Escolar Documentos
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Description
Page No.
03 05 09 13 14 16 18 24 27 33 35 37 39 40 43 45 47 51 60
IAS 1 Presentation of Financial Statements IAS 2 Inventory . IAS 7 Cash Flow Statements IAS 8 Accounting polices, change in accounting estimates & errors IAS 10 Post Balance Sheet Events . IAS 11 Construction contracts . IAS 12 Deferred Taxation IAS 16 PPE IAS 17 Leases . IAS 18 Revenue Recognition . IAS 23 Borrowing Cost IAS 24 Related Parties IAS 36 Impairment IAS 37 Provision, Contingent Liabilities, Contingent Assets . IAS 38 Intangible Assets... IAS 40 Investments Partnership accounts Consolidated accounts Pass Paper solutions
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Objective and Scope To prescribe the basis for presentation of general purpose financial statements, in order to ensure comparability both with the entitys own financial statements of previous periods and with the financial statements of other entities. In order to fulfill this objective, financial statements must provide information about the following aspects of an entitys results. a) b) c) d) e) f) Assets Liabilities Equity Income and expenses (including gains and losses) Contributions by and distribution to owner Cash flows
Along with other information in the notes and related documents, this information will assist users in predicting the entitys future cash flows Components of financial statements: 1. 2. 3. 4. 5. A statement of financial position at the end of period A statement of comprehensive income for the period Statement changes in equity, for the period A statement of cash flows Notes comprising summary of accounting policies and explanatory notes
Following concepts are paper related Going Concern The entity is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that the entity has neither the intention nor the necessity of liquidation or of curtailing materially the scale of its operations.
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IAS 2 was revised in December 2003. It lays out the required accounting treatment for inventories (stock) under the historical cost system. The major area of contention is the cost value of inventory to be recorded. This is recognised as an asset of the entity until the related revenues are recognised at which point the inventory is recognised as an expense. Part or all of the cost of inventories may also be expensed if a write- down to net realizable value is necessary. In other words, the fundamental accounting assumption of accruals requires costs to be matched with associated revenues. In order to achieve this, costs incurred for goods which remain unsold at the year end must be carried forward in the statement of financial position and matched against future revenues. 1) Inventories are assets: . Held for sale in the ordinary course of business . In the process of production for such sale . In the form of materials or supplies to be consumed in the production process or in the rendering of services. 2) Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. 3) Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arms length transaction.
1 - Cost - NRV
2 Inventory System - Periodic ( FIFO & ARG) - Perpetual ( FIFO & ARG)
3 Calculation of closing stock through trading account App. By Mark up & Margin
4 - Correction of stock sheet - Stock taking before B/S date - Stock taking after B/S date
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xxx xxx xxx ---------------------Total FC xxx Add: W.I.P opening xxx Less: W.I.P closing xxx --------------------Cost of good production xxx Add: Finish good opening xxx Less: Finish good closing xxx ----------------------Cost of good sold xxxx Inventory shall be measure at lower of cost & NRV These below costs will not be included in inventory cost a) AOH (Admin overhead) b) SOH (Selling overhead) c) Storage cost d) Abnormal loss Part 2: If stock is given in the trail balance then it assumed that company is using Perpetual inventory system If stock is given out side the trail balance then it assumed that company is using Periodic inventory system
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xxx
Example Question: Opening stock Rs 100,000/- , purchases Rs 300,000/-, Purchase return Rs 20,000/-, Sales Rs 500,000/-, Sale Return Rs 50,000/- and GP 30% markup. Find Closing stock? Trading Account Opening stock Purchases Sale return Gross profit 100,000 300,000 50,000 103,846 553,846 S = C + GP 500,000 50,000 = X + 30% of X 450,000 = 1.30X X = 450,000/1.30 X = 346,154 * 30% GP = 103,846/Muhammad Naseem Page 7 553,846 Sale Purchase return Closing Stock 500,000 20,000 33,846
2 Stock taking before balance sheet date: Stock + net purchases - net sale (cost of good sold) Adjusted stock xxx xxx (xxx) Xxx
3 Stock taking after balance sheet date: Stock - net purchases + net sale (cost of good sold) Adjusted stock Xxx (xxx) Xxx Xxx
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Information relating to cash flows helps users of financial statements to assess: A. The ability of the entity to generate cash and cash equivalents B. The need of entity for cash A statement of cash flow allows users of the financial statements to evaluate the ability of the entity to generate cash flows and the timing and certainty of those cash flows. This may influence the economic decisions taken by users. A statement of cash flow is therefore required because it provides useful information that other financial statements do not provide. The statement of cash flow provides information on the liquidity, viability and adaptability of the entity, which is not provided by the other financial statements. A company may have high net assets and large profits, but these are not a guarantee of financial viability. If the entity makes sales on credit, but later cannot collect the debts it is owed by customers, it may not have cash to spend on replacing the inventory it has sold, in order to make further sales. Cash is the lifeblood of a business; the statement of cash flow therefore plays an important role in understanding the financial position of an entity. IAS 7 states that cash flow should be presented under three headings: A. Cash flow from operating activities B. Cash flow from investing activities C. Cash flow form financing activities Cash flows are itemized under each of these three headings, and the total cash flow is also shown for each heading. Together, they explain the total increase or decrease in cash equivalents during the financial period. Statements of cash flows, as their name indicates and show cash flows that have occurred during the period. Non cash transactions are excluded. For example, if a company re-values and item of property or makes a bonus issue of shares, these transactions would not feature in the statement of cash flow because they do not involve a flow of cash. The only non cash items included in a statement of cash flow are adjustments to the profit before tax, when the indirect method is used to present cash flows from operating activities. Cash flow from operating activities can be presented by using two methods; Direct & indirect method Muhammad Naseem Page 9
Inflow outflow
inflow
outflow
inflow
outflow
Sale of FA Sale of LTL Int. received Inflow Less Add Out flow Add Less
CA CL
Formats of cash flow statement as follow for Direct & Indirect method Cash flow statement Indirect method RS CF from operating activities Net profit Adjustments: Add: Depreciation Exp Amortization Exp Provision for debts Provision for tax Interest Exp Loss on disposal Less: Interest income Gain on disposal Net CF from operating Act. Muhammad Naseem xxxx xxx xxx xxx xxx xxx xxx xxx xxx xxxx Cash flow statement direct method RS CF from operating activities Net CF from operating Act. Before WC item changes: Add: Decrease in CA Increase in CL Less: Increase in CA Decrease in CL Tax paid interest paid CF from investing activities Add: Sale of FA xxxx xxx xxx xxx xxx xxx xxx xxxxx xxx Page 10
RS
RS
xxxxx
Less:
xxxx
xxxxx
CF from financing activities Add: Issued s. capital Received LT Loan Less: Paid dividend Paid LT Loan
CF from investing activities Add: Sale of FA Sale of LTL Interest received Purchase of FA Purchase of LTL xxx xxx xxx xxx xxx xxxx CF from financing activities Add: Less: Issued s. capital Received LT Loan Paid dividend Paid LT Loan xxx xxx xxx xxx xxxx xxxx
Less:
Xxx Xxxx Net increase in cash & cash equivalent Add: Opening balance of Cash Closing balance of cash & cash equivalent
Net increase in cash & cash equivalent Add: Opening balance of Cash Closing balance of cash & cash equivalent
Cash and Cash equivalent Opening Cash Bank Market Securities Bank overdraft Xxx Xxx Xxx Xxxx (xxx) Xxxx Closing Xxx Xxx Xxx Xxxx (xxx) Xxxx
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There are two steps for solving cash flow statement question Step 1 find cash & cash equivalent Step 2 Critical accounts for missing information
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1st Jan
Definition: Events occurring after the reporting period are those events, both favorable and unfavorable, that occur between the end of the reporting period and the date on which the financial statements are authorized for issue. Two types of events can be identified: a) Those that provide further evidence of conditions that existed at the end of the reporting period. b) Those are indicative of conditions that arose subsequent to the end of the reporting period. Accounting treatment: a) Adjust assets and liabilities where events after the reporting date provide further evidence of conditions existing at the reporting date. b) Do not adjust, but instead disclose, important events after reporting date that do not affect condition of assets and liabilities at the reporting date. c) Dividends for period proposed/declared after the reporting date but before FS are approved should not be recognised as a liability at the reporting date. Disclosure: a) Nature of events b) Estimate of financial effect Purpose of IAS 10: The financial statements are prepared as at the end of the reporting period, but often the accounts are not authorized by the directors until some months later. During this time events may take place within the entity that should be communicated to the shareholders.
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Adjusting events 1. 2. 3. 4. 5. 6. Settlement of court cases Bad debts after BS date. Inventory at lower of cost & NRV Declaration of bonus Fraud & errors Determine the cost of PPE
Non adjusting events 1. Loss due to theft or fire after BS date 2. Decline in the value of investment. 3. Dividends 4.Major business combination sale of subsidiary 5. Plan to discontinuous the major operations 6. Disposal of assets 7.Change in asset price or foreign exchange rate 8. Change in tax rate and law 9. Contingent liabilities 10. Litigation arising solely at of events 11. Implementation of major restructuring
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Expected profit
Expected loss
Revenue, cost & profit taken according to stage of completion % of completion with reference to cost =Cost to date/ total cost x 100
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Amount due from /due to customer Add: Cost to date Profit / loss to date Progress billing to date A xx xx (xx) xxx B xx xx (xx) xxx C Xx Xx (xx) Xxx
Less:
Estimated profit Contract price Cost to date Estimated further cost to complete Total cost Total estimated profit Xx Xx (xxx) xxxx (xxx) xxxx (xxx) Xxxx A xxx B xxx C Xxx
if percentage is not given for attributed profit then you have to find this % If you are using cost formula then: if you are using work certified then: Cost to date / total cost x 100 work certified/ contract price x 100
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1. Current tax estimation for current tax: Tax expense To Tax provision 1. Over provide: Tax provision To Income tax expense prior 5 Deferred tax income: Deferred tax asset To Deferred tax income
2. under provide: Tax expense prior To Income tax provision 4. Deferred tax expense: Deferred tax expense To Deferred tax liability
Definitions: 1) Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable temporary differences. 2) Deferred tax assets are the amounts of income taxes recoverable in future periods in respect of: a) Deductible temporary differences; b) The carry forward of unused tax losses; c) The carry forward of unused tax credits. Muhammad Naseem Page 18
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Fair value adjustments and revaluations a) Financial assets or investment property are carried at fair value. This exceeds cost, but no equivalent adjustment is made for tax purposes. b) Property, plant and equipment is revalued by an entity under IAS 16, but no equivalent adjustment is made for tax purposes. Remember the rule I gave you above, that all taxable temporary differences give rise to a deferred liability? There are two circumstances given in the standards where this does not apply. a) The deferred tax liability arises form goodwill for which amortization is not deductible for tax purposes. b) The deferred tax liability arises from the initial recognition of an asset or liability in a transaction which: i) Is not a business combination ii) At the time of the transaction affects neither accounting profit nor taxable profit. Timing differences: Some TD are often called timing differences, when income or expense is included in accounting profit in one period, but is included in taxable profit in a different period. The main types of TTD which are timing differences and which result in deferred tax liabilities. a) Interest received which is accounted for on an accruals basis, but which for tax purposes is included on a cash basis. b) Accelerated depreciation for tax purposes c) Capitalized and amortized development costs
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Deductible temporary differences All deductible temporary difference gives rise to a deferred tax asset. Transaction that affect the statement of comprehensive income under DTD a) Retirement benefit cost (pension costs) b) Accumulated depreciation of an asset c) The cost of inventories sold before the end of the reporting period d) The NRV of inventory, or the recoverable amount of an item of PPE e) Research costs or organization/ other start-up costs f) Income is deferred in the statement of financial position g) A government grant Fair value adjustments and revaluations Current investments or financial instruments may be carried at fair value which is less than cost, but no equivalent adjustment is made for tax purposes. Reasoning behind the recognition of deferred tax assets arising from DTD: a) When a liability is recognized, it is assumed that its carrying amount will be settled in the form of out flows of economic benefits form the entity in future period. b) When these resources flow from the entity, part or all may be deductible in determining taxable profit of a period later than that in which the liability is recognized. c) A temporary tax difference then exists between the carrying amount of the liability and its tax base. d) A deferred tax asset therefore arises, representing the income taxes that will be recoverable in future periods when that part of the liability is allowed as deduction form taxable profit. e) Similarly, when the carrying amount of an asset is less than its tax base, the difference gives rise to a deferred tax asset in respect of the income taxes that will be recoverable in future periods. Taxable profit in future period When can we be sure that sufficient taxable profit will be available against which a DTD can be utilized? IAS 12 states that this will be assumed when sufficient TTD exist which relate to the same taxation authority and the same taxable entity. These should be expected to reverse: a) In the same period as the expected reversal of the DTD b) In periods into which a tax loss arising from the deferred tax asset can be carried back or forward. Only in these circumstances is the deferred tax asset recognized, in the period in which the DTD arise. When there are insufficient TTD? It may still be possible to recognize the deferred tax asset, but only to the extent that:
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(10,000) Page 22
There two methods for calculating taxable profit Direct method (above use) and indirect method indirect method you can find in text book
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Disclosure The standard has a long list of disclosure requirements, for each class of PPE: 1) Measurement bases for determining the gross carrying amount 2) Depreciation methods used 3) Useful life or depreciation rates used 4) Gross carrying amount and accumulated depreciation at the beginning and end of the period 5) Reconciliation of the carrying amount at the beginning and end of the period showing: i) Additions ii) Disposals iii) Acquisitions through business combinations iv) Increases/decreases during the period from revaluations and from impairment losses v) Impairment losses reversed in the statement of comprehensive income vi) Depreciation vii) Net exchange differences viii) Any other movements The financial statements should also disclose the following a) Any recoverable amounts of PPE b) Existence and amounts of restriction on title, and items pledged as security for liabilities c) Accounting policy for the estimated costs of restoring the site d) Amount of expenditures on account of items in the course of construction e) Amount of commitments to acquisitions Revalued assets require further disclosures: Muhammad Naseem Page 25
The standard also encourages disclosure of additional information, which the users of financial statements may find useful. a) The carrying amount of temporarily idle PPE b) The gross carrying amount of any fully depreciated PPE that is still in use c) The carry amount of PPE retired from active use and held for disposal d) The fair value of PPE when this is materially different from the carrying amount
Element of cost
Revaluation
1. Cost of purchase: (list price + import duty + non refundable tax + handling charges + transportation charges Less trade discount) 2. Directly attributable cost (Wages & salaries, professional fee, assembly cost, installation cost, cost of testing net of sale proceeds) 3. Initial estimated cost of dismantling, removing & restoration
Following costs will not be added in an asset value: 1. 2. 3. 4. 5. 6. Admin cost Cost of opening new facility Cost of conducting business with new customer Redeploying cost Abnormal loss of material, labor & overhead Internal profit Page 26
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Other definitions Minimum lease payments: The payments over the lease term that the lessee is or can be required to make, excluding contingent rent, costs for services and taxes to be paid by and be reimbursable to the lessor, together with: b) In the case of the lessee, any amounts guaranteed by the lessee or by a party related to the lessee; c) In the case of the lessor, any residual value guaranteed to the lessor by either: i) The lessee; ii) A party related to the lessee; iii) An independent third party financially capable of meeting this guarantee However, if the lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that the option will be exercised, the minimum lease payments comprise the minimum payments payable over the lease term to the expected date of exercise of this purchase option and payment required to exercise it. Interest rate implicit in the lease: The discount rate that, at the inception of the lease, causes the aggregate present value of: a) The minimum lease payments; b) The unguaranteed residual value. To be equal to the sum of: i) The fair value of the leased asset; ii) Any initial direct cost
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Finance lease
Operating lease
Yes
No
Is ownership transferred by the end of the lease term? Does the lease contain a bargain purchase option? Is the lease term for a major part of the asset useful life? Is the present value of minimum lease payments greater than or substantially equal to the asset fair value?
There are two methods, which are as follows: 1. At the start of lease= amount to be recovered / 1 + PVIFAr,(n-1)
20,000
20,000
18,000
12,000
30,000
Accounting general entries Lessor lease receivable To Asset UFI D/P Dr Cr Cr Dr Cr Dr Cr Dr Cr Asset subject to FL To Obligation in FL D/P Obligation to FL to Cash interest interest expense to Accrued interest 1st installment Asset subject to FL Dr Accrued interest Dr to Cash Cr Depreciation Dr Cr Dr Cr Lessee Dr Cr
Cash to Lease receivable Interest UFI to FI 1st installment Cash to Lease receivable Depreciation Muhammad Naseem
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non- CA lease receivable C.A C/M of lease receivable non- C.L UFI C.L C/M UFI
Balance Sheet Entries non- CA Xxx Asset subject to FL Less: Acc. Dep Xxx non - C.L obligation under FL C/M of obligation
Xxx
Xxx
2.
To find this type of lease just check that sale price & cost given or not in the question. If given then it is MDL. Initial direct cost (IDC) will be charge to P & L account. 3. Sale & Lease Back
Finance lease
Operating lease
FV > CV
FV < CV
SP = FV
SP > FV
SP < FV
When implicit rate is given then fair value will be equal to PVMLP Muhammad Naseem Page 31
Example for journal entries of Sale & Lease back as follow: Lessee Book of accounts SP 1 2 3 4 5 1 10,000 10,000 15,000 Cash to Asset Deferred profit Asset sub. To FL OUFL 2000/5 = 400 Deferred profit P&L a/c 2 Cash P&L a/c Assets Asset sub. To FL UFI 3 Cash Asset P&L a/c 4 Cash Deferred loss Asset P&L a/c Def. loss 5 Cash Asset Def. profit Muhammad Naseem FV 10,000 8,000 10,000 15,000 10,000 CV 8,000 10,000 8,000 12,000 8,000 10,000 8,000 2,000 10,000 10,000 400 400 8,000 2,000 10,000 8,000 8,000 10,000 8,000 2,000 10,000 2,000 12,000 2,000 2,000 15,000 8,000 5,000 Dr Cr Cr Dr Cr Dr Cr Dr Dr Cr Dr Cr Dr Cr Cr Dr Dr Cr Dr Cr Dr Cr Cr Page 32 Operating lease Finance Lease
Revenue recognition
1. Sale of goods
2. Rendering of services
Sale of goods: (Paragraph 14 of IFRS) 1. 2. 3. 4. 5. Transfer of risk & rewards No managerial involvement Revenue can be measure reliably Cost can be measure reliably Economic benefit flow to entity
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Interest, Dividend & Royalties: (Paragraph 29 of IFRS) 1. Revenue can be measure reliably 2. Economic benefit flow to entity General recognition: 1. Dispatching goods 2. Services have been rendered 3. Accrued basis (when right to receive is established) If entity retain significant risk of ownership, then transaction is not sale & revenue will not be recognize. Risk & Rewards: 1. Transfer of legal title 2. Possession of goods Risk retain by entity: 1. When entity retain an obligation or ownership then unsatisfactory performance not cover by normal warranty provision. 2. When receipt of sale is particular contingent 3. When the good are shift subject to installation and installation is major part of contract 4. When the buyer have right to return the goods
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General funds
Specific funds
Calculate capitalization rate: Borrowing cost / borrowing outstanding x 100% Calculate weighted average expenditure (WAE) Apply capitalization rate on WAE Comments
Actual cost of borrowing Less: investment income (If any) Borrowing cost to be capitalize
When borrowing cost will be capitalize: a) Expenditures have been incurred b) Borrowing cost have been incurred c) Activity is in progress
Suspend
Suspend (controllable)
Loan interest will be charge to asset (capitalize) and remaining will be charge to P&L account
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Related parties are as follows: 1. Parent > 50% 2. Subsidiary 3. Associate >20% & <50% 4. Joint venture 5. Close family members 6. Key management personnel 7. Other related parties Transaction with related parties: (Paragraph 21 of IAS 24) 1. Sale & purchase of goods / services 2. Sale / purchase of property & other assets 3. Rendering / receiving services 4. Leasing 5. R & D 6. Provision of guarantees and collateral security 7. Transfer under licence agreements 8. Settlement of liabilities on behalf of the entity or by the entity on behalf of another party Transactions, which are not related parties: (paragraph 11 of IAS 24) 1. Common director ship 2. Provider of finance 3. Trade unions 4. Public utilities 5. Customer, supplier, distributor etc. Disclosure: Relation Subsidiary Transactions sale of good Lease R&D rendering of service Purchase of good Amount xxxx xxxx xxxx xxxx xxxx
Joint venture
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No
Possible obligation
No
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IAS 37
Provisions
Contingencies
Recognition criteria Present obligation Probable outflow Reliable estimate Obligation Legal Constructive Measurement Expected values Best estimate Specific scenarios Guarantee, warranty, onerous contract, Restructuring, environments etc
Contingent liability
Contingent asset
Remote: Less then 5% chance Possible: 50 /50 % chance Probable: more then 50% chance Virtually certain: more then 95% chance
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Fair value model additional disclosure An entity that adopts this must also disclose a reconciliation of the carrying amount of the investment property at the beginning and end of the period. Cost model additional disclosure These relate mainly to the depreciation method. In addition, an entity which adopts the cost model must disclose the fair value of the investment property.
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Partnership
Definition Partnership can be defined as the relationship which exists between persons carrying on a business in common with a view of profit. In other words, a partnership is an arrangement between two or more individuals in which they undertake to share the risks and rewards of a joint business operation The partnership agreement is a written agreement in which the terms of the partnership are set out and in particular the financial arrangements as between partners such as: I. Capital II. Profit sharing ratios III. Interest on capital IV. Partners salaries V. Withdrawals against profit In addition to a capital account, each partner normally has: I. A current account II. A withdrawals account III. A current account is used to record the profits retained in the business by the partner A partnership statement of financial position consists of: I. II. The capital accounts of each partner The current account of each partner, net of withdrawals on account
The net profit of a partnership is shared out between partners according to the terms of their agreement. This sharing out is shown in an appropriation account, which follows on from the statement of comprehensive income. Various methods are used to calculate the goodwill of a firm at a particular date. Some of the commonly used methods are: I. Average profits basis II. Super profit basis III. Capitalization methods The formation of partnership by amalgamation
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Conversion of a partnership to a limited liability company When a partnership is completely dissolved, its assets are dispersed and it ceases to exist both as a trading and a legal entity. A partnership may, however, be sold to another firm which continues the partnership trading activities but under a different legal umbrella. The new firm may be another partnership, or a sole trader, or as often happens a limited liability company. The acquisition of the partnership business may be achieved in one of two ways. a) A completely independent limited liability company taking over the firm for cash consideration b) A limited liability company formed especially for the purpose of acquiring the business of the partnership. This may occur when a successful partnership or sole trader has reached the stage where incorporation is desirable because of: i) The benefits of limited liability ii) The need to obtain capital through issues of ordinary shares to outsiders iii) Possible taxation advantages The accounting entries for the sale of the partnership to the limited liability company record: a) The cessation of the partnership and the realization of its net assets b) The purchase by the newly created company of the business and net assets of the partnership The sale price, normally referred to as the purchase consideration, is usually paid to the partners in the form of: a) Shares in the limited liability company or b) Debentures in the limited liability company If the company has already been in existence or has incurred outside borrowings, cash may form part of the purchase consideration, if only to settle any balances due to the partners. Closing the partnership books The accounting procedures usually adopted to close off the partnership books are similar to those on the complete dissolution of a partnership. Step 1: All assets (expect cash) and liabilities are transferred to a realization account at their book value Step 2: Each partners current account is cleared to his capital account, as the distinction between the two is irrelevant at this stage. Step 3: if any liabilities are not being taken over by the company, but are settled directly, the entries needed are to credit bank and debit realization account. Step 4: If any assets are being taken over by the partners, the agreed values should be credited to the realization account and debited to the partners account. Muhammad Naseem Page 49
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Parent
Subsidiary
Associates
Key definitions IAS 27 Consolidated financial statements: the financial statements of a group presented as those of a single economic entity. a) Parent: An entity that has one or more subsidiaries b) Subsidiary: An entity, including an unincorporated entity such as a partnership, that is controlled by another entity (know as the parent) c) Control: The power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
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Preparing a consolidated statement of financial position, you have to follow the below five steps: Step 1: Group structure % of investment & date of acquisition Step 2: Cost of investment Cash (if paid) Share capital Deferred liability Cost of invest. xxx xxx xxx -------------Xxx journal entry will be as follow share capital CR deferred liability CR cost of investment DR cash transaction will not be consider under entry
Step 2: Net asset of subsidiary Share capital Share premium Retain earning Fair value adjustment: (Assets & liabilities both) Depreciation on fair value Provision for unrealized profit (S P) -----------Total net assets xxxx At acquisition xxx xxx xxx xxx At end / reporting xxx xxx xxx xxx (xxx) (xxx) ----------xxxx
Difference between total net assets is post acquisition profit Step 3: Good will (two methods to calculate goodwill) Proportion method Cost of investment Less: % of P in net asset at Acq. Good will Impairment loss Muhammad Naseem xxx (xxx) ------------xxx (xxx) Fair value method Cost of investment Fair value of NCI xxx xxx --------------xxx (xxx) Page 52
Net good will Step 4: Non controlling interest (two methods to calculate NCI) Proportion method % of NCI in net asset at acq. xxx Add: % of NCI at post acq. Profit xxx Less: % of NCI in impairment loss (xxx) -------------Net NCI xxxx Step 5: Group reserve/ Retain earning Closing balance of retain earning of P % of P in post acquisition profit % of P in impairment loss Provision of unrealized profit (P S) (PURP) Net group reserve xxx xxx (xxx) (xxx) -------------------xxxx
Fair value method Fair value of NCI % of NCI at post acq. Profit % of NCI in impairment loss net NCI xxx xxx (xxx) -----------xxxx
Some time a subsidiary has reserves other than retained earnings. The same basic rules apply. If a reserve existed at the acquisition date, it is included in the goodwill calculation and treated in the same way as pre-acquisition profits. If a reserve arose after the acquisition date, it is treated in the same way as post-acquisition profits. Preparing a consolidated statement of comprehensive income A consolidated statement of comprehensive income brings together the sales revenue, income and expenses of the parent and the sales revenue, income and expenses of its subsidiaries. Pre- and post-acquisition profits When a parent acquires a subsidiary during a financial year, the profits of the subsidiary have to be divided into pre-acquisition and post-acquisition profits.
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Other adjustments to the consolidated statement of comprehensive income: impairment of good will One such adjustment is impairment of goodwill. When purchased goodwill is impaired, the impairment does not affect the individual financial statement of the parent company or the subsidiary. The effect of the impairment applies exclusively to the consolidated statement of financial position and the consolidated statement of comprehensive income. If good will is impaired: a) It is written down in value in the consolidated SFP b) The amount of the write-down is charged as an expense in the consolidated statement of comprehensive income, usually as an administration expense. A write-down in goodwill affects the parent entity only not the non-controlling interest. It should therefore be deducted from the profit attributable to the owners in the parent. Muhammad Naseem Page 54
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CR
The parent therefore reverses the transaction for the cash in transit, as though the payment has not yet been made. If cash is in transit from a subsidiary to the parent, in the statement of financial position of the parent: Cash DR Amount receivable from the subsidiary
CR
The parent therefore records the receipt of the cash payment from the subsidiary, even though the cash has not yet been received. Unrealized profit in inventory
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Pass Papers
Summer paper 2011
Question # 07 Step 1: Group structure J : Parent date of acquisition: 1st July 2009 F : subsidiary shares are in million 8000/10000 * 100 80% Step: 2 Net Assets at acquisition 10,000 4,000 7,800 4,000 4,000 (3,000) 200 27,000 8000/4*3*5 30,000 6,500 36,500 36,500 4,500 41,000 (27,000) 14,000 4,500 180 4,680 at end 10,000 4,000 9,300 4,000 4,000 (400) (3,000) nil 27,900
S. Capital S. premium R/E Fair value adj: Land 8000 *50% Build. 8000 * 50% Dep. on build.4000/10 Deferred tax Inventory Cost of investment S. Capital Deferred liability Step: 3 Goodwill cost of investment Fair value of NCI Net asset at acquisition date NCI Fair value of NCI % of post acq. Profit (900 * 20%) Group reserve
Less: Step: 4
Step: 5
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Consolidated Balance Sheet Non CA PPE (45000+18000+8000-400) Franchise right Financial assets Good will C.A Inventory (18000+10000) Trade receivable (15000+9000) Net assets Equity and liabilities S. Capital (25000+6000) S. Premium (10000+24000) R/E & other reserves NCI 28,000 24,000 52,000 159,600 W. 2 70,600 2,000 21,000 14,000 107,600
W. 3
W. 5 W. 4
Non C.L Interest bearing borrowings Deferred tax (2000+1500+3000) W. 2 C.L Trade payable Tax payable Bank overdraft provision Deferred liability W. 2
24,000 6,500 30,500 16,000 3,000 8,000 1,200 6,500 34,700 159,600
Question # 02 IAS 36 impairment Good will Cost of investment F.V NCI Net asset F.V at Acq Good will Impairment: carrying value less recoverable amount 270 75 345 (300) 45 CV: 420 + 45 = 465 impair loss 35 Dr then impair will be good will 35 Cr 465 - 430 = 35 remaining good will Rs. 10 m will be shown in B/S
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Cost of production per unit = 1,674,600/ 8000 = 209.33 Closing stock value 5000 * 209 = 1,046,650/-
Negative goodwill will not be impair & charge to P/L account (only parent %) 4. Fair value of NCI 1000 share * 70 = 70,000/5. Interim dividend 25000 * 2% = 500/-
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Consolidated income statement of PL group Rs. 270,000 (138,000) 132,000 (35,000) (21,000) (2,400) 600 74,200 (16,700) 32,000 89,500
Revenue Cost of sale Gross profit Distribution exp Admin exp Finance cost Other income Profit before tax Tax exp Negative good will Profit for the year
W. 7 W. 2 & 7
W. 5 & 6 W. 5 & 6
W. 3
Question # 4 Partnership All figures are in Rs. 000 Freehold premises Plant & machinery Inventory T. Receivable Cash received Profit: 3/5 of K 2/5 of J 1. Realization A/C 16,000 note payable 5,000 T. Payable 16,000 Bank O/D 26,000 P. C 19,800 10,320 6,880 100,000 2. Capital A/C J 19,200 B/D Profit Cash 19,200 10,000 20,000 10,000 60,000
100,000
80,000
Question # 5 For answer see IAS 1 of notes Question # 6 It is finance lease under sale and lease back Under IAS 17 rule is that if fair value is grater than the carrying value Then deferred profit will be there and it will amortize over lease terms Sold Cost Profit 215 200 15
FV > CV
This will be amortized over lease terms mean over 5 years Cash 215 Dr Asset 200 Cr Deferred profit 15 Cr asset sub to FL OUFL 215 215 Dr Cr
Note: the intangible assets of S are all of a type where recognition would not be permitted under IAS 38 that's why all intangible assets will be zero. Step 3 - Goodwill Consolidated Balance Sheet Total asset Cost of investment 100,000 PPE 150,000 Fair value of NCI 30,000 adj. of fair value (w-2) 13,000 130,000 net current assets (w-5) 79,000 Net asset at acquisition date (110,000) 242,000 20,000 Equity & liability Impairment loss (20,000) share capital 120,000 Nil R/E w-5 93,400 NCI w-4 28,600 242,000
Question # 2
Part 1 under IAS 37 provision should be provided Because Present obligation court fee 100,000 Probable out flow replaced cost 400,000 * 70% 280,000 Measurement reliable repair cost 15000 * 30% 4,500 Provision should be 384,500 Part 2 Under IAS 37 provision should be provided Because Present obligation repair cost 12000 * 5% *1/3 * 1000 200,000 Probable out flow replaced cost 12000*5%*2/3*10000 4,000,000 Measurement reliable Provision should be 4,200,000 Part 3 Option # 1 Option # 2 Cost 3,000 +1,000 = 4,000 If 3,500 4,000 = 500 15,000 + 150,000 = 300,000/Cost will be 500 * 1,000 = 500,000/Provision should be option # 2 Rs. 300,000/-
Question # 3
Goodwill Cost of investment 2,200,000 Fair values 1.85 * 90% (1,665,000) 535,000 Carrying value 1,300 +200+250+535 Muhammad Naseem 2,285,000 Page 65 Allocation of impairment loss G.W C.D.E CV 535 200 Allocation (347) (200) 188 PPE 1,300 (178) 1,122 NCA 250 250
Question # 4
Statement of comprehensive income 2009 2008 Sale 104,000 73,500 Cost of good sold (80,000) (60,000) Gross profit 24,000 13,500 Tax 30% (7,200) (4,050) PAT 16,800 9,450 Statement of financial position 2009 NCA 40,000 CA 22,000 62,000 S.Capital R/E CL 5,000 36,250 20,750 62,000 Statement of changes in equity Opening R/E 20,000 adj of fraud in 2008 (10,000) Restated R/E 10,000 profit of 2008 9,450 19,450 profit of 2009 16,800 36,250 2008 30,000 7,500 37,500 5,000 19,450 13,050 37,500
Question # 7
Contract price Cost to date Further cost Less: rectification cost Total cost Estimated G.P/loss Attributable profit/loss Income statement Revenue (%) cost G.P/Loss A 1,154 (900) 254 B 1,067 (800) 267 G 2,250 (3,000) (750) C 10,000 (4,500) 5,500 A 5,000 1,000 3,000 4,000 (100) 3,900 1,100 800 2,200 3,000 3,000 1,000 B 4,000 3,000 3,000 6,000 6,000 (1,500) 3,000/6,000*100 50% G 4,500 4,500 4,500 4,500 5,500 C 10,000
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Question # 8
1-Jan-08 Land 60 DR Revaluation 60 CR Building Revaluation 31-Dec-08 Land Revaluation 33 DR 33 CR 20 DR 20 CR 120/40 = 3 99 -132 = 33 3 x 7 = 21 - 120 = 99
80 -60 = 20 132 - 4 = 128 130 - 128 = 2 132 / 33 = 4 extra dep 4 - 3 = 1 will charge to I/S
4 (1) 3
114 3 117
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Muhammad Naseem
Deferred tax liability TTD (49500 x 35%) Deferred tax asset DTD (2000 x 35%) C/F unused loss (250000 x 35%) Net deferred tax O/B deferred tax Deferred tax income Muhammad Naseem
Year 2010 Asset PPE Prepaid Exp R&D Liability Adv. Income Loan Accrued Exp
109000 x 15% = 92650/TD 42,350 4,000 900 (1,500) TTD 42,350 4,000 900 47,250 DTD (1,500) (1,500)
Def. tax liability TTD (47250 x 35%) Deferred tax asset DTD (1500 x 35%) Net deferred tax Less: O/B 2009 Def. tax exp
it add as it is income
Deferred tax ---------------------------------------------------------------------------------------------O/B 70,875 Exp 86,888 C/B 16,013 86,888 86,888
Accounting profit Add: DTD (2000 - 1500) Less: TTD (49500 - 47250) CFUTL Taxable profit Current tax (201750 x 35%)
70,613 70,613
Dr Cr Page 70
Question # 7 Loan 500 x 15% x 5/12 = 31.25 500 x 17.5% x 3/12 = 21.88 Actual cost of borrowing 53.13 Less: investment income (12 -5) (7.00) Net borrowing cost to Capitalized 46.13 Add: cost incurred 350.00 Cost of W.I.P 396.13
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