relation to total contract costs
(proportional of costs incurred): cost to date/(cumulative costs spend + estimated costs)
then if you multiply this by total revenue you’ll have Year 1 Revenue
2. surveys of work performed (value of work certified): it signifies how much revenue can be
recognised so far and it is approved by professional value
3. completion of a physical proportion of work: it is very basic, it is allowed but not mostly used

first type of contract: reliable and profit making

if contract is expected to be profit making, in general, then we can recognise proportional revenue
based on stage of completion
total contract price – (cost incurred + estimated costs) = you see if it’s profitable or not

progress billings is always progress billings invoiced

contract receivable
Y1: progress billings invoiced 360
Progress billing received (200)
Contract receivable 160
Second type of contract: loss making
If we are expected to do a loss, then we should immediately recognise it in full amount
1st thing you do is to put the loss in the income statement
2nd in the statement of financial position you recognise the loss,

Third type of contract: unreliable contract – contract in early stages

Contract costs are recognised as incurred
Contract revenue is recognised only to the extent of costs incurred that are recoverable
The standard doesn’t tell us the percentage of completion when the contract can be said to be
unreliable or not, but it depends on the type of thing you’re building, if it’s a building you can easily
tell it, if it’s a complex thing, then something you are given the percentage.

Week 10 class 2

1. In lessee’s accounts we should recognise an asset as well as corresponding liability (for future
payments)
2. Asset is depreciated in a normal way similar to a non-current asset, as discussed earlier in
IAS16
3. Liability: original balance is recognised in statement of financial position, during the year we
should recognise finance charge (increase the liability and expense in income statement)
4. On an annual basis, lease payments will reduce liability and it will reduce cash as well
5. The original balance for an asset and liability should be the lower of present value of lease
payments and market fair value

Week 10 class 2

Calculating current and non-current liabilities for finance lease:

If the annual payment is made in advance (so at the start of the year) the current liability will be
next year annual lease payments.

When the annual lease payment is made at the end of each year in arrears:
1. Non current liability is the balance outstanding at the end of the next year
2. Current liability will be a balancing figure between total liability at the end of the year – total
liability at the end of the next year

Week 11 Class 2

Events after the reporting period – IAS10

Definition of an event after the reporting method: those events, both favourable and unfavourable,
which occur between the end of the reporting period and the date on which the financial statements
are authorised for issue by the board of directors.

Summary di Khamid: these are the events taking place between the year end and when financial
statements are authorised for issue by directors (usually 3/4 month after the year end)
 - Adjusting events: these are the events which take place after the year end but are related to
the year end figures  What do we do? We need to adjust financial statements for the year
end  examples: accounting errors or fraud identified after the year end related to the year
end figures
- Non-Adjusting events: events are taking place after the year end but before the authorised
issue, it could be any event (sale of major asset, restructuring, purchase of new equipment,
new investments)  what do we do? If the balance is material (in terms of amount and
nature), we provide a disclosure note, no adjustment is required

Week 12 Class 1

Discussion questions

1. Discuss recognition criteria for revenue in relation to goods and services and their treatment
in the financial statements per IAS 18 – Revenue

5 criteria:
 The seller has transferred the significant risks and rewards of ownership of the goods to
the buyer.
 The seller does not retain control over the goods or managerial involvement with them
to the degree usually associated with ownership.
 The amount of revenue can be measured reliably.
 It is probable that the economic benefits associated with the transaction will flow to the
seller
 The costs incurred or to be incurred by the seller in respect of the transaction can be
measured reliably.

2. Explain “risk and rewards of ownership” concept in relation to revenue recognition

If the entity retains significant risks of ownership, the transaction is not a sale and revenue
is not recognised. An entity may retain a significant risk of ownership in a number of ways.
Examples of situations in which the entity may retain the significant risks and rewards of
ownership are:

1. when the entity retains an obligation for unsatisfactory performance not covered
by normal warranty provisions;
2. when the receipt of the revenue from a particular sale is contingent on the
derivation of revenue by the buyer from its sale of the goods;
3. when the goods are shipped subject to installation and the installation is a
significant part of the contract which has not yet been completed by the entity; and

If an entity retains only an insignificant risk of ownership, the transaction is a sale and
revenue is recognised. For example, a seller may retain the legal title to the goods solely to
protect the collectibility of the amount due. In such a case, if the entity has transferred the
significant risks and rewards of ownership, the transaction is a sale and revenue is
recognised. Another example of an entity retaining only an insignificant risk of ownership
may be a retail sale when a refund is offered if the customer is not satisfied. Revenue in such
 cases is recognised at the time of sale provided the seller can reliably estimate future returns
and recognises a liability for returns based on previous experience and other relevant
factors.

3. How do we deal with revenue received in advance and revenue for bundled product and
service.

When the client pays in advance or pays after the sale is made, you cannot recognise the full
amount, but you have to recognised the discounted amount, this especially happens if the
client pays at the end of the period. Regarding the bundled product and service, here we
have to divide the costs of the product from the service itself. For the recognition of cost, as
shown before, it works in a different way from the payments received in advance.

Exercise 1
Initial: 1 Jan 2003
Dr. Trade Receivables (SFP) 1,500
Cr. Revenue (F/S) 1,500
2,000/1.103

31 Dec 2003
1,500*10%= 150
Dr. Trade Receivale 150
Cr. Interest Income (I/S) 150

SFP
Current assets
Trade receivables 1,650

I/S
Revenue 1,500
Interest income 150

31 Dec 2004
1,650*10%= 165

31 Dec 2005
1,815*10%= 181.5

Income: increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other than those
relating to contributions from equity participants.

Difference between Gain and Revenue

Revenue: income that arises in the course of the ordinary activities of an entity (i.e. sales, turnover,
fees, interest, dividends, royalties)
Gain: other items meeting the definition of income (i.e. gains on disposal of non-current asset,
unrealised gains from increases in the valuation of assets)
When do we recognise revenue? We can recognise the revenue on the delivery/collection of the
actual items, you don’t have to wait until the cash enters in your bank account.

Revenue recognition in the operating cycle – manipulation

Revenues can be manipulated:
- Keeping the quarter open to improve sales figures (cut-off)
- Recording phoney sales and shipping products to a “friendly third party” where they are kept
until requested by legitimate customers
- Asking customers to accept additional products sooner than needed – often allowing them
to delay payments for up to six months
- Reducing production quality standards to meet volume goals and shipping products of poor
quality knowing that they will be returned during next quarter

Agreed price: £800,000  for 2 years

Cost of computing solutions: £48,000/anno
Gross profit: 20%
The customer pays £800,000 in May 20X0

31 March 20X0/20X1/20X2
sales revenue: 48,000 + [48,000*(20/80) = 12,000] = 60,000
revenue to be recognised on handover of system
price: 800,000
less: 2 years of after sales support revenue 120,000
total: 680,000

Financial statements for years ended 31 March

20X0 20X1 20X2
Income statement
Sales revenue 680,000
After-sales support revenue 60,000 60,000
Statement of financial position
Current asset- receivables 800,000
Current liability-deferred revenue 60,000 60,000
Non-Current liability-deferred revenue 60,000

Substance over form in one sentence: economic substance over the legal form.

Exercises to do 3 to 7 and question 9 and 10

Class 1 week 14

Post-acquisition consolidated SoFP-example 5

80% of the ordinary share capital for £150,000

retained earnings £50,000
fair value 1 Jan 20X3 £20,000
depreciation: straight-line method, 10 years of life

- If S is included the revaluation of its PPE to fair value in its financial statements:
o PPE increased by £20,000
o Revaluation reserve in equity of £20,000

- W1: Goodwill
o Cost of investment (consideration paid) 150
o Less: FV of NAs
 S.C. 30
 R.E. 50
 F.V. 20
 Total 100*80% (80)
o Goodwill year end 70

- W2: NCI
o Net Assets
 S.C. 30
 R.E. 80
 F.V. 20
 Depr. (2)
 Total 128*20% 128

- W3: Group RE (year end)

o Parent’s RE 570
o Add: 80%*sub’s post profit
o 80%*(80-50-2) 22.4
o R.E. (Year end) 592.4

1. To consolidate parent and subsidiaries for income statement each individual line should be
added across until profit after tax.
2. If a subsidiaries is acquired during the year, subsidiaries income statement should be find
apportionate (only include profit after the acquisition). i.e. subsidiaries is acquired on the
July 1st and the year end is December, then what you do is to only take 6 months, so if you
paid 10 million you will only include 5 million.
3. Profit after tax should be divided between parents shares and NCI shares
4. Any intercompany transactions should be cancelled out.

Inventory sales and unrealised profit

1. Ask deborah
2. If there is any unrealised profit it should be added to the cost of sales (e.i. reducing overall
profit)

In class exercises: question 3,4,5

Question 3

- W1: Goodwill
o Cost of investment 38
o Less: FV of NAs
 S.C

week 14 class 2
exercise in class

W1: Goodwill
Consideration paid 90,000
Less:%FV of NAs at acq.
- S.C. 30,000
- R.E. 26,720
- F.V. 15,000
- 80%*71,720 (57,376)
Goodwill 32,624
Impairment (8,000)
Goodwill 24,624

W2: NCI (20% at Year End)

- S.C. 30,000
- R.E. 36,400
- F.V. 15,000
- 20%*81,400 16,280

W3: Group retained earnings

Parents RE (given) 352,700
Add: % of Sub’s profit post acq.
80%*[36,400-26,720] 7,744
Goodwill impairment (8,000)
352,444

W4: intercompany
Sales 12,000
Cost (7,000)
Profit 5,000

Unrealised= 0  all goods are sold to 3rd party before year end