Introduction HKICPA QPA Financial Reporting Jun 2012 Exam No. Exam A Financial Reporting 1,257 61% May-2005 A Financial Reporting 1,342 57% Feb-2006 A Financial Reporting 2,041 52% Sep-2006 A Financial Reporting 2,063 44% May-2007 A Financial Reporting 2,396 50% Feb-2008 A Financial Reporting 2,626 55% Sep-2008 A Financial Reporting 2,912 49% May-2009 A Financial Reporting 2,579 44% Feb-2010 A Financial Reporting 2,381 46% Dec-2010 A Financial Reporting 1,459 45% Jun-2011 A Financial Reporting 2,240 50% Dec-2011 65% QPA 60% 55% 50% QPA 45% 40% May-2005 Oct-2005 Mar-2006 Aug-2006 Jan-2007 Jun-2007 Nov-2007 Apr-2008 Sep-2008 Feb-2009 Jul-2009 Dec-2009 May-2010 Oct-2010 Mar-2011 Aug-2011 Prepared by Ted Chan, CPA, CFA 1 Copyright Kaplan Financial 2012
Introduction HKICPA QPA Financial Reporting Jun 2012 Before the Exam 1. A well indexed file a. You really need a critical file in order to handle QPA b. Try to separate your materials (notes and past paper) by different standards c. Use a lot of colourful post-it for easier identification during the exam d. Put your materials in box files. Try not to take the materials out of the box files during the exam. If you take them out during the exam, you probably won t be able to locate them again 2. Understand the theories behind a. A well indexed file helps you a lot in QPA, but understanding the relevant knowledge can further increase your speed b. Merely indexing without understanding NOT fast enough in the real exam 3. Practice past papers a. Past papers often repeat themselves Worth practicing b. Ideally, you should practice past paper as if you were taking a closed-book exam This enhances your understanding and speed This helps you to count the time needed Better time management in the real exam 4. Read the 2 sets of guidance notes about the 2 workshops Prepared by Ted Chan, CPA, CFA 2 Copyright Kaplan Financial 2012
Statements of Cash Flows HKICPA QPA Financial Reporting Jun 2012 Standards under this Chapter 1. HKAS 7 Statements of Cash Flows Examinable Areas 1. Direct method and indirect method to calculate the cash flow from operating activities 2. Prepare a statement of cash flow including the acquisition of subsidiaries 3. Prepare a statement of cash flow including foreign currencies Relatively Minor Areas Definitions of cash Definitions (LP 20.1.2.3) Cash Cash comprises cash on hand and demand deposits Cash Equivalents Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes An investment normally qualifies as a cash equivalent only when it has a short maturity of, say, 3 months or less from the date of acquisition Equity investments are NOT cash equivalents Example of Cash Equivalents Investments in redeemable preference shares within a short period of their maturity and with a specified redemption date Bank borrowings are generally considered to be financing activities NOT cash Overdrafts that are repayable on demand are included as a component of cash and cash equivalents Cash Flows Inflows and outflows of cash and cash equivalents Cash flows EXCLUDE movements between items that constitute cash or cash equivalents Prepared by Ted Chan, CPA, CFA 3 Copyright Kaplan Financial 2012
Statements of Cash Flows HKICPA QPA Financial Reporting Jun 2012 Operating Activities Operating activities are the principal revenue-producing activities of the entity and other activities that are not investing or financing activities Operating activities generally result from the transactions and other events that enter into the determination of P&L Examples of Cash Flows from Operating Activities 1. Cash receipts from the sale of goods and the rendering of services; 2. Cash receipts from royalties, fees, commissions and other revenue; 3. Cash payments to suppliers for goods and services; 4. Cash payments to and on behalf of employees; 5. Cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities; and 6. Cash receipts and payments from contracts held for dealing or trading purposes Investing Activities Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents Examples of Investing Activities 1. Cash payments (or receipts) to acquire (or sales of) PPE, IA and other long-term assets 2. Cash payments (or receipts) to acquire (or sales of) equity or debt instruments of other entities and interests in joint ventures 3. Cash advances (or cash receipts) and loans made to (or repayments from) other parties (other than advances and loans made by a financial institution) For financial institutions, should be classified as operating activities 4. Cash payments (or receipts) for futures contracts, forward contracts, etc, except when the contracts are held for dealing or trading purposes Financing Activities Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity Examples of Financing Activities 1. Cash proceeds from issuing shares or other equity instruments; 2. Cash payments to owners to acquire or redeem the entity s shares; 3. Cash proceeds from issuing debentures, loans, notes, or other short or long-term borrowings; 4. Cash repayments of amounts borrowed; and 5. Cash payments by a lessee for the reduction of the outstanding liability relating to a finance lease Prepared by Ted Chan, CPA, CFA 4 Copyright Kaplan Financial 2012
Statements of Cash Flows HKICPA QPA Financial Reporting Jun 2012 Classifications (LP 20.2.3) Operating Investing Financing Interest Received / Dividend Received Yes (If can determine P&L) Yes (If = return on investment) - Interest Paid Dividend Paid Tax Paid Tax Received Finance Lease Payments Yes (If can determine P&L) Yes (If can assist users to determine the ability of an entity to pay dividends out of operating cash flows) Yes Yes Yes (for the repayment of interest) - Yes (If = cost of obtaining financial resources) - Yes (If = cost of obtaining financial resources) Yes (If specifically identified with investing or financing activities) - Yes (for the repayment of principal) Prepared by Ted Chan, CPA, CFA 5 Copyright Kaplan Financial 2012
Statements of Cash Flows HKICPA QPA Financial Reporting Jun 2012 Operating Cash Flows 2 Methods (LP 20.2.2) Examinable!! HKAS 7 requires that an entity shall report cash flows from operating activities using either: 1. The direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed; or 2. The indirect method, whereby profit or loss is adjusted for the effects of a. Transactions of a non-cash nature, b. Any deferrals or accruals of past or future operating cash receipts or payments, and c. Items of income or expense associated with investing or financing cash flows Example of Direct Method (Source: HKICPA Learning Pack P.416) Example of Indirect Method (Source: HKICPA Learning Pack P.416) Prepared by Ted Chan, CPA, CFA 6 Copyright Kaplan Financial 2012
Statements of Cash Flows HKICPA QPA Financial Reporting Jun 2012 Example 1 of a Simple Statement of Cash Flows (Source: HKICPA Learning Pack Feb 2010 P.26-12) Prepared by Ted Chan, CPA, CFA 7 Copyright Kaplan Financial 2012
Statements of Cash Flows HKICPA QPA Financial Reporting Jun 2012 Prepared by Ted Chan, CPA, CFA 8 Copyright Kaplan Financial 2012
Statements of Cash Flows HKICPA QPA Financial Reporting Jun 2012 Answer 1 of a Simple Statement of Cash Flows Indirect Method $000 Loss before tax (80) Adjustments for: Depreciation 50 ( non cash) Doubtful debts 20 ( non cash) Interest Income (10) ( non cash) Gain on sale of PPE (20) ( non cash) (40) Increase in inventories (100) $230 - $130 Decrease in AR 50 $100 - $150 Cash generated from operations (90) Interest received 10 Net cash from operating activities (80) Prepared by Ted Chan, CPA, CFA 9 Copyright Kaplan Financial 2012
Statements of Cash Flows HKICPA QPA Financial Reporting Jun 2012 Prepared by Ted Chan, CPA, CFA 10 Copyright Kaplan Financial 2012
Statements of Cash Flows HKICPA QPA Financial Reporting Jun 2012 Special Treatment Acquisitions of Subsidiaries (LP 20.3.1) Examinable!! HKAS 7 requires that the aggregate cash flows arising from obtaining or losing control of subsidiaries shall be presented separately and classified as investing activities (Source: HKICPA Learning Pack P.422) HKAS 7 requires that the cash flows arising changes in ownership interests in a subsidiary that do not result in a loss of control shall be classified as cash flows from financing activities No loss of control = equity transactions Dividend paid from subsi to NCI = Financing activities Prepared by Ted Chan, CPA, CFA 11 Copyright Kaplan Financial 2012
Statements of Cash Flows HKICPA QPA Financial Reporting Jun 2012 Example 2 of a Consolidated Statement of Cash Flows (Source: HKICPA Learning Pack Feb 2010 P.26-16) I Cash O O O Cash Prepared by Ted Chan, CPA, CFA 12 Copyright Kaplan Financial 2012
Statements of Cash Flows HKICPA QPA Financial Reporting Jun 2012 Answer 2 of a Consolidated Statement of Cash Flows Indirect Method $000 Loss before tax (80) Adjustments for: Depreciation 50 ( non cash) Doubtful debts 20 ( non cash) Interest Income (10) ( non cash) Gain on sale of PPE (20) ( non cash) (40) Decrease in AP (20) $150 ($150 + $20) Increase in inventories (90) $230 ($130 + $10) Decrease in AR 55 $100 ($150 + 5) Cash generated from operations (95) Interest received 10 Net cash from operating activities (85) Prepared by Ted Chan, CPA, CFA 13 Copyright Kaplan Financial 2012
Statements of Cash Flows HKICPA QPA Financial Reporting Jun 2012 Prepared by Ted Chan, CPA, CFA 14 Copyright Kaplan Financial 2012
Statements of Cash Flows HKICPA QPA Financial Reporting Jun 2012 Special Treatment Asso and JV (LP 20.3.3) When an entity accounts for its investment in Subsi by use of cost method (for example in its separate F/S), the entity shall restrict its reporting in the statement of cash flows to the cash flows of dividends and advances When an entity accounts for its investment in an associate by use of the equity or cost method, the entity shall restrict its reporting in the statement of cash flows to the cash flows of dividends and advances Share of Asso s profit has NO impact to Conso cash flows When an entity reports its interest in a jointly controlled entity using the equity method Same as Asso Subsi Asso JV Cost Method Equity Method - Dividends + Advances Dividends + Advances Prepared by Ted Chan, CPA, CFA 15 Copyright Kaplan Financial 2012
Statements of Cash Flows HKICPA QPA Financial Reporting Jun 2012 Special Treatment Cash Flows in Foreign Currency (LP 20.3.4) HKAS 7 requires that Examinable!! 1. Cash flows arising from transactions in a foreign currency shall be recorded in an entity s functional currency by applying to the foreign currency amount the exchange rate between the functional currency and the foreign currency at the date of the cash flow; and Foreign currency Functional currency 2. Cash flows of a foreign subsidiary shall be translated at the exchange rates between the functional currency and the foreign currency at the dates of the cash flows Functional currency Presentation currency HKAS 21 allows using average rate to translate cash flows Unrealised gains and losses The effect of changes in exchange rate on cash and cash equivalents held or due in a foreign currency is reported in the statement of cash flows in order to reconcile cash and cash equivalents at the beginning and the end of the period. This amount is presented separately from cash flows from operating, investing and financing activities (HKD2,069 on Example 3) Prepared by Ted Chan, CPA, CFA 16 Copyright Kaplan Financial 2012
Statements of Cash Flows HKICPA QPA Financial Reporting Jun 2012 Example 3 of a Statement of Cash Flows (with Foreign Currency) (Source: HKICPA Learning Pack Feb 2010 P.26-24) HKD has depreciated Will have exchange gain DR/(CR) Prepared by Ted Chan, CPA, CFA 17 Copyright Kaplan Financial 2012
Statements of Cash Flows HKICPA QPA Financial Reporting Jun 2012 Ex gain Prepared by Ted Chan, CPA, CFA 18 Copyright Kaplan Financial 2012
Statements of Cash Flows HKICPA QPA Financial Reporting Jun 2012 Answer 3 of a Statement of Cash Flows (with Foreign Currency) Exchange rate differences in cash NOT belong to any one of the 3 activities Prepared by Ted Chan, CPA, CFA 19 Copyright Kaplan Financial 2012
Feb 2006 Case HKICPA QPA Financial Reporting Jun 2012 Prepared by Ted Chan, CPA, CFA 20 Copyright Kaplan Financial 2012
Feb 2006 Case HKICPA QPA Financial Reporting Jun 2012 Prepared by Ted Chan, CPA, CFA 21 Copyright Kaplan Financial 2012
Feb 2006 Case HKICPA QPA Financial Reporting Jun 2012 Prepared by Ted Chan, CPA, CFA 22 Copyright Kaplan Financial 2012
Feb 2006 Case HKICPA QPA Financial Reporting Jun 2012 Prepared by Ted Chan, CPA, CFA 23 Copyright Kaplan Financial 2012
Feb 2006 Case HKICPA QPA Financial Reporting Jun 2012 Q1b (17P + 8 = 25) Operating activities Asset up Cash out Asset down Cash in Liabilities up Cash in Liabilities down Cash out 3 examinable areas of Cash Flows 1. Normal 2. Acquire / Dispose Subsi (Feb 2006) 3. Foreign Currency (Sep 2008) Don t use old name Consolidated Statement of Cash Flows HKD 000 HKD 000 Profit before tax 9,700 Adjustments for: Share of profit of an asso (1,000) Translation loss 300 Interest expense 400 Depreciation 4,000 Increase in inventories [5,300 (3,900 + 1,000)] (400) Decrease in AR [2,700 (2,600 + 1,400)] 1,300 Decrease in AP [1,200 (380 + 1,000)] (180) Cash generated from operations 14,120 Interest paid [200 (400 + 0)] (200) Income taxes paid [2,100 (1,000 + 1,400)] (300) Net cash from operating activities 13,620 Purchase of PPE [48,000 (33,000 + 5,000 4,000)] (14,000) Acquisition of asso (1,000) Acquisition of subsi (6,000 200) (5,800) Dividend from asso (W1) 600 2 Net cash used in investing activities (20,200) Issuance of shares 4,000 Dividend paid (3,000) Dividend paid to NCI (W2) (520) 2 Net cash from financing activities 480 1 Net decrease in cash and cash equivalents (6,100) Cash and cash equivalents at 1 Apr 2005 6,300 Cash and cash equivalents at 31 Mar 2006 200 Prepared by Ted Chan, CPA, CFA 24 Copyright Kaplan Financial 2012
Feb 2006 Case HKICPA QPA Financial Reporting Jun 2012 W1 Asso HKD 000 Beginning 6,000 Share of Profit 1,000 Cash Inflow (600) Ending 6,400 W2 NCI HKD 000 Beginning 1,200 Subsi 1,320 (6,600 x 20%) Profit 600 Cash outflow (520) Ending 2,600 Disclosure = Copy!! Disclosure note 1 Copy from LP HKAS 7 requires an entity to disclose the followings: 1. The total consideration paid (ie $6m) 0.5P 2. The portion of the consideration consisting of cash (ie $6m) 3. The amount of cash in the subsidiaries (ie $200k) 0.5P 4. The amount of the assets and liabilities other the cash in the subsidiaries, summarised by each category 2 HKD 000 PPE 5,000 Inventories 1,000 AR 1,400 Cash 200 AP (1,000) 6,600 NCI (1,320) Goodwill 720 6,000 Prepared by Ted Chan, CPA, CFA 25 Copyright Kaplan Financial 2012
Feb 2006 Case HKICPA QPA Financial Reporting Jun 2012 Disclosure note 2 Copy from LP HKAS 7 requires an entity to disclose investing and financing transactions that do not require the use of cash During the year, the group has acquired 20% interest in an associate by paying cash $1m and raising long term debt $5m repayable on 31 Mar 2008 1 Disclosure note 3 Copy from LP HKAS 7 requires an entity to disclose the components of cash and cash equivalents (ie cash on hand and balances with banks) Examiner s Comments Feb 2006 Case Q1b This question was fairly answered Many candidates failed to take into account the impact on the cash flow statement of the acquisition of a subsidiary during the year Most of them failed to include the newly acquired subsidiary when calculating the changes in accounts receivable, accounts payable and inventory A very common problem: NOT reading the question carefully!! Furthermore, very few candidates prepared the notes to the cash flow statement though the question specifically asked for all the required notes General Examiner s Comments Feb 2006 Case The case tested candidates knowledge of the accounting treatment for a subsidiary, an associate and a non-current borrowing, and was followed by the preparation of a consolidated cash flow statement. In general, candidates performance was less than satisfactory. Although preparation of a consolidated cash flow statement is straightforward, many candidates could not correctly compute the figures. Besides, some candidates did not show their workings and only gave brief descriptions or narratives Prepared by Ted Chan, CPA, CFA 26 Copyright Kaplan Financial 2012
Feb 2006 Case HKICPA QPA Financial Reporting Jun 2012 Prepared by Ted Chan, CPA, CFA 27 Copyright Kaplan Financial 2012
Feb 2006 Case HKICPA QPA Financial Reporting Jun 2012 Prepared by Ted Chan, CPA, CFA 28 Copyright Kaplan Financial 2012
Feb 2006 Case HKICPA QPA Financial Reporting Jun 2012 Prepared by Ted Chan, CPA, CFA 29 Copyright Kaplan Financial 2012
Sep 2008 Case HKICPA QPA Financial Reporting Jun 2012 Prepared by Ted Chan, CPA, CFA 30 Copyright Kaplan Financial 2012
Sep 2008 Case HKICPA QPA Financial Reporting Jun 2012 Prepared by Ted Chan, CPA, CFA 31 Copyright Kaplan Financial 2012
Sep 2008 Case HKICPA QPA Financial Reporting Jun 2012 Prepared by Ted Chan, CPA, CFA 32 Copyright Kaplan Financial 2012
Sep 2008 Case HKICPA QPA Financial Reporting Jun 2012 Prepared by Ted Chan, CPA, CFA 33 Copyright Kaplan Financial 2012
Sep 2008 Case HKICPA QPA Financial Reporting Jun 2012 Prepared by Ted Chan, CPA, CFA 34 Copyright Kaplan Financial 2012
Sep 2008 Case HKICPA QPA Financial Reporting Jun 2012 Q1b (18P + 9 = 27) Operating activities Asset up Cash out Asset down Cash in Liabilities up Cash in Liabilities down Cash out 3 examinable areas of Cash Flows 1. Normal 2. Acquire / Dispose Subsi (Feb 2006) 3. Foreign Currency (Sep 2008) Don t use old name Consolidated Statement of Cash Flows HKD 000 HKD 000 Profit before tax 115,295 Adjustments for: Finance cost 4,974 Loss on disposal of an associate 7,888 Interest income (5,306) Depreciation 32,036 Share-based payment expense 333 Loss on disposal of PPE 802 Impairment loss on AR 210 Increase in inventories [270,726 (346,984 + 120)] 76,378 Increase in AR [719,128 (670,522 + 140 210)] (48,676) Decrease in AP [(675,602 (708,524 + 40)] (32,962) Decrease in due to a related party (48,634 37,862) 10,772 Cash generated from operations 161,744 Income taxes paid (W1) (18,356) Net cash from operating activities 143,388 Purchase of PPE (34,240) 1 Disposal of PPE [(2,898 2,092) 802] 4 2 Disposal of asso 3,860 Interest received 5,306 Decrease in pledged bank deposit [(6,582 + 2,322) (6,232 + 13,522)] 10,850 1 Net cash used in investing activities (14,220) Issuance of shares 68 Dividend paid (16,990 + 9,102) (26,092) 1 Repayment of finance lease [(220) (2,690 + 216)] (2,686) Repayment of bank borrowings [(76,482 + 10,412) (83,006 + 8,908)] (5,020) Interest paid (4,974) Net cash from financing activities (38,704) 1 2 1 Prepared by Ted Chan, CPA, CFA 35 Copyright Kaplan Financial 2012
Sep 2008 Case HKICPA QPA Financial Reporting Jun 2012 Net increase in cash and cash equivalents 90,464 Effect of foreign exchange rate changes 90 Cash and cash equivalents at 1 Apr 2007 143,472 Cash and cash equivalents at 31 Mar 2008 234,026 W1 Tax HKD 000 Beginning current 10,580 Beginning deferred 7,202 Tax expense 14,758 Cash outflow (18,356) Ending current and deferred (7,898 + 6,286) 14,184 Examiner s Comments Sep 2008 Case Q1b This question required candidates to prepare the consolidated statement of cash flows This was a straightforward question The majority of candidates performed well in this question However, many candidates failed to treat the exchange differences correctly and they missed out the cash impact of the decrease in pledged bank deposits Also only a few candidates could work out the correct cash outflow for dividends paid and the effect of foreign exchange rate changes General Examiner s Comments Sep 2008 Case The case study questions were quite straightforward They tested the candidates knowledge of statement of cash flows, presentation of financial statements, intangible assets and equity-settled share-based payment expenses The overall performance was satisfactory Candidates in general scored high marks in the preparation of the statement of cash flows consolidation However, many candidates found it difficult to apply their knowledge to the issues raised in Q1a In particular, they failed to explain the reasons for the classification of bank deposits and cash into three items in the statement of financial position Prepared by Ted Chan, CPA, CFA 36 Copyright Kaplan Financial 2012
Sep 2008 Case HKICPA QPA Financial Reporting Jun 2012 Prepared by Ted Chan, CPA, CFA 37 Copyright Kaplan Financial 2012
Sep 2008 Case HKICPA QPA Financial Reporting Jun 2012 Prepared by Ted Chan, CPA, CFA 38 Copyright Kaplan Financial 2012