BPP ACCA f7 financial reporting book 2017

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Study Text

Paper F7
Financial Reporting
This ACCA Study Text for Paper F7 Financial
Reporting has been comprehensively reviewed by
the ACCA examining team. This review guarantees
appropriate depth and breadth of content and
comprehensive syllabus coverage.

Financial Reporting

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Paper F7
Financial Reporting

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PAPER F7
FINANCIAL REPORTING

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First edition 2007
Ninth edition February 2016

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Contents
Page

Introduction
Helping you to pass .......................................................................................................................................................... v
Studying F7 .................................................................................................................................................................... vii
The exam paper.............................................................................................................................................................. viii
Syllabus and study guide................................................................................................................................................. ix
1
2
3
4
5
6
7
8
9
10
11
12
13
14

15
16
17
18
19
20
21
22
23

The conceptual framework....................................................................................................................................... 1
The regulatory framework ...................................................................................................................................... 19
Tangible non-current assets .................................................................................................................................. 31
Intangible assets.................................................................................................................................................... 57
Impairment of assets ............................................................................................................................................. 71
Revenue................................................................................................................................................................. 81
Introduction to groups......................................................................................................................................... 107
The consolidated statement of financial position ................................................................................................. 117
The consolidated statement of profit or loss and other comprehensive income ................................................... 153
Accounting for associates.................................................................................................................................... 171
Financial instruments .......................................................................................................................................... 185
Leasing................................................................................................................................................................ 205
Provisions and events after the reporting period.................................................................................................. 217
Inventories and biological assets......................................................................................................................... 233
Taxation............................................................................................................................................................... 247
Presentation of published financial statements.................................................................................................... 267
Reporting financial performance.......................................................................................................................... 293
Earnings per share............................................................................................................................................... 313
Calculation and interpretation of accounting ratios and trends ............................................................................ 329
Limitations of financial statements and interpretation techniques........................................................................ 359

Statements of cash flows ..................................................................................................................................... 367
Accounting for inflation ....................................................................................................................................... 389
Specialised, not-for-profit and public sector entities ........................................................................................... 401

Practice question bank.................................................................................................................................... 411
Practice answer bank ....................................................................................................................................... 447
Index.......................................................................................................................................................................... 499
Review form

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Helping you to pass
BPP Learning Media – ACCA Approved Content Provider
As an ACCA Approved Content Provider, BPP Learning Media gives you the opportunity to use study
materials reviewed by the ACCA examination team. By incorporating the examination team's comments
and suggestions regarding the depth and breadth of syllabus coverage, the BPP Learning Media Study
Text provides excellent, ACCA-approved support for your studies.

The PER alert
Before you can qualify as an ACCA member, you not only have to pass all your exams but also fulfil a three
year practical experience requirement (PER). To help you to recognise areas of the syllabus that you
might be able to apply in the workplace to achieve different performance objectives, we have introduced
the 'PER alert' feature. You will find this feature throughout the Study Text to remind you that what you
are learning to pass your ACCA exams is equally useful to the fulfilment of the PER requirement.
Your achievement of the PER should now be recorded in your online My Experience record.

Tackling studying
Studying can be a daunting prospect, particularly when you have lots of other commitments. The different
features of the Study Text, the purposes of which are explained fully on the Chapter features page, will
help you whilst studying and improve your chances of exam success.

Developing exam awareness
Our Study Texts are completely focused on helping you pass your exam.
Our advice on Studying F7 outlines the content of the paper, the necessary skills you are expected to be
able to demonstrate and any brought forward knowledge you are expected to have.
Exam focus points are included within the chapters to highlight when and how specific topics were
examined, or how they might be examined in the future.

Using the syllabus and study guide
You can find the syllabus and study guide on pages ix–xx of this Study Text.

Testing what you can do
Testing yourself helps you develop the skills you need to pass the exam and also confirms that you can
recall what you have learnt.
We include Questions – lots of them – both within chapters and in the Practice Question Bank, as well as
Quick Quizzes at the end of each chapter to test your knowledge of the chapter content.

Introduction

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Chapter features
Each chapter contains a number of helpful features to guide you through each topic.
Topic list

Topic list

Syllabus reference

Tells you what you will be studying in this chapter and the
relevant section numbers, together with ACCA syllabus
references.

Introduction

Puts the chapter content in the context of the syllabus as
a whole.

Study Guide

Links the chapter content with ACCA guidance.

Exam Guide

Highlights how examinable the chapter content is likely to
be and the ways in which it could be examined.

Knowledge brought forward from earlier studies

What you are assumed to know from previous
studies/exams.

FAST FORWARD

Summarises the content of main chapter headings,

allowing you to preview and review each section easily.

Examples

Demonstrate how to apply key knowledge and
techniques.

Key terms

Definitions of important concepts that can often earn you
easy marks in exams.

Exam focus points

Tell you when and how specific topics were examined, or
how they may be examined in the future.

Formula to learn

Formulae that are not given in the exam but which have to
be learnt.
This is a new feature that gives you a useful indication of
syllabus areas that closely relate to performance
objectives in your Practical Experience Requirement
(PER).

vi

Question

Give you essential practice of techniques covered in the
chapter.

Case Study

Provide real world examples of theories and techniques.

Chapter Roundup

A full list of the Fast Forwards included in the chapter,
providing an easy source of review.

Quick Quiz

A quick test of your knowledge of the main topics in the
chapter.

Practice Question Bank

Found at the back of the Study Text with more
comprehensive chapter questions. Cross referenced for
easy navigation.

Introduction

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1 Studying F7
F7 is a demanding paper covering all the fundamentals of financial reporting. It has five main sections:
1.

2.
3.
4.
5.

The conceptual framework of accounting
The regulatory framework
Preparation of financial statements which conform with IFRS
Preparation of consolidated financial statements
Analysis and interpretation of financial statements

All of these areas will be tested to some degree at each sitting. Sections 3 and 4 are the main areas of
application and you must expect to have to produce consolidated and single company financial statements
in your exam.
Some of this material you will have covered at lower level papers. You should already be familiar with
accounting for inventories and non-current assets and preparing simple statements of profit or loss,
statements of financial position and statements of cash flows. You should know the basic ratios.
F7 takes your financial reporting knowledge and skills up to the next level. New topics are consolidated
financial statements, long-term contracts, biological assets, financial instruments and leases. There is also
coverage of creative accounting and the limitations of financial statements and ratios. New topics from
September 2016 are foreign currency and disposals of subsidiaries. These will be examined at only a very
basic level.
If you had exemptions from lower level papers or feel that your knowledge of lower level financial
reporting is not good enough, you may want to get a copy of the Study Text for F3 Financial Accounting
and read through it, or at least have it to refer to. You have a lot of new material to learn for F7 and basic
financial accounting will be assumed knowledge.
The way to pass F7 is by practising lots of exam-level questions, which you will do when you get onto
revision. Only by practising questions do you get a feel for what you will have to do in the exam. Also,
topics which you find hard to understand in the Study Text will be much easier to grasp when you have
encountered them in a few questions. So don't get bogged down in any area of the Study Text. Just keep

going and a lot of things you find difficult will make more sense when you see how they appear in an exam
question.

Introduction

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2 The exam paper
Format of the paper
Question 1 – 15 MCQs
Question 2 – three case questions – 10 marks each
Question 3
Question 4

Marks
30
30
20
20
100

From September 2016, the exam will be 3 hours and 15 minutes in duration. The exam paper is divided
into three sections.
Section A consists of 15 multiple choice questions of 2 marks each.
Section B consists of 15 mini scenario based multiple choice questions of 2 marks each.
Section C consists of 2 constructive response questions of 20 marks each. In Section C, answers to the
questions will require a mixture of calculations and discussion.
All questions are compulsory.

The exam will cover as much of the syllabus as possible.

Computer Based Examination
ACCA have announced that they intend to commence the launch of computer based exams (CBEs) for F5–
F9 towards the end of 2016. At the time of going to print the exact details had not been confirmed. Paper
based examinations will be run in parallel while the CBEs are phased in and BPP materials have been
designed to support you, whichever exam option you choose.

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Introduction

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Syllabus and study guide
The F7 syllabus and study guide can be found below.

Introduction

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ix


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Introduction

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Introduction

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xii

Introduction

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Introduction

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xiii


xiv

Introduction

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Introduction

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xvi

Introduction

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Introduction

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xvii


xviii

Introduction

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Introduction

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xix


xx

Introduction

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The conceptual

framework

Topic list

Syllabus reference

1 Conceptual framework and GAAP

A1

2 The IASB's Conceptual Framework

A1

3 The objective of general purpose financial reporting

A1

4 Underlying assumption

A1

5 Qualitative characteristics of useful financial information

A1

6 The elements of financial statements

A2

7 Recognition of the elements of financial statements

A2

8 Measurement of the elements of financial statements

A2

9 Fair presentation and compliance with IFRS

A2

Introduction
A conceptual framework for financial reporting can be defined as an attempt to
codify existing generally accepted accounting practice (GAAP) in order to
reappraise current accounting standards and to produce new standards.
Under IFRS we have the IASB Conceptual Framework.

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Study guide
Intellectual level
A1

The need for a conceptual framework and the characteristics of useful
information.

(a)

Describe what is meant by a conceptual framework of accounting

2

(b)

Discuss whether a conceptual framework is necessary and what an
alternative system might be

2

(c)

Discuss what is meant by relevance and faithful representation and describe
the qualities that enhance these characteristics

2

(d)

Discuss whether faithful representation constitutes more than compliance
with accounting standards

1

(e)

Discuss what is meant by understandability and verifiability in relation to the
provision of financial information

2

(f)

Discuss the importance of comparability and timeliness to users of financial
statements

2

A2

Recognition and measurement

(a)

Define what is meant by 'recognition' in financial statements and discuss
the recognition criteria

2

(b)

Apply the recognition criteria to:

2

(c)

(i)

Assets and liabilities

(ii)

Income and expenses

Explain and compute amounts using the following measures:
(i)

Historical cost

(ii)

Current cost

2

(iii) Net realisable value
(iv) Present value of future cash flows
(v)

Fair value

1 Conceptual framework and GAAP
FAST FORWARD

There are advantages and disadvantages to having a conceptual framework.

1.1 The search for a conceptual framework
A conceptual framework, in the field we are concerned with, is a statement of generally accepted

theoretical principles which form the frame of reference for financial reporting.
These theoretical principles provide the basis for the development of new accounting standards and the
evaluation of those already in existence. The financial reporting process is concerned with providing
information that is useful in the business and economic decision-making process. Therefore a conceptual
framework will form the theoretical basis for determining which events should be accounted for, how
they should be measured and how they should be communicated to the user. Although it is theoretical in
nature, a conceptual framework for financial reporting has highly practical final aims.
The danger of not having a conceptual framework is demonstrated in the way some countries' standards
have developed over recent years; standards tend to be produced in a haphazard and fire-fighting

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1: The conceptual framework  F7 Financial Reporting

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approach. Where an agreed framework exists, the standard-setting body act as an architect or designer,
rather than a fire-fighter, building accounting rules on the foundation of sound, agreed basic principles.
The lack of a conceptual framework also means that fundamental principles are tackled more than once in
different standards, thereby producing contradictions and inconsistencies in basic concepts, such as
those of prudence and matching. This leads to ambiguity and it affects the true and fair concept of
financial reporting.
Another problem with the lack of a conceptual framework has become apparent in the USA. The large
number of highly detailed standards produced by the Financial Accounting Standards Board (FASB) has
created a financial reporting environment governed by specific rules rather than general principles. This
would be avoided if a cohesive set of principles were in place.
A conceptual framework can also bolster standard setters against political pressure from various 'lobby
groups' and interested parties. Such pressure would only prevail if it was acceptable under the conceptual
framework.

1.2 Advantages and disadvantages of a conceptual framework
Advantages
(a)

(b)

(c)

The situation is avoided whereby standards are developed on a patchwork basis, where a particular
accounting problem is recognised as having emerged, and resources were then channelled into
standardising accounting practice in that area, without regard to whether that particular issue was
necessarily the most important issue remaining at that time without standardisation.
As stated above, the development of certain standards (particularly national standards) have been
subject to considerable political interference from interested parties. Where there is a conflict of
interest between user groups on which policies to choose, policies deriving from a conceptual
framework will be less open to criticism that the standard-setter buckled to external pressure.
Some standards may concentrate on profit or loss whereas some may concentrate on the
valuation of net assets (statement of financial position).

Disadvantages
(a)
(b)
(c)

Financial statements are intended for a variety of users, and it is not certain that a single
conceptual framework can be devised which will suit all users.
Given the diversity of user requirements, there may be a need for a variety of accounting standards,
each produced for a different purpose (and with different concepts as a basis).
It is not clear that a conceptual framework makes the task of preparing and then implementing
standards any easier than without a framework.

Before we look at the IASB's attempt to produce a conceptual framework, we need to consider another
term of importance to this debate: generally accepted accounting practice; or GAAP.

1.3 Generally Accepted Accounting Practice (GAAP)
GAAP signifies all the rules, from whatever source, which govern accounting.
In individual countries this is seen primarily as a combination of:




National company law
National accounting standards
Local stock exchange requirements

Although those sources are the basis for the GAAP of individual countries, the concept also includes the
effects of non-mandatory sources such as:



International accounting standards
Statutory requirements in other countries

F7 Financial Reporting  1: The conceptual framework

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