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ACCA
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Paper F7
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Financial Reporting
Essential Text
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British library cataloguinginpublication data
Published by:
Kaplan Publishing UK
Unit 2 The Business Centre
Molly Millars Lane
Wokingham
Berkshire
RG41 2QZ
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© Kaplan Financial Limited, 2014
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A catalogue record for this book is available from the British Library.
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The text in this material and any others made available by any Kaplan Group company does not
amount to advice on a particular matter and should not be taken as such. No reliance should be
placed on the content as the basis for any investment or other decision or in connection with any
advice given to third parties. Please consult your appropriate professional adviser as necessary.
Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any
person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or
otherwise arising in relation to the use of such materials.
Printed and bound in Great Britain
Acknowledgements
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We are grateful to the Association of Chartered Certified Accountants and the Chartered Institute of
Management Accountants for permission to reproduce past examination questions. The answers
have been prepared by Kaplan Publishing.
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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or
transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or
otherwise, without the prior written permission of Kaplan Publishing.
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Contents
Page
Introduction to published accounts
Chapter 2
Tangible noncurrent assets
Chapter 3
Intangible assets
Chapter 4
Impairment of assets
Chapter 5
Noncurrent assets held for sale and
discontinued operations
77
Chapter 6
A conceptual and regulatory framework
95
Chapter 7
Accounting concepts and policies
109
Chapter 8
Leases
119
Chapter 9
Substance over form
Chapter 10
Financial assets and financial liabilities
161
Chapter 11
Inventories, agriculture and construction
contracts
191
Chapter 12
Provisions, Contingent Liabilities and Contingent 219
Assets
Chapter 13
Taxation
239
Chapter 14
Earnings per share
259
Chapter 15
Statement of cash flows
281
Chapter 16
Principles of consolidated financial statements
315
Chapter 17
Consolidated statement of financial position
321
Chapter 18
Consolidated statement of profit or loss
365
Chapter 19
Associates
393
Chapter 20
Interpretation of financial statements
425
Chapter 21
Appendix
457
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1
17
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Chapter 1
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chapter
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Intro
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Paper Introduction
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How to Use the Materials
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Syllabus
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Paper background
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Objectives of the syllabus
Core areas of the syllabus
The examination
Examination format
Examination tips
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Study skills and revision guidance
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Syllabus objectives
Preparing to study
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Effective studying
Three ways of taking notes
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Revision
Further reading
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You can find further reading and technical articles under the
student section of ACCA's website. Also, you may find it
useful to read "Corporate Finance and Valuation" by Bob
Ryan (the P4 examiner). Several theories and methods from
this book appear in this Kaplan Text with the kind
permission of the author.
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Introduction to published
accounts
Chapter learning objectives
Upon completion of this chapter you will be able to:
prepare an entity’s financial statements in accordance with
prescribed structure and content
•
prepare and explain the contents and purpose of the statement of
changes in equity
•
distinguish between the primary aims of notforprofit and public
sector entities and those of profitorientated entities
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•
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1
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Introduction to published accounts
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1 Preparation of financial statements for companies
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IAS 1 Presentation of financial statements
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In most jurisdictions the structure and content of financial statements are
defined by local law. IASs are, however, designed to work in any jurisdiction
and therefore require their own set of requirements for presentation of
financial statements. This is provided in IAS 1, revised June 2011.
A complete set of financial statements comprises:
a statement of financial position
either
– a statement of profit or loss and other comprehensive income, or
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•
•
–
a statement of changes in equity
a statement of cash flows
accounting policies and explanatory notes.
IAS 1 (revised) does not require the above titles to be used by companies. It
is likely in practice that many companies will continue to use the previous
terms of balance sheet rather than statement of financial position, income
statement instead of statement of profit or loss, and cash flow statement
rather than statement of cash flows.
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•
•
•
a statement of profit or loss plus a statement showing other
comprehensive income
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Exceptional items
The accounting treatment is to:
include the item in the standard statement of profit or loss line
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•
•
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Exceptional items is the name often given to material items of income and
expense of such size, nature or incidence that disclosure is necessary in
order to explain the performance of the entity.
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disclose the nature and amount in notes.
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In some cases it may be more appropriate to show the item separately on
the face of the statement of profit or loss.
Examples include:
write down of inventories to net realisable value (NRV)
write down of property, plant and equipment to recoverable amount
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restructuring
gains/losses on disposal of noncurrent assets
discontinued operations
litigation settlements
reversals of provisions
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•
•
•
•
•
•
•
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The statement of financial position
A recommended format is as follows:
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XYZ Statement of Financial Position as at 31 December 20X2
Assets
Noncurrent assets:
cc
Property, plant and equipment
Investments
Intangibles
$
$
X
X
X
–––
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X
X
X
––
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Total assets
Total equity
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Noncurrent liabilities:
Longterm borrowings
Deferred tax
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Current liabilities:
Trade and other payables
Shortterm borrowings
Current tax payable
Shortterm provisions
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Total equity and liabilities
X
––
X
––
X
X
X
––
X
––
X
––
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Equity and liabilities
Capital and reserves:
Share capital
Retained earnings
Other components of equity
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Current assets:
Inventories
Trade receivables
Cash and cash equivalents
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Introduction to published accounts
X
X
––
X
X
X
X
X
––
X
––
X
––
Note that IAS 1 requires an asset or liability to be classified as current if:
•
•
it will be settled within 12 months of the reporting date, or
it is part of the entity's normal operating cycle.
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revaluation surplus
investment reserve (seen in financial instruments, chapter 10).
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Statement of changes in equity (SOCIE)
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Within the equity section of the statement of financial position, other
components of equity include:
The statement of changes in equity provides a summary of all changes in
equity arising from transactions with owners in their capacity as owners.
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This includes the effect of share issues and dividends.
Other nonowner changes in equity are disclosed in aggregate only.
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XYZ Group
Statement of changes in equity for the year ended 31 December
20X2
Share Share Revaluation Retained Total
capital premium surplus
earnings equity
$
$
$
$
$
Balance at 31
X
X
X
X
X
December 20X1
Change in
(X)
(X)
accounting
policy/prior year
error (IAS 8)
––
––
––
––
––
Restated balance
X
X
X
X
X
Dividends
(X)
(X)
Issue of share
X
X
X
capital
Total
X
X
X
comprehensive
income
Transfer to retained
(X)
X
–
earnings
––
––
––
––
––
Balance at 31
X
X
X
X
X
December 20X2
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Statement of profit or loss and other comprehensive income
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Total comprehensive income is the realised profit or loss for the period,
plus other comprehensive income.
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Other comprehensive income is income and expenses that are not
recognised in profit or loss (i.e. they are recorded in reserves rather than as
an element of the realised profit for the period). For the purposes of F7,
other comprehensive income includes any change in the revaluation of non
current assets (IAS 16, covered in chapter 2) and fair value through other
comprehensive income financial assets (IFRS 9, covered in chapter 10).
Presentation of other comprehensive income
IAS 1 Presentation of financial statements requires that you prepare either:
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(1) A statement of profit or loss and other comprehensive income showing
total comprehensive income; or
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(2) A statement of profit or loss showing the realised profit or loss for the
period PLUS a statement showing other comprehensive income.
Statement of profit or loss
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A recommended format is as follows:
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XYZ Group : Statement profit or loss and other comprehensive
income for the year ended 31 December 20X2
$
Revenue
X
Cost of sales
(X)
––
Gross profit
X
Distribution costs
(X)
Administrative expenses
(X)
––
Profit from operations
X
Finance costs
(X)
Investment income
X
––
Profit before tax
X
Income tax expense
(X)
––
Profit for the year
X
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Total comprehensive income for the year
––
X
––
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X
X
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Other comprehensive income
Gain/loss on revaluation (IAS 16)
Gain/loss on fair value through other comprehensive
income financial assets (IFRS 9)
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chapter 1
2 Introduction to published accounts
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Alternative presentation
Test your understanding 1
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Example 1 – Published accounts
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The following questions enable preparation of published accounts utilising
knowledge gained at F3 Financial Accounting. In order to be able to
complete an F7 published accounts question these basic preparation
techniques must be followed and the accounting standards in chapters 2 –
14 must first be learned.
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The following trial balance has been extracted from the books of Arran
as at 31 March 20X7:
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Administration expenses
Distribution costs
Share capital (all ordinary shares of $1 each)
Share premium
Revaluation surplus
Dividend
Cash at bank and in hand
Receivables
Interest paid
Dividends received
Interest received
Land and buildings at cost (land 380, buildings 100)
Land and buildings: accumulated depreciation
Plant and machinery at cost
Plant and machinery: accumulated depreciation
Retained earnings account (at 1 April 20X6)
$000 $000
250
295
270
80
20
27
3
233
25
15
1
480
30
400
170
235
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Introduction to published accounts
Purchases
Sales
Inventory at 1 April 20X6
Trade payables
Bank loan
1,260
140
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2,165
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27
100
––––– –––––
3,113 3,113
––––– –––––
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Additional information
(1) Inventory at 31 March 20X7 was valued at a cost of $95,000.
Included in this balance were goods that had cost $15,000. These
goods had become damaged during the year and it is considered
that following remedial work the goods could be sold for $5,000.
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(2) Depreciation for the year to 31 March 20X7 is to be charged
against cost of sales as follows:
Buildings
5% on cost (straight line)
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Plant and machinery 30% on carrying value (CV) (reducing
balance)
(3) Income tax of $165,000 is to be provided for the year to 31 March
20X7.
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(4) Land is to be revalued upwards by $100,000.
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Prepare the statement of profit or loss and other comprehensive
income, statement of changes in equity and statement of financial
position for year ended 31 March 20X7.
Note: Show all workings but notes are not required.
3 Notforprofit and public sector entities
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Notforprofit and public sector entities
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chapter 1
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Chapter summary
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Test your understanding 2
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The following trial balance relates to P at 31 March 20X1:
Dr
$000
1,350
490
370
190
25
390
4,250
2,700
114
418
12
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Revenue
Cost of sales
Dividends received
Administration expenses
Distribution costs
Interest payable
Prepayments
Dividends paid
Property, plant and equipment
Shortterm investments
Inventory at 31 March 20X1
Trade receivables
Cash and cash equivalents
Trade payables
Longterm loans (repayable 20X9)
Share capital
Share premium
Retained earnings at 31 March 20X0
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Cr
$000
5,300
210
––––––––
10,309
––––––––
136
1,200
1,500
800
1,163
––––––––
10,309
––––––––
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The following information should also be taken into account:
(1) The tax charge for the year has been estimated at $470,000.
(2) The directors declared a final dividend of $270,000 on 3 April 20X1.
Required:
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Prepare, in a form suitable for publication, the statement of profit or loss
and other comprehensive income, statement of financial position and
statement of changes in equity for the year ended 31 March 20X1.
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Test your understanding answers
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Test your understanding 1
sp
Statement of profit or loss and other comprehensive income for
the year ended 31 March 20X7
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Revenue
Cost of sales (W1)
Gross profit
Administration
Distribution
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Profit before tax
Income tax expense
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Operating profit
Finance cost
Interest receivable
Investment income
Profit for the year
$000
2,165
(1,389)
––––––
776
(295)
(250)
––––––
231
(25)
1
15
––––––
222
(165)
––––––
57
––––––
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Other comprehensive income
Gain on land revaluation
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Total comprehensive income for the year
100
–––––
157
––––––
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Introduction to published accounts
C/f
–––
270
–––
80
sp
ot.
Share Share Revaluation Retained Total
capital premium surplus earnings equity
$000
$000
$000
$000
$000
270
80
20
235
605
100
57
157
(27)
–––
265
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B/f
Total
comprehensive
income for the
year
Dividends
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Statement of changes in equity
–––
120
(27)
–––
735
Statement of financial position as at 31 March 20X7
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Current assets:
Inventory
Receivables
Bank
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Noncurrent assets:
Property, plant and equipment (W2)
Share capital (from SOCE)
Share premium (from SOCE)
Revaluation surplus (from SOCE)
Retained earnings (from SOCE)
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Noncurrent liabilities
Current liabilities ($27 + $165)
12
$000
706
85
233
3
––––
321
––––
1,027
––––
270
80
120
265
––––
735
100
192
––––
1,027
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Workings
Total
(W2) Tangible noncurrent assets
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CV c/f
Land and
Plant and
Total
buildings
machinery
$000
$000 $000
450
230
680
100
100
(5)
(69)
(74)
–––––
––––– ––––
545
161
706
ate
CV b/f
Revaluation
Depreciation charge
sp
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Opening inventory
Purchases
Closing inventory (95 – 10)
Depreciation (5% × 100) + (400 – 170) × 30%
$
140
1,260
(85)
74
–––––
1,389
–––––
ot.
(W1) Cost of sales
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Test your understanding 2
$000
5,300
(1350)
–––––
3,950
(370)
(490)
–––––
3,090
210
(190)
–––––
3,110
(470)
–––––
2,640
–
–––––
2,640
–––––
sp
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Revenue
Cost of Sales (W1)
Gross profit
Distribution costs
Administration expenses
Profit from operations
Income from investments
Finance cost
Profit before tax
Income tax expense
Profit for period
Other comprehensive income:
ot.
P Ltd Statement of profit or loss and other comprehensive
income for the year ended 31 March 20X1
Total comprehensive income for the period
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P Ltd Statement of changes in equity for the year ended 31 March
20X1
Balance at 1 April 20X0
$
$
$
$
1,500
800
1,163
3,463
Total comprehensive income
2,640
2,640
Dividends
(390)
(390)
–––––––
–––––––
1,500
800
–––––––
–––––––
cc
Balance at 31 March 20X1
––––––– –––––––
3,413
5,713
––––––– –––––––
Note: Dividends declared after the year end will not be adjusted for.
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Share
Share Retained Total
capital premium earnings
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P Ltd Statement of financial position as at 31 March 20X1
Current assets
$000
4,250
Inventories
114
Trade and other receivables
418
25
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Prepayments
ot.
Property, plant and equipment
$000
sp
Noncurrent assets
2,700
Investments
Cash and cash equivalents
12
––––––
3,269
–––––––
7,519
–––––––
1,500
800
3,413
––––––
5,713
Longterm loans
Current liabilities
1,200
Trade payables
136
470
––––––
Equity and liabilities
Capital and reserves
Share premium
Retained earnings
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Noncurrent liabilities
ate
Issued ordinary share capital
Income tax
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Total assets
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chapter 1
7,519
–––––––
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Total equity and liabilities
606
–––––––
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