ACCA FR (F7)

FINANCIAL REPORTING
COMPLETE SUBJECT NOTES
BY ONLINE ACCA
FOR EXAMS IN 2022
 TABLE OF CONTENTS

CHAPTER TOPIC PAGE

NO.
1 Conceptual Framework 3

2 Regulatory Framework 9

3 IFRS 15 - Revenue 15

4 IAS 16 - Property Plant and Equipment 25

5 IFRS 13 – Fair Value Adjustment 32

6 IAS 40 - Investment Property 34

7 IAS 38 - Intangible Assets 37

8 IAS 36 - Impairment of Assets 43

9 IAS 37 - Provisions 50

10 IAS 23 - Borrowing Cost 59

11 IAS 10 – Events after Reporting Date 63

12 IAS 20 - Government Grants 65

13 IAS 12 – Income Tax 68

14 IFRS 16 - Leases 78

15 IFRS 9 - Financial Instruments 85

16 Introduction to Consolidation and Groups 93

17 Consolidated Statement of Financial Position 100

18 Consolidated Statement of Profit and Loss 112

19 Accounting for Associates 116

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20 IAS 33 - EPS 119

21 IAS 2 – Inventories 125

22 IAS 8 Accounting Policies, Changes in Accounting 129

Estimates and Errors
23 IAS 21 - Foreign Currency 135

24 IAS 41 – Biological Assets 139

24b IFRS 6 - Exploration for and Evaluation of Mineral 142

Resources
25 IFRS 5 – NCA Held for Sale and Discontinued Operations 144

26 Cash Flow Statement 148

27 Interpretation of Financial Analysis 155

28 Limitation of Financial Statements 166

29 Accounting for Inflation 170

30 IAS 1 – Presentation of Financial Statements 172

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1. Conceptual Framework
Definition:

A conceptual framework for financial reporting is a statement of generally

accepted theoretical principles. These principles provide basis for:

• The development of accounting standards (IFRS)

• Assist preparers of accounting in areas where IFRS standards are not
available.
• Understanding and interpretation of accounting standards.

Objective of General-Purpose Financial Reporting:

Provide financial information about the reporting entity that is useful to existing
and potential investors, lenders and other creditors (primary users) in making
decision about providing resources to the entity.

Primary users make decisions about buying/providing, selling/settling or holding

shares/debt instruments. These decisions need information regarding:

• Economic resources of the entity and claims against the entity.

• Management’s stewardship (Efficiency of management in managing
entity)

Going Concern:

If the management is certain that the business will go on for further 12 months
(foreseeable future) then the business is said to be a going concern. However, if
the management has a doubt whether the business will not continue for next 12
months then the financial statements will be recorded at break-up value.

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Accrual’s Concept:

Effect of transactions should be recorded when they are occurred and not when
there is cash inflow/outflow.

However, going concern and accrual concept is linked. Because we are sure that
our business will continue till foreseeable future, we can record the cost of
production of goods that are yet to be sold.

Qualitative Characteristics of Financial Information:

A financial statement is meaningful if it is true and fair. To achieve this there are
some characteristics that should be considered while producing the financial
statements

Fundamental Qualitative Characteristics:

1. Relevance:

Relevant information possesses either predictive or confirmatory value or both.

Predictive values can predict and influencing future decisions. Confirmatory
values are used to check, confirm or correct prior predictions.

2. Faithful representations:

Information must be complete, neutral and free from errors.

Thus, the information must include all the necessary details and explanations
needed to understand the financial statement.

To be neutral, the information must be without biasness. It should not be

manipulated in order to influence the decisions.

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Free from errors mean that there are no omissions or misstatements even in the
estimates that are a matter of judgment.

Substance over form is also an aspect of faithful representation.

Enhancing Qualitative Characteristics:

1. Comparability:

The financial statements should be measured in a way that they can be

compared over the past years or with the other similar businesses. This can be
achieved through consistency and disclosure.

2. Verifiability:

Information that can be verified independently is more trusted. Verifiability means

that different people with the same information are most likely to reach the same
conclusion.

3. Timeliness:

Information may be less useful if it is not provided at an appropriate time.

However, there should be a balance between timeliness and reliability.

4. Understandability:

The financial statement should be presented in such a way that is understandable

to people with reasonable knowledge of finance and economics.

Elements of Financial Statements:

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Asset:

Asset is an economic resource controlled by the business as a result of past events

and from which economic benefit is expected to flow in the business.

In simpler words, it is something valuable which a business owns or uses.

Liabilities:

It is a present obligation of the entity arising from the past events. In simpler words,
it is an accounting term for debts.

Equity:

It is the residual interest in the assets of an entity after deducting all its liabilities.

Income:

It is an increase in assets or decrease in liabilities other than those relating to

contributions from equity participants.

Expense:

It is a decrease in assets or increase in liabilities other than those relating to

contributions from equity participants.

Recognition of Elements:

The element is recognized if it meets the definition of one of the elements from
CLEAR (Capital, Liability, Expenses, Assets, Revenue) and if it adheres to the
qualitative characteristics of useful information.

De Recognition of Elements:
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It is normally when an item no longer meets the definition of an element.

For an asset, it is when the control is lost whereas for liabilities, it is when there is no
longer an obligation present.

Measurement:

There are usually two measurement bases:

Historical cost:

It is the cost that was incurred when the asset was acquired or created and for
liability, it is the value of consideration received when the liability was incurred.

It is a traditional form of accounting.

Current Value

• Fair Value
• Value in use (for assets)
• Current cost

Fair Value:

It is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date.
– IFRS 13

Value in use:
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It is the present value of the cash flows or other economic benefits that an entity
expects to derive from the use of an assets and from its ultimate disposal. (Future
value)

Current cost:

Current cost of an asset:

It is the cost of equivalent asset at the measurement date, comprising the

consideration that would be paid at the measurement ate plus the transaction
costs that would be incurred at that date.

Current cost of a liability:

It is the consideration that would be received for an equivalent liability at the

measurement date, minus the transaction costs that would be incurred at that
date.

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2. Regulatory Framework
Objective:

The aim of regulatory framework is to narrow the areas of difference and choice
in financial reporting and to improve comparability. This is even more important
when we consider how different financial reporting can be around the world.

Principles Based Approach versus Rule Based Approach:

Principles Based Approach Rule Based Approach

These are the general principles on These include specific rules that are
which accounting standards are then complied while accounting.
based
Since it’s flexible, one can avoid Rule based approach is very rigid.
implication of standards based on There is a specific rule for each
reasonable explanation for non- situation. Non-compliance can lead
compliance. to serious consequences.
E.g., IFRS – UK E.g., GAAP – USA

Advantages and Disadvantages of Principal Based

Approach:

Advantages:

1. Principle based approach based on single conceptual framework ensures

standards are consistent with each other.

2. Rules can be broken and ‘loopholes’ found. Principles offer a ‘catch all’
scenario.
3. This reduces the need for excessive details in standards.
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Disadvantages:

• Principles can become out of date like usage of fair value valuation
method.
• They are flexible and easy to manipulate.

International Accounting Standards Board (IASB):

The IASB is an independent accounting standard setter established in April 2001.

It is based on London, UK. Its predecessor, the International Accounting Standards
Committee (IASC) was founded in 1973. Its aims are:

• To develop understandable and enforceable global accounting standards

that require high quality, transparent and comparable financial information
for its users.
• To promote rigorous application of those standards.
• To bring convergence of national accounting standards and IFRS standards
to high quality solutions.

Advantages of IASB over National Framework:

• Greater international consistency and comparability of financial

statements.
• Reduced cost of maintaining a national regulatory framework
• Reduced cost of finance and increased investment opportunities for
companies
• Greater control over and understanding of foreign operations
• Consolidation of foreign operations using IFRS standards is easier.

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Disadvantages of IASB over National Framework:

• IFRS standards may not meet local needs

• Loss of control and independence
• Interference and conflicts with national and regional law
• Language, translation and interpretation issues.

Standard Setting Process of IASB:

IFRS standards are developed through a formal system of due process and broad
international consultation involving accountants, financial analysts and other
users and regulatory bodies from around the world.

Step 1: Issues paper – IASB staff prepares an issue paper including studying the
approach of national standard setters.

The IFRS Advisory council is consulted about the availability of aiding the topic to
the IASB agenda.

Step 2: Discussion Paper – It may be published for public comment.

Step 3: Exposure Draft – Following the previous comments and reviews, it is

published for public comment

Step 4: International Financial Reporting Standard – After considering all the

comments received, an IFRS is approved by a majority of IASB. The final standard
includes both a basis for conclusions and any dissenting opinions.

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Interpretation of IFRS:

The IASB has developed a procedure for issuing interpretations of its standards. In
September 1996, the IASC Board approved the formation of a Standards
Interpretations Committee (SIC) for this task. This has been renamed under the
IASB as the IFRS Interpretations Committee (IFRSIC). The duties of the
Interpretations Committee are:

• To interpret the application of International Financial Reporting Standards

and provide timely guidance on financial reporting issues not specifically
addressed in IFRSs or IASs in the context of the IASB's Framework and
undertake other tasks at the request of the Board.
• To have regard to the Board's objective of working actively with national
standard setters to bring about convergence of national accounting
standards and IFRSs to high quality solutions.
• To publish, after clearance by the Board, Draft Interpretations for public
comment and consider comments made within a reasonable period
before finalizing an Interpretation.
• To report to the Board and obtain Board approval for final Interpretations.

In developing interpretations, the IFRSIC will work closely with similar national
committees.

Criticism of IASB:

Advantages:

In favor of accounting standards (both national and international), the following

points can be made.

• They reduce or eliminate confusing variations in the methods used to prepare

accounts.

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• They provide a focal point for debate and discussions about accounting
practice.
• They oblige companies to disclose the accounting policies used in the
preparation of accounts.

• They are a less rigid alternative to enforcing conformity by means of legislation.

• They have obliged companies to disclose more accounting information than
they would otherwise have done if accounting standards did not exist, for
example IAS 33 Earnings per share.

Disadvantages:

Many companies are reluctant to disclose information which is not required by

national legislation.

However, the following arguments may be put forward against standardization

and in favor of choice.

• A set of rules which give backing to one method of preparing accounts

might be inappropriate in some circumstances. For example, IAS 16 on
depreciation is inappropriate for investment properties (properties not
occupied by the entity but held solely for investment), which are covered
by IAS 40 on investment property.
• Standards may be subject to lobbying or government pressure (in the case
of national standards).
• For example, in the US, the accounting standard FAS 19 on the accounts of
oil and gas companies led to a powerful lobby of oil companies, which
persuaded the SEC (Securities and Exchange Commission) to step in. FAS
19 was then suspended.
• Many national standards are not based on a conceptual framework of
accounting, although IFRS’s are.

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• There may be a trend towards rigidity, and away from flexibility in applying
the rules.

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3. IFRS 15 – Revenue Recognition

Revenue:

Revenue is cash inflow obtained from core activities or non-core activities of the
business. The types of revenue are:

• Revenue (Profit and loss) – Income arising during an entity’s ordinary

activities. (IFRS 15)
• Interest and Dividend Income (Profit and loss) – IFRS 9
• Other gains or losses on assets:
✓ Revaluation of investments (Profit and loss) – IFRS 9
✓ Revaluation of NVA (Other Comprehensive Income) – IAS 16

Definitions – IFRS 15

Contract: An agreement between two or more parties that creates

enforceable rights and obligations.

Performance obligation: A promise in contract with a customer to transfer

to the customer:

• A good or service (or a bundle) that is distinct.

• A series of distinct goods and services that are substantially same and have
almost the same pattern of transfer to the customer.

Transaction price: The amount of consideration to which an entity expects

to be entitled in exchange for transferring promised goods or services to a
customer excluding amounts collected on behalf of third parties.

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Recognition Criteria:

Revenue is recognized when there is transfer of control to the customer from the
entity supplying the goods or service.

Indicators of transfer of control are:

• The entity has a present right to payment for the asset.

• The customer has legal title to the asset.
• The entity has transferred physical possession of the asset.
• The significant risk and rewards of ownership have been transferred to the
customer.

Five Steps to Recognize and Measure Revenue:

Step 1: Identify the contract. The contract is only in scope when:

• Both parties are committed to carry it out.

• Each party’s rights to be transferred can be identified.
• The payment terms can be identified.
• The contract has commercial substance ( Some monetary value)
• It is probable the entity will collect the consideration.

Note: A contract can be written, verbal or implied.

Step 2: Identify Performance Obligation: Performance obligation should be

accounted for separately provides the good or service is distinct. Where a
promised good or service is not distinct, it is combined with others until a distinct
bundle of goods or service is identified.

IFRS 15 says that a commodity is distinct if:

• The customer can benefit from the good or service either on its own or
together with other resources that are readily available to the customer.
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 • The entity’s promise to transfer the good or service is separately identifiable
from other promises in the contract.

Step 3: Determine Transaction Price: The amount to which the entity expects to
be ‘entitled’. In determining the transaction price, consider the effect of:

• Variable consideration (Probability weight expected value or most likely

amount)
• Existence of a significant financing component (Adjustment of time value
of money)
• Noncash consideration ( Measured at fair value)
• Consideration payable to a customer. (Including discount, refunds, etc.)

Step 4: Allocate Transaction Price to Performance Obligation: Transaction price is

allocated to each separate performance obligation in proportion to stand-alone
selling price of performance inception of each performance obligation.

Step 5: Recognize Revenue when Performance Obligation is satisfied: An entity

must be able to reasonably measure the outcome of a performance obligation
before revenue can be recognized.

For obligations met: An asset is transferred when (or) the customer obtains control
over the asset. Control includes ability to direct the use of and obtain substantially
all the remaining benefits from the asset.

For obligation satisfied over time: Performance obligation is satisfied over time if
one of the criteria is met:

• Customer simultaneously receives and consumes the benefits provided as

they occur.
• Entity’s performance creates or enhances an asset that the customer
controls as the asset is create or enhanced.

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 • Entity’s performance does not create an asset with an alternative use to
the entity and the entity has an enforceable right to payment for the
performance completed to date.

Examples include construction contracts of building, dams, etc.

Measurement of Revenue Satisfied Over Time:

Methods to measure progress the obligation satisfied are input and output
method.

Input Method: Proportion of work completed based on the inputs (Costs)

incurred to date like labor costs, material costs, etc.

Output Methods: Proportion of work completed based on assessing how much

of the finished product is completed.

• Surveys of performance completed to date

• Appraisals of results achieved
• Time elapsed
• Units produced or delivered.

Note: If an entity cannot reasonably measure the outcome of a performance

obligation, then the measurement should be done according to the input
method of measuring performance obligation satisfied over time.

Presentation in SOFP:

Statement of Financial Position Description

Receivable It is when an entity’s right to
consideration is unconditional(Only a
passage of time is required before
payment is due)
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 Contract liability If a customer pays consideration or the
entity has the right to an amount of
consideration that is unconditional
before the goods are transferred,
entity should present the contract as
‘contract liability’ when payment is
made or falls due.
Contract asset If an entity transfers goods or services
before the customer pays, it is
recorded as contract asset if the
entity’s right to consideration is
conditional on something other than
the passage of time.

Contract liability is when a customer has paid prior to the entity transferring control
of the good or service to the customer.

Contract asset is recognized when revenue has been earned but not yet
invoiced.

Revenue recognized (based on % certified to date) X

Less: Amounts invoiced to customer to date (X)

Contract asset/ (Liability) X/(X)

Question BPP MCQ 88 (5 steps of revenue recognition)

Newmarket Co’s revenue as shown in its draft statement of profit and loss for the
year ended 31 Dec 2019 is $27m. This includes $8m for a consignment of goods
sold on 31st Dec 2019 on which Newmarket Co will incur ongoing service and
support costs for two years after sale.
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The supply of the goods and the provision of service and support are separate
performance obligations under the terms of IFRS 15.

The cost of providing service and support is estimated at $800,000 per annum.
Newmarket Co applies a 30% mark up to all service cost.

At what amount should revenue be recognized in the statement of profit and loss
of Newmarket Co for the year ended 31st Dec 2019? (Ignore time value of money)

Solution:

Step 1: Identify the contract – The absence of anything regarding acceptance of

contract encourages us to assume that contract has been identified.

Step 2: Identify Performance Obligation – There are 2 performance obligations

present:

1. Consignment of goods sold

2. Ongoing service and support costs

Step 3: Determine Transaction Price- The total transaction price has been given
i.e., $8,000,000. Since the question says to ignore time value of money and other
aspects that effect the transaction price are not mentioned, then it will be
assumed $8m is the final transaction price.

Step 4: Allocate Transaction Price to Performance Obligation – $8,000,000 will be

allocated to consignment of goods and the ongoing service.

Ongoing service:

Cost: 800,000 Mark up: 30%

Price: (800,000 *1.3) = 1,040,000

Ongoing service for 2 years = (1,040,000*2) = 2,080,000

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Consignment of cost of goods sold (8m – 1.04m) = $5,920,000

Step 5: Recognize Revenue when Performance Obligation is satisfied – The

consignment of goods sold is satisfied but the obligation of ongoing service is not
satisfied. Hence the amount for this performance obligation should not have
been recognized.

Hence according to the question requirement, we will remove the effect of this
obligation.

Total Revenue $27,000,000

Ongoing Service ($2,080,000)

Net Revenue to be recognized $24,920,000

Question BPP MCQ 77-Output method:

Carraway Co entered a contract on 1st Jan 2015 to construct a factory for Seed
Co.

The total contract price was $2.8m which is expected to generate a profit for
Carraway Co. Seed Co obtains control of the factory as the asset is constructed.

Carraway Co has an enforceable right for payment in respect of the construction

completed to date. The contract states that the performance obligations under
the contract by reference to the value of work certified as complete. At 31st Dec
2015, the contract was certified by the surveyor as 35% complete.

$800,000 has been invoiced to the customer but not yet paid.

Solution:

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Revenue recognized (2,800,000*35%) 980,000

Less: Amount invoiced 800,000

Contract asset 180,000

Common Types of Transaction:

1. Principal versus agent

2. Consignment arrangements
3. Bill and hold arrangements
4. Warranties

Principle Verses Agent:

When another party is involved in providing goods or services to a customer, the
entity shall determine whether the nature of its promise is a performance
obligation to provide the specified goods/service itself, or to arrange for those
goods/services to be provided to the customer.

How to identify that entity controls the goods/service:

• Entity is primarily responsible for fulfilling the promise to provide specified

goods/service.
• Entity faces inventory risk (Risk of damage of inventory)
• Entity has discretion in establishing the price for specified goods/service.

If entity controls the goods/services, the gross revenue is recorded as revenue.

If entity is responsible for arranging the goods/services to be provided by other

party, then the revenue is recorded as a fee or commission since the entity here
is acting as an agent.

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Sales With a Right of Return:

In case of sales with right of return, the following are required to be recognized by
the entity:

• Revenue for transferred products in the amount of consideration to which

the entity expects to be entitled (Revenue is not recognized for products
expected to be returned.
• Refund liability
• Asset for its right to recover products from customers on settling the refund
liability.

Dr. Cash XX

Cr. Revenue XX

Cr. Refund liability XX

Consignment Arrangements:
The customer does not obtain control of the product at the delivery date.
Inventory remains in the books of the entity and revenue is not recognized until
control passes to the final consumer. (For e.g., arrangement for inventory
purchase in supermarkets)

Bill and Hold Arrangements:

Goods are sold but remain in the possession of the seller for a specified period. An
entity will need to determine at what point the customer obtains control of the
product.

The criterion for control includes:

• The reason for the bill and hold must be substantive

• The product must be separately identified as belonging to the customer
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 • The product must be ready for physical transfer to the customer
• The entity cannot have the ability to use the product or transfer it to another
person.

Warranties:

IFRS 15 defines three types of warranty:

1. Standard warranty:
This provides assurance that the product will function as intended per
agreed-upon specifications at no cost to the customer.
It is accounted for in accordance with IAS 37-Provisions, Contingent
Liabilities and Contingent Assets.
2. Additional Warranty:
Additional warranty at no cost to the customer provides an additional
service beyond assurance that the product will function as intended per
agreed-upon specifications.
Additional warranty is also available to the customer at cost.

It is accounted for as an additional performance obligation in sales

contract under IFRS 15 by allocating a portion of it to transaction price.

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