CIMA f1 ELSEVIER Financial Operations

CIMA Official
Learning System
Operational Level

F1 – Financial
Operations
Jo Watkins


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Contents

The CIMA Learning System

xvii
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xxi

Acknowledgements
How to use the CIMA Learning System
Guide to the Icons used within this Text
Study technique
Paper F1 – Financial Operations

1

Principles of Business Taxation – Introduction

1.1
1.2
1.3

1.4

1.5
1.6
1.7

2

Learning Outcomes
Learning aims
Introduction
Taxation as a source of government revenue
Principles of taxation
1.3.1 Canons of taxation
1.3.2 The American Institute of Certified Public Accountants’ (AICPA)
statement – Guiding Principles of Good Tax Policy:
A Framework for Evaluating Tax Proposals
Basic tax terminology
1.4.1 Direct taxes
1.4.2 Indirect taxes
1.4.3 Incidence
1.4.4 Taxable person
1.4.5 Competent jurisdiction
1.4.6 Hypothecation
1.4.7 Withholding responsibilities
1.4.8 Tax rate structure

1.4.9 The tax gap
Tax bases and classification of taxes
Sources of tax rules
Summary
Revision Questions

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Solutions to Revision Questions

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Direct Taxes on Company Profits and Gains
2.1

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Learning Outcome
Introduction
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FINANCIAL OPERATIONS F1

CONTENTS

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2.2

2.3
2.4

2.5
2.6

2.7
2.8
2.9

The corporate tax base
2.2.1 Schedular systems of corporate taxation
2.2.2 Classification of income
2.2.3 Expenditure
2.2.4 Capital gains
Nominal corporate tax rates
The interaction of the corporate tax system with the personal tax system
2.4.1 Classical system
2.4.2 Imputation system
2.4.3 Partial imputation system
2.4.4 Split rate systems
2.4.5 Examples to illustrate the difference between traditional and
imputation systems
Rules recharacterising interest as dividends
Treatment of losses
2.6.1 Trading losses
2.6.2 Capital losses
2.6.3 Cessation of business
Principles of relief for foreign taxes
The concept of tax consolidation
2.8.1 Capital losses and tax groups
Summary
Revision Questions
Solutions to Revision Questions

3

Indirect Taxes and Employee Taxation
3.1
3.2
3.3

3.4
3.5

3.6

3.7

Learning Outcomes
Introduction
Indirect taxes collected by the entity
3.2.1 Unit taxes and ad valorem taxes
Consumption taxes
3.3.1 Single-stage sales taxes
3.3.2 Multi-stage sales taxes
Value-added tax
3.4.1 Transactions liable to VAT
Indirect taxes paid by the entity
3.5.1 Excise duties
3.5.2 Property taxes
3.5.3 Wealth taxes
Employee taxation
3.6.1 The employee as a separate taxable person subject to a personal
income tax regime
3.6.2 Social security contributions

3.6.3 Other payroll taxes
Use of employer reporting and withholding to ensure compliance and
assist tax collection

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FINANCIAL OPERATIONS

Example of the tax regime information given in the exam
Summary
Revision Questions
Solutions to Revision Questions

4

Administration of Taxation
4.1

4.2

4.3
4.4

4.5

4.6
4.7
4.8

Learning Outcomes
Introduction
The need for record-keeping and record retention
4.2.1 Corporate income tax
4.2.2 Sales tax or VAT
4.2.3 Overseas subsidiaries
4.2.4 Employee taxes and social security
The need for deadlines for reporting (filing returns) and tax payments
Types of powers of tax authorities to ensure compliance with tax rules
4.4.1 Power to review and query filed returns
4.4.2 Power to request special reports or returns
4.4.3 Power to examine records (generally extending back some years)
4.4.4 Powers of entry and search
4.4.5 Exchange of information with tax authorities in other
jurisdictions
Tax avoidance and tax evasion
4.5.1 Tax evasion
4.5.2 Tax avoidance
4.5.3 Statutory general anti-avoidance provisions and case law regimes

Forum on tax administration
International tax dialogue
Summary
Revision Questions
Solutions to Revision Questions

5

International Taxation
5.1
5.2
5.3

5.4
5.5
5.6
5.7

Learning Outcomes
Introduction
The Organisation for Economic Co-operation and Development
(OECD) – Model tax convention
The concept of corporate residence
5.3.1 Place of control and central management of an entity
5.3.2 Place of incorporation
5.3.3 Place of control and place of incorporation
The OECD Articles of the model convention with respect to taxes on
income and on capital
Withholding tax
Underlying tax

Means of establishing a taxable presence in another country
5.7.1 Subsidiary
5.7.2 Branch

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3.8
3.9

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5.8
5.9

Double taxation treaties
5.8.1 The OECD model tax convention
Summary
Revision Questions
Solutions to Revision Questions

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Taxation in Financial Statements
6.1
6.2
6.3
6.4

6.5
6.6
6.7
6.8

Learning Outcome
Introduction
Calculation of current tax
Accounting for current tax
Calculation of deferred tax
6.4.1 Introduction to deferred tax
6.4.2 Timing difference approach

6.4.3 Temporary difference approach
6.4.4 Deferred tax assets
6.4.5 Tax losses
Accounting for deferred tax
Income tax charge
Disclosure
Summary
Revision Questions
Solutions to Revision Questions

7

The IASC and the Standard-Setting Process
7.1
7.2

7.3
7.4

7.5

Learning Outcomes
Learning aims
The need for regulation of financial statements
Variation from country to country
7.2.1 Sources of finance and capital markets
7.2.2 The political system
7.2.3 Entity ownership
7.2.4 Cultural differences
Harmonisation versus standardisation

7.3.1 The need for harmonisation of accounting standards
Elements that might be expected in a regulatory framework for
published accounts
7.4.1 Local law that applies to entities
7.4.2 Locally adopted accounting standards
7.4.3 Local stock exchange requirements
7.4.4 International body requirements
7.4.5 International accounting standards
7.4.6 Locally developed or international conceptual framework for
accounting
Generally accepted accounting practice (GAAP)

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FINANCIAL OPERATIONS

The International Accounting Standards Committee Foundation
(IASC Foundation)
7.6.1 Structure of the IASC Foundation

7.6.2 IASC Foundation
7.6.3 The International Accounting Standards Board (IASB)
7.6.4 The International Financial Reporting Interpretations
Committee (IFRIC)
7.6.5 The Standards Advisory Council (SAC)
7.7
Objectives of the IASC Foundation
7.8 The International Organisation of Securities Commissions (IOSCO)
7.9
Local regulatory bodies
7.9.1
Convergence activities
7.9.2
International reaction
7.10 The standard-setting process
7.10.1 Development of a standard
7.10.2 Other aspects of due process
7.10.3 Co-ordination with national standard-setting
7.10.4 Benchmark treatments and allowed alternatives
7.11 Ways in which IFRS’s are used by countries
7.11.1 Adoption as local GAAP
7.11.2 Model for local GAAP
7.11.3 Persuasive influence in formulating local GAAP
7.11.4 Local GAAP developed with little or no reference to IFRS’s
7.12 Summary
Revision Questions
Solutions to Revision Questions

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Regulatory Framework
8.1
8.2

8.3

8.4
8.5
8.6

Learning Outcome
Introduction
The development of the Framework
8.2.1 Purpose of the Framework
8.2.2 Status of the Framework
8.2.3 Scope of the Framework
The Framework
8.3.1 The objective of financial statements
8.3.2 Underlying assumptions
8.3.3 The qualitative characteristics of financial information
8.3.4 The elements of financial statements
8.3.5 Recognition of the elements of financial statements
8.3.6 Measurement of the elements of financial statements
8.3.7 Concepts of capital and capital maintenance
Usefulness of a conceptual Framework
The IASB’s Framework and the standard-setting process
Summary
Revision Questions
Solutions to Revision Questions

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CONTENTS

7.6

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CONTENTS

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FINANCIAL OPERATIONS F1

9

The Role of the External Auditor
9.1

9.2
9.3

9.4

Learning Outcome
External audit
9.1.1 The purpose of an audit
9.1.2 The auditor’s duties
9.1.3 The powers of auditors
9.1.4 The audit process
The audit report
9.2.1
A closer look at the report
Modified audit reports
9.3.1
Materiality
9.3.2 The wording of a modified audit report
9.3.3
Independent auditor’s report showing qualified opinion
9.3.4
Independant auditor’s report-adverse opinion
Summary
Revision Questions
Solutions to Revision Questions

10 CIMA Code of Ethics for Professional Accountants

10.1

10.2

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Learning Outcomes
Fundamental principles of the code
10.1.1 Integrity
10.1.2 Objectivity
10.1.3 Professional competence and due care
10.1.4 Confidentiality
Section 220 of CIMA’s code of conduct preparation and reporting
of information

Published Financial Statements
Learning Outcome
Learning aims
11.1 Introduction
11.2 General requirements
11.2.1 Purpose of financial statements
11.2.2 Responsibility for financial statements
11.2.3 Components of financial statements
11.2.4 Fair presentation and compliance with IFRSs
11.2.5 Other requirements affecting the preparation of financial
statements
11.3 The statement of financial position
11.3.1 Specimen statement of financial position
11.3.2 Information to be presented in the statement of financial
position

11.3.3 Information to be presented either in the statement of
financial position or in the notes
11.3.4 Share capital and reserves disclosures
11.3.5 The current/non-current distinction

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FINANCIAL OPERATIONS

11.5
11.6
11.7
11.8

Revision Questions
Solutions to Revision Questions

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Reporting Financial Performance
Learning Outcome
Introduction
IAS 18 Revenue Recognition
12.2.1 Introduction
12.2.2 Sale of goods
12.2.3 Rendering of services
12.2.4 Interest, royalties and dividends
12.2.5 Disclosure requirements
12.3 Profit or loss for the period
12.3.1 Extraordinary items
12.3.2 Profit or loss from ordinary activities
12.4 Definitions – Accounting policies, accounting estimates and errors
12.5 Changes in accounting policies
12.5.1 Treatment and disclosure
12.6 Changes in accounting estimates
12.7 Errors
12.7.1 Treatment and disclosure
12.8 Discontinuing operations
12.8.1 Objective
12.8.2 Definition of a discontinued operation
12.8.3 Measurement of a non-current asset (or disposal group)
held for sale
12.8.4 Presentation and disclosure
12.9 International financial reporting standard 8 Operating Segments
(IFRS 8)
12.9.1 IFRS 8 Operating Segments – core principle
12.9.2 Definition of operating segment
12.9.3 Reportable segments
12.9.4 Segment accounting policies

12.9.5 Disclosure
12.1
12.2

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CONTENTS

11.4

11.3.6 Current assets
11.3.7 Current liabilities
The statement of comprehensive income
11.4.1 Information to be presented in the statement of
comprehensive income
11.4.2 Specimen statements of comprehensive income
11.4.3 Information to be presented either in the statement of
comprehensive income or in the notes

Changes in equity
11.5.1 Format for the statement of changes in equity
Notes to financial statements
11.6.1 Accounting policies
An illustrative question
Summary

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FINANCIAL OPERATIONS F1

CONTENTS

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12.9.6 Reconciliations
12.9.7 Information about geographical areas
12.9.8 Information about major customers
12.10 Main differences between IAS 14 Segment Reporting and IFRS 8
Operating Segments
12.11 Summary
Revision Questions
Solutions to Revision Questions

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Statement of Cash Flows
13.1
13.2

13.3

13.4

13.5
13.6

Learning Outcome
Introduction
Objective of IAS 7 Statement of Cash Flows
Statement of cash flows format
13.3.1 Cash flows from operating activities
13.3.2 Cash flows from investing activities
13.3.3 Cash flows from financing activities
13.3.4 Increase (or decrease) in cash and cash equivalents
during period
A worked example
13.4.1 Worked example
13.4.2 Cash flow from operations
13.4.3 Cash flows from investing activities
13.4.4 Cash flows from financing activities
13.4.5 The statement of cash flows
Interpreting a statement of cash flows
Summary
Revision Questions
Solutions to Revision Questions

14

Accounting for Investments in Subsidiary’s

and Associates
14.1
14.2
14.3
14.4

14.5

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Learning Outcome
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Introduction
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Accounting for investments
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Investment in associates
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Investment in subsidiaries
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14.4.1 The principle of control
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14.4.2 The requirement to prepare consolidated financial statements 286
14.4.3 Exclusion from preparing consolidated accounts
286
14.4.4 Goodwill
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14.4.5 IFRS 3 Business combinations
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14.4.6 Fair values in acquisition accounting
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Summary
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Revision Questions

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Solutions to Revision Questions
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The Consolidated Statement of Financial Position 295

CONTENTS

15

FINANCIAL OPERATIONS

15.1
15.2

15.3
15.4
15.5
15.6
15.7

Learning Outcome
Introduction
Applying the principles of consolidation: the consolidated statement
of financial position
15.2.1 Goodwill
15.2.2 Bargain purchases

The elimination of intragroup balances
Intra-group loans and preference shares
The treatment of unrealised profits on assets bought from group
companies
Adjustments for fair value at the date of acquisition
Summary
Revision Questions
Solutions to Revision Questions

16

The Consolidated Statements of Comprehensive
Income
16.1
16.2
16.3
16.4

Learning Outcomes
Introduction
Basic principles
Intra-group trading
Summary
Revision Questions
Solutions to Revision Questions

17

Associates
17.1

17.2
17.3
17.4

Learning Outcome
Introduction
Accounting for associates
17.2.1 Equity accounting
Fair values and accounting policies
Summary
Revision Questions
Solutions to Revision Questions

18

Non-current Tangible Asset Standards
18.1
18.2

Learning Outcome
IAS 16 Property, Plant and Equipment
18.1.1 Objective
Revision of some definitions in IAS 16
18.2.1 Property, plant and equipment
18.2.2 Carrying amount
18.2.3
Cost
18.2.4
Depreciable amount

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18.2.5
Depreciation
18.2.6
Fair value
18.2.7
Impairment loss
18.2.8
Recoverable amount
18.2.9
Residual value
18.2.10 Useful life
18.3
Recognition

18.3.1
Elements of cost
18.3.2
Self-constructed assets
18.3.3
Recognising parts of an asset as separate assets
18.4 Measurement
18.4.1
Cost model
18.4.2
Revaluation model
18.5
Subsequent expenditure
18.6
Accounting for depreciation
18.6.1
Review of useful life
18.6.2
Depreciation method
18.7
Retirements and disposals
18.8
Revaluation of assets
18.8.1
Revaluation surplus
18.8.2
Revaluation deficits
18.8.3
Disposal of a revalued asset
18.9

Disclosure requirements
18.10 IAS 23 Borrowing Costs (revised 2007)
18.10.1 Introduction
18.10.2 Borrowing costs – accounting treatment
18.10.3 Interest rate
18.10.4 Period of capitalisation
18.10.5 Disclosure
18.11 Available for sale financial assets
18.12 Summary
Revision Questions
Solutions to Revision Questions

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Accounting for Leases
19.1
19.2
19.3

19.4

19.5
19.6

Learning Outcome
Introduction
Key definitions
Characteristics of leases
19.3.1
Finance leases

19.3.2
Operating leases
19.3.3
Leases of land and buildings
Accounting for operating leases
19.4.1
Rent-free period
19.4.2
Cashback incentives
Disclosures for operating leases
Accounting for finance leases

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FINANCIAL OPERATIONS

19.8
19.9

Calculating the implied interest on finance leases
19.7.1
In advance/in arrears
Disclosures for finance leases
Summary
Revision Questions
Solutions to Revision Questions

20

Inventories and Construction Contracts
20.1
20.2

20.3

20.4

Learning Outcome
Introduction
IAS 2 Inventories
20.2.1
Definition of inventories
20.2.2
Measurement

20.2.3
Determining cost
20.2.4
Costs not included in cost of inventory
20.2.5
Allocation of overheads
20.2.6
Calculation of costs
20.2.7
Allowed alternative method
20.2.8
Disclosures for inventories
IAS 11 Construction Contracts
20.3.1
General principle
20.3.2
Accounting treatment
20.3.3
Sales revenue
20.3.4
Recognisable contract profits
20.3.5
Expected contract losses
20.3.6
Uncertain outcome
20.3.7
Inventories
20.3.8
Receivables
20.3.9

Payables
20.3.10 Provisions for foreseeable losses
20.3.11 Disclosure requirements
20.3.12 Illustrations from IAS 11
20.3.13 A comprehensive example
Summary
Revision Questions
Solutions to Revision Questions

21

Non-current Intangible Assets
21.1

Learning Outcome
Introduction
21.1.1
Objective of IAS 38 Intangible Assets
21.1.2
Recognition and initial measurement
21.1.3
Internally generated goodwill
21.1.4
Internally generated intangible asset
21.1.5
Subsequent expenditure
21.1.6
Subsequent measurement

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CONTENTS

19.7

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21.2

21.3

21.4
21.5

21.1.7
Amortisation
21.1.8
Impairment losses
21.1.9
Retirements and disposals
21.1.10 Disclosure
Purchased goodwill
21.2.1
Purchased goodwill – recognition and measurement
21.2.2
Negative purchased goodwill
IAS 36 Impairment of Assets
21.3.1
Introduction
21.3.2
Procedures to check for impairment
21.3.3
Recognition and measurement of an impairment loss
Disclosure of impairments
Summary
Revision Questions
Solutions to Revision Questions

22

Share Capital Transactions
Learning Outcome
Introduction
IAS 1 requirements
22.2.1
Interests of shareholders
22.2.2
Disclosures
22.3
Different classes of shares
22.4
IAS 32 Financial Instruments – Presentation
22.5
Issue of shares
22.5.1
Process
22.5.2
Accounting for the issue of shares
22.5.3
Share issue costs, redemption costs and dividends
22.5.4
Redeemable shares
22.5.5
Convertible debt
22.6
Bonus issues
22.6.1
Process
22.6.2
Accounting for a bonus issue

22.7
Accounting for a rights issue
22.8
Accounting for treasury shares
22.9 The purchase and redemption of shares
22.9.1
Purchases out of distributable profits
22.10 Summary
22.1
22.2

Revision Questions
Solutions to Revision Questions

23

Recognition and Disclosure of Other Significant
Accounting Transactions
23.1

Learning Outcome
Introduction

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FINANCIAL OPERATIONS

IAS 10 Events After the Reporting Period
23.2.1
Introduction
23.2.2
Definitions
23.2.3
Adjusting events
23.2.4
Non-adjusting events
23.3 Proposed dividends
23.4 Going concern
23.5 Disclosure requirements of IAS 10
23.6 IAS 37 Provisions, Contingent Liabilities and Contingent Assets
23.6.1
Introduction
23.6.2
Provisions
23.6.3
Measurement of provisions
23.6.4

Provision for decommissioning costs
23.6.5
Provision for warranties
23.7 Contingent liabilities and contingent assets
23.8 Problems with IAS 37 as regards contingencies
23.9 Related party disclosures
23.10 Definitions
23.10.1
Exclusions
23.11 Disclosure
23.11.1
Disclosure of control
23.11.2
Disclosure of transactions and balances
23.11.3
Examples of related party transactions
23.12 Summary
Revision Questions
Solutions to Revision Questions

Preparing for the Examination
Revision technique
Planning
Getting down to work
Tips for the final revision phase

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492
493
499
503
505
505
506
506

Exam Q & As

507

Index

509

CONTENTS

23.2

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The CIMA
Learning System
Acknowledgements
Every effort has been made to contact the holders of copyright material, but if any here
have been inadvertently overlooked, the publishers will be pleased to make the necessary
arrangements at the first opportunity.
We would also like to thank Mike Rogers for his invaluable contribution as the reviewer
also Tom Rolfe author of previous editions of this text.

How to use the CIMA Learning System
This Financial Operations Learning Systems has been devised as a resource for students
attempting to pass their CIMA exams, and provides:
a detailed explanation of all syllabus areas;
extensive ‘practical’ materials, including readings from relevant journals;

● generous question practice, together with full solutions;
● an exam preparation section, complete with exam standard questions and solutions.
This Learning System has been designed with the needs of home-study and distance-learning
candidates in mind. Such students require full coverage of the syllabus topics, and also
the facility to undertake extensive question practice. However, the Learning System is also
ideal for fully taught courses.
The main body of the text is divided into a number of chapters, each of which is organised in the following pattern:
●
●

●

●

●

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Detailed learning outcomes. These outcomes are expected after your studies of the chapters are complete. You should assimilate these before beginning detailed work on the
chapter, so that you can appreciate where your studies are leading.
Step-by-step topic coverage. This is the heart of each chapter, containing detailed explanatory text supported where appropriate by worked examples and exercises. You should
work carefully through this section, ensuring that you understand the material being
explained and can tackle the examples and exercises successfully. Remember that in
many cases knowledge is cumulative: if you fail to digest the earlier material thoroughly,
you may struggle to understand later chapters.
Readings and activities. Most chapters are illustrated by more practical elements, such
as relevant journal articles or other readings, together with comments and questions
designed to stimulate discussion.
Question practice. The test of how well you have learned the material is your ability to tackle
exam-standard questions. Make a serious attempt at producing your own answers, but

at this stage don’t be too concerned about attempting the questions in exam conditions.
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FINANCIAL OPERATIONS F1

●

In particular, it is more important to absorb the material thoroughly by completing a full
solution than to observe the time limits that would apply in the actual exam.
Solutions. Avoid the temptation to merely ‘audit’ the solutions provided. It is an illusion
to think that this provides the same benefits as you would gain from a serious attempt of
your own. However, if you are struggling to get started on a question, you should read
the introductory guidance provided at the beginning of the solution, and then make
your own attempt before referring back to the full solution.

Having worked through the chapters, you are ready to begin your final preparations for
the examination. The final section of the CIMA Learning System provides you with the
guidance you need. It includes the following features:
●
●

●
●

●

●

A brief guide to revision technique.
A note on the format of the examination. You should know what to expect when you
tackle the real exam, and in particular the number of questions to attempt, which questions are compulsory and which optional, and so on.
Guidance on how to tackle the examination itself.
A table mapping revision questions to the syllabus learning outcomes allowing you to
quickly identify questions by subject area.
Revision questions. These are of exam standard and should be tackled in exam conditions, especially as regards the time allocation.
Solutions to the revision questions. As before, these indicate the length and the quality
of solution that would be expected of a well-prepared candidate.

If you work conscientiously through this CIMA Learning System according to the guidelines above, you will be giving yourself an excellent chance of exam success. Good luck
with your studies!

Guide to the Icons used within this Text
Key term or definition
Equation to learn
Exam tip to topic likely to appear in the exam
Exercise
Question
Solution
Comment or Note

Study technique
Passing exams is partly a matter of intellectual ability, but however accomplished you are in
that respect, you can improve your chances significantly by the use of appropriate study and
revision techniques. In this section we briefly outline some tips for effective study during the
earlier stages of your approach to the exam. Later in the text we mention some techniques

that you will find useful at the revision stage.


FINANCIAL OPERATIONS

To begin with, formal planning is essential to get the best return from the time you spend
studying. Estimate how much time you are going to need in total for each subject that you
face. Remember that you need to allow time for revision as well as for initial study of the
material. The amount of notional study time for any subject is the minimum estimated
time that students will need to achieve the specified learning outcomes set out earlier in
this chapter. This time includes all appropriate learning activities, for example, face-to-face
tuition, private study, directed home study, learning at the workplace, revision time, etc.
You may find it helpful to read Better exam results by Sam Malone, CIMA Publishing,
ISBN: 075066357X. This book will provide you with proven study techniques. Chapter
by chapter it covers the building blocks of successful learning and examination techniques.
The notional study time for Operational Level – Financial Operations is 200 hours. Note
that the standard amount of notional learning hours attributed to one full-time academic
year of approximately 30 weeks is 1200 hours.
By way of example, the notional study time might be made up as follows:
Hours
Face-to-face study: up to
Personal study: up to
‘Other’ study – e.g. learning at the workplace, revision, etc.: up to

60
100
40
200

Note that all study and learning-time recommendations should be used only as a guideline and are intended as minimum amounts. The amount of time recommended for

face-to-face tuition, personal study and/or additional learning will vary according to the
type of course undertaken, prior learning of the student, and the pace at which different
students learn.
Now split your total time requirement over the weeks between now and the examination. This will give you an idea of how much time you need to devote to study each week.
Remember to allow for holidays or other periods during which you will not be able to
study (e.g. because of seasonal workloads).
With your study material before you, decide which chapters you are going to study in
each week, and which weeks you will devote to revision and final question practice.
Prepare a written schedule summarising the above – and stick to it!
The amount of space allocated to a topic in the study material is not a very good guide
as to how long it will take you. For example, ‘Financial accounting and reporting’ has a
weight of 60 per cent in the syllabus and this is the best guide as to how long you should
spend on it. It occupies 60 per cent of the main body of the text.
It is essential to know your syllabus. As your course progresses you will become more
familiar with how long it takes to cover topics in sufficient depth. Your timetable may need
to be adapted to allocate enough time for the whole syllabus.

Tips for effective studying
(1) Aim to find a quiet and undisturbed location for your study, and plan as far as possible
to use the same period of time each day. Getting into a routine helps to avoid wasting
time. Make sure that you have all the materials you need before you begin, so as to
minimise interruptions.

THE CIMA LEARNING SYSTEM

Planning

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FINANCIAL OPERATIONS F1

(2) Store all your materials in one place, so that you don’t waste time searching for items
around the house. If you have to pack everything away after each study period, keep
them in a box, or even a suitcase, which won’t be disturbed until the next time.
(3) Limit distractions. To make the most effective use of your study periods, you should
be able to apply total concentration, so turn off the TV, set your phones to message
mode, and put up your ‘do not disturb’ sign.
(4) Your timetable will tell you which topic to study. However, before diving in and
becoming engrossed in the finer points, make sure you have an overall picture of all
the areas that need to be covered by the end of that session. After an hour, allow yourself a short break and move away from your books. With experience, you will learn to
assess the pace you need to work at. You should also allow enough time to read relevant articles from newspapers and journals, which will supplement your knowledge
and demonstrate a wider perspective.
(5) Work carefully through a chapter, making notes as you go. When you have covered
a suitable amount of material, vary the pattern by attempting a practice question.
Preparing an answer plan is a good habit to get into, while you are both studying and
revising, and also in the examination room. It helps to impose a structure on your
solutions, and avoids rambling. When you have finished your attempt, make notes of
any mistakes you made, or any areas that you failed to cover or covered only skimpily.
(6) Make notes as you study, and discover the techniques that work best for you. Your
notes may be in the form of lists, bullet points, diagrams, summaries, ‘mind maps’,
or the written word, but remember that you will need to refer back to them at a later
date, so they must be intelligible. If you are on a taught course, make sure you highlight any issues you would like to follow up with your lecturer.
(7) Organise your paperwork. There are now numerous paper storage systems available to
ensure that all your notes, calculations and articles can be effectively filed and easily
retrieved later.

FINANCIAL OPERATIONS

Syllabus Overview
The core objectives of Paper F1 are the preparation of the full financial statements for
a single company and the principal consolidated financial statements for a simple group.
Coverage of a wide range of international standards is implicit in these objectives, as specified in the paper’s content. Similarly, understanding the regulatory and ethical context of
financial reporting, covered in the paper, is vital to ensuring that financial statements meet
users’ needs. Principles of taxation are included, not only to support accounting for taxes
in financial statements, but also as a basis for examining the role of tax in financial analysis and decision-making within subsequent papers (Paper F2 Financial Management and
Paper F3 Financial Strategy).

Syllabus Structure
The syllabus comprises the following topics and study weightings:
A
B
C

Principles of Business Taxation
Regulation and Ethics of Financial Reporting
Financial Accounting and Reporting

25%
15%
60%

Assessment Strategy
There will be a written examination paper of 3 hours, plus 20 minutes of pre-examination
question paper reading time. The examination paper will have the following sections:

Section A – 20 marks
A variety of compulsory objective test questions, each worth between 2 and 4 marks. Mini
scenarios may be given, to which a group of questions relate.
Section B – 30 marks
Six compulsory short answer questions, each worth 5 marks. A short scenario may be
given, to which some or all questions relate.
Section C – 50 marks
One or two compulsory questions. Short scenarios may be given, to which questions relate.

THE CIMA LEARNING SYSTEM

Paper F1 – Financial Operations

xxi


F1 – A. Principles of Business Taxation (25%)
Learning Outcomes
On completion of their studies students should be able to:
Lead
Component
1. Explain the types of tax that can apply to
(a) identify the principal types of taxation likely to be of
incorporated businesses, their principles and
relevance to an incorporated business in a particular
potential administrative requirements. (2)
country; including direct tax on the company’s trading
profits and capital gains, indirect taxes collected by the
company, employee taxation and withholding taxes on
international payments;

(b) describe the features of the principal types of taxation
likely to be of relevance to an incorporated business in a
particular country; (e.g. in terms of who ultimately bears
the tax cost, withholding responsibilities, principles of
calculating the tax base);
(c) identify and explain key administrative requirements
(e.g. record-keeping and record retention rules, filing
and tax payment deadlines) and the possible enquiry and
investigation powers of taxing authorities associated with
the principal types of taxation likely to be of relevance to an
incorporated business;
(d) explain the difference in principle between tax avoidance
and tax evasion;
(e) illustrate numerically the principles of different types of tax
based on provided information.

Indicative Syllabus Content
●

●

●

●

Concepts of direct versus indirect taxes, taxable
person and competent jurisdiction. (A)
Types of taxation, including direct tax on the
company’s trading profits and capital gains,
indirect taxes collected by the company,

employee taxation and withholding taxes on
international payments, and their features
(e.g. in terms of who ultimately bears the tax
cost, withholding responsibilities, principles of
calculating the tax base). (A, B)
Sources of tax rules (e.g. domestic primary
legislation and court rulings, practice of the
relevant taxing authority, supranational bodies,
such as the EU in the case of value added/sales
tax, and international tax treaties). (A, B)
Indirect taxes collected by the company:
– In the context of indirect taxes, the distinction
between unit taxes (e.g. excise duties based on
physical measures) and ad valorem taxes (e.g.
sales tax based on value).

FINANCIAL OPERATIONS F1

Learning Outcomes and Indicative Syllabus Content

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FINANCIAL OPERATIONS

(Continued)

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THE CIMA LEARNING SYSTEM

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– The mechanism of value added/sales taxes,
in which businesses are liable for tax on their
outputs less credits for tax paid on their
inputs, including the concepts of exemption
and variation in tax rates depending on the
type of output and disallowance of input
credits for exempt outputs. (B)
Employee taxation:
– The employee as a separate taxable person
subject to a personal income tax regime.
– Use of employer reporting and withholding
to ensure compliance and assist tax
collection. (B)
The need for record-keeping and record
retention that may be additional to that required
for financial accounting purposes. (C)
The need for deadlines for reporting (filing
returns) and tax payments. (C)
Types of powers of tax authorities to ensure

compliance with tax rules:
– Power to review and query filed returns.
– Power to request special reports or returns.
– Power to examine records (generally extending
back some years).
– Powers of entry and search.
– Exchange of information with tax authorities
in other jurisdictions. (C)


Learning Outcomes
On completion of their studies students should be able to:
Lead

2. Explain fundamental concepts in
international taxation of incorporated
businesses.

Component

(a) identify situations in which foreign tax obligations
(reporting and liability) could arise and methods for
relieving foreign tax;

Indicative Syllabus Content
●

The distinction between tax avoidance and tax
evasion, and how these vary among jurisdictions
(including the difference between the use of

statutory general anti-avoidance provisions and
case law based regimes). (D)

●

International taxation:
– The concept of corporate residence and the
variation in rules for its determination across
jurisdictions (e.g. place of incorporation versus
place of management).
– Types of payments on which withholding
tax may be required (especially interest,
dividends, royalties and capital gains accruing
to non-residents).
– Means of establishing a taxable presence in
another country (local company and branch).
– The effect of double tax treaties (based on the
OECD Model Convention) on the above (e.g.
reduction of withholding tax rates, provisions
for defining a permanent establishment). (A, B)

●

Direct taxes on company profits and gains:
– The principle of non-deductibility of
dividends and systems of taxation defined
according to the treatment of dividends in the
hands of the shareholder (e.g. classical, partial
imputation and imputation).

(b) describe and explain sources of tax rules and explain the
importance of jurisdiction.

3. Prepare corporate income tax calculations
based on a given simple set of rules. (3)

(a) prepare corporate income tax calculations based on a given
simple set of rules.

FINANCIAL OPERATIONS F1

F1 – A. Principles of Business Taxation (25%) (continued)

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THE CIMA LEARNING SYSTEM