March 2021

Frameworks The professional and ethical duty of the accountant Performance reporting and performance appraisal Revenue Non-current assets, agriculture and inventories Foreign currency in individual financial statements Leases Employee benefits Share-based payment Events after the reporting period, provisions and contingencies Financial instruments Tax Segment reporting Related parties Adoption of International Financial Reporting Standards Specialised entities and specialised transactions Non-financial reporting Current issues Group accounting – basic groups Complex groups Change in a group structure Group accounting – foreign currency Group re organisations Group statement of cash flows UK GAAP Questions & Answers

Test your understanding 1 – Cookie   Cookie, a company, prepares its financial statements in accordance with International Financial Reporting Standards. It has investments in two other companies, Biscuit and Cracker. The statements of financial position of all three companies as at 30 April 20X4 are presented below:     Cookie Biscuit Cracker   Non-current assets $m $m $m           Property, plant and equipment 80 85 67   Investments 101 10 −     ––––– ––––– –––––   Current assets 181 95 67           Inventories 19 6 25   Trade receivables 17 13 33   Cash and cash equivalents 22 3 14     ––––– ––––– –––––   Total assets 239 117 139   Equity and liabilities ––––– ––––– –––––           Share capital ($1) 21 10 20   Other components of equity 50 – 20   Retained earnings 105 79 43     ––––– ––––– –––––   Total equity 176 89 83   Non-current liabilities 40 10 18   Current liabilities 23 18 38     ––––– ––––– –––––   Total equity and liabilities 239 117 139     ––––– ––––– –––––     The following notes are relevant to the preparation of the consolidated financial statements:   On 1 May 20X3, Cookie acquired 55% of the ordinary shares of Biscuit. Consideration was in the form of cash and shares. The cash consideration of $30 million has been recorded in the accounts of Cookie but no entries have been made for the 5 million shares issued. These had a fair value of $4.50 each on 1 May 20X3. The retained earnings of Biscuit at this date were $70 million.   The fair value of the net assets of Biscuit at the acquisition date was $95 million. The difference between the fair value and carrying amount of the net assets was due to a brand that was not recognised by Biscuit. This brand was estimated to have a remaining useful economic life of 5 years. The fair value of the non-controlling interest in Biscuit at acquisition was $45 million.   On 1 May 20X3, Cookie spent $56 million to acquire 70% of the ordinary shares of Cracker. On this date, Cracker had retained earnings of $30 million and other components of equity of $20 million. On 1 November 20X3, Cookie spent another $15 million in order to increase its holding to 90% of Cracker’s ordinary shares. Cookie elected to measure the non-controlling interest in Cracker using the share of net assets method.   During the year, Cookie sold goods to Biscuit for $4 million making a profit of $2 million. This sale was made on credit and the invoice has not yet been settled. One quarter of the goods remain in the inventory of Biscuit at the year end.   There has been no impairment in respect of the goodwill arising on the acquisition of Cracker. At the year end, it was estimated that the recoverable amount of the net assets of Biscuit was $107 million.   The investments held by Biscuit relate to equity shares that have been designated as fair value through profit and loss. They were purchased during the current year and are currently held at cost. At 30 April 20X4, these shares had a fair value of $15 million.   Included in the non-current liabilities of Cookie is a loan denominated in another currency, the Dinar (DN). The loan, for DN10 million, was received on 1 August 20X3 and correctly recorded at the spot rate. No other entries have been posted. The following exchange rates are relevant:     DN:$1 1 August 20X3 2.3:1 30 April 20X4 2.6:1       Included in the property, plant and equipment of Cookie is an item of specialised plant which was constructed internally. Construction began on 1 May 20X3. The asset was recorded at a cost of $15 million and was attributed a useful economic life of five years. A breakdown of the cost is as follows:     $m Materials for construction 7.3 Directly attributable labour 2.9 Testing of machine 0.6 Training staff to use machine 0.5 Allocated general overheads 3.7   ––––– 15.0   –––––   The plant was available for use on 1 November 20X3 and was depreciated from this date.   During the year, Cookie started selling goods under warranty. No warranty provision has been accounted for. Cookie will repair goods under warranty for any manufacturing defects that become apparent within a year of purchase. If all items under warranty at 30 April 20X4 developed minor defects, then the total cost of repairs would be approximately $6 million. If all items under warranty developed major defects, then the total cost of repairs would be approximately $14 million. The directors of Cookie estimate that 7% of items under warranty will develop minor defects within the warranty period and that 4% of items under warranty will develop major defects within the warranty period.   Required:   Prepare the consolidated statement of financial position for the Cookie Group as at 30 April 20X4.   Test your understanding 2 – Pineapple   Pineapple is a public limited company which has investments in a number of other companies. The draft statements of profit or loss for the year ended 30 September 20X3 are presented below:     Pineapple Strawberry Satsuma Apricot   $000 $000 $000 $000 Revenue 9,854 3,562 2,435 6,434 Cost of sales (5,432) (2,139) (945) (3,534)   ––––––– ––––––– ––––––– ––––––– Gross profit 4,422 1,423 1,490 2,900 Administrative (1,432) (400) (523) (600) expenses         Distribution (402) (324) (237) (254) costs ––––––– ––––––– ––––––– ––––––– Profit from 2,588 699 730 2,046 operations         Investment 386 15 34 135 income         Finance costs (246) – (35) –   ––––––– ––––––– ––––––– ––––––– Profit before 2,728 714 729 2,181 taxation         Taxation (486) – (161) (432)   ––––––– ––––––– ––––––– ––––––– Profit after tax 2,242 714 568

1 Purpose of chapter     The P2 UK paper   This chapter contains the additional syllabus content required for those who are sitting the P2 UK paper.   If you are sitting the P2 INT paper then you do not need to study this chapter.       2 UK GAAP     UK standards   Guidance about the accounting standards that UK companies should apply is found within FRS 100 Application of Financial Reporting Requirements. The rules are as follows:   Listed groups must prepare their accounts under IFRS.   – However, the companies within the group can take advantage of disclosure exemptions outlined in FRS 101 when preparing their individual (non-consolidated) financial statements.   Other UK companies will apply FRS 102 The Financial Reporting Standard Applicable in the UK and the Republic of Ireland unless:   –   they voluntarily choose to apply IFRS, or   – they are a micro-entity and choose to apply FRS 105 The Financial Reporting Standard Applicable to the Micro-Entities Regime. Purpose of chapter     The P2 UK paper   This chapter contains the additional syllabus content required for those who are sitting the P2 UK paper.   If you are sitting the P2 INT paper then you do not need to study this chapter.       2 UK GAAP     UK standards   Guidance about the accounting standards that UK companies should apply is found within FRS 100 Application of Financial Reporting Requirements. The rules are as follows:   Listed groups must prepare their accounts under IFRS.   – However, the companies within the group can take advantage of disclosure exemptions outlined in FRS 101 when preparing their individual (non-consolidated) financial statements.   Other UK companies will apply FRS 102 The Financial Reporting Standard Applicable in the UK and the Republic of Ireland unless:   –   they voluntarily choose to apply IFRS, or   – they are a micro-entity and choose to apply FRS 105 The Financial Reporting Standard Applicable to the Micro-Entities Regime.   A small entity that applies FRS 102:   –   does not have to show other comprehensive income   –   does not have to produce a statement of cash flows   – is exempt from many of the disclosure requirements of FRS 102.     FRS 101   FRS 101 Reduced Disclosure Framework applies to the individual financial statements of subsidiaries and ultimate parent companies. It provides exemptions from disclosure requirements that will result in cost savings when producing individual financial statements. FRS 101 does not apply to consolidated financial statements.   To apply FRS 101, the shareholders of a qualifying entity must have been notified about its use and they must not object.       FRS 102   FRS 102 is a single standard that is organised by topic.   Although FRS 102 is based on IFRS for Small and Medium Entities (the SMEs Standard), there are differences. The differences that are examinable in the P2 UK syllabus are outlined later in this chapter.       FRS 105   The Financial Reporting Council has withdrawn the Financial Reporting Standard for Smaller Entities (FRSSE). Micro-entities can now choose to prepare their financial statements in accordance with FRS 105 The Financial Reporting Standard Applicable to the Micro-entities Regime.   An entity qualifies as a micro-entity if it satisfies two of the following three requirements:   Turnover of not more than £632,000 a year   Gross assets of not more than £316,000   An average number of employees of 10 or less.   FRS 105 is based on FRS 102 but with some amendments to satisfy legal requirements and to reflect the simpler nature of micro-entities. For example, FRS 105:   Prohibits accounting for deferred tax   Prohibits accounting for equity-settled share-based payments prior to the issue of the shares   Prohibits the revaluation model for property, plant and equipment, intangible assets and investment properties   Prohibits the capitalisation of borrowing costs   Prohibits the capitalisation of development expenditure as an intangible asset   Simplifies the rules around classifying a financial instrument as debt or equity   Removes the distinction between functional and presentation currencies.   There are very few disclosure requirements in FRS 105.     3 Examinable differences between International and UK standards     Examinable differences between FRS 102 and the SMEs Standard   Although FRS 102 is based on IFRS for Small and Medium Entities (the SMEs Standard), there are differences. Some of these differences are included in the UK P2 syllabus.   Financial statement presentation   To comply with Companies Act, FRS 102 allows a ‘true and fair over-ride’. If compliance with FRS 102 is inconsistent with the requirement to give a true and fair view, the directors must depart from FRS 102 to the extent necessary to give a true and fair view. Particulars of any such departure, the reasons for it and its effect are disclosed.   Statement of cash flows   Under FRS 102, small entities, mutual life assurance companies, pension funds and certain investment funds are not required to produce a statement of cash flows. This exemption does not exist under the SMEs Standard.   Consolidated and separate financial statements   Under the SMEs Standard, a parent need not present consolidated financial statements if the parent is itself a subsidiary, and its ultimate parent (or any intermediate parent) produces consolidated general purpose financial statements that comply with full IFRS and IAS Standards or the SMEs Standard.   FRS 102 makes some slight amendments to the above to comply with Companies Act. In particular, consolidated financial statements do not need to be produced if the parent, and group headed by it, qualifies as small. The requirements of Companies Act are dealt with in more detail later in this chapter.   Inventories   FRS 102 specifies that the cost of inventories acquired through a non-exchange transaction (such as a donation or legacy) should be measured at the fair value of the inventories at the acquisition date. The

Objective of statements of cash flows   IAS 7 Statement of Cash Flows provides guidance on the preparation of a statement of cash flows. The objective of a statement of cash flows is to provide information on an entity’s changes in cash and cash equivalents during the period.   The statement of financial position and statement of profit or loss are prepared on an accruals basis and do not show how the business has generated and used cash in the reporting period. The statement of profit or loss may show profits even though the company is suffering severe cash flow problems. A statement of cash flows is therefore important because it enables users of the financial statements to assess the liquidity, solvency and financial adaptability of the business.   Definitions   Cash consists of cash in hand and deposits repayable upon demand, less overdrafts. This includes cash held in a foreign currency.   Cash equivalents are ‘short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value’ (IAS 7, para 6).   Cash flows are ‘inflows and outflows of cash and cash equivalents’ (IAS 7, para 6).   2 Classification of cash flows   IAS 7 does not prescribe a specific format for the statement of cash flows, although it requires that cash flows are classified under one of three headings:   cash flows from operating activities, defined as the entity’s principal revenue earning activities and other activities that do not fall under the next two headings   cash flows from investing activities, defined as the acquisition and disposal of long-term assets and other investments (excluding cash equivalents)   cash flows from financing activities, defined as activities that change the size and composition of the entity’s equity and borrowings.   Proforma statement of cash flow per IAS 7       Cash flows from operating activities $ $   X     Profit before tax     Add: finance costs X     Less: investment income (X)     Less: income from associate (X)     Adjust for non-cash items dealt with in arriving at       operating profit:       Add: depreciation X     Less: gain on disposal of subsidiary (X)     Add: loss on disposal of subsidiary X     Add: loss on impairment charged to P/L X     Add: loss on disposal of non-current assets X     Add: increase in provisions X       ––––     Changes in working capital: X/(X)           Increase in inventory (X)     Increase in receivables (X)     Decrease in payables (X)       ––––     Cash generated/used from operations X/(X)     Interest paid (X)     Taxation paid (X)     Net cash Inflow/(outflow) from operating ––––       X/(X)   activities         Cash flows from investing activities   Payments to purchase NCA (X) Receipts from NCA disposals X Net cash paid to acquire subsidiary (X) Net cash proceeds from subsidiary disposal X Cash paid to acquire associates (X) Dividend received from associate X Interest received X Net cash inflow/(outflow) from investing –––– activities     X/(X) Cash flows from financing activities   Proceeds from share issue X Proceeds from loan or debenture issue X Cash repayment of loans or debentures (X) Lease liability repayments (X) Equity dividend paid by parent (X) Dividend paid to NCI (X) Net cash inflow/(outflow) from financing –––– activities     X/(X)   –––– Increase/(decrease) in cash and equivalents X/(X) Cash and equivalents brought forward X/(X)   –––– Cash and equivalents carried forward X/(X)   ––––     Classification of cash flows       Cash flows from operating activities         The key figure within cash flows from operating activities is ‘cash generated from operations’. There are two methods of calculating cash generated from operations:   The direct method shows operating cash receipts and payments, such as cash receipts from customers, cash payments to suppliers and cash payments to and on behalf of employees.   The indirect method (used in the proforma statement of cash flows presented earlier in the chapter) starts with profit before tax and adjusts it for non-cash charges and credits, deferrals or accruals of past or future operating cash receipts and payments, as well as for items that relate to investing and financing activities. The most frequently occurring adjustments required are:   –   finance costs and investment incomes   –   depreciation or amortisation charges in the year   –   impairment charged to profit or loss in the year   –   profit or loss on disposal of non-current assets   –   change in inventories   –   change in trade receivables   –   change in trade payables.   IAS 7 permits either method, although encourages the use of the direct method. The methods differ only in respect of how the item ‘cash generated from operating activities’ is derived. A comparison between the direct and indirect method to arrive at cash generated from operations is shown below:   Direct method: $m Indirect method: $m   Cash receipts from customers 15,424 Profit before tax 6,022   Cash payments to suppliers (5,824) Depreciation charges 899   Cash payments to and on behalf (2,200) Increase in inventories (194)   of employees         Other cash payments (511) Increase in receivables (72)       Increase in payables 234     ––––   ––––   Cash generated from operations 6,889 Cash generated from 6,889     –––– operations ––––           The principal advantage of the direct method is that it discloses operating cash receipts and payments. Knowledge of the specific sources of cash receipts and the purposes for which cash payments have been made in past periods may be useful in assessing and predicting future cash flows.   Cash flows from investing activities   Cash flows to appear under this heading include:   cash paid for

Definition of a group reorganisation   A group reorganisation (or restructuring) is any of the following:   the transfer of shares in a subsidiary from one group entity to another   the addition of a new parent entity to a group   the transfer of shares in one or more subsidiaries of a group to a new entity that is not a group entity but whose shareholders are the same as those of the group’s parent   the combination into a group of two or more companies that before the combination had the same shareholders   the acquisition of the shares of another entity that itself then issues sufficient shares so that the acquired entity has control of the combined entity.   Reasons for a reorganisation   There are a number of reasons why a group may wish to reorganise.   These include the following.   A group may wish to list on a public stock exchange. This is usually facilitated by creating a new holding company and keeping the business of the group in subsidiary entities.   The ownership of subsidiaries may be transferred from one group company to another. This is often the case if the group wishes to sell a subsidiary, but retain its trade.   The group may decide to transfer the assets and trades of a number of subsidiaries into one entity. This is called divisionalisation and is undertaken in order to simplify the group structure and save costs. The details of divisionalisation are not examinable at P2.   There may be corporate tax advantages to reorganising a group structure, particularly if one or more subsidiaries within the group is loss-making.   The group may split into two or more parts; each part is still owned by the same shareholders but is not related to the other parts. This is a demerger and is often done to enhance shareholder value. By splitting the group, the value of each part is realised whereas previously the stock market may have undervalued the group as a whole. The details of demergers are not examinable at P2.   An unlisted entity may purchase a listed entity with the aim of achieving a stock exchange listing itself. This is called a reverse acquisition.   Types of group reorganisation   There are a number of ways of effecting a group reorganisation. The type of reorganisation will depend on what the group is trying to achieve.   New holding company   A group might set up a new holding entity for an existing group in order to improve co-ordination within the group or as a vehicle for flotation. H becomes the new holding entity of S.   Usually, H issues shares to the shareholders of S in exchange for shares of S, but occasionally the shareholders of S may subscribe for shares in H and H may pay cash for S.   IFRS 3 excludes from its scope any business combination involving entities or businesses under ‘common control’, which is where the same parties control all of the combining entities/businesses both before and after the business combination.   As there is no mandatory guidance in accounting for these items, the acquisition method should certainly be used in examination questions.       Change of ownership of an entity within a group   This occurs when the internal structure of the group changes, for example, a parent may transfer the ownership of a subsidiary to another of its subsidiaries.   The key thing to remember is that the reorganisation of the entities within the group should not affect the group accounts, as shareholdings are transferred from one company to another and no assets will leave the group.   The individual accounts of the group companies will need to be adjusted for the effect of the transfer.   The following are types of reorganisation:   Subsidiary moved up This can be achieved in one of two ways.   S transfers its investment in T to H as a dividend in specie. If this is done then S must have sufficient distributable profits to pay the dividend.   H purchases the investment in T from S for cash. In practice the purchase price often equals the fair value of the net assets acquired, so that no gain or loss arises on the transaction.   Usually, it will be the carrying value of T that is used as the basis for the transfer of the investment, but there are no legal rules confirming this.   A share-for-share exchange cannot be used as in many jurisdictions it is illegal for a subsidiary to hold shares in the parent company.   Subsidiary moved down This reorganisation may be carried out where there are tax advantages in establishing a ‘sub-group’, or where two or more subsidiaries are linked geographically.   This can be carried out either by:   a share-for-share exchange (S issues shares to H in return for the shares in T)   a cash transaction (S pays cash to H).   Subsidiary moved along This is carried out by T paying cash (or other assets) to S. The consideration would not normally be in the form of shares because a typical reason for such a reconstruction would be to allow S to be managed as a separate part of the group or even disposed of completely. This could not be achieved effectively were S to have a shareholding in T.   If the purpose of the reorganisation is to allow S to leave the group, the purchase price paid by T should not be less than the fair value of the investment in U, otherwise S may be deemed to be receiving financial assistance for the purchase of its own shares, which is illegal in many jurisdictions. Reverse acquisitions   Definition   A reverse acquisition occurs when an entity obtains ownership of the shares of another entity, which in turn issues sufficient shares so that the acquired entity has control of the combined entity.   Reverse

Key definitions   Foreign currency transactions in the individual financial statements of a company were covered earlier in this text.   Below is a reminder of some key definitions:   The functional currency is the currency of the ‘primary economic environment where the entity operates’ (IAS 21, para 8). In most cases   this will be the local currency.   The presentation currency is the ‘currency in which the entity presents its financial statements’ (IAS 21, para 8).   2 Consolidation of a foreign operation   The functional currency used by a subsidiary to prepare its own individual accounting records and financial statements may differ from the presentation currency used for the group financial statements. Therefore, prior to adding together the assets, liabilities, incomes and expenses of the parent and subsidiary, the financial statements of an overseas subsidiary must be translated.   Translating the subsidiary’s financial statements   The rules for translating an overseas subsidiary into the presentation currency of the group are as follows:   Incomes, expenses and other comprehensive income are translated at the rate in place at the date of each transaction. The average rate for the year may be used as an approximation.   Assets and liabilities are translated at the closing rate.   Illustration 1 – Dragon   This example runs through the chapter and is used to illustrate the basic steps involved in consolidating an overseas subsidiary.   Dragon bought 90% of the ordinary shares of Tattoo for DN180 million on 31 December 20X0. The retained earnings of Tattoo at this date were DN65 million. The fair value of the non-controlling interest at the acquisition date was DN14 million.   The financial statements of Dragon and Tattoo for the year ended 31   December 20X1 are presented below:   Statements of profit or loss for year ended 31 December 20X1     Dragon Tattoo   $m DNm Revenue 1,200 600 Costs (1,000) (450)   –––––– –––––– Profit 200 150   –––––– –––––– Statements of financial position as at 31 December 20X1     Dragon Tattoo   $m DNm Property, plant and equipment 290 270 Investments 60 – Current assets 150 130   –––––– ––––––   500 400   –––––– ––––––       Share capital 10 5 Retained earnings 290 215 Liabilities 200 180   –––––– ––––––   500 400   –––––– ––––––   There has been no intra-group trading. Goodwill arising on the acquisition of Tattoo is not impaired. The presentation currency of the consolidated financial statements is the dollar ($).   Exchange rates are as follows:     DN to $ 31 December 20X0 3.0 31 December 20X1 2.0 Average for year to 31 December 20X1 2.6   Required:   For inclusion in the consolidated statement of profit or loss and other comprehensive income for the year ended 31 December 20X1, calculate:   Revenue   Costs   For inclusion in the consolidated statement of financial position as at 31 December 20X1, calculate:   Property, plant and equipment   Investments   Current assets   Share capital   Liabilities   Solution     $m Revenue ($1,200 + (DN600/2.6)) 1,430.8 Costs ($1,000 + (DN450/2.6)) (1,173.1) PPE ($290 + (DN270/2)) 425.0 Investments (eliminated on consolidation) – Current assets ($150 + (DN130/2)) 215.0 Share capital (Dragon only) 10.0 Liabilities ($200 + (DN180/2)) 290.0       Remember, the incomes and expenses of an overseas subsidiary are translated at the average rate. The assets and liabilities are translated at the closing rate.     Translating goodwill   Goodwill should be calculated in the functional currency of the subsidiary.   According to IAS 21, goodwill should be treated like other assets of the subsidiary and therefore translated at the reporting date using the closing rate.   As with all consolidated statement of financial position questions, it may be helpful to produce a table showing the subsidiary’s net assets (at fair value) at both the year end and acquisition date (‘Working 2’). This should be completed in the functional currency of the subsidiary.   Illustration 2 – Goodwill   Required:   Using the information in illustration 1, calculate goodwill for inclusion in the consolidated statement of financial position for the Dragon group as at 31 December 20X1.   Solution   Goodwill calculation     DNm Consideration 180 NCI at acquisition 14 Net assets at acquisition (W) (70)   ––––   124 Goodwill impairments –   ––––   124   ––––   Goodwill is translated at the closing rate to give a value of $62m (DN124/2).   (W) Net assets of Tattoo     Acquisition date Reporting date Post-acquisition   DNm DNm DNm Share capital 5 5   Retained earnings 65 215     –––––– –––––– ––––––   70 220 150   –––––– –––––– ––––––       Exchange differences   The process of translating an overseas subsidiary gives rise to exchange gains and losses. These gains and losses arise for the following reasons:   Goodwill: Goodwill is retranslated each year-end at the closing rate. It will therefore increase or decrease in value simply because of exchange rate movements.   Opening net assets: At the end of the prior year, the net assets of the subsidiary were translated at the prior year closing rate. This year, those same net assets are translated at this year’s closing rate. Therefore, opening net assets will have increased or decreased simply because of exchange rate movements.   Profit: The incomes and expenses (and, therefore, the profit) of the overseas subsidiary are translated at the average rate. However, making a profit increases the subsidiary’s assets which are translated at the closing rate. This disparity creates an exchange gain or loss.   Current year exchange gains or losses on the translation of an overseas subsidiary and its goodwill are recorded in other comprehensive income.   Goodwill translation   The proforma for calculating the current year gain or loss on the retranslation of goodwill is as follows:     DN Exchange Rate $ Opening goodwill X Opening rate X Impairment loss in year (X) Average rate (X)

Acquisition of a subsidiary   There are two acquisition scenarios that need to be considered in more detail:   mid-year acquisitions   step acquisitions.   Mid-year acquisitions   A parent entity consolidates a subsidiary from the date that it achieves control. If this happens partway through the reporting period then it will be necessary to pro-rate the results of the subsidiary so that only the post-acquisition incomes and expenses are consolidated into the group statement of profit or loss.     Illustration 1 – Tudor – mid-year acquisition of a subsidiary   On 1 July 20X4 Tudor purchased 1,600,000 of the 2,000,000 $1 equity shares of Windsor for $10,280,000. On the same date it also acquired 1,000,000 of Windsor’s $1 10% loan notes. At the date of acquisition the retained earnings of Windsor were $6,150,000.   The statements of profit or loss for each entity for the year ended 31 March 20X5 were as follows.     Tudor Windsor     $000 $000   Revenue 60,000 24,000   Cost of sales (42,000) (20,000)     ––––––– –––––––   Gross profit 18,000 4,000   Distribution costs (2,500) (50)   Administrative expenses (3,500) (150)     ––––––– –––––––   Profit from operations 12,000 3,800   Investment income 75 –   Finance costs – (200)     ––––––– –––––––   Profit before tax 12,075 3,600   Tax (3,000) (600)     ––––––– –––––––   Profit for the year 9,075 3,000   Retained earnings bfd ––––––– –––––––   16,525 5,400     There were no items of other comprehensive income in the year.   The following information is relevant:   The fair values of Windsor’s net assets at the date of acquisition were equal to their carrying values with the exception of plant and equipment, which had a carrying value of $2,000,000 but a fair value of $5,200,000. The remaining useful life of this plant and equipment was four years at the date of acquisition. Depreciation is charged to cost of sales and is time apportioned on a monthly basis.   During the post-acquisition period Tudor sold goods to Windsor for $12 million. The goods had originally cost $9 million. During the remaining months of the year Windsor sold $10 million (at cost to Windsor) of these goods to third parties for $13 million.   Incomes and expenses accrued evenly throughout the year.   Tudor has a policy of valuing non-controlling interests using the full goodwill method. The fair value of non-controlling interest at the date of acquisition was $2,520,000.   The recoverable amount of the net assets of Windsor at the reporting date was $14,150,000. Any goodwill impairment should be charged to administrative expenses.   Required:   Prepare a consolidated statement of profit or loss for Tudor group for the year ended 31 March 20X5.       Solution   Tudor group statement of profit or loss for the year ended 31 March 20X5     $000   Revenue ($60,000 + (9/12 × $24,000) – $12,000) 66,000   Cost of sales (46,100)   ($42,000 + (9/12 × $20,000) – $12,000 + $600 (W6) + $500     (W5)) ––––––       Gross profit 19.900   Distribution costs ($2,500 + (9/12 × $50)) (2,538)   Administrative expenses (3,912)   ($3,500 + (9/12 × $150) + $300 (W3)) ––––––       Profit from operations 13,450   Investment income ($75 – $75) –   Finance costs ((9/12 × $200) – $75) (75)     ––––––   Profit before tax 13,375   Tax ($3,000 + (9/12 × $600)) (3,450)     ––––––   Profit after tax for the year 9,925   Profit attributable to: ––––––       Owners of the parent (bal. fig) 9,655   Non-controlling interest (W7) 270     ––––––   9,925   ––––––   There were no items of other comprehensive income in the year.   (W1) Group structure – Tudor owns 80% of Windsor   –   the acquisition took place three months into the year   –   nine months is post-acquisition   (W2) Goodwill impairment     $000 Net assets of the subsidiary (W3) 13,000 Goodwill (W4) 1,450   ––––––   14,450 Recoverable amount (14,150)   –––––– Impairment 300   ––––––   The impairment will be allocated against goodwill and charged to the statement of profit or loss.   Goodwill has been calculated using the fair value method so the impairment needs to be factored in when calculating the profit attributable to the NCI (W7).   (W3) Net assets Acq’n Rep.         date date     $000 $000   Equity capital 2,000 2,000   Retained earnings 6,150 8,400   (Rep date = $5,400 bfd + $3,000) 3,200     Fair value adjustment – PPE ($5.2m – 3,200   $2.0m)       Depreciation on FVA (W6) – (600)     –––––– ––––––     11,350 13,000     –––––– ––––––       (W4) Goodwill     $000 Consideration 10,280 FV of NCI at acquisition 2,520   –––––––   12,800 FV of net assets at acquisition (W3) (11,350)   ––––––– Goodwill pre-impairment review (W2) 1,450   –––––––   (W5) PURP   $2 million ($12m – $10m) of the $12 million intra-group sale remains in inventory.   The profit that remains in inventory is $500,000 (($12m – $9m) × 2/12).   (W6) Excess depreciation   Per W3, there has been a fair value uplift in respect of PPE of $3,200,000.   This uplift will be depreciated over the four year remaining life.   The depreciation charge in respect of this uplift in the current year statement of profit or loss is $600,000 (($3,200,000/4 years) × 9/12).   (W7) Profit attributable to the NCI         $000 $000   Profit of Windsor (9/12 × $3,000) 2,250     Excess depreciation (W6) (600)     Goodwill impairment (W2) (300)       –––––     × 20% 1,350 –––––       Profit attributable to the NCI   270       –––––             Step acquisitions   A step acquisition occurs when

Complex group structures   Complex group structures exist where a subsidiary of a parent entity owns a shareholding in another entity which makes that other entity also a subsidiary of the parent entity.   Complex structures can be classified under two headings:   Vertical groups   Mixed groups.   2 Vertical groups   Definition   A vertical group arises where a subsidiary of the parent entity holds shares in a further entity such that control is achieved. The parent entity therefore controls both the subsidiary entity and, in turn, its subsidiary (often referred to as a sub-subsidiary entity).   Look at the following two situations: In both situations, H controls S, and S controls T. H is therefore able to exert control over T by virtue of its ability to control S. All three companies form a vertical group.   Both companies that are controlled by the parent are consolidated.   The basic techniques of consolidation are the same as seen previously, with some changes to the goodwill, NCI and group reserves calculations.   Approach to a question   When establishing the group structure, follow these steps:   Control – which entities does the parent control directly or indirectly?   Percentages – what are the effective ownership percentages for consolidation?   Dates – when did the parent achieve control over the subsidiary and the sub-subsidiary?   Illustration 1 – Vertical group structure Control   H controls S and S controls T. Therefore, H can indirectly control T.   Effective consolidation percentage   S will be consolidated with H owning 90% and the NCI owning 10%.   T will be consolidated with H owning 72% (90% × 80%) and the NCI owning 28% (100% – 72%).   These effective ownership percentages will be used in standard workings (W4) and (W5). Dates   S will be consolidated from 31 December 20X0.   When H acquires control of S, it also acquires indirect control over T.   Therefore H will consolidate T from 31 December 20X0. Illustration 2 – Vertical group structure Control   H controls S and S controls T. Therefore, H can indirectly control T.   Effective consolidation percentage   S will be consolidated with H owning 70% and the NCI owning 30%.   T will be consolidated with H owning 42% (70% × 60%) and the NCI owning 58% (100% – 42%).   The effective ownership percentages will be used in standard workings (W4) and (W5).   Do not be put off by the fact that the effective group interest in T is less than 50%, and that the effective non-controlling interest in T is more than 50%.   Dates   S will be consolidated from 31 December 20X1.   However, S did not gain control of T until 30 April 20X2 meaning that H does not indirectly control T until this date. Therefore, T is consolidated into the H group from 30 April 20X2. Indirect holding adjustment   Accounting for a sub-subsidiary requires an indirect holding adjustment.   Goodwill in the sub-subsidiary is calculated from the perspective of the ultimate parent company. Therefore, the cost of the investment in the sub-subsidiary should be the parent’s share of the amount paid by its subsidiary.   – The NCI’s share of the cost of the investment in the sub-subsidiary must be eliminated from the goodwill calculation.   The value of the non-controlling interest in the subsidiary includes the NCI’s share of the cost of the investment in the sub-subsidiary.   – The NCI’s share of the cost of the investment in the sub-subsidiary must be eliminated from the NCI calculation.   Illustration 3 – Indirect holding adjustment   On 31 December 20X1, A purchased 90% of the equity shares in B for $150,000 and B purchased 80% of the equity shares in C for $100,000.   At this date, the fair value of the net assets of B and C were $144,000 and $90,000 respectively. The fair value of the non-controlling interest in B and C was $17,000 and $15,000 respectively.   Required:   Calculate goodwill and the non-controlling interest for inclusion in the consolidated statement of financial position as at 31 December 20X1. Solution Goodwill         B C     $ $   Consideration 150,000 100,000   Indirect holding adjustment (10% × $100,000)   (10,000)   Add: FV of non-controlling interest at acquisition 17,000 15,000     –––––– ––––––     167,000 105,000   Less: Net assets at acquisition (144,000) (90,000)   Goodwill at acquisition –––––– ––––––   23,000 15,000     –––––– ––––––   Non-controlling interest           $   B: NCI at acquisition (W3)   17,000   B: Indirect holding adjustment (W3)   (10,000)   C: NCI at acquisition (W3)   15,000       ––––––   Non-controlling interest   22,000       ––––––     Note: In subsequent years, the NCI will be adjusted for its share of the post-acquisition net asset movement of each subsidiary.   The NCI % in B is 10% (100% – 90%).   The NCI % in C is 28% (100% – (90% × 80%)) Illustration 4 – Vertical group 1   The draft statements of financial position of David, Colin and John, as at 31 December 20X4, are as follows:     D C J   $000 $000 $000 Sundry assets 280 180 130 Shares in subsidiary 120 80     –––– –––– ––––   400 260 130   –––– –––– –––– Equity capital ($1 shares) 200 100 50 Retained earnings 100 60 30 Liabilities 100 100 50   –––– –––– ––––   400 260 130   –––– –––– ––––   The following information is also available:   David acquired 75,000 $1 shares in Colin on 1 January 20X4 when the retained earnings of Colin amounted to $40,000. At that date, the fair value of the non-controlling interest in Colin was valued at $38,000.   Colin acquired 40,000 $1 shares in John on 30 June 20X4 when the retained earnings of John amounted

Overview of interests in other entities   The following diagram presents an overview of the varying types of interests in other entities, together with identification of applicable reporting standards. The standards referred to in the diagram above cover a range of group accounting issues:   IFRS 10 Consolidated Financial Statements   IFRS 11 Joint Arrangements   IFRS 12 Disclosure of Interests in Other Entities   IAS 28 Investments in Associates and Joint Ventures   These standards, as well as IFRS 3 Business Combinations, are covered in this chapter. IFRS 9 Financial Instruments was dealt with earlier in the publication.     Group accounting – basic groups     2 Definitions   IFRS 10 Consolidated Financial Statements says that an entity that is a parent is required to prepare consolidated financial statements. The standard provides the following definitions:   A parent is an entity that controls another entity.   A subsidiary is an entity that is controlled.   An investor controls an investee when:   the investor has power over the investee, and   the investor is exposed, or has rights, to variable returns from its involvement with the investee, and   the investor has the ability to affect those returns through its power over the investee.   Consolidated financial statements present the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries as if they were a single economic entity.   3 Revision from F7: Consolidation techniques   Consolidated statement of financial position   Producing a consolidated statement of financial position involves five standard workings. These will help you to understand the structure of the group and to calculate goodwill, the non-controlling interest and group reserves.   The first step in any examination question should be to determine the group structure.   (W1) Group structure This working is useful to decide the status of any investments. If one entity is controlled by another entity then it is a subsidiary and must be consolidated.   In numerical exam questions, control is normally presumed to exist if one company owns more than half of the voting capital of another entity.   Once the group structure has been determined, set up a proforma statement of financial position.   Group statement of financial position as at the reporting date     $000 Goodwill (W3) X Assets (P + S) X   ––– Total assets X   ––– Equity capital (Parent’s only) X Retained earnings (W5) X Other components of equity (W5) X Non-controlling interest (W4) X   ––– Total equity X Liabilities (P + S) X   ––– Total equity and liabilities X   ––– You will need to do the following:     – Eliminate the carrying amount of the parent’s investments in its subsidiaries (these will be replaced by goodwill)   – Add together the assets and liabilities of the parent and its subsidiaries in full   – Include only the parent’s balances within share capital and share premium   – Set up and complete standard workings 2 – 5 to calculate goodwill, the non-controlling interest and group reserves.   (W2) Net assets of each subsidiary   This working sets out the fair value of the subsidiary’s identifiable net assets at acquisition date and at the reporting date.     At acquisition At reporting date   $000 $000 Equity capital X X Share premium X X Other components of equity X X Retained earnings X X Goodwill in the accounts of the sub. (X) (X) Fair value adjustments (FVA) X X Post acq’n dep’n/amort. on FVA   (X) PURP if the sub is the seller   (X)   ––––––––– –––––––––   X X   (to W3)     ––––––––– –––––––––   Remember to update the face of the statement of financial position for adjustments made to the net assets at the reporting date (such as fair value uplifts and provisions for unrealised profits (PURPS)).   The fair value of the subsidiary’s net assets at the acquisition date are used in the calculation of goodwill.   The movement in the subsidiary’s net assets since acquisition is used to calculate the non-controlling interest and group reserves.   (W3) Goodwill       $000   Fair value of purchase consideration X   NCI at acquisition** X     –––   Less: fair value of identifiable net assets at acquisition X       (per net assets working) (X)     –––   Goodwill at acquisition X   Less: impairment to date (X)     –––   Goodwill to consolidated SFP X     –––       **if full goodwill method adopted, NCI value = FV of NCI at date of acquisition. This will normally be given in a question.   **if proportionate goodwill method adopted, NCI value = NCI % of the fair value of the net assets at acquisition (per W2).   (W4) Non-controlling interest     $000 NCI value at acquisition (W3) X NCI % of post-acquisition movement in net assets (W2) X Less: NCI % of goodwill impairment (fair value method only) (X)   ––– NCI to consolidated SFP X   ––– (W5) Group reserves   Retained earnings     $000 Parent’s retained earnings (100%) X For each subsidiary: group share of post-acquisition   retained earnings (W2) X Add: gain on bargain purchase (W3) X Less: goodwill impairment** (W3) (X) Less: PURP if the parent was the seller (X)   ––– Retained earnings to consolidated SFP X   –––   If the NCI was valued at fair value at the acquisition date, then only the parent’s share of the goodwill impairment is deducted from retained earnings.   Other components of equity     $000 Parent’s other components of equity (100%) X For each subsidiary: group share of post-acquisition   other components of equity (W2) X   ––– Other components of equity to consolidated SFP X   –––     Consolidated statement of profit or loss and other comprehensive income   Step 1: Group structure   This working is useful to decide the status of any investments.

1 Introduction     What is meant by a ‘current issue’?   In relation to ‘current issues’, the ACCA P2 study guide says that candidates need to be able to discuss:   recent IFRS Standards   practice and regulatory issues   proposed changes to IFRS Standards   problems with extant standards.   2 Recent IFRS Standards     Recently issued standards   IFRS 16 Leases was issued recently. This standard is covered in Chapter 7.       3 Practice and regulatory issues     Key issues for regulators   The European Securities and Markets Authority (ESMA) regularly highlights areas of focus for European national regulators when they review financial statements. The financial reporting topics identified by ESMA in recent years are:   financial instruments   impairment of non-financial assets   defined benefit obligations   provisions   preparation and presentation of consolidated financial statements   joint arrangements   deferred tax assets   fair values   cash flows.   Financial instruments   Transparency of information relating to financial instruments is important for users of the financial statements, particularly as a result of the financial crisis. The disclosure requirements of IFRS 7 are therefore a key area for concern. Entities must include relevant quantitative and qualitative disclosures that reflect the nature of their risk exposure.   Impairment of non-financial assets   The current economic environment increases the likelihood that the carrying amount of assets will exceed their recoverable amounts. Therefore, users must be provided with sufficient information, in accordance with IAS 36, about impairment reviews conducted during a reporting period.   When calculating value-in-use, ESMA emphasises the need to use realistic assumptions. Disclosures should include entity-specific information related to assumptions used when preparing discounted cash flows (such as growth rates, discount rate and consistency of such rates with past experience) and sensitivity analyses.   Defined benefit obligations   A defined benefit obligation should be discounted using the yield on high-quality corporate bonds. However, if a country does not have a deep market in such bonds then the market yields on government bonds should be used instead. As a result of the economic crisis, some entities will need to change their approach. ESMA emphasises the need for entities to be transparent about the yields used and the reasons for using them.   Provisions   Information about provisions is key because it highlights the risks and uncertainties that an entity is subject to. Yet the information provided is often over-aggregated and overly standardised in nature. ESMA emphasises that, in accordance with IAS 37, entities should disclose descriptions of the nature of the obligations concerned, the expected timing of outflows of economic benefits, uncertainties related to the amount and timing of those outflows as well as major assumptions about future events. This should be done for each class of provision and should reflect the risks specific to the entity.   Preparation and presentation of consolidated financial statements   ESMA notes that entities must consult the application guidance in IFRS 10 Consolidated Financial Statements when assessing whether control exists. Such assessments require significant judgement and so entities must carefully explain these judgements in the financial statement disclosures.   ESMA has also stressed the importance of disclosing whether there are restrictions on the use of cash and cash equivalent balances within the group.   Joint arrangements   The classification of a joint arrangement is based on the rights and obligations of the parties to the arrangement. ESMA notes that joint arrangements with similar characteristics may need to be classified in different ways depending on their structure. As such, it is vital that entities adequately disclose the significant judgements and assumptions made regarding the nature of interests in joint arrangements.   Deferred tax assets   In accordance with IAS 12 Income Taxes, the recognition of a deferred tax asset is limited to the extent that future taxable profits will be available against which the deductible temporary differences can be utilised. Recent losses provide strong evidence that future profits may be lacking and therefore the recognition of deferred tax assets should be conditional on convincing evidence. ESMA notes that entities should disclose the nature of the evidence used when assessing deferred tax asset recognition, the period used for the assessment, and any key judgements or assumptions made.   Fair values   ESMA believes that there is room for improvement with regards to the measurement and disclosure of the fair values of non-financial assets. Fair value measurement should maximise observable inputs.   Cash flows   ESMA notes that entities need to provide greater disclosure of the reasoning behind the classification of cash flows, particularly when this is judgemental. Entities also need to assess more carefully whether their financial instruments meet the definition of a ‘cash equivalent’.   4 Proposed changes to IFRS Standards     The change process   The International Accounting Standards Board (the Board) is continually engaged in projects to update and improve existing standards and introduce new ones.   At any time there are a number of discussion papers (DPs) and exposure drafts (EDs) in issue as part of these projects.   A good source of up to date information is the current projects page of the Board’s website at www.iasb.org.       Proposed changes   The following table outlines documents, other than issued IAS and IFRS Standards, that are examinable in P2 and indicates where these are covered in this text.               Statement/Document Textbook         chapter               IFRS Practice Statement: Application of Materiality in 1     Financial Statements       ED 2015/3 Conceptual Framework for Financial Reporting 1     ED 2015/1 Classification of Liabilities – proposed 3     amendments to IAS 1       Practice Statement on Management Commentary 17     The International <IR> Framework 17     ED 2014/4 Measuring Quoted Investments in Subsidiaries, 19     Joint Ventures and Associates at Fair Value                

Non-financial reporting     Non-financial reporting   Non-financial information, in the form of additional information provided alongside the financial information in the annual report, has become more important in recent years.   While financial information remains important, stakeholders are interested in other aspects of an entity’s performance.   For example:   how the business is managed   its future prospects   the entity’s policy on the environment   its attitude towards social responsibility.   Although these activities do have an impact upon financial position and performance, some users of financial statements may have a particular interest in these activities. For example, potential shareholders may be attracted to invest in a particular entity (or not), based upon their environmental or social policies, in addition to their financial performance. Regulators or consumer pressure groups may also have a particular interest in such policies and disclosures to manage their activities or monitor the effectiveness of their activities.   Additional reports and disclosures go some way towards providing transparency for evaluation of entity financial performance, position and strategy. Transparency fosters confidence in the information which is made available to investors and other stakeholders who may be interested in both financial and non-financial information.   2 Management commentary     Management commentary   Purpose of the Management Commentary   The IFRS Practice Statement (PS) Management Commentary provides a framework for the preparation and presentation of management commentary on a set of financial statements.   Management commentary provides users with more context through which to interpret the financial position, financial performance and cash flows of an entity.   It is not mandatory for entities to produce a management commentary.   Framework for presentation of management commentary   The purpose of a management commentary is:   to provide management’s assessment of the entity’s performance, position and progress   to supplement information presented in the financial statements, and   to explain the factors that might impact performance and position in the future.   This means that the management commentary should include information which is forward-looking.   Elements of management commentary   Management commentary should include information that is essential to an understanding of:   the nature of the business   management’s objectives and strategies   the entity’s resources, risks and relationships   the key performance measures that management use to evaluate the entity’s performance.       3 Environmental reporting     Environmental reporting   Environmental reporting is the disclosure of information in the published annual report or elsewhere, of the effect that the operations of the business have on the natural environment.   Environmental reporting in practice   There are two main vehicles that companies use to publish information about the ways in which they interact with the natural environment:   The published annual report (which includes the financial statements)   A separate environment report (either as a paper document or simply posted on the company website).   IAS 1 points out that any statement or report presented outside financial statements is outside the scope of IFRS Standards. This means there are no mandatory requirements governing the production or content of separate environmental reports.   The content of environment reports   The content of an environment report may cover the following areas.   Environmental issues pertinent to the entity and industry   –   The entity’s policy towards the environment and any improvements made since first adopting the policy.   – Whether the entity has a formal system for managing environmental risks.   – The identity of the director(s) responsible for environmental issues.   – The entity’s perception of the risks to the environment from its operations.   – The extent to which the entity would be capable of responding to a major environmental disaster and an estimate of the full economic consequences of such a future major disaster.   – The effects of, and the entity’s response to, any government legislation on environmental matters.   – Details of any significant infringement of environmental legislation or regulations.   – Material environmental legal issues in which the entity is involved.   – Details of any significant initiatives taken, if possible linked to amounts in financial statements.   – Details of key indicators (if any) used by the entity to measure environmental performance. Actual performance should be compared with targets and with performance in prior periods.   Financial information   – The entity’s accounting policies relating to environmental costs, provisions and contingencies.   – The amount charged to profit or loss during the accounting period in respect of expenditure to prevent or rectify damage to the environment caused by the entity’s operations. This could be analysed between expenditure that the entity was legally obliged to incur and other expenditure.   – The amount charged to profit or loss during the accounting period in respect of expenditure to protect employees and society in general from the consequences of damage to the environment caused by the entity’s operations. Again, this could be analysed between compulsory and voluntary expenditure.   – Details (including amounts) of any provisions or contingent liabilities relating to environmental matters.   – The amount of environmental expenditure capitalised during the year.   – Details of fines, penalties and compensation paid during the accounting period in respect of non-compliance with environmental regulations.   Social reporting   Corporate social reporting is the process of communicating the social and environmental effects of organisations’ economic actions to particular interest groups within society and to society at large.   Social responsibility   A business interacts with society in several different ways as follows.   It employs human resources in the form of management and other employees.   Its activities affect society as a whole, for example, it may:   –   be the reason for a particular community’s existence   – produce goods that are helpful or harmful to particular members of society   –   damage the environment in ways that harm society as a whole   – undertake charitable works in the community or promote particular values.   If a business interacts with

Not-for-profit entities     Reporting not-for-profit entities   A not-for-profit entity is one that does not carry on its activities for the purposes of profit or gain to particular persons and does not distribute its profits or assets to particular persons.   The main types of not-for-profit entity are:   clubs and societies   charities   public sector organisations (including central government, local government and National Health Service bodies).   The objectives of a not-for-profit entity   The main objective of public sector organisations is to provide services to the general public. Their long-term aim is normally to break even, rather than to generate a surplus.   Most public sector organisations aim to provide value for money, which is usually analysed into the three Es – economy, efficiency and effectiveness.   Other not-for-profit entities include charities, clubs and societies whose objective is to carry out the activities for which they were created.   Assessing performance in a not-for-profit entity   It can be difficult to monitor and evaluate the success of a not-for-profit organisation as the focus is not on a resultant profit as with a traditional business entity.   The success of the organisation should be measured against the key indicators that reflect the visions and values of the organisation. The strategic plan will identify the goals and the strategies that the organisation needs to adopt to achieve these goals.   The focus should be the measures of output, outcomes and their impact on what the charity is trying to achieve.   Accounting in a not-for-profit entity   The financial statements of a public sector entity or a charity are set out differently from those of a profit making entity, because their purpose is different. A public sector organisation is not reporting a profit; it is reporting on its income and how it has spent that income in achieving its aims.   The financial statements include a statement of financial position or balance sheet, but the statement of profit or loss and other comprehensive income is usually replaced with a statement of financial activities or an income and expenditure account showing incoming resources and resources expended.       Example of not-for-profit accounts   An example of a statement of financial activities for a charity is shown below.   The Toytown Charity, Statement of Financial Activities for the year ended 31 March 20X7   Incoming resources $       Resources from generated funds     Grants 10,541,000   Legacies 5,165,232   Donations 1,598,700   Activities for generating funds     Charity shop sales 10,052,693   Investment income 3,948,511   Total incoming resources –––––––––   31,306,136     Specialised entities and specialised transactions     Resources expended Cost of generating funds   Fund raising (1,129,843)   Publicity (819,828)   Charity shop operating costs (6,168,923)   Charitable activities     Supporting local communities (18,263,712)   Elderly care at home (4,389,122)   Pride in Toytown campaign (462,159)   Total resources expended ––––––––––   (31,233,587)   Net incoming resources for the year ––––––––––   72,549   Funds brought forward at 1 March 20X6 21,102     ––––––––––   Funds carried forward at 31 March 20X7 93,651     ––––––––––     The statement of financial position or balance sheet of a not-for-profit entity only differs from that of a profit making entity in the reserves section, where there will usually be an analysis of the different types of reserve, as shown below:   Toytown Charity, Balance sheet as at 31 March 20X7     Non-current assets $       Tangible assets 80,500   Investments 12,468     –––––––     92,968   Current assets     Inventory 2,168   Receivables 10,513   Cash 3,958     –––––––     16,639   Total assets –––––––   109,607   Reserves –––––––       Restricted fund 20,200   Unrestricted funds 73,451     –––––––     93,651     Non-current liabilities     Pension liability 9,705   Current liabilities     Payables 6,251   Total funds –––––––   109,607     –––––––     The reserves are separated into restricted and unrestricted funds.   Unrestricted funds are funds available for general purposes.   Restricted funds are those that have been set aside for a specific purpose or in a situation where an individual has made a donation to the charity for a specific purpose, perhaps to replace some equipment, so these funds must be kept separate.       2 Small and medium sized entities     The SMEs Standard   Definition   A small or medium entity may be defined or characterised as follows:   they are usually owner-managed by a relatively small number of individuals such as a family group, rather than having an extensive ownership base   they are usually smaller entities in financial terms such as revenues generated and assets and liabilities under the control of the entity   they usually have a relatively small number of employees   they usually undertake less complex or difficult transactions which are normally the focus of a financial reporting standard.   One of the underlying requirements for financial reporting is that the cost and burden of producing financial reporting information for shareholders and other stakeholders should not outweigh the benefits of making that information available.   IFRS for small and medium-sized entities (the SMEs Standard) has been issued for use by entities that have no public accountability. This means that debt or equity instruments are not publicly traded. The SMEs Standard reduces the burden of producing information that is not likely to be of interest to the stakeholders of a small or medium company.   Specialised entities and specialised transactions     The problem of differential reporting   It can be difficult to define a small or medium entity.   If a company ceases to qualify as a small or medium entity then there will be a cost and time burden in order to comply with full IFRS and IAS Standards.   There may be comparability problems if one company applies