0. Advanced Financial Reporting Familiarisation
CIMA Paper F2

1. 1
Session
Long term finance

2. Sources of long term finance
Equity
Debt
Sources of long term finance

3. 2
Session
Cost of capital

4. WACC Pool of Funds Funds from Other Sources
Funds from Equity Sources
Funds from Other Sources
Pool of Funds
Used to Finance Various Investment Projects

5. 3
Session
Financial Instruments

6. Financial Instruments
Definition – IAS 32 Any contract that gives rise to both a financial assets of one entity and a financial liability or equity instrument of another entity.

7. Financial Asset
Cash
Right to receive cash
Equity

8. Financial Liability
Contractual obligation to deliver cash

9. Equity Instrument
Evidence of ownership

10. Classification of Financial Instruments
Equity or Liability?
Substance
Responsibility to deliver cash = liability
Mandatory redemption = liability
No responsibility to deliver cash = equity

11. Classification of Financial Instruments
Asset?
Fair value through profit or loss
Held to maturity
Loans and receivables
Available for sale

12. 4
Session
Share-based payment

13. Share-based payment (IFRS 2)
Equity settled
Cash settled
Share-based payment (IFRS 2)

14. Share-based payment IFRS 2: Recognise expense over vesting period
Based on fair value and expectation of number vesting
Distinctions between treatment of equity-settled and cash-settled

15. Share-based payment Difference Equity-settled Cash-settled
Fair value measurement
At grant date
At reporting date
Credit to SFP
Equity reserve
Liability

16. 5
Session
Earnings per share

17. Earnings Per Share Net Profit Attributable to Ordinary Shareholders
EPS =
Weighted Average Number of Ordinary Shares
Notes ref. p107

18. Diluted Earnings Per Share
Potential Ordinary Share
Earnings Adj
No. of Shares Adj
Convertible debt
+ Interest – Tax
Increase by maximum
Convertible preference shares
+ Preference dividends
Increase by maximum
Options
Nil
Options x (FV-Ex) FV

19. 6
Session
Leases

20. Leases
Finance leases
Operating leases
Leases (IAS 17)

21. Types of leases Classification of lease Finance Lease Operating Lease
Risks and rewards transferred to lessee
Not a finance lease

22. Accounting treatment of leases
Finance Lease
Operating Lease
Asset and liability
Lease expense (SPL)

23. 7
Session
Revenue and Substance Over Form

24. IAS 18 Revenue Revenue should be recognised when:
It is probable that future economic benefits will flow to the enterprise and
These benefits can be measured reliably

25. IAS 18 Revenue Recognition criteria for revenue from: Sale of goods
Provision of services
Interest, royalties & dividends

26. IAS 18 Revenue – sale of goods

27. IAS 18 Revenue – provision of services

28. Consignment inventory
Manufacturer
Dealer
Who has risks and rewards of ownership?

29. Sale and repurchase Sale and repurchase Risks and rewards transferred
Risks and rewards not transferred
Treat as loan
Treat as sale

30. 8
Session
Provisions, Contingent Liabilities and Contingent Assets

31. IAS 37 Provisions, contingent liabilities and contingent assets
A provision is a liability of uncertain timing or amount
Liabilities and probability
Virtually certain – Recognise (liability)
Probable – Recognise (provision)
Possible – Disclose as a note (contingent liability)
Remote – Ignore

32. IAS 37 Provisions, contingent liabilities and contingent assets
Assets and probability
Virtually certain – Recognise (asset)
Probable – Disclose as a note (contingent asset)
Possible – Ignore
Remote – Ignore

33. 9
Session
Deferred Tax

34. Deferred tax
Estimated future tax consequences of transactions and events already recognised
CV of NA > tax base => deferred tax liability
CV of NA < tax base => deferred tax asset
Deferred tax asset must be considered recoverable

35. Calculation of deferred tax
Temporary difference = Carrying value less tax base Deferred tax balance = Temporary difference × tax rate

36. 10
Session
Construction Contracts

37. IAS 11 Construction contracts
A construction contract is a contract specifically negotiated for the construction of an asset or a combination of asset for use by another entity. A contract normally spans at least one accounting period so revenue recognition needs to be addressed.

38. IAS 11 Construction contracts
Key Workings:
Calculate overall expected profit on the contract
Calculate percentage completion of contract at reporting date

39. 11
Session
Related Parties

40. IAS 24 Related party disclosures
A party is related to the entity if:
The party controls or is controlled by the entity
Is under common control with the entity
The party is a member of the key management personnel
The party is a close family member of an individual in i or iii above

41. 12
Session
Consolidated Statement of Financial Position

42. What is a Group? P
Control
Group S

43. 13
Session
Fair Value Adjustments

44. Initial Recognition and Measurement of Net Assets of S
General principles
For recognition as a separate asset or liability needs to satisfy the framework criteria
Measurement is fair value at the date of acquisition

45. Exceptions to the general principles
Contingent liabilities are recognized at fair value even where the probability of settlement is <50%
Certain assets and liabilities (e.g employee benefit liabilities and assets held for sale) are measured using the bases laid down in the relevant IFRSs

46. 14
Session
Consolidated Statement of Profit or Loss and Other Comprehensive Income

47. Consolidated Statement of Profit or Loss and Other Comprehensive Income
Mid-year acquisitions
Non-controlling Interest
PUPs
SPL&OCI
Impairments
Intra Group Transactions
Fair Value Adjustments

48. 15
Session
Associates and Joint Ventures

49. Associate Parent Significant Influence Control 20-50% Voting Rights
Subsidiary
Associate
IAS 28 Equity Accounting

50. Joint venture Parent Joint control Control Subsidiary JV
Contractual arrangement
Unanimous consent
Subsidiary JV
IAS 28 Equity Accounting

51. Equity Accounting
Consolidated Statement of Financial Position Non-current assets Investment in associate/joint venture Cost of investment X P’s share of post-acquisition reserves X Impairment of investment (if any) (X) X

52. Equity Accounting
Consolidated Statement of Profit or Loss Share of associate/JV profits (A% x A’s PAT) less any impairment X Profit before tax X

53. 16
Session
Complex Groups

54. Complex Groups Vertical Group Parent Controls Subsidiary Controls
Sub-Subsidiary

55. 17
Session
Changes in Group Structure

56. Changes in Group Structure
Step-by-step (Piecemeal) Acquisition
Simple Investment
Associate
Subsidiary

57. Step by step acquisition – the detail
Date of acquisition = date control gained
Re-measure any prior interest in S to FV at date of acquisition (above) – gain/loss to profit or loss
Include FV of any prior interest as part of ‘consideration paid’ for goodwill purposes

58. Step by step acquisition – further purchases after control gained
Do not re-compute goodwill
Net assets of S already being consolidated so only change is to NCI %age
Difference between additional consideration paid and change in NCI taken to equity

59. Changes in Group Structure
Disposal of Subsidiary – Loss of control Proceeds X FV of retained interest (if any) X X NA of S at disposal X Goodwill of S at disposal X NCI in S no longer recognised (X) (X) Gain/Loss for group X

60. Changes in Group Structure
Disposal of Subsidiary – no loss of control
No change to goodwill recognised
NA of S still consolidated
NCI in S increases
Difference between disposal proceeds and increase in NCI taken to equity

61. 18
Session
Consolidated Statement of Changes in Equity

62. Statement of Changes in Equity proforma
Parent s/h NCI Balance b/f X X Comprehensive income X X Dividends paid – to parent (X) - to NCI (NCI% x S) (X) Acquisition/disposal of Sub X/(X) Transfer between owners X/(X) X/(X) Balance c/f X X
Items to appear line by line

63. 19
Session
Group Statements of Cash Flow

64. Statement of Cash Flow Proforma
Cash Flows from Operating Activities Group profit before tax X Adjustments for: Depreciation X Amortisation X Impairments X Profit/loss on sale of PPE (X) / X Share of associate’s profit (X) Investment Income (X) Finance costs X X
Items to appear line by line

65. Statement of Cash Flow Proforma
X Increase/decrease in inventory (X)/X Increase/decrease in receivables (X)/X Increase/decrease in payables X/(X) Cash generated from operations X Interest paid (X) Tax paid (X) Net cash from operating activities X
Items to appear line by line

66. Statement of Cash Flow Proforma
Cash Flows from Investing Activities
Sale proceeds from disposal of PPE X
Purchases of PPE (X)
Interest received X
Dividends received from Associate X
Acq’n/Sale of Sub, net of cash balances (X) / X X
Notes ref. P61
Items to appear line by line

67. Statement of Cash Flow Proforma
Cash Flows from Financing Activities Loan – issue/repayment X / (X) Share issues X Dividends paid to parent shareholders (X) Dividends paid to NCIs (X) X
Notes ref. P61
Items to appear line by line

68. Statement of Cash Flow Proforma
Cash flows from operating activities X Cash flows from investing activities X Cash flows from financing activities X Change in cash and cash equivalents X Cash and cash equivalents b/f X Cash and cash equivalents c/f X
Notes ref. P61
First three lines to appear together and then line by line

69. 20
Session
Foreign Currency Translation

70. Translation of foreign operation
Statement of financial position Closing Rate Statement of comprehensive income Average Rate Exchange gains/losses Other comprehensive income
Notes ref. p53

71. Exchange gain/loss on goodwill
Goodwill opening rate X average rate (X) Exchange gain/(loss) – bal X/(X) Goodwill closing rate X

72. Exchange gain/loss on net assets
Net assets opening rate X Comprehensive average rate X Exchange gain/(loss) – bal X/(X) Net assets closing rate X

73. 21
Session
Analysis and Interpretation of Financial Information

74. Performance
Profitability x Efficiency = Returns GP% OP% x Asset utilisation = ROCE NP%

75. Liquidity Sell Goods Inventory Days Receivable Days Buy Goods Cash In
Cash Out
Payables Days

76. Capital Structure
Equity
Debt
High Gearing Low Interest Cover

77. Limitations of Ratio Analysis
Financial statements
Comparisons of different entities
Ratios
Creative accounting
Notes ref. P102