PAPER F1 Financial reporting and taxation

Transcription

1 OperatiOnal level PAPER F1 Financial reporting and taxation cima OFFICIAL REVISION CARDS

2 Financial REPORTING AND TAATION Published by: Kaplan Publishing UK Unit 2 The Business Centre, Molly Millars Lane, Wokingham, Berkshire RG41 2QZ Copyright 2015 Kaplan Financial Limited. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without the prior written permission of the publisher. Acknowledgements The CIMA Publishing trademark is reproduced with kind permission of CIMA. Notice The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN Printed and bound in Great Britain 2

3 Financial REPORTING AND TAATION How to use Revision Cards The concept Revision Cards are a new and different way of learning, based upon research into learning styles and effective recall. The cards are in full colour and have text supported by a range of images, making them far more effective for visual learners and easier to remember. Unlike a bound text, Revision Cards can be rearranged and reorganised to appeal to kinaesthetic learners who prefer to learn by doing. Being small enough to carry around means that you can take them anywhere. This gives the opportunity to keep going over what you need to learn and so helps with recall. The content has been reduced down to the most important areas, making it far easier to digest and identify the relationships between key topics. Revision Cards, however you learn, whoever you are, wherever you are... 3

4 Financial REPORTING AND TAATION How to use them Revision Cards are a pack of approximately 52 cards, slightly bigger than traditional playing cards but still very easy to carry and so convenient to use when travelling or moving around. They can be used during the tuition period or at revision. They are broken up into 3 sections. An overview of the entire subject in a mind map form (orange). A mind map of each specific topic (blue). Content for each topic presented so that it is memorable (green). Each one is a different colour, allowing you to sort them in many ways. Perhaps you want to get a more detailed feel for each topic, why not take all the green cards out of the pack and use those. You could create your own mind maps using the blue cards to explore how different topics fit together. And if there are some topics that you understand, take those out of the pack, leaving yourself only the ones you need to concentrate on. There are just so many ways you can use them. 4

5 Financial REPORTING AND TAATION Contents 1 Fundamentals of Business Taxation 2 Regulatory Environment for Financial Reporting and Corporate Governance 3 Single Entity Financial Statements 4 Consolidated Financial Statements 5 Accounting Standards 6 Short-Term Finance and Investments 7 Working Capital Management 8 Working Capital Management Receivables and Payables 9 Working Capital Management Inventory Control 10 Working Capital Management Cash Control Examinable legislation 5

6 Financial REPORTING AND TAATION Assessment guidance The assessment will involve 60 objective testing questions in a one and a half hour period covering all of the syllabus learning outcomes. The pass rate is 70%. Core areas of the syllabus The syllabus comprises of: A Regulatory Environment for Financial Reporting and Corporate Governance 10% Quality and accuracy are of the utmost importance to us so if you spot an error in any of our products, please send an to mykaplanreporting@kaplan.com with full details, or follow the link to the feedback form in MyKaplan. Our Quality Co-ordinator will work with our technical team to verify the error and take action to ensure it is corrected in future editions. B Financial Accounting and Reporting 45% C Management of Working Capital, Cash and Sources of Short-Term Finance 20% D Fundamentals of Business Taxation 25% 6

7 Overview financial reporting and taxation RevisionCards

8 Financial REPORTING AND TAATION Regulatory environment for financial reporting and corporate governance Financial reporting and taxation Fundamentals of business taxation Financial accounting & reporting Management of working capital, cash and sources of the short-term finance 8

9 Fundamentals of business taxation financial reporting and taxation RevisionCards

10 FOREIGN / OVERSEAS Financial REPORTING AND TAATION Fundamentals of Business Taxation Change to International tax Accounting for taxation Definitions Trading income Direct tax Capital taxes Fundamentals of business tax Employment tax Indirect tax Consumption tax Misc taxes 10

11 Financial REPORTING AND TAATION Fundamentals of Business Taxation Carry loss forward against income of the same trade Trading losses Carry loss back Capital losses Carry loss forward against future capital gains DIRECT TA imposed directly on a person/enterprise Trading Income Profit Net Net Profit Disallowable Capital Taxes Sell assets e.g. Shares Proceeds less cost Allowable expenses e.g. Capital cost, costs to buy, improvements Income Expenses Tax Depreciation depreciation 11

12 Financial REPORTING AND TAATION Fundamentals of Business Taxation Trading Income Proforma Accounting profit Add back: disallowable expenses Less: disallowable income Add: depreciation Less: tax depreciation Taxable profit THIS IS A LEARN, COVER, PRACTICE PROFORMA! The taxable profit will then be charged at the appropriate tax rate for that accounting period. $ () () Capital Taxes Proforma $ Proceeds Less: costs to sell () Less: cost to buy () Less: original cost () Less: enhancements () Compensation for inflation (% cost) () Taxable gain THIS IS A LEARN, COVER, PRACTICE PROFORMA! The taxable gain will then be charged at the appropriate tax rate for that accounting period. 12

13 Financial REPORTING AND TAATION Fundamentals of Business Taxation INDIRECT TA imposed on one part of the economy with the intention to pass onto another Consumption Taxes Property Taxes Wealth Taxes Excise Duties Multi Stage Tax at each stage of production Exempt supplies Taxable supplies Standard rate Single stage Tax at one stage of production Cascade Tax No Refunds VAT Refunds Zero rate Outputs less inputs 13

14 Financial REPORTING AND TAATION Fundamentals of Business Taxation Personal allowances amount of tax relief PAYE Tax deducted at source by employer Employment Tax Income Salary, bonus, benefits Expenses Subscriptions to professional bodies, occupational pension schemes, business expenses 14

15 Financial REPORTING AND TAATION Fundamentals of Business Taxation Residency country of incorporation or control OECD Model Tax gross income in country of residency International Tax Gross income = amount received + total foreign income Total foreign tax Tax relief in country of residency (if tax treaty exists) Deduction method Withholding tax Tax at source Types of operation Double tax relief: Underlying tax Tax on profits used to distribute a dividend Branch Subsidiary Exemption method Tax credit method 15

16 Financial REPORTING AND TAATION Fundamentals of Business Taxation Payment made greater than last years liability add to current tax estimate Payment made less than last year s liability deduct from current tax expense Under provision Under/over provisions Over-provision Dr tax expense (SPL) Cr tax liability (SOFP) Accounting for tax SOFP SPL Current tax estimate (SOFP) Under provisions Over-provisions () Tax expense for the year Disclosures Current tax estimate Current liability 16

17 Financial REPORTING AND TAATION Fundamentals of Business Taxation Current tax This is the estimated amount of taxation payable on the taxable profits for the period: The taxable profit will then be charged at the appropriate tax rate for that accounting period. This is recorded as: Accounting profit Add back: disallowable expenses Less: disallowable income Add: depreciation Less: tax depreciation Taxable profit THIS IS A LEARN, COVER, PRACTICE PROFORMA! $ () () Dr Income tax expense (SPL) Cr Income tax liability (SOFP) The income tax liability is always shown under current liabilities on the SOFP and the liability should always represent this year s estimate for taxation. 17

18 Financial REPORTING AND TAATION Fundamentals of Business Taxation Under/over-provisions In the following period the income tax will be paid but it is unlikely that the exact amount provided for will be the same as the amount paid. This will result in an under/over-provision. This must be adjusted for in the current accounting period. Under-provision = more tax is paid than provided for in the previous accounting period. E.g. Liability $20,000 and a payment of $21,000 will result in a debit balance in the trial balance on the tax account. This under provision must be added to the current tax expense in the SPL. REMEMBER + Over-provision = less tax is paid than provided for in the previous accounting period. E.g. Liability $20,000 and a payment of $19,000 will result in a credit balance in the trial balance on the tax account. This under provision must be deducted from the current tax expense in the SPL. REMEMBER 18

19 Financial REPORTING AND TAATION Fundamentals of Business Taxation Definitions Incidence The incidence of a tax is the distribution of the tax burden and can be split into formal and actual incidence. Formal incidence This is the person who has direct contact with the tax authorities, i.e. who is legally obliged to pay the tax. Actual incidence This is the person who actually ends up bearing the cost of the tax. Taxable person The person accountable for the tax payment, e.g. Individual or company. Competent jurisdiction A taxable person normally pays tax in the country of origin. Competent jurisdiction is the tax authority that has the legal powers to assess and collect the taxes. Hypothecation This means that certain taxes are devoted entirely to certain types of expenditure, e.g. road tax is used entirely on maintaining roads. Progressive taxes These take an increased proportion of income as income rises. 19

20 Financial REPORTING AND TAATION Fundamentals of Business Taxation Proportional taxes These take the same proportion of tax as income rises. Regressive taxes These take a decreasing proportion of tax as income rises. Tax consolidation This is a type of group relief enabling trading losses to be surrendered between different companies. Excise duties This is a tax imposed on certain products to discourage over consumption of harmful products, to pay for extra costs (such as increased healthcare) and to tax luxuries, hence raise more revenue for the government. Consumption taxes This is a tax imposed on the consumption of goods and added to the purchase price. Withholding tax This is a tax deducted at source from foreign income. Underlying tax This is the tax on foreign profits that are used to distribute a dividend. Current tax The estimated amount of tax payable on the taxable profits of the entity for the period. Taxable profit This is the profit on which taxation authorites base their tax calculations. Accounting profit This is the profit before tax reported to the shareholders in the financial statements. THESE ARE ALL LEARN, COVER, PRACTICE DEFINITIONS! 20

21 Regulatory environment for financial reporting and corporate governance financial reporting and taxation RevisionCards

22 Financial REPORTING AND TAATION Regulatory Environment for Financial Reporting and Corporate Governance Corporate governance Regulatory Environment Needs External audit Approaches Regulatory environment for financial reporting and corporate governance Ethics Objective Qualitative characteristic Types of audit reports Conceptual Framework CIMA s code of ethics Measurement Underlying assumption Recognition Elements Purpose 22

23 Financial REPORTING AND TAATION Regulatory Environment for Financial Reporting and Corporate Governance Fundamental Enhancing Assets Liabilities Income Expenses Qualitative characteristics Elements Equity Recognition Conceptual Framework Measurement Underlying assumption Purpose Going concern Financial position Financial performance Changes in financial position 23

24 Financial REPORTING AND TAATION Regulatory Environment for Financial Reporting and Corporate Governance Underlying assumption Going concern concept A business will continue for the foreseeable future. 24

25 Financial REPORTING AND TAATION Regulatory Environment for Financial Reporting and Corporate Governance Qualitative characteristics The Framework splits qualitative characteristics into two categories: Fundamental qualitative characteristics Relevance Faithful representation Enhancing qualitative characteristics Comparability Verifiability Timeliness Understandability 25

26 Financial REPORTING AND TAATION Regulatory Environment for Financial Reporting and Corporate Governance The elements of financial statements Assets An asset is a resource controlled by the enterprise as a result of a past event and from which economic benefits are expected to flow to the enterprise. Liability A liability is a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources from the enterprise. Equity Equity is the residual interest in the assets of the enterprise after deducting all its liabilities. Income Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. Expenses Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. YOU MUST LEARN THESE ELEMENTS!! 26

27 Financial REPORTING AND TAATION Regulatory Environment for Financial Reporting and Corporate Governance Recognition of the elements of financial statements In order to recognise items in the statement of financial position or statement of profit or loss, the following criteria should be satisfied: It meets the definition of an element of financial statements. It is probable that any future economic benefit associated with the item will flow to or from the enterprise. The item has a cost or value that can be measured with reliability. Measurement of the elements of financial statements Measurement is the process of determining the monetary amounts at which the elements of financial statements are to be recognised and carried in the statement of financial position and statement of profit or loss. There are a number of different ways of measuring the elements including: Historical cost Current cost Realisable (settlement) value? Question can you link these ways of measurement to the qualitative characteristics????? Present value 27

28 Financial REPORTING AND TAATION Regulatory Environment for Financial Reporting and Corporate Governance Regulatory Environment There is a need for regulation to ensure that the financial statements can be relied upon by users. Regulation promotes consistency and so helps users when interpreting statements. Elements of regulation are: Local law Local accounting standards International accounting standards Conceptual frameworks Requirements of international bodies 28

29 Financial REPORTING AND TAATION Regulatory Environment for Financial Reporting and Corporate Governance True and fair Complies with legislation Duties Objective External Audit Modified Types of Reports Rights Not true and fair Unmodified Qualified opinion Disclaimer of opinion Adverse opinion Clean audit 29

30 Financial REPORTING AND TAATION Regulatory Environment for Financial Reporting and Corporate Governance The objective of external audit To express an opinion as to whether the financial statements: Show a true and fair view (accurate and unbiased) Complies with specific legislation (this will vary internationally). Types of audit reports Unmodified reports Auditors will issue an unmodified report when their opinion is that the financial statements do show a true and fair view and have been prepared in accordance with specific legislation, i.e. no problems found. This is sometimes referred to as a clean audit. Modified reports Modified reports are therefore the type of report that are issued when either the opinion of the auditors is that the financial statements do not or may not show a true or fair view or have not or may not have been prepared in accordance with specific legislation. Key term: Pervasive Pervasive effects on the financial statements are those that, in the auditor s judgment: (i) Are not confined to specific elements, accounts or items of the financial statements; (ii) If so confined, represent or could represent a substantial proportion of the financial statements; or (iii) In relation to disclosures, are fundamental to users understanding of the financial statements. Types of modification: Qualified opinion i.e. The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements; the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive. Adverse Opinion i.e. The auditor shall express an adverse opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements. Disclaimer of Opinion The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive. 30

31 Financial REPORTING AND TAATION Regulatory Environment for Financial Reporting and Corporate Governance Why are they important Resolving a dilemma Ethics CIMA s Code of Ethics Principles Threats 31

32 Financial REPORTING AND TAATION Regulatory Environment for Financial Reporting and Corporate Governance Principles Objectivity Professional Competence and due care Professional behaviour Integrity Confidentiality Mnemonic for Principles OPPIC Over Pompous People Ignore Codes Threats Self-interests Intimidation Familiarity Advocacy Self-review Mnemonic for Threats SIFAS Study Indepth For Accountancy Success 32

33 Financial REPORTING AND TAATION Regulatory Environment for Financial Reporting and Corporate Governance What is corporate governance Approaches to corporate governance Corporate Governance Rules based Principles based Choice of approach Corporate governance in action 33

34 Financial REPORTING AND TAATION Regulatory Environment for Financial Reporting and Corporate Governance Approaches to Corporate Governance Rules Based eg USA Applied by law Fines for not applying Principles Based eg UK Adhere in spirit rather than law Comply or explain why 34

35 Single entity financial statements financial reporting and taxation RevisionCards

36 Financial REPORTING AND TAATION Single Entity Financial Statements Statement of profit or loss Statement of changes in equity Single Entity Financial Statements Statement of financial position Statement of cash flows 36

37 Financial REPORTING AND TAATION Single Entity Financial Statements Statement of profit or loss and other comprehensive income for (Name of entity) for the year ended 31 December 20 Proforma: Continuing operations: $ Revenue Cost of sales () Gross profitt Distribution costs () Administrative expenses () Profit before interest and tax Finance costs () Profit before tax Tax expense Profit for the period from continuing operations Discontinuing operations: Profit for the period from discontinued operations Total profit for the period Other comprehensive income: Gains/losses on revaluations Total comprehensive income for the period THIS IS A LEARN, COVER, PRACTICE PROFORMA! () 37

38 Financial REPORTING AND TAATION Single Entity Financial Statements Proformas Statement of Changes in Equity (SOCIE) for (Name of entity) for the year ended 31 December 20 Share Share Revaluation Retained Total Capital Premium Reserve Earnings Opening balance Change in accounting policy/errors (IAS 8) /() () Share issue Revaluation surplus/deficit /() /() Profit from SP&L Dividends () () Closing balance 38

39 Financial REPORTING AND TAATION Single Entity Financial Statements Proformas Statement of Financial Position for (Name of entity) as at 31 December 20 $ $ ASSETS Non-Current Assets Property, plant and equipment Goodwill Other intangibles Investment in associates Available for sale investments Current Assets Inventories Trade receivables and other receivables Cash and cash equivalents Total assets EQUITY AND LIABILITIES Equity Share capital Share premium Revaluation reserve Retained earnings Non-current liabilities Long-term borrowings Long-term provisions Current liabilities Trade and other payables Short-term borrowings Current tax payable Short-term provisions Total equity and liabilities 39

40 Financial REPORTING AND TAATION Single Entity Financial Statements Statement of cashflow for (Name of entity) for year ended 31 December 20 PROFORMA (Indirect method) Cash flows from OPERATING activities $ $ Net profit before taxation Adjustments for: Depreciation/amortisation/impairment Provision increases/(decreases) /() (Profit)/loss on disposal ()/ Interest receivable/investment income () Finance costs Operating profit before working capital changes (Increase)/decrease in inventories ()/ (Increase)/decrease in receivables ()/ Increase/(decrease) in payables /() Cash generated from operations Interest paid () Tax paid () Net cash from operating activities ca$h 40

41 Financial REPORTING AND TAATION Single Entity Financial Statements Cash flows from INVESTING activities Purchase of property, plant and equipment () Purchase of intangibles () Purchase of investments () Proceeds from sale of property, plant and equipment Proceeds from sale of intangibles and investments Investment income received Net cash from investing activities Cash flows from FINANCING activities Proceeds from share issue Proceeds /Redemption from long-term borrowings /() Dividends paid () Net cash from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period THIS IS A LEARN, COVER, PRACTICE PROFORMA! ca$h 41

42 Financial REPORTING AND TAATION Single Entity Financial Statements Purpose of cash flows C ash flow is key to future survival A ssess companies adaptability ca$h $ olvency problems indicated early on H ighlights where cash is generated and spent IMPROVES THE UNDERSTANDABILITY OF THE FINANCIAL STATEMENTS 42

43 Financial REPORTING AND TAATION Single Entity Financial Statements Short-term highly liquid investments Cash Equivalents ca$h Cash at hand and bank Cash Definitions Operating activities Investing activities Principle revenue producing activities Financing activities Disposal and acquisition of long-term assets Changes in equity and borrowings 43

44 Financial REPORTING AND TAATION Single Entity Financial Statements Cash is generated from operations Two approaches to calculation Indirect method Direct Method Take profit and adjust for non CA$H items ca$h Analyse the cashbook for CA$H received and CA$H paid 44

45 Financial REPORTING AND TAATION Single Entity Financial Statements Proforma working of Direct method Statement of cash flows for (Name of company) for the year ended 31 December 20 Cash flows from operating activities $ Cash received from customers Cash paid to suppliers () Cash paid to employees () Other cash payments for expenses () Cash generated from operations ca$h 45

46 RevisionCards

47 Consolidated RevisionCards financial statements financial reporting and taxation RevisionCards

48 Financial REPORTING AND TAATION Consolidated financial statements Acquisition accounting Standard workings Consolidated statement of financial position Consolidated Statement of profit or loss and other comprehensive income Standard workings Consolidated financial statements Standard workings What is a group? Associates 48

49 Financial REPORTING AND TAATION Consolidated financial statements What is a group? A group exists when one company CONTROLS another company. Control is the POWER to govern the financial and operating policies so as to obtain benefits from its activities. An investor (parent) controls an investee (subsidiary) only if the following three elements can be demonstrated: 49 power over the investee exposure, or rights, to variable returns from the investee the ability to use that power to affect the variable returns received. We call the company in control the parent and the controlled company the subsidiary. Control is normally achieved by the parent company owning more than 50% of the voting rights of the subsidiary.

50 Financial REPORTING AND TAATION Consolidated financial statements Acquisition accounting Consolidated Statement of financial position Add the parent and subsidiatry assets, liabilities, income and expenses Eliminate the cost of the investment against the share of the subsidiary s net assets at the acquisition date. The difference is goodwill The Rules Adjust net assets to Fair Value Use uniform accounting policies The share capital and share premium of the group is always the share capital and share premium of the parent only. 50

51 Financial REPORTING AND TAATION Consolidated financial statements Consolidated Statement of Financial Position Standard workings: (W1) Group structure Parent % of subsidiary Parent % of associate (W2) Net assets of subsidiary/associate (THIS REALLY HELPS!) Acquisition Reporting date date Share capital Retained earnings Other reserves 51

52 Financial REPORTING AND TAATION Consolidated financial statements (W3) Goodwill Fair value of parent s investment Value of NCI at acquisition Fair value of sub s net assets (NAs) acquired (W2) Goodwill at acquisition Impairment Goodwill at the reporting date (W4) Non-controlling interests (NCI) Value of NCI at acquisition (as per W3) NCI % x post-acquistion reserves (W2) NCI % x impairment (W3) (fair value method only) NCI at reporting date () () () 52

53 Financial REPORTING AND TAATION Consolidated financial statements (W5) Retained earnings group reserves Parent Subsidiary (% x post-acq reserves) (W2) Impairment Retained earnings () 53

54 Financial REPORTING AND TAATION Consolidated financial statements Consolidated Statement of Financial Position Current accounts (receivables/payables) or intra-group loans Intra Group balances In transit items REMEMBER eliminate in full CA$H in transit Dr Bank Dr Payables Cr Receivables Goods in Transit Dr Inventory Dr Payables Cr Receivables Parent sells to subsidiary Provisions for unrealised profit (PUP) Subsidiary sells to parent 54 Decrease inventory Decrease Group reserves (W5) Decrease net assets at the reporting date (W2) Decrease inventory

55 Financial REPORTING AND TAATION Consolidated financial statements NCI Fair value method The fair value of the NCI s interest may be calculated using the market value of the subsidiary s shares at date of acquisition or the other valuation techniques if the subsidiary s shares are not traded in an active market. You will be given the fair value of the NCI in the assessment if you are asked to use this method Proportion of net assets method Under this method, the NCI s holding is measured by calculating their share of the fair value of the subsidiary s net assets at acquisition (W2) Impairment Impairment 55

56 Financial REPORTING AND TAATION Consolidated financial statements When valuing NCI at the fair value method we should record the impairment loss by: Reducing goodwill (W3) by the full impairment loss (Cr goodwill) Reducing NCI (W4) by the NCI% of the impairment loss (Dr NCI) Reducing retained earnings for the group (W5) by parent s % of the impairment loss (Dr RE) When valuing NCI at the proportion of net assets method we record the impairment loss by: Reducing goodwill (W3) by the full impairment loss (Cr goodwill) Reducing retained earning for the group (W5) by the full impairment loss (Dr RE) 56

57 Financial REPORTING AND TAATION Consolidated financial statements Associates Definitions An associate is an entity over which the investor has significant influence and which is neither a subsidiary nor a joint venture of the investor. Significant influence is the power to participate in, but not control, the financial and operating policy decisions of an entity. A holding of 20% or more of the voting power is presumed to give significant influence. Accounting for associates Associates are not consolidated as the parent does not have control. Instead they are equity accounted. Standard workings: (W1) to (W5) as a subsidiary (W6) Investment in associate Cost of investment Increase in net assets (% of post-acquisition reserves) (W2) Impairment losses PUP (where parent is the seller) () OR % of net assets at the reporting date Carrying value of goodwill PUP (where parent is the seller) () 57

58 Financial REPORTING AND TAATION Consolidated financial statements Intra-group trading between group and associate No adjustments required for intra-groups sales or intra-group balances. PUP % of shareholding total unrealised profit in inventory The adjustment if the parent sells to the associate: Decrease group reserve (W5) Decrease investment in associate (W6) Don t forget to increase the cost of sales in the CSCI, hence reduce profits. The adjustment if the associate sells to the parent: Decrease the group reserves (W5) Decrease the group inventory Group share of associate profits This is calculated by: Associate profit after tax % of shareholding 58

59 Financial REPORTING AND TAATION Consolidated financial statements Proforma Consolidated statement of profit or loss and other comprehensive income (SPL) Statement of profit or loss and other comprehensive income for (Name of entity) for the year ended 31 December 20 Parent Subsidiary Adjustments Total Revenue Intra-group trading () Cost of sales () () Intra-group trading Inventory adjustment PUP (if P selling) () PUP (if S selling) () () Gross profit Distribution costs () () () Administrative expenses () () () Impairment (if NCI proportionate method) () Impairment (if NCI FV method) () () Operating profit INITIALLY GET CONFIDENT ON REVENUE PBIT... PRACTICE MAKES PERMANENT 59

60 Financial REPORTING AND TAATION Consolidated financial statements Continued... Share of profit from associate Investment income Intra-group dividend () Intra-group interest () Finance costs () () Intra-group interest () Profit before tax Tax () () () Profit for the year Other comprehensive income (e.g. property revaluaton) Total comprehensive income Attributable to: Non-controlling interest (profits for the year from the sub x NCI %) Parent shareholders (balance of the total profit for the year) FINALLY LEARN PBIT... DOWN TO... ATTRIBUTABLE TO: 60