ITC Preparatory Course | Financial Reporting: Notes
ITC PREPARATORY COURSE
Financial Reporting: Notes
Page 0 of 270
,ITC Preparatory Course | Financial Reporting: Notes
Table of Contents
1. Financial reporting: The big picture ............................................................................. 10
2. Financial Reporting syllabus: ITC 2023 ......................................................................... 15
2.1 IFRS for SMEs.................................................................................................................... 16
2.2 Use of past Qualifying Examination (“QE”) and ITC papers ................................................. 16
3. Writing the exam ........................................................................................................ 17
3.1 Using your IFRS handbooks in an open-book exam ............................................................ 17
3.1.1 Format of IFRS ...................................................................................................................... 18
3.2 Exam technique and style of testing .................................................................................. 21
3.2.1 Common pitfalls in examinations ........................................................................................ 22
3.2.2 Discussion-type questions.................................................................................................... 25
3.2.3 Concluding advice ................................................................................................................ 28
3.3 The “required” aspects of an assessment .......................................................................... 28
3.4 Journal entries .................................................................................................................. 38
3.4.1 Some basics .......................................................................................................................... 38
3.4.2 Adjusting journal entries ...................................................................................................... 39
3.4.3 Policy changes ...................................................................................................................... 39
3.4.4 Journal entries and other comprehensive income .............................................................. 41
3.4.5 Group implications – 60% shareholding .............................................................................. 42
Notes on IFRS ................................................................................................................. 43
1. The Conceptual Framework for Financial Reporting (“the framework”) ....................... 44
1.1 Introduction ..................................................................................................................... 44
1.2 Important points .............................................................................................................. 45
1.2.1 The objective of general purpose financial reporting .......................................................... 45
1.2.2 Qualitative characteristics of useful financial information .................................................. 45
1.2.3 Financial statements and the reporting entity .................................................................... 48
1.2.4 The elements of financial statements.................................................................................. 48
1.2.5 Recognition of the elements of financial statements .......................................................... 51
1.2.5 Derecognition....................................................................................................................... 52
1.2.6 Measurement of the elements of financial statements ...................................................... 52
1.2.7 Presentation and disclosure................................................................................................. 55
1.2.8 Concepts of capital and capital maintenance ...................................................................... 55
1.3 Answering questions on the definition of elements ........................................................... 55
1.4 Conclusion ........................................................................................................................ 57
2. IAS 1: Presentation of financial statements ................................................................. 58
2.1 Statement of profit or loss and other comprehensive income ............................................ 58
2.2 Statement of changes in equity ......................................................................................... 60
2.3 Statement of financial position ......................................................................................... 61
3. Statement of cash flows (IAS7).................................................................................... 62
3.1 Introduction ..................................................................................................................... 62
3.2 Objective .......................................................................................................................... 62
3.3 Benefits of cash flow information...................................................................................... 62
3.4 Definitions........................................................................................................................ 62
3.5 Operating activities (IAS7:13-15) ....................................................................................... 63
3.6 Investing and financing cash flows (IAS7:16-17) ................................................................. 63
3.7 Netting off of cash flows (IAS7:22)..................................................................................... 64
3.8 Foreign currency cash flows (IAS7:25-28) ........................................................................... 64
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,ITC Preparatory Course | Financial Reporting: Notes
3.9 Interest and dividends (IAS7:31)........................................................................................ 64
3.10 Taxation (IAS7:35-36) ...................................................................................................... 64
3.11 Purchase and sale of subsidiaries and business units (IAS 7: 39 – 42B) .............................. 64
3.12 Non cash transactions (IAS7:43 – 44) ............................................................................... 65
3.13 Cash and cash equivalents (IAS7:45 – 47) ......................................................................... 65
3.14 Disclosures (IAS7:48 – 52)................................................................................................ 65
3.15 IAS 7 Statement of cash flows - VAT Implications ............................................................. 66
3.16 Exam technique .............................................................................................................. 68
4. IAS 8: Accounting policies ........................................................................................... 70
4.1 Introduction ..................................................................................................................... 70
4.2 Important definitions: material and impracticable ............................................................. 70
4.2.1 Material ................................................................................................................................ 70
4.2.2 Glossary ................................................................................................................................ 70
4.2.3 Impracticable ....................................................................................................................... 70
4.3 Accounting policies ........................................................................................................... 71
4.4 Selecting accounting policies ............................................................................................. 71
4.4.1 Selecting accounting policies ............................................................................................... 71
4.4.2 Consistent application of accounting policies...................................................................... 72
4.5 Ability to change policies .................................................................................................. 72
4.6 Applying changes in accounting policies ............................................................................ 72
4.6.1 Transitional provisions ......................................................................................................... 73
4.6.2 Retrospective application .................................................................................................... 73
4.6.3 Presentation issues when retrospective restatement ......................................................... 73
4.6.4 Disclosure where policy changed......................................................................................... 73
4.6.5 Disclosure of future policy changes ..................................................................................... 74
4.6.6 Journal entries...................................................................................................................... 74
4.7 Error correction ................................................................................................................ 74
4.7.1 Definition ............................................................................................................................. 74
4.7.2 Correction of errors ............................................................................................................. 74
4.7.3 Disclosure requirements ...................................................................................................... 75
5. Revenue recognition (IFRS 15)..................................................................................... 76
5.1 Related issues and documents .......................................................................................... 76
5.2 Introduction ..................................................................................................................... 76
5.3 Revenue ........................................................................................................................... 76
5.4 The core principle and the five steps ................................................................................. 77
5.5 Customer options for additional goods or services ............................................................. 79
5.6 Warranties ....................................................................................................................... 80
5.7 Contract costs ................................................................................................................... 80
5.8 Disclosure......................................................................................................................... 81
5.9 Circular 09/2006 ............................................................................................................... 81
5.10 Revenue Journal Entries .................................................................................................. 82
6. Income taxes .............................................................................................................. 85
6.1 Related pronouncements .................................................................................................. 85
6.2 Income taxes .................................................................................................................... 85
6.2.1 Deferred tax ......................................................................................................................... 85
6.2.2 Overview of deferred tax ..................................................................................................... 85
6.3 Calculation of tax base ...................................................................................................... 86
6.3.1 Tax base of assets ................................................................................................................ 86
6.3.2 Tax base of liabilities ............................................................................................................ 87
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, ITC Preparatory Course | Financial Reporting: Notes
6.3.3 Other factors in calculating tax base.................................................................................... 87
6.4 Recognition of deferred tax liabilities ................................................................................ 88
6.4.1 Goodwill ............................................................................................................................... 88
6.4.2 Initial recognition of an asset............................................................................................... 88
6.5 Recognition of deferred tax assets .................................................................................... 89
6.5.1 Tax losses ............................................................................................................................. 89
6.6 Measurement of deferred tax balance............................................................................... 90
6.6.1 The tax rate .......................................................................................................................... 90
6.6.2 Paragraph 51 of IAS 12 ......................................................................................................... 90
6.6.3 Anticipated basis of recovery............................................................................................... 91
6.7 Recognition of the other side of the deferred tax entry...................................................... 92
6.8 Group accounts ................................................................................................................ 93
6.9 Offset ............................................................................................................................... 94
6.10 Deferred tax balance changes without change in the temporary differences .................... 94
6.11 Disclosure ....................................................................................................................... 96
6.11.1 Tax expense........................................................................................................................ 96
6.11.2 Note disclosure relating to profit or loss ........................................................................... 96
6.11.3 Note disclosure relating to statement of financial position .............................................. 97
6.11.4 Note disclosure relating to items of OCI ............................................................................ 98
6.11.5 Additional disclosure when debit balance ......................................................................... 98
6.12 Exam technique .............................................................................................................. 98
6.13 Exam hint ....................................................................................................................... 99
7. Group accounts ........................................................................................................ 100
8. Separate financial statements (IAS27) ....................................................................... 102
8.1 General .......................................................................................................................... 102
8.2 Parent does not produce consolidated accounts .............................................................. 102
8.3 Disclosure requirements ................................................................................................. 102
9. Definition of subsidiary and process of consolidation ................................................ 104
9.1 Control: Subsidiary or parent .......................................................................................... 104
9.2 What is control? ............................................................................................................. 104
9.2.1 Power and rights ................................................................................................................ 104
9.2.2 Exposure or rights to variable returns ............................................................................... 106
9.2.3 Link between power and returns ....................................................................................... 106
9.2.4 Other considerations ......................................................................................................... 106
9.3 Consolidation ................................................................................................................. 107
9.4 Non-controlling interest .................................................................................................. 107
9.5 Subsequent changes to shareholding .............................................................................. 108
9.5.1 Change in shareholding without change in control ........................................................... 108
9.5.2 Loss of Control ................................................................................................................... 108
10. Group journal entries .............................................................................................. 110
10.1 Introduction ................................................................................................................. 110
10.2 Starting point and process............................................................................................. 110
10.3 Initial consolidation entry ............................................................................................. 111
10.4 More complex transactions ........................................................................................... 112
10.5 Attribution of profit and total comprehensive income to non-controlling interest .......... 112
10.6 Pro-forma journal entries and foreign companies .......................................................... 113
11. Joint arrangements (IFRS 11) ................................................................................... 114
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ITC PREPARATORY COURSE
Financial Reporting: Notes
Page 0 of 270
,ITC Preparatory Course | Financial Reporting: Notes
Table of Contents
1. Financial reporting: The big picture ............................................................................. 10
2. Financial Reporting syllabus: ITC 2023 ......................................................................... 15
2.1 IFRS for SMEs.................................................................................................................... 16
2.2 Use of past Qualifying Examination (“QE”) and ITC papers ................................................. 16
3. Writing the exam ........................................................................................................ 17
3.1 Using your IFRS handbooks in an open-book exam ............................................................ 17
3.1.1 Format of IFRS ...................................................................................................................... 18
3.2 Exam technique and style of testing .................................................................................. 21
3.2.1 Common pitfalls in examinations ........................................................................................ 22
3.2.2 Discussion-type questions.................................................................................................... 25
3.2.3 Concluding advice ................................................................................................................ 28
3.3 The “required” aspects of an assessment .......................................................................... 28
3.4 Journal entries .................................................................................................................. 38
3.4.1 Some basics .......................................................................................................................... 38
3.4.2 Adjusting journal entries ...................................................................................................... 39
3.4.3 Policy changes ...................................................................................................................... 39
3.4.4 Journal entries and other comprehensive income .............................................................. 41
3.4.5 Group implications – 60% shareholding .............................................................................. 42
Notes on IFRS ................................................................................................................. 43
1. The Conceptual Framework for Financial Reporting (“the framework”) ....................... 44
1.1 Introduction ..................................................................................................................... 44
1.2 Important points .............................................................................................................. 45
1.2.1 The objective of general purpose financial reporting .......................................................... 45
1.2.2 Qualitative characteristics of useful financial information .................................................. 45
1.2.3 Financial statements and the reporting entity .................................................................... 48
1.2.4 The elements of financial statements.................................................................................. 48
1.2.5 Recognition of the elements of financial statements .......................................................... 51
1.2.5 Derecognition....................................................................................................................... 52
1.2.6 Measurement of the elements of financial statements ...................................................... 52
1.2.7 Presentation and disclosure................................................................................................. 55
1.2.8 Concepts of capital and capital maintenance ...................................................................... 55
1.3 Answering questions on the definition of elements ........................................................... 55
1.4 Conclusion ........................................................................................................................ 57
2. IAS 1: Presentation of financial statements ................................................................. 58
2.1 Statement of profit or loss and other comprehensive income ............................................ 58
2.2 Statement of changes in equity ......................................................................................... 60
2.3 Statement of financial position ......................................................................................... 61
3. Statement of cash flows (IAS7).................................................................................... 62
3.1 Introduction ..................................................................................................................... 62
3.2 Objective .......................................................................................................................... 62
3.3 Benefits of cash flow information...................................................................................... 62
3.4 Definitions........................................................................................................................ 62
3.5 Operating activities (IAS7:13-15) ....................................................................................... 63
3.6 Investing and financing cash flows (IAS7:16-17) ................................................................. 63
3.7 Netting off of cash flows (IAS7:22)..................................................................................... 64
3.8 Foreign currency cash flows (IAS7:25-28) ........................................................................... 64
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,ITC Preparatory Course | Financial Reporting: Notes
3.9 Interest and dividends (IAS7:31)........................................................................................ 64
3.10 Taxation (IAS7:35-36) ...................................................................................................... 64
3.11 Purchase and sale of subsidiaries and business units (IAS 7: 39 – 42B) .............................. 64
3.12 Non cash transactions (IAS7:43 – 44) ............................................................................... 65
3.13 Cash and cash equivalents (IAS7:45 – 47) ......................................................................... 65
3.14 Disclosures (IAS7:48 – 52)................................................................................................ 65
3.15 IAS 7 Statement of cash flows - VAT Implications ............................................................. 66
3.16 Exam technique .............................................................................................................. 68
4. IAS 8: Accounting policies ........................................................................................... 70
4.1 Introduction ..................................................................................................................... 70
4.2 Important definitions: material and impracticable ............................................................. 70
4.2.1 Material ................................................................................................................................ 70
4.2.2 Glossary ................................................................................................................................ 70
4.2.3 Impracticable ....................................................................................................................... 70
4.3 Accounting policies ........................................................................................................... 71
4.4 Selecting accounting policies ............................................................................................. 71
4.4.1 Selecting accounting policies ............................................................................................... 71
4.4.2 Consistent application of accounting policies...................................................................... 72
4.5 Ability to change policies .................................................................................................. 72
4.6 Applying changes in accounting policies ............................................................................ 72
4.6.1 Transitional provisions ......................................................................................................... 73
4.6.2 Retrospective application .................................................................................................... 73
4.6.3 Presentation issues when retrospective restatement ......................................................... 73
4.6.4 Disclosure where policy changed......................................................................................... 73
4.6.5 Disclosure of future policy changes ..................................................................................... 74
4.6.6 Journal entries...................................................................................................................... 74
4.7 Error correction ................................................................................................................ 74
4.7.1 Definition ............................................................................................................................. 74
4.7.2 Correction of errors ............................................................................................................. 74
4.7.3 Disclosure requirements ...................................................................................................... 75
5. Revenue recognition (IFRS 15)..................................................................................... 76
5.1 Related issues and documents .......................................................................................... 76
5.2 Introduction ..................................................................................................................... 76
5.3 Revenue ........................................................................................................................... 76
5.4 The core principle and the five steps ................................................................................. 77
5.5 Customer options for additional goods or services ............................................................. 79
5.6 Warranties ....................................................................................................................... 80
5.7 Contract costs ................................................................................................................... 80
5.8 Disclosure......................................................................................................................... 81
5.9 Circular 09/2006 ............................................................................................................... 81
5.10 Revenue Journal Entries .................................................................................................. 82
6. Income taxes .............................................................................................................. 85
6.1 Related pronouncements .................................................................................................. 85
6.2 Income taxes .................................................................................................................... 85
6.2.1 Deferred tax ......................................................................................................................... 85
6.2.2 Overview of deferred tax ..................................................................................................... 85
6.3 Calculation of tax base ...................................................................................................... 86
6.3.1 Tax base of assets ................................................................................................................ 86
6.3.2 Tax base of liabilities ............................................................................................................ 87
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, ITC Preparatory Course | Financial Reporting: Notes
6.3.3 Other factors in calculating tax base.................................................................................... 87
6.4 Recognition of deferred tax liabilities ................................................................................ 88
6.4.1 Goodwill ............................................................................................................................... 88
6.4.2 Initial recognition of an asset............................................................................................... 88
6.5 Recognition of deferred tax assets .................................................................................... 89
6.5.1 Tax losses ............................................................................................................................. 89
6.6 Measurement of deferred tax balance............................................................................... 90
6.6.1 The tax rate .......................................................................................................................... 90
6.6.2 Paragraph 51 of IAS 12 ......................................................................................................... 90
6.6.3 Anticipated basis of recovery............................................................................................... 91
6.7 Recognition of the other side of the deferred tax entry...................................................... 92
6.8 Group accounts ................................................................................................................ 93
6.9 Offset ............................................................................................................................... 94
6.10 Deferred tax balance changes without change in the temporary differences .................... 94
6.11 Disclosure ....................................................................................................................... 96
6.11.1 Tax expense........................................................................................................................ 96
6.11.2 Note disclosure relating to profit or loss ........................................................................... 96
6.11.3 Note disclosure relating to statement of financial position .............................................. 97
6.11.4 Note disclosure relating to items of OCI ............................................................................ 98
6.11.5 Additional disclosure when debit balance ......................................................................... 98
6.12 Exam technique .............................................................................................................. 98
6.13 Exam hint ....................................................................................................................... 99
7. Group accounts ........................................................................................................ 100
8. Separate financial statements (IAS27) ....................................................................... 102
8.1 General .......................................................................................................................... 102
8.2 Parent does not produce consolidated accounts .............................................................. 102
8.3 Disclosure requirements ................................................................................................. 102
9. Definition of subsidiary and process of consolidation ................................................ 104
9.1 Control: Subsidiary or parent .......................................................................................... 104
9.2 What is control? ............................................................................................................. 104
9.2.1 Power and rights ................................................................................................................ 104
9.2.2 Exposure or rights to variable returns ............................................................................... 106
9.2.3 Link between power and returns ....................................................................................... 106
9.2.4 Other considerations ......................................................................................................... 106
9.3 Consolidation ................................................................................................................. 107
9.4 Non-controlling interest .................................................................................................. 107
9.5 Subsequent changes to shareholding .............................................................................. 108
9.5.1 Change in shareholding without change in control ........................................................... 108
9.5.2 Loss of Control ................................................................................................................... 108
10. Group journal entries .............................................................................................. 110
10.1 Introduction ................................................................................................................. 110
10.2 Starting point and process............................................................................................. 110
10.3 Initial consolidation entry ............................................................................................. 111
10.4 More complex transactions ........................................................................................... 112
10.5 Attribution of profit and total comprehensive income to non-controlling interest .......... 112
10.6 Pro-forma journal entries and foreign companies .......................................................... 113
11. Joint arrangements (IFRS 11) ................................................................................... 114
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