9706 TSG IAS v2

International Accounting
International Accounting Standards
Cambridge International AS & A Level

Accounting
9706
Guidance for students
Contents
Introduction............................................................................................................................................. 3
IAS 1: Presentation of financial statements............................................................................................ 5
IAS 2: Inventories................................................................................................................................. 11
IAS 7 Statement of cash flows.............................................................................................................. 15
IAS 8: Accounting policies, changes in accounting estimates and errors.............................................18
IAS 10: Events after the reporting period..............................................................................................19
IAS 16: Property, plant and equipment................................................................................................. 21
IAS 36: Impairment of assets............................................................................................................... 25
IAS 37: Provisions, contingent liabilities and contingent assets...........................................................27
IAS 38: Intangible assets...................................................................................................................... 28
Appendices........................................................................................................................................... 30
Appendix 1 – Statement of changes in equity..................................................................................31
Appendix 2 – Alternative format for statement of financial position...................................................32
Appendix 3 – Financial statements for other forms of business (AS Level).....................................33
Appendix 4 – Financial statements for other forms of business (A Level).......................................37
Appendix 5 – Resources for photocopying.......................................................................................40
International Accounting Standards – Introduction
Introduction
This document is designed to help teachers in their delivery of International Accounting Standards (IAS)
to learners of Cambridge International AS & A Level Accounting. Its aims are:
 to give a definitive indication of the areas learners will need to be aware of in relation to IAS for
future Cambridge International A Level Accounting examinations
 to provide illustrative examples for learners and teachers.
The guidance presented in this document is primarily aimed at teachers. Only those standards
identified in the Cambridge AS and A Level 9706 Accounting syllabus will be considered, as listed in
the following table.
International Accounting Standards

Candidates will be required to have a basic knowledge of the following standards and how these
standards relate to topics in the syllabus.
IAS Topic
IAS 1 Presentation of financial statements
IAS 2 Inventories (not long-term contracts)
IAS 7 Statement of cash flows
IAS 8 Accounting policies, changes in accounting estimates and errors
IAS 10 Events after the reporting period
IAS 16 Property, plant and equipment
IAS 36 Impairment of assets
IAS 37 Provisions, contingent liabilities and contingent assets
IAS 38 Intangible assets
Use of this document

The model financial statements in this document are given to help you and your learners apply the
relevant standards, at the relevant level, to a course of study. They are provided for illustrative and
information purposes only.
Every effort has been made to make sure that the document is complete in terms of the relevant
requirements of International Financial Reporting Standards (IFRS) and IAS. However, as the
standards are constantly changing, you should review professional documents as they become
available in order to maintain current working knowledge of the standards.
Users of financial statements

Financial statements are used by a variety of groups for a variety of reasons. The framework
surrounding IAS identifies the typical user groups of accounting statements. The table below identifies
the user groups (stakeholders) and gives likely reasons for the user groups to refer to financial
statements.
Cambridge International AS & A Level Accounting 9706 3

International Accounting Standards – Introduction
Main users Reasons for use

Investors  To assess past performance as a basis for future investment
Employees  To assess performance as a basis of future wage and salary negotiations
 To assess performance as a basis for continuity of employment and job security
Lenders  To assess performance in relation to the security of their loan to the company
Suppliers  To assess performance in relation to receiving payment of their liability
Customers  To assess performance in relation to the likelihood of continuity of trading
Government  To assess performance in relation to compliance with regulations and
assessment of taxation liabilities
Public  To assess performance in relation to ethical trading
Qualitative characteristics
As shown above, financial statements are prepared for a variety of reasons. IAS sets out four
qualitative characteristics of financial statements that make them useful to users:
 Understandability – the information is readily understandable by users
 Relevance – the information influences the economic decisions of users
 Reliability – the information is free from material error and bias
 Comparability – the information enables comparisons over time to identify and evaluate trends.
4 Cambridge International AS & A Level Accounting 9706

International Accounting Standards – IAS 1 Presentation of financial statements
IAS 1: Presentation of financial statements
The revised IAS 1 (September 2007) changed the titles of financial statements as they will be used in
IFRS:
 'balance sheet' became 'statement of financial position'
 'income statement' became 'statement of comprehensive income'
 'cash flow statement' became 'statement of cash flows'.
The revised IAS 1 is effective for annual periods beginning on or after 1 January 2009. Early adoption
was permitted. Entities (businesses) are not required to use the new titles in their financial
statements, but all existing standards and interpretations are being amended to reflect the new
terminology. The difference in terminology could be a source of confusion for teachers using recent
textbooks or doing online research.
Presentation of financial statements

This standard covers a number of areas, including the background to the purpose of financial
statements, the components of statements, and illustrations of the presentation of the income
statement and the statement of financial position.
The purpose of financial statements

Financial statements provide information, about the financial position, financial performance and
cash flows of an entity that is useful to a wide range of users in making economic decisions. To meet
that objective, financial statements provide information about an entity’s:
 assets
 liabilities
 equity
 income and expenses, including gains and losses
 contributions by and distributions to owners (in their capacity as owners)
 cash flows.
The components of the financial statements

A complete set of financial statements as set out in the standard, comprises:
 a statement of financial position at the end of the period
 a statement of profit or loss and other comprehensive income for the period
 a statement of changes in equity for the period
 a statement of cash flows for the period (see IAS 7)
 accounting policies and explanatory notes (see IAS 8).
Accounting concepts
The standard requires compliance with a series of accounting concepts:
 Going concern – the presumption is that the entity will not cease trading in the foreseeable future.
(This is generally taken to mean within the next 12 months).
 Accrual basis of accounting – with the exception of the statement of cash flows, the information
is prepared under the accruals concept; income and expenditure are matched to the same
accounting period.
 Consistency – the presentation and classification of items in the financial statements is to be
consistent from one period to the next.
 Materiality and aggregation – classes of similar items are to be presented separately in the
financial statements. This would apply to a grouping such as current assets.
 Offsetting – this is generally not permitted for both assets and liabilities, and income and

expenditure. For example it is not permitted to offset a bank overdraft with another bank account
not in overdraft.
 Comparative information – there is a requirement to show the figures from the previous period
for all the amounts shown in the financial statements. This is designed to help users make relevant
comparisons.
Structure and content of financial statements

IAS 1 identifies in detail how the financial statements should be presented. It also sets out some
general principles that must be adopted in those statements:
 a clear identification of the financial statements (income statement, statement of financial
position, etc.)
 the name of the entity (e.g. XYZ Limited)
 the period covered by the financial statements (year ended, etc.)
Note that statements are usually prepared on an annual basis. If this is not the case, the reason
for the change (for example to a short accounting period) must be disclosed, as must the fact that
the figures may not be comparable with previous data.
 the currency used (e.g. £s, $s)
 the rounding used (e.g. if the statements are presented in thousands, millions).
Income statement (Statement of comprehensive income for the year ended)

The standard requires certain data to be identified and detailed on the face of the income statement.
The information included in the statement can be summarised, rather than detailing every single item.
The following are required:
 revenue
 finance costs
 the charge for taxation
 the after-tax profit or loss for the period from discontinued operations.
The statement ends by showing the profit or loss for the period attributable to the equity holders.
Expenses may be analysed:

 by nature – raw materials, employee costs, depreciation etc.
or
 by function – cost of sales, administration expenses, distribution expenses, etc.
Analysing by nature may be more applicable for a manufacturing company. The method used will
depend on which provides the more reliable and relevant information.
The following example uses analysis by function. Note that:

 it is presumed that the entity is operating on a continuing basis
 the information is in summarised form
 revenue is the sales revenue less sales returns
 cost of sales is the netted-off total of opening stock, purchases and closing stock, less purchases
returns
 distribution costs include, for example, delivery vehicle r u n n i n g costs, driver’s wages,
warehouse costs
 administration costs include office costs, heat and light etc.

Example statement of comprehensive income

XYZ Limited
Statement of comprehensive income for the year ended 31 December 2013

31 December 2013 31 December 2012
$000 $000
Revenue 100,000 80,000
Cost of Sales (60,000) (45,000)
Gross Profit 40,000 35,000

Distribution Costs (8,000) (7,000)
Administration Expenses (11,000) (10,000)
Profit/(Loss) from Operations 21,000 18,000
Finance Costs (3,000) (2,000)
Profit/(Loss) Before Tax 19,000 16,000
Taxation (4,500) (4,000)
Profit/(Loss) for the year attributable to equity holders 14,500 12,000
Notes:
 Other comprehensive income and revaluation gains can be shown after the profit or loss
attributable to equity holders.
 IAS 1 does not permit items to be described as ‘extraordinary items’. Any material items, for
example, disposal of investments or property, are to be separately disclosed, either in the
statement or by way of a note to it.
 Note the end point of this statement. Unlike previous statements, there is now a requirement to
show various other information in:
 statement of changes in equity
 information relating to dividends.

Example statement of changes in equity
Retained Earnings

$000 $000
Balance at start of year 43,000 35,000
Profit for the year 14,500 12,000
Transfers from other reserves – –
57,500 47,000
Dividends paid (5,000) (4,000)

Transfers to other reserves – –
Balance at end of year 52,500 43,000
Notes:
 In practice, the statement of changes in equity has a separate column for each classification of
equity e.g. share capital, share premium, revaluation reserve, plus any other reserves of the
company.
 The lines indicating transfers to and from reserves would include revaluation reserves, share
premium, revenue reserves, etc.
See Appendix 1 for a comprehensive example of a statement of changes in equity.
Example dividends statement

Notes to the financial statements
$000 $000
Amounts recognised as distributions to
equity holders during the year:
Final dividend for last year of $0.075per share 3,000 2,200
Interim dividend for this year of $0.050 per share 2,000 1,800
Proposed final dividend for this year of 5,000 4,000
$0.095 per share 3,800 3,000
Notes:
 Only dividends paid during the year are now included in the financial statements. They are
shown as deductions in the statement of changes in equity.
 The proposed final dividend is subject to approval of the shareholders at the Annual General
Meeting. It is only included by way of a note to the financial statements.
 No liability is included in the financial statements in respect of the proposed final dividend.

The statement of financial position

IAS 1 specifies the minimum information which must be shown on the face of the statement of
financial position. It requires entities to separate out:
 non-current assets – property, plant, equipment, plant and machinery, motor vehicles, intangible
assets, goodwill, etc.
 current assets – inventories, trade receivables, cash and cash equivalents
 current liabilities – trade payables, bank overdrafts and taxation
 non-current liabilities – bank loans and long-term provisions
 equity – share capital, share premium, reserves and retained earnings.
The example below shows the way the information should be presented. Notice that the figure for
retained earnings is the closing figure from the statement of changes in equity.
IAS 1 does not prescribe the format of the statement of financial position or the order in which
information is presented. For example, non-current assets can be presented before current assets or
vice versa; current liabilities can be presented before non-current liabilities, then equity, or vice versa.
A net asset presentation (assets minus liabilities) is allowed. The long-term financing approach
used in the UK and elsewhere (fixed assets + current assets  short-term payables = long-term
debt plus equity) is also acceptable.
The layout in the example below is acceptable and familiar to teachers and learners. The alternative
layouts used in recent textbooks and by some companies may be a source of confusion. See
Appendix 2 for the common configuration/alternative that appears in some text books and company
reports.
Financial statements of a private limited company

Many private limited companies are changing to the IAS format used by a public limited company
(PLC – one which is traded on the stock exchange). However the traditional format of an income
statement is given below, as this format is likely to continue to appear in textbooks and in the
accounts of private limited companies.
The income statement of a private limited company (a company which is not traded on the stock
exchange) follows the same format as for a sole trader, although interest on debentures and
directors’ remuneration may be included in the expenses in the profit and loss section.
The first section of the statement of financial position of a private limited company is similar to that of
a sole trader. The second section of the statement of financial position needs to show the share
capital and reserves.

Example statement of financial position
XYZ Limited
Statement of financial position at 31 December 2013

$000 $000 $000
Non-current Assets
Goodwill 7,700 8,000
Property, plant & equipment 100,000 92,100
107,700 100,100
Current Assets
Inventories 1,000 800
Trade and other receivables 5,000 4,000
Cash and cash equivalents 500 300
6,500 5,100
Current Liabilities
Trade and other payables 1,200 1,000
Tax liabilities 3,500 4,000
4,700 5,000
Net Current Assets 1,800 100
Net Current Liabilities

Bank loan (5,000) 5,200
104,500 95,000
Equity
Share capital 40,000 40,000
Share premium 2,000 2,000
General reserve 10,000 10,000
Retained earnings 52,500 43,000
104,500 95,000

International Accounting Standards – IAS 2 Inventories
IAS 2: Inventories
The term inventory refers to the stock of goods which the business holds in a variety of forms:
 raw materials for use in a subsequent manufacturing process
 work in progress, partly-manufactured goods
 finished goods, completed goods ready for sale to customers
 finished goods that the business has bought for resale to customers.
The principle of inventory valuation set out in IAS 2 is that inventories should be valued at the
lower of cost and net realisable value.
Note the exact wording. It is the lower of cost and net realisable value, not the lower of cost or net
realisable value.
The net realisable value is the estimated selling price in the normal course of business, less the
estimated cost of completion and the estimated costs necessary to make the sale.
Note that stock is never valued at selling price or net realisable value when that price is greater than
the cost.
Example of stock valuation (1)
The ABC Stationery Company bought 20 boxes of photocopier paper at $5 per box. Following a
flood in their stockroom 5 of the boxes were damaged. They were offered for sale at $3 per box. All
were unsold at the end of the company’s financial year.
At what price will they be valued in the annual accounts?
15 boxes will be valued at their cost of $5 per box, a total of $75.

5 boxes will be valued at $3 per box, a total of $15. The total stock value will be $90.

Example of stock valuation (2)
The Good Look Clothing Company carries a variety of stocks. At their year end they produce the
following data:
Item Cost Net Realisable Selling

Price Value Price (when new)
$ $ $
New dresses 1,000 1,500 2,000
Children’s clothes 2,000 3,000 3,000
Bargain fashions 1,200 900 2,000
What will be the total stock value for the annual accounts?
$
New dresses 1,000
Children’s clothes 2,000
Bargain fashions 900
Total stock value 3,900
Note that the valuation of the Bargain Fashions is the lowest of the three choices. This means that
inventory valuation follows the prudence concept.
Inventory valuation methods

IAS 2 allows two different methods to be used for valuing inventory:
 First in, first out (FIFO). This assumes that the first items to be bought will be the first to be
used, although this may not match the physical distribution of the goods. Valuation of remaining
inventory will therefore always be the value of the most recently purchased items.
 Average cost (AVCO). Under this method a new average value (usually the weighted average
using the number of items bought) is calculated each time a new delivery of inventory is received.
IAS 2 does not allow for inventory to be valued using the last in, first out (LIFO) method.
Inventories which are similar in nature and use to the company will use the same valuation method.
Only where inventories are different in nature or use, can a different valuation method be used.
Once a suitable method of valuation has been adopted by a company then it should continue to use
that method unless there are good reasons why a change should be made. This is in line with the
consistency concept.
Closing inventories for a manufacturing organisation

A manufacturer may hold three categories of inventory:
 raw materials

 work in progress
 finished goods.
Valuing raw materials

A comparison is made between the cost of the raw materials (applying either FIFO or AVCO) and
their realisable value.
Valuing work in progress and finished goods

IAS 2 requires that the valuation of these two items includes not only their raw or direct material
content, but also includes an element for direct labour, direct expenses and production overheads.
The cost of these two items therefore consists of:

 direct materials
 direct labour
 direct expenses
 production overheads (costs to bring the product to its present location and condition)
 other overheads which may be applicable to bring the product to its present location and
condition.
The cost of these two items excludes:

 abnormal waste in the production process
 storage costs
 selling costs
 administration costs not related to production.

Example valuation of work in progress and finished goods

The XYZ Manufacturing Company manufactures wooden doors for the building trade. For the period
under review it manufactured and sold 10,000 doors. At the end of the trading period there were 1,000
completed doors ready for despatch to customers and 200 doors which were half-completed as
regards direct material, direct labour and production overheads.
Costs for the period under review were:

$
Direct material used 20,000
Direct labour 5,000
Production overheads 8,300
Non-production overheads 10,000
Total costs for the period 43,300
Calculate the value of work in progress and finished goods:
Total units sold 10,000

Finished goods units 1,000
Half-completed units (200 x 0.5) 100
Production for the period 11,100
Attributable costs $33,300
Cost per unit 33,300 / 11,100 = $3
Value of work in progress:

200 x 0.5 x $3 = $300
Value of finished goods:

1,000 x 3 = $3,000
Notes:
 Overheads are excluded from the calculations.
 The value of finished goods ($3,000) will be compared with their net realisable value when
preparing the final accounts.

International Accounting Standards – IAS 7 Statement of cash flows
IAS 7 Statement of cash flows
IAS 7 covers the presentation of information about the historical changes in an entity’s cash and cash
equivalents in a statement of cash flows. The statement classifies cash flows during the period according
to operating, investing and financing activities.
This statement is required to be produced as part of a company’s financial statements. IAS 7 provides
guidelines for the format of the statement of cash flows. The statement is divided into three categories:
 operating activities – the main revenue-generating activities of the business, together with the
payment of interest and tax
 investing activities – the acquisition and disposal of long- term assets and other investing
activities
 financing activities – receipts from the issue of new shares, payments for the redemption
of shares and changes in long-term borrowings.
At the end of the statement, the net increase in cash and cash equivalents is shown, both at the start
and end of the period under review. For this purpose:
 Cash is defined as cash on hand and demand deposits.
 Cash equivalents are defined as short-term, highly liquid investments that can easily be converted
into cash. This is usually taken to mean money held in a term deposit account that can be
withdrawn within three months from the date of deposit.
 Bank overdrafts – usually repayable on demand – are included as part of the cash and cash
equivalents.
Format of the statement

Operating activities
The cash flow from operating activities is calculated as:
 profit from operations (profit before deduction of tax and interest)
 add: depreciation charge for the year
 add: loss on sale of non-current assets (or deduct gain on sale of non- current assets)
 less: investment income
 add: decrease in inventories, decrease in receivables and increase in trade payables
or
deduct: increase in inventories, increase in receivables and decrease in trade payables
 less: interest paid
 less: taxes paid on income (usually corporation tax).
Investing activities
This is calculated by including:
 inflows from proceeds from sale of non-current assets, both tangible and intangible, together with
other long-term non-current assets
 outflows from cash used to purchase non-current assets, both tangible and intangible, together with
other long-term non-current assets
 interest received
 dividends received.
Financing activities
This is calculated by including:
 inflows from:
– cash received from the issue of share capital (including share premium)
– raising or increasing loans

 outflows from:
– repayment of share capital
– repayment of loans and finance lease liabilities
 equity dividends paid.
Example calculation of cash flow from operating activities

$
Profit from operations (before tax and interest) 50,000
Adjustments for:
Depreciation charge for the year 12,000
Increase in inventories (3,000)
Decrease in trade receivables 2,000
Increase in trade payables 4,000
Cash (used in)/from operations 65,000
Interest paid (during the year) (5,000)
Tax paid (during the year) (8,000)
Net cash (used in)/from operating activities 52,000
The final figure from the calculation is used in the cash flow statement below.
Example statement of cash flows

Statement of cash flows for the year ended 31 December 2013
$ $
Net cash (used in)/from operating activities 52,000
Cash flows from investing activities:

Purchase of non-current assets (20,000)
Proceeds from the sale of non-current assets 1,000
Interest received 2,000
Dividends received 500

Net cash (used in)/from investing activities (16,500)
Cash flows from financing activities:

Proceeds from issue of share capital (this would 80,000
include both the share and share premium amounts)
Repayment of long-term borrowings (30,000)
Dividends paid (4,000)
Net cash (used in)/from financing activities 46,000
Net increase/(decrease) in cash and cash equivalents 81,500
Cash and cash equivalents at the beginning of the year 10,000
Cash and cash equivalents at the end of the year 91,500

Allowable variations:
IAS 7 allows some flexibility in the way in which cash flow statements can be presented:
 Cash flows from interest and dividends received and paid, can be shown as operating or investing
or financing activities. Whichever is chosen must be applied consistently.
 Cash flows arising from taxes on income are always classified as operating activities unless they
can be specifically identified with financing and/or investing activities.

International Accounting Standards – IAS 8 Accounting policies
IAS 8: Accounting policies, changes in accounting estimates and

errors
This standard is designed to formalise accounting policies within an organisation. It contains a

number of key definitions and general comments.
Accounting policies
These are defined as: ‘the specific principles, bases, conventions, rules and practices applied by an
entity in preparing and presenting financial statements’.
Accounting policies are selected by the directors of the entity (see below). In selecting and applying
policies, the standard requires that:
 Where an accounting policy is given in an accounting standard then that policy must apply.
 Where there is no accounting policy provided to give guidance then the directors of the entity must
use their judgement to give information that is relevant and reliable. They must refer to any other
standards or interpretations or to other standard-setting bodies to assist them. However, they must
make sure that their subsequent interpretation or recommended method of treatment for the
transaction does not result in conflict with international standards or interpretations.
An entity must apply accounting policies consistently for similar transactions. Changes in
accounting policies can only occur:
 if the change is required by a standard or interpretation
or
 if the change results in the financial statements providing more reliable and relevant information.
Any changes adopted must be applied retrospectively to financial statements. This means that the
previous figure for equity and other figures in the income statement and statement of financial position
must be altered, subject to the practicalities of calculating the relevant amounts.
 Accounting principles – No formal definition is given in the standard, but these are the broad
concepts that apply to almost all financial statements, e.g. going concern, materiality, prudence
and consistency.
 Accounting bases – Again, no formal definition is given, but these are the methods developed for
applying the accounting principles to financial statements. They are intended to reduce subjectivity
by identifying and applying acceptable methods.
Dealing with errors

The standard also provides guidance on the effect of errors on financial statements. Errors are defined
as: ‘omissions from and misstatements in the entity’s financial statements for one or more prior
periods arising from a failure to use, or misuse of, reliable information that:
 was available when those financial statements for those periods were authorised for issue
and
 could reasonably be expected to have been obtained and taken into account in the preparation
and presentation of those financial statements’.
Errors in this context could be mathematical mistakes, mistakes in applying policies, oversights or
misinterpretation of the facts. It also includes fraud.
The general principle is that the entity must correct material errors from prior periods in the next set of
financial statements. Thus comparative amounts from prior periods must be restated, subject to the
practicalities of calculating the relevant amounts.

International Accounting Standards – IAS 10 Events after the reporting period
IAS 10: Events after the reporting period
These are events, either favourable or unfavourable, that occur between the statement of financial
position date, and the date on which the financial statements are authorised for issue. They may occur
as a result of information which becomes available after the end of the year, and therefore need to be
disclosed in the accounts.
The key is the point in time at which changes to the financial statements can be made. Once the
financial statements have been approved for issue by the board of directors they cannot be altered.
For example, the accounts are prepared up to 31 December. They are approved for issue by the
board of directors on 30 April in the following year. Between these two dates, changes resulting from
events after 31 December can be disclosed in the accounts.
The statement distinguishes between two types of events:
Adjusting events
An adjusting event is defined as an event after the reporting period that provides further evidence of
conditions that existed at the end of the reporting period. If such an event would materially affect the
financial statements, the financial statements should be changed to reflect these conditions.
Examples of adjusting events include:

 the settlement, after the statement of financial position date, of a court case that confirms that
a present obligation existed at the date of the statement of financial position
 the determination, after the date of the statement of financial position, of the purchase price or
sale price of a non-current asset bought or sold before the year end
 inventories where the net realisable value falls below the cost price
 assets where a valuation shows that impairment is required
 trade receivables where a customer has become insolvent
 the discovery of fraud or errors which show the financial statements to be incorrect.
Non-adjusting events
A non-adjusting event is defined as an event after the reporting period that is indicative of a condition
that arose after the end of the reporting period. No adjustment is made to the financial statements for
such events. If material, they are disclosed by way of notes to the financial statements.
Examples of non-adjusting events include:

 major purchase of assets
 losses of production capacity caused by fire, floods or strike action by employees
 announcement or commencement of a major reconstruction of the business
 changes in tax rates
 entering into significant commitments or contingent liabilities
 commencing litigation based on events arising after the date of the statement of financial position
 major share transactions.
Specific cases
There are three situations in addition to the above that require consideration:
 Dividends declared or proposed after the date of the statement of financial position are no longer
recognised as a liability in the statement of financial position. They are non-adjusting events and
are now to be shown in a note to the financial statements.
 If, after the date of the statement of financial position, the directors determine that the business
intends to liquidate or cease trading and that there is no alternative to this course of action, then
the financial statements cannot be prepared on a going-concern basis.

International Accounting Standards – IAS 10 Events after the reporting period
 Entities must disclose the date when the financial statements were authorised for issue and
who gave that authorisation. If anyone had the power to amend the financial statements after their
authorisation then this fact must also be disclosed.
Examples of adjusting and non-adjusting events
ABC PLC has prepared its financial statements for the year ended 30 June 2014. During August 2014,
before the financial statements have been approved, the following issues arise:
1. The company are informed that a customer has been declared bankrupt owing ABC PLC $8,000.
The debt related to sales in January 2014.
2. The directors are told that an error in preparing the financial statements resulted in revenue being
understated by $50,000.
3. A fire at one of the company’s properties in July 2014 resulted in damage estimated at $125,000.
What action should the directors take in respect of these issues?
1. As the outstanding debt dated back to January 2014, before the end of the financial period, the
insolvency was evidence of a condition that existed at the date of the financial statements. It is thus an
adjusting event and the financial statements should be amended to write off the outstanding $8,000.
2. The error of understating $50,000 revenue relates back to the period ended 30 June 2014. It is thus
an adjusting event and revenue should be increased by $50,000.
3. The fire happened after the end of the financial period and is therefore not evidence of a condition
that existed at that date. This is a non-adjusting event. No adjustment is to be made in the financial
statements, but as the amount is material, the event should be disclosed in the notes to the accounts.

International Accounting Standards – IAS 16 Property, plant and equipment
IAS 16: Property, plant and equipment
This standard deals with the accounting treatment of the non- current assets of property, plant and
equipment. Property, plant and equipment is initially measured at its cost, and subsequently measured
using either a cost or revaluation model, and depreciated so that its depreciable amount is allocated
on a systematic basis over its useful life. The issues covered by the standard are:
 recognition of the assets
 determination of their carrying amounts
 their depreciation charges
 their impairment losses.
As with the other standards, there are a number of definitions:
 Property, plant and equipment – tangible assets held for use in the production or supply of goods
and services, for rental to others and for administrative purposes, which are expected to be used
for more than a period of more than one year
 Depreciation – the systematic allocation of the depreciable amount of an asset over its useful life
 Depreciable amount – the cost or valuation of the asset, less any residual amount
 Useful life – the length of time, or number of units of production, for which an asset is
expected to be used
 Residual value – the net amount the entity expects to obtain for an asset at the end of its
useful life, after deducting the expected costs of disposal
 Fair value – the amount for which an asset could be exchanged between knowledgeable, willing
parties in an arm’s length transaction
 Carrying amount – the amount at which an asset is recognised in the statement of financial
position, after deducting any accumulated depreciation and impairment loss.
Recognition of the asset in the financial statements

At what point does an entity recognise the asset? The standard states that an item of property, plant
and equipment is to be brought into the financial statements when:
 it is probable that future economic benefits will flow to the entity
and
 the cost of the asset can be reliably measured.
Additional costs associated with the asset

The standard recognises that in addition to the initial purchase price of the asset, other amounts will
also be spent on it. The standard provides the following guidelines to assist with the treatment of such
expenditure:
 Day-to-day costs of servicing or repairing the asset should be charged as expenditure in the
income statement
 Where parts (e.g. the seats in an aeroplane) require replacement at regular intervals, these costs
can be recognised as part of the carrying amount of the asset – subject to the rules of asset
recognition above.
 Where the asset requires regular inspections in order for the asset to continue operating, the costs
of such inspections can also be recognised in the carrying amount, again subject to the rules of
recognition above.

Costs which can be included in the statement of financial position when the
asset is purchased
The statement provides that the following can be included as part of the cost in the statement of
financial position:
 the initial purchase price
 any import duties, taxes directly attributable to bring the asset to its present location and condition
 the costs of site preparation
 initial delivery and handling costs
 installation and assembly costs
 cost of testing the asset
 professional fees (e.g. architects or legal fees).
The statement also provides guidance on which costs must be excluded as part of the cost in the
statement of financial position:
 any general overhead costs
 the start up costs of a new business or section of the business
 the costs of introducing a new product or service (e.g. advertising).
Valuation of the asset

Once the asset is acquired, the entity must adopt one of two models for its valuation:
 Cost model – cost less accumulated depreciation.
 Revaluation model – the asset is included (carried) at a revalued amount. This is taken as its fair
value less any subsequent depreciation and impairment losses. Revaluations are to be made
regularly to make sure that the carrying amount does not differ significantly from the fair value of
the asset at the date of the statement of financial position.
The standard provides further guidance on the use of fair values in the revaluation model:
 land and buildings – usually determined from a valuation by professional valuers
 plant and equipment – market value.
Guidance is also given on the frequency of the revaluations:

 if changes are frequent, annual revaluations must be made
 where changes are insignificant, revaluations can be made every three to five years.
If an asset is revalued then every asset in that class must be revalued. Thus, if one parcel of land and
buildings is revalued then all land and buildings must be revalued. Any surplus on revaluation is
transferred to the equity section of the statement of financial position as part of the revaluation
reserve. Any loss on revaluation is recognised as an expense in the income statement.
Depreciation
The expected life and residual value of the asset are to be reviewed at least annually. If there is a
difference from previous estimates this must be recognised as a change in an estimate under IAS 8
(Accounting policies, changes in accounting estimates and errors).
 Depreciation must continue to be charged even if the fair value of an asset exceeds its carrying
amount.
 Depreciation need not be charged when the residual value is greater than the carrying amount.
 Depreciation is to be included as an expense in the income statement.

When considering the useful life of an asset the following should be considered:
 expected usage of the asset, its capacity or output
 expected physical wear and tear
 technical or commercial obsolescence
 legal or other limits imposed on the use of the asset.
Freehold land is not to be depreciated, other than in the case of a mine or quarry. It is carried in the
statement of financial position at cost.
Land and buildings are to be separated out. The element of land is not depreciated, but buildings are.
Allowable methods of depreciation are:

 straight line
 diminishing or reducing balance
 units of output.
The entity must choose a method of depreciation which reflects the pattern of its usage over its useful
economic life. Ideally, once the entity has decided on the method it should not be changed. It is
possible, though, to review the method, and if a change in the pattern of usage of the asset has
occurred, the method of depreciation should be changed to reflect this. This type of change comes
under IAS 8.
Derecognition
This occurs when the asset is sold or no further future economic benefits are expected from its use.
Any profit or loss on disposal is shown in the income statement.
Disclosure in the financial statements

For each class of property, plant and equipment the financial statements must show:
 the basis for determining the carrying amount
 the depreciation method used
 the useful life or depreciation rate
 the gross carrying amount at the beginning and end of the accounting period
 the accumulated depreciation and impairment losses at the beginning and end of the accounting
period
 additions during the period
 disposals during the period
 depreciation for the period.
These are likely to be shown as a fixed asset schedule and included as a note to the financial
statements.

Example schedule of non-current assets
DEF plc
Schedule of non-current assets at 31 December 2014
Premises Plant and Motor Total

machinery vehicles
$000 $000 $000 $000
Cost
At 1 January 2013 600 320 250 1170
Revaluation 300 300
Additions - 115 120 235
Disposals - (85) (90) (175)
At 31 December 2014 900 350 280 1530
Depreciation
At 1 January 2013 60 145 115 320
Revaluation (60) (60)
Provided in the year - 35 90 125
Disposals - (15) (30) (45)
At 31 December 2014 - 165 175 340
Net book value

At 31 December 2014 900 185 105 1190
At 31 December 2013 540 175 135 850

International Accounting Standards – IAS 36 Impairment of assets
IAS 36: Impairment of assets
This standard seeks to make sure that an entity’s assets are not carried at more than their recoverable
amount, and to define how the recoverable amount is determined.
There is a series of key definitions:

 Impairment loss – the amount by which the carrying amount of an asset exceeds its recoverable
amount.
 Carrying amount – the amount at which the asset is recognised in the statement of financial
position, after deducting accumulated depreciation and accumulated impairment losses.
 Recoverable amount – the higher of the asset’s fair value less net selling price and its value in
use.
 Fair value – the amount for which an asset could be exchanged, or a liability settled between
knowledgeable, willing parties in an arm’s length transaction. The standard provides guidance:
– The best evidence of fair value is a binding sale agreement less disposal costs.
– If there is an active market as evidenced by buyers, sellers and readily-available prices, it is
permissible to use the market price less disposal costs.
– Where there is no active market, the entity can use an estimate based on the best information
available of the selling price less the disposal costs.
– Costs of disposal are direct costs only, for example legal or removal expenses.
 Value in use – the present value of the estimated future cash flows expected to be derived from an
asset. This is usually calculated using discounted cash flow techniques. The entity should consider
the following:
– estimated future cash flows from the asset
– expectations of possible variations, either in amount or timing of the future cash flows
– current interest rates
– the effect of uncertainty inherent in the asset.
Identifying an asset that may be impaired

At the end of each reporting period, an entity is required to assess whether there is any indication that
an asset may be impaired (i.e. its carrying amount may be higher than its recoverable amount).
Goodwill should be tested for impairment annually.
Indications of impairment
External sources:
 market value declines
 negative changes in technology, markets, economy or laws
 increases in interest rates
 net assets of the company higher than market capitalisation.
Internal sources:
 obsolescence or physical damage
 asset is idle
 worse economic performance than expected.
An indication of impairment indicates that the asset’s useful life, depreciation method, or residual value
may need to be reviewed and adjusted.

International Accounting Standards – IAS 36 Impairment of assets
Recognition of an impairment loss

 An impairment loss is recognised whenever the recoverable amount is below the carrying amount.
 The impairment loss is recognised as an expense in the income statement, unless it relates to a
revalued asset. For revalued assets, the impairment loss is treated as a revaluation decrease.
 Depreciation for future periods must be adjusted.
Disclosure
Impairment losses either recognised or reversed should be disclosed by class of asset.
If an individual impairment loss is material, the following must be disclosed:

 the events and circumstances resulting in the impairment loss
 the amount of the loss or reversal
 details of the individual asset and the class to which it relates.
If impairment losses recognised or reversed are material in total to the financial statements as a
whole, disclose:
 the main classes of assets affected
 the main events and circumstances involved.
Example asset values in statement of financial position

An entity has three non-current assets in use at the date of its statement of financial position.
Details of their carrying values and recoverable amounts are set out below:
Asset Carrying amount Fair value less costs Value in use

to sell
$ $ $
1 30000 10000 50000
2 15000 12000 14000
3 20000 15000 9000
In the statement of financial position they should be shown at the following values:
Asset Value in statement of Reason

financial position
$
The carrying amount is less
1 30000 than the recoverable
amount, its value in use.
The carrying amount is
2 14000 greater than the
recoverable amount, the
highest of which is its value
in use.
The carrying amount is
3 15000 greater than the
recoverable amount, the
highest of which is its fair
value less costs to sell.

International Accounting Standards – IAS 37 Provisions, contingent liabilities and contingent assets
IAS 37: Provisions, contingent liabilities and contingent assets
The objective of the standard is to make sure that appropriate recognition criteria and measurement
bases are applied to provisions, contingent liabilities and contingent assets. Enough information must
be disclosed in the notes to the financial statements to enable users to understand their nature, timing
and amount.
There are a series of key definitions:
 Provision – a liability of uncertain timing or amount

 Liability – a present obligation as a result of past events, where settlement is expected to result in
an outflow of resources (payment)
 Contingent liability – a possible obligation depending on whether some uncertain future event
occurs, or a present obligation, but payment is not probable or the amount cannot be reliably
measured
 Contingent asset – a possible asset that arises from past events and whose existence will be
confirmed only by the occurrence of one or more uncertain future events not wholly within the
control of the entity.
Recognition of a provision
Recognition of a provision or a contingent liability depends on the probability of liability resulting.
A provision must be recognised if:

 a present obligation exists as a result of a past event
 payment is probable (more likely than not)
and
 the amount can be reliably estimated.
An obligating event is an event that creates a legal or constructive obligation and, therefore, results in
an entity having no realistic alternative but to settle the obligation.
A possible obligation (a contingent liability) is disclosed, but not accrued.
Where the possibility of payment is remote, no accrual or disclosure is required.
The amount recognised as a provision should be the best estimate at the date of the statement of
financial position of the expenditure required to settle the present obligation.
Contingent asset
These should not be recognised in the financial statements, but should be disclosed where an inflow
of economic benefits is probable and the amount is material. Where the inflow of economic benefits is
possible or remote, there should be no recognition and no disclosure.
Example of recognition of provision or contingent liability

A company manufactures shampoo. A customer has sued the company claiming that the shampoo has
caused burns to her head. The customer is claiming damages of $100,000. Lawyers have advised the
company that it is possible that the customer may win the legal case.
As the outcome of the case is uncertain (i.e. a possible successful claim for damages), the company
is not certain to be liable, i.e. this is a contingent liability. In these circumstances, the company should
not make a provision, but should disclose details of the case in its notes to the accounts.
If the lawyer was of the opinion that it was probable that they would lose the legal case, provision for
the damages should be made in the financial statements.

International Accounting Standards – IAS 38 Intangible assets
IAS 38: Intangible assets
This standard covers the accounting treatment for intangible assets.
An intangible asset is defined as an identifiable non-monetary asset without physical substance.

The three critical attributes of an intangible asset are:
 must be identifiable
 must be controlled by the entity
 the entity must be able to obtain future economic benefits from the asset.
Intangible assets may be self-produced or purchased.
Examples of intangible assets

The following is not an exhaustive list, but gives some examples of intangible assets:
 patented technology, for example computer software, databases, trade secrets
 trademarks
 customer lists
 marketing rights
 franchise agreements.
Recognition
The standard requires an entity to recognise an intangible asset, whether purchased or self-created (at
cost) if:
 it is probable that the future economic benefits attributable to the asset will flow to the entity
and
 the cost of the asset can be reliably measured.
If an intangible asset does not meet both the definition of, and the criteria for, recognition, IAS 38
requires the expenditure to be recognised as an expense when it is incurred.
Specific cases
The standard details initial recognition criteria and accounting treatment for specific cases as follows.
Research and development costs

 Research costs – charge all to the income statement.
 Development costs may be capitalised (as an intangible asset) only after the technical and
commercial feasibility of the asset for sale or use have been established. The entity must
demonstrate how the asset will generate future economic benefits.
Internally generated brands, customer lists etc.

These should not be recognised as assets.
Computer software
If purchased, this may be capitalised. If internally generated, whether for sale or for use, it should be
charged as an expense until technical and commercial feasibility has been established.
Other types of cost

The following items must be charged to expenses when incurred, not classed as intangible assets:
 internally-generated goodwill
 start-up costs
 training costs
 advertising and promotional costs
 relocation costs.

International Accounting Standards – IAS 38 Intangible assets
Measurement subsequent to acquisition

Similarly to tangible non-current assets, an entity must choose either the cost model or the revaluation
model for each class of intangible asset.
Cost model
After initial recognition, intangible assets should be carried at cost less accumulated amortisation
(depreciation) and impairment losses.
Revaluation model
Intangible assets may be carried at a revalued amount (based on fair value) less any subsequent
amortisation and impairment losses, only if fair value can be determined by reference to an active
market. In the case of intangible assets, it is unlikely that such markets will exist.
Classification based on useful life

Intangible assets are classified as having either an indefinite life or a finite life.
Indefinite life
This is where there is no foreseeable limit to the period over which the asset is expected to generate
net cash inflows for the entity. An intangible asset with an indefinite useful life should not be amortised.
Finite life
This is where there is a limited period of benefit to the entity. In these circumstances, the cost less
residual value should be amortised on a systematic basis over that life, reflecting the pattern of
benefits.
Disclosure
For each class of intangible asset, the following should be disclosed:
 useful life or amortisation rate
 amortisation method
 gross carrying amount
 accumulated amortisation and impairment losses
 reconciliation of the carrying amount at the beginning and end of the reporting period
 the basis for determining that an intangible asset has an indefinite life
 description and carrying amount of individually material intangible assets.

International Accounting Standards – Appendices
Appendices
Appendix 1: Statement of changes in equity 31

Appendix 2: Alternative format for statement of financial position 32
Appendix 3: Financial statements for other forms of business (AS Level) 33
Appendix 4: Financial statements for other forms of business (A Level) 37
Appendix 5: Resources for photocopying 40

International Accounting Standards – Appendix 1
Appendix 1: Statement of changes in equity
Statement of changes in equity for the year ended 31 December 2013
Share Share Revaluation Retained

capital premium reserve earnings Total
$ $ $ $ $
Balance at start of year 150,000 5,000 20,000 108,000 283,000
Share issue 30,000 3,000 33,000
Profit for the year 58,000 58,000
Revaluation 30,000 30,000
Dividends paid (12,000) (12,000)
Balance at end of the year 180,000 8,000 50,000 154,000 392,000

Appendix 2: Alternative format for statement of financial position
XYZ Limited
2013 2012
$000 $000
ASSETS
Non-current assets
Goodwill 7,700 8,000
Property, plant & equipment 100,000 92,100
107,700 100,100
Current assets
Inventories 1,000 800
Trade and other receivables 5,000 4,000
Cash and cash equivalents 500 300
6,500 5,100
Total assets 114,200 105,200
EQUITY & LIABILITIES

Capital and reserves
Issued capital 40,000 40,000
Share premium 2,000 2,000
General reserve 10,000 10,000
Retained earnings 52,500 43,000
104,500 95,000
Non-current liabilities
Bank loan 5,000 5,200
Current liabilities
Trade and other payables 1,200 1,000
Tax liabilities 3,500 4,000
4,700 5,000
Total equity and liabilities 114,200 105,200

Appendix 3: Financial statements for other forms of business

(AS Level)
(a) Financial statements of a sole trader – trading business
Income statement
Sole Trader (Name)

Income statement for the year ended 31 December 2013
$000 $000 $000
Revenue (sales) 520
Less Sales returns 3
517
Less Cost of sales
Opening inventory 46
Purchases 196
Less Purchase returns 4
192
Less Goods for own use 2
190
Carriage inwards 5 195
241
Less closing inventory 56 185
Gross profit 332
Discount received 2
Rent received 14
Commission received 4
* Profit on disposal of non-current assets -
** Reduction in provision for doubtful debts -
352
Less Expenses
Wages and salaries 84
Office expenses 52
Rent and rates 26
Insurance 19
Motor vehicle expenses 28
Selling expenses 22
Loan interest 2
* Loss on disposal of non-current assets 7
** Provision for doubtful debts 3
Depreciation of fixtures and fittings 9
Depreciation of office equipment 6
Depreciation of motor vehicles 8 266
*** Profit for the year 86
Notes:
* If only one asset was sold during the year only one of these items will appear.
** If the provision reduces, the surplus amount is added to the gross profit: if the provision increases,
the amount required is included in the expenses.
*** If the expenses exceed the gross profit plus other income, the resulting figure is described as
a net loss.

Statement of financial position
Sole Trader (Name)

$000 $000 $000
ASSETS
Non-current assets Cost Depreciation Book
to date value
Land and buildings 50 - 50
Fixtures and fittings 49 39 10
Office equipment 36 16 10
Motor vehicles 85 32 53
220 87 123
Current assets
Inventory 56
Trade receivables 53
Less Provision for doubtful debts 6 47
Other receivables 6
* Cash at bank 12
Cash on hand 2 123
Total assets 226
CAPITAL & LIABILITIES

Capital
Opening balance 152
Add Profit for the year * 86
238
Deduct drawings 62
176
Bank loan 20
Current liabilities
Trade payables 21
Other payables 6
Bank overdraft 3 30
Total capital and liabilities 226
Note:
* If there is a net loss, this will be deducted rather than added.

(b) Financial statements (final accounts) of a partnership business
Income statement
The income statement of a partnership is the same as the income statement of a sole trader. The net
profit is then appropriated to the partners as follows. Assume that the partners share profits in the ratio
2:1.
(Partnership Name)
Profit and Loss Appropriation Account for the year ended 31 December 2013
$ $ $
Net profit 45,000
Add Interest on drawings – Partner A 2,200
Partner B 3,800 6,000
51,000
Less Interest on capital – Partner A 2,000
Partner B 1,000 3,000
Partner’s salary – Partner B 18,000 21,000
30,000
Profit shares Partner A 20,000
Partner B 10,000 30,000

The first section of the statement of financial position of a partnership is similar to a sole trader.
The second section shows the capital and current account of each partner. Where the full details
of the partners’ current accounts are not required, this section could be presented as follows.
(Partnership Name)
Statement of financial position (extract) at 31 December 2013
Partner A Partner B Total

Capital accounts 40,000 20,000 60,000
* Current accounts 28,200 16,800 45,000

68,200 36,800 105,000
Note:
* Where the balance of a partner’s current account is a debit balance it is shown in brackets and
deducted rather than added.

Where full details of the current accounts are required the ‘Financed by’ section of a partnership
statement of financial position could be presented as follows.
Partnership (Name)
Statement of financial position (extract) at 31 December 2013
$ $ $
Partner A Partner B Total
Capital accounts 40,000 20,000 60,000
Current accounts
*Opening balance 27,200 17,300 44,500
Interest on capital 2,000 1,000 3,000
Partner’s salary - 18,000 18,000
**Profit shares 20,000 10,000 30,000
49,200 46,300 95,500
Less Drawings 21,000 29,500 50,500
28,200 16,800 45,000
Notes:
* Where a balance is a debit balance it is shown in brackets and deducted rather than added.
** Where there is a loss to share out it is shown in brackets and deducted rather than added.

Appendix 4: Financial statements for other forms of business

(A Level)
(a) Financial statements (final accounts) of a manufacturing business

Manufacturing account
A business that manufactures goods must prepare a manufacturing account to show the calculation of
the cost of manufacture, whatever the ownership of the business. The manufacturing business could
be a sole trader or a partnership.
Name of manufacturing business

Manufacturing Account for the year ended 31 December 2013
$ $
Cost of material consumed
Inventory of raw material 38,000
Purchases of raw material 76,000
Carriage on raw material 2,000
116,000
Less closing inventory of raw material 35,000 81,000
Direct wages 43,000
Direct expenses 14,000
Prime cost 138,000
Add Factory overheads
Indirect wages 26,000
Factory rent and rates 18,000
Factory insurance 11,000
Factory fuel and power 15,000
Factory general expenses 23,000
Depreciation of factory machinery 9,000 102,000
240,000
Add opening inventory of work in progress 15,000
255,000
Less closing inventory of work in progress 12,000
Production costs of goods completed 243,000
Trading account
The trading account of a manufacturing business follows the same format as that of any other
form of business. The trading account also includes the production cost of goods completed.
Name of manufacturing business

Trading Account for the year ended 31 December 2013
$ $
Revenue (sales) 365,000
Less cost of sales
Opening inventory of finished goods 23,000
Production cost of goods completed 243,000
Purchases of finished goods 17,000
283,000
Less Closing inventory of finished goods 22,000 261,000
Gross profit 104,000

Statement of comprehensive income (income statement)

The income statement of a manufacturing business follows the same format as that of other forms of
business. The income statement will include only office, selling and financial expenses.

The statement of financial position of a manufacturing business follows the same format as that of any
other business; however there may be three inventories rather than one.
(b) Financial statements (final accounts) of a non-trading organisation

Receipts and payments account
A summary of the cash book, known as a receipts and payments account, is prepared by the
treasurer of a non-trading organisation. All money received is shown on the debit side and all money
paid out on the credit side. It is balanced in the same way as a cash account. A trading account
may be prepared if a shop or café etc. is operated by the organisation.
Non-trading Organisation (Name)

Shop Trading Account for the year ended 31 December 2013
$ $ $
Revenue (sales) 22,500
Less cost of sales
Opening inventory 2,300
Purchases 7,400
9,700
Less closing inventory 1,800
Cost of goods sold 7,900
Add Shop expenses
Wages of shop assistant 4,200
Shop rent and rates 3,600
Depreciation of shop fittings 1,100 8,900 16,800
Profit on shop 5,700

Income and expenditure account

An income and expenditure account is also prepared – the equivalent of the income statement of a
business. The expenses of the organisation are deducted from the revenue and the resulting figure
is a surplus or deficit, rather than a profit or loss.

Income and Expenditure Account for the year ended 31 December 2013
$ $
Income
Subscriptions 45,000
Profit on shop 5,800
Competition – entrance fees 1,600
less expenses 400 1,200
Interest received 1,300
* Profit on disposal of non-current assets -
53,300
Expenditure
General expenses 16,300
Rates and insurance 12,000
Repairs and maintenance 2,400
Loan interest 600
* Loss on disposal of non-current assets 300
Depreciation of equipment 1,500 33,100
** Surplus for the year 20,200
Notes:
* If only one asset was sold during the year only one of these items will appear.
** If the expenditure exceeds the income the resulting figure is described as a deficit.

The first section of the statement of financial position of a non-trading organisation follows the same
format as that of a sole trader. The second section of the statement of financial position has to be
modified so that it shows the accumulated fund and the surplus or deficit.

Extract from statement of financial position at 31 December 2013
$
Accumulated fund
Opening balance 67,500
Plus surplus for the year 20,200
87,700

Appendix 5: Resources for photocopying
(a) Income statement of a sole trader / partnership

(b) Statement of financial position of a sole trader
(c) Partnership appropriation account
(d) Statement of financial position of a partnership
(e) Income statement of a limited company
(f) Statement of changes in equity of a limited company
(g) Statement of financial position of a limited company
(h) Statement of cash flows of a limited company
(i) Schedule of non-current assets of a limited company
(j) Manufacturing account

a) Income statement of a sole trader / partnership
…………………………………………………………………………
Income statement for the year ended .......................................................
$ $
Revenue
Cost of sales
Gross profit for the year

Add:
Less: Expenses
Profit for the year
b) Statement of financial position of a sole trader
………………………………………………
Statement of financial position at ..........................................
$ $
Non-current assets

Current assets
Total assets $
Capital account
Current liabilities
Total capital and liabilities $
c) Partnership appropriation account
…………………………………………………………
Partnership appropriation account for the year ended………………………

$ $
Profit for the year
Add: Interest on drawings
Less: Interest on capital
Less: Partners’ salaries
Profit before appropriation
Profit shared


d) Statement of financial position of a partnership
………………………………………………
Statement of financial position at ..........................................
$ $
Non-current assets
Current assets
Total assets $
Capital accounts
Current accounts
Current liabilities
Total capital and liabilities $

e) Income statement of a limited company
…………………………………………………………………………
Income statement for the year ended .......................................................
$
Revenue
Cost of sales
Gross profit
Distribution costs
Administration expenses
Profit / (loss) from operations
Finance costs
Profit / (loss) before tax
Tax
Profit for the year
f) Statement of changes in equity of a limited company

…………………………………………………………………………
Statement of changes in equity for the year ended ....................................
Share Retained
capital earnings Total
$ $ $ $ $
Balance at start of year
Balance at end of the year

g) Statement of financial position of a limited company
$000
ASSETS
Non-current assets
Current assets
Total assets $
EQUITY & LIABILITIES

Capital and reserves
Current liabilities
Total equity and liabilities $
h) Statement of cash flows of a limited company
…………………………………………………………………..
Statement of cash flows for the year ended ………………………………….
$ $
Net cash (used in) / from operating activities
Cash flows from investing activities

Net cash (used in) / from investing activities

Cash flows from financing activities
Net cash (used in) / from financing activities
Net increase / (decrease) in cash and cash equivalents

Cash and cash equivalents at start of the year
Cash and cash equivalents at end of the year
i) Schedule of non-current assets of a limited company
…………………………………………………………………….
Schedule of non-current assets at ……………………………………………
Total
$ $ $ $ $
Cost
At
Revaluation
Additions
Disposals
At
Depreciation
At
Revaluation
Provided in the year
Disposals
At

Net book value

At
At
j) Manufacturing account
………………………………………………………..
Manufacturing account for the year ended ……………………………….
$ $
Cost of raw material consumed
Direct wages
Direct expenses
Prime cost
Add: Factory expenses
Add: Opening inventory of work in progress
Less: Closing inventory of work in progress

Production cost of goods completed

© Cambridge International Examinations 2015

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Cambridge International Examinations

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International Accounting

International Accounting Standards

Cambridge International AS & A Level

International Accounting Standards

IAS 1 Presentation of financial statements

IAS 2 Inventories (not long-term contracts)

IAS 7 Statement of cash flows

IAS 8 Accounting policies, changes in accounting estimates and errors

IAS 10 Events after the reporting period

IAS 16 Property, plant and equipment

IAS 36 Impairment of assets

IAS 37 Provisions, contingent liabilities and contingent assets

IAS 38 Intangible assets

Use of this document

Users of financial statements

Cambridge International AS & A Level Accounting 9706 3

Main users Reasons for use

4 Cambridge International AS & A Level Accounting 9706

IAS 1: Presentation of financial statements

Presentation of financial statements

The purpose of financial statements

The components of the financial statements

Cambridge International AS & A Level Accounting 9706 5

Structure and content of financial statements

Income statement (Statement of comprehensive income for the year ended)

Expenses may be analysed:

The following example uses analysis by function. Note that:

6 Cambridge International AS & A Level Accounting 9706

Example statement of comprehensive income

Statement of comprehensive income for the year ended 31 December 2013

Revenue 100,000 80,000

Cost of Sales (60,000) (45,000)

Gross Profit 40,000 35,000

Profit/(Loss) from Operations 21,000 18,000

Finance Costs (3,000) (2,000)

Profit/(Loss) Before Tax 19,000 16,000

Taxation (4,500) (4,000)

Profit/(Loss) for the year attributable to equity holders 14,500 12,000

Cambridge International AS & A Level Accounting 9706 7

Example statement of changes in equity

31 December 2013 31 December 2012

Profit for the year 14,500 12,000

Transfers from other reserves – –

Dividends paid (5,000) (4,000)

Balance at end of year 52,500 43,000

See Appendix 1 for a comprehensive example of a statement of changes in equity.

Example dividends statement

Final dividend for last year of $0.075per share 3,000 2,200

Proposed final dividend for this year of 5,000 4,000

$0.095 per share 3,800 3,000

8 Cambridge International AS & A Level Accounting 9706

The statement of financial position

Financial statements of a private limited company

Cambridge International AS & A Level Accounting 9706 9

Example statement of financial position

Statement of financial position at 31 December 2013

31 December 2013 31 December 2012

Property, plant & equipment 100,000 92,100

Trade and other receivables 5,000 4,000