INTERNATIONAL FINANCIAL
REPORTING A PRACTICAL GUIDE 5TH
EDITION MELVILLE SOLUTIONS
MANUAL
International Financial Reporting A Practical Guide 5th Edition Melville Solutions Manual
Instructor’s Manual
International
Financial Reporting:
A Practical Guide
Fifth Edition
Alan Melville
Melville: International Financial Reporting: A Practical Guide, Fifth Edition, Instructor’s Manual
Contents
Preface
Acknowledgements
v
vi
Chapter 1 The regulatory framework
Solutions 1.8 and 1.9
1
Chapter 2 The IASB conceptual framework
Solutions 2.8 and 2.9
3
Chapter 3 Presentation of financial statements
Solution 3.7
5
Chapter 4 Accounting policies, accounting estimates and errors
Solution 4.7
8
Chapter 5 Property, plant and equipment
Solutions 5.7 and 5.8
9
Chapter 6 Intangible assets
Solutions 6.8 and 6.9
12
Chapter 7 Impairment of assets
Solutions 7.7 and 7.8
14
Chapter 8 Non-current assets held for sale and discontinued operations
Solution 8.7
15
Chapter 9 Leases
Solutions 9.7 and 9.8
16
Chapter 10 Inventories
Solutions 10.5 and 10.6
18
Chapter 11 Financial instruments
Solution 11.6
20
Chapter 12 Provisions and events after the reporting period
Solution 12.8
22
Chapter 13 Revenue from contracts with customers
Solutions 13.7 and 13.8
23
Chapter 14 Employee benefits
Solution 14.6
24
Chapter 15 Taxation in financial statements
Solution 15.7
26
Chapter 16 Statement of cash flows
Solutions 16.7 and 16.8
27
Chapter 17 Financial reporting in hyperinflationary economies
Solution 17.5
30
Chapter 18
Groups of companies (1)
Solutions 18.6 and 18.7
31
Chapter 19
Groups of companies (2)
Solution 19.5
36
Chapter 20 Associates and joint arrangements
Solution 20.5
39
Chapter 21 Related parties and changes in foreign exchange rates
Solution 21.4
41
Chapter 22 Ratio analysis
Solutions 22.5 and 22.6
42
Chapter 23 Earnings per share
Solutions 23.6 and 23.7
45
Chapter 24 Segmental analysis
Solution 24.6
46
Chapter 1
The regulatory framework
1.8
(a) The objectives of the IASB are:
(i) to develop, in the public interest, a single set of high-quality, understandable, enforceable and
globally accepted financial reporting standards based upon clearly articulated principles; these
standards should require high quality, transparent and comparable information in financial
statements and other financial reporting to help investors, participants in the world's capital
markets and other users of financial information to make economic decisions;
(ii) to promote the use and rigorous application of those standards;
(iii) in fulfilling objectives (i) and (ii), to take appropriate account of the needs of a range of sizes
and types of entities in diverse economic settings;
(iv) to bring about convergence of national accounting standards and international standards.
(b) The Preface states that IFRSs and IASs are designed to apply to the general purpose financial
statements and other financial reporting of profit-oriented entities, whether these are organised in
corporate form or in other forms.
(c) The main stages in the IASB due process are:
– identification and review of all the issues associated with the topic concerned
– consideration of the way in which the IASB's Conceptual Framework applies to these issues
– a study of national accounting requirements in relation to the topic and an exchange of views
with national standard-setters
– consultation with the Trustees and the Advisory Council about the advisability of adding this
topic to the IASB's agenda
– publication of a discussion document for public comment
– consideration of comments received within the stated comment period
– publication of an exposure draft for public comment
– consideration of comments received within the stated comment period
– approval and publication of the standard.
1.9
(a) The objective of IFRS1 is to ensure that an entity's first financial statements that comply with inter-
national standards should contain high-quality information that:
– is transparent for users and comparable for all periods presented
– provides a suitable starting point for accounting under international standards
– can be generated at a cost that does not exceed the benefits to users.
(b) An entity's "first IFRS reporting period" is the reporting period covered by the first IFRS financial
statements. The first IFRS financial statements are the first financial statements in which the entity
adopts international standards and makes an explicit and unreserved statement of compliance with
those standards.
The "date of transition to IFRS" is the date at the beginning of the earliest period for which an entity
presents comparative information in its first IFRS financial statements.
(c) The company's first IFRS reporting period is the year to 31 October 2016. The earliest period for
which comparative figures are presented in the first IFRS financial statements is the year to 31
October 2011. Therefore the date of transition is 1 November 2010. The company must:
(i) prepare an IFRS statement of financial position as at the start of business on 1 November 2010
(i.e. as at the close of business on 31 October 2010)
(ii) use identical accounting policies in this "opening" IFRS statement of financial position and in
the financial statements for the year to 31 October 2016 and in the comparative figures
provided for the previous five years; these accounting policies must comply with international
standards in force for periods ending on 31 October 2016
(iii) provide a reconciliation of equity as reported under previous GAAP with equity reported
under IFRS, for 31 October 2010 and 31 October 2015
(iv) provide a reconciliation of total comprehensive income as reported under previous GAAP with
total comprehensive income as it would have been reported under IFRS, for the year to 31
October 2015.
Chapter 2
The IASB conceptual framework
2.8
(a) £1 invested at 7% per annum will become £1 × 1.07 × 1.07 × 1.07 after three years. So the present
value on 1 January 2016 of an amount to be received on 1 January 2019 (assuming a discount rate
of 7%) is equal to that amount divided by (1.07)
3
. This is the same as multiplying the amount by a
discounting factor (to three decimal places) of 0.816 (1/1.07
3
).
So the present value of £50,000 to be received on 1 January 2019 is £40,800 (£50,000 × 0.816).
(b) Similarly, the discounting factor over a five-year period is 0.713 (1/1.07
5
) and so the present value
of £100,000 to be received on 1 January 2021 is £71,300 (£100,000 × 0.713).
(c) With a discount rate of 7%, discounting factors for one, two, three and four years are 0.935, 0.873,
0.816 and 0.763 respectively (the calculation of these factors is left to the reader). So the present
value of £10,000 to be received on 1 January each year from 2017 to 2020 inclusive is £33,870
(£9,350 + £8,730 + £8,160 + £7,630).
2.9
(a) The Conceptual Framework sets out the concepts that underlie the preparation and presentation of
general purpose financial statements prepared for the benefit of external users. The main purposes
of the Conceptual Framework are:
– to assist in the development of future international standards and review of existing standards
– to provide a basis for reducing the number of alternative accounting treatments permitted by
international standards
– to assist national standard-setters in developing national standards
– to assist preparers of financial statements in applying international standards and in dealing with
topics which are not yet covered by international standards
– to assist auditors in forming an opinion as to whether financial statements conform with
international standards
– to assist the users of financial statements in interpreting the information contained in financial
statements prepared in accordance with international standards
– to provide information about the IASB approach to the formulation of international standards.
(b) The Conceptual Framework states that the objective of general purpose financial reporting is to
provide financial information about the reporting entity that is useful to existing and potential
investors, lenders and other creditors in making decisions about providing resources to the entity.
(c) The primary users of general purpose financial reports are existing and potential investors, lenders
and other creditors. Further user groups include employees, customers, governments (and their agencies)
and the public. Examples of the types of information that each user group would be seeking from
financial reports are given in Chapter 2 of the textbook.
(d) Financial statements are normally prepared on the "going concern" basis. It is assumed that the
reporting entity will continue to operate for the foreseeable future and has neither the intention nor
the need either to close down or materially reduce the scale of its operations. But if an entity is not a
going concern, the financial statements will have to be prepared on a different basis and that basis should
be disclosed.
(e) The fundamental qualitative characteristics are relevance and faithful representation. The enhancing
characteristics are comparability, verifiability, timeliness and understandability. A full explanation
of each characteristic is given in Chapter 2 of the textbook.
(f) Reporting financial information imposes costs and these costs should be justified by the benefits
which users obtain from this information. This means that there is a cost constraint on the extent to
which financial statements can attain all of the qualitative characteristics that are listed in the Conceptual
Framework.
Chapter 3
Presentation of financial statements
3.7
(a)
Chilwell Ltd
Statement of comprehensive income for the year to 31 October 2015
£
Sales revenue (£1,025,420 - £27,110) 998,310
Cost of sales (W1) 465,900
———
Gross profit 532,410
Distribution costs (W2) 173,610
Administrative expenses (W3) 259,250 432,860
———- ———
99,550
Other income 10,270
———
109,820
Finance costs (£6,220 + £3,600) 9,820
———
Profit
before taxation 100,000
Taxation (£20,000 + £8,400) 28,400
———
Profit
for the year 71,600
Other comprehensive income for the year:
Items that will not be reclassified to profit or loss:
Gain on revaluation of land 30,000
———
Total comprehensive income for the year 101,600
———-
(b)
Chilwell Ltd
Statement of changes in equity for the year to 31 October 2015
Share
capital
Revaluation
reserve
Retained
earnings
Total
equity
£ £ £ £
Balance at 31 October 2014 80,000 75,000 247,060 402,060
Total comprehensive income
30,000 71,600 101,600
Dividend paid
(35,000) (35,000)
Bonus issue 40,000 (40,000)
———- ———- ———- ———
Balance at 31 October 2015 120,000 105,000 243,660 468,660
———- ———- ———- ———-
(c)
Chilwell Ltd
Statement of financial position as at 31 October 2015
£ £
Assets
Non-current assets
Property, plant and equipment (W4) 565,550
Current assets
Inventories 92,280
Trade receivables (£69,500 × 98%) 68,110 160,390
———- ———
Total
assets 725,940
———-
Equity
Share capital 120,000
Other reserves 105,000
Retained earnings 243,660 468,660
———-
Liabilities
Non-current liabilities
Long-term borrowings 120,000
Current liabilities
Trade and other payables (£103,290 + £3,600) 106,890
Bank overdraft 10,390
Current tax payable 20,000 137,280
———- ———
Total equity and liabilities 725,940
———-
Workings
W1 Cost of sales
£
Opening inventory 87,520
Purchases 483,230
Returns outwards (12,570)
Closing inventory (92,280)
———
465,900
———-
W2 Distribution costs
£
Per trial balance 107,050
Wages and salaries (50%) 51,200
Buildings depreciation (W4) (30%) 2,400
Equip't depreciation (W4) (60%) 10,710
Loss on disposal (W4)
2,250
———
173,610
———-
W3 Administrative expenses
£
Per trial balance 143,440
Directors' fees 50,000
Wages and salaries (50%) 51,200
Buildings depreciation (W4) (70%) 5,600
Equip't depreciation (W4) (40%) 7,140
Bad debts
Reduction in allowance for receivables:
(2% × £69,500) - £1,520
2,000
(130)
———-
259,250
———
W4 Property, plant and equipment £ £ £
Land at valuation 280,000
Buildings at cost 300,000
Depreciation to 31/10/2014 60,000
Depreciation for year (£240,000 ÷ 30) 8,000 68,000 232,000
———- ———-
Equipment at cost (£197,400 - £64,000)
133,400
Depreciation to 31/10/2014 (£105,750 - £43,750) 62,000
Depreciation for year (25% × £71,400)
17,850
———-
79,850
———
53,550
———-
Notes re sold vehicle:
(i) WDV of sold vehicle was £64,000 × 75% × 75% × 75% × 75% = £20,250.
(ii) Accumulated depreciation was £43,750 (£64,000 - £20,250).
(iii) The loss on disposal was £2,250 (£20,250 - £18,000).
565,550
———-
Chapter 4
Accounting policies, accounting estimates and errors
4.7
(a) IAS8 permits a change of accounting policy only if the change is required by an international
standard (or interpretation) or if the change results in reliable and more relevant information being
provided to the users of the financial statements.
A change in accounting policy which arises from the initial application of an international standard
or interpretation should be accounted for in accordance with the transitional provisions of that
standard or interpretation.
A change in accounting policy which has been made voluntarily so as to improve the relevance of
the financial statements should be accounted for retrospectively. Comparative figures for the
previous period(s) must be adjusted and presented as if the new policy had always been applied.
(b)
(restated)
2016 2015
£000 £000
Revenue 5,200 5,400
Operating expenses 4,100 3,900
––––– –––––
Profit before taxation 1,100 1,500
Taxation 220 300
––––– –––––
Profit after taxation 880 1,200
––––– –––––
(c)
Retained earnings
£000
Balance b/f as previously reported 1,605
Change in accounting policy (950 × 80%) 760
–––––
Restated balance 2,365
Profit for the year to 31 March 2016 880
–––––
Balance c/f 3,245
–––––
(d) The draft statement of comprehensive income suggests that revenue and profits both increased in
the year to 31 March 2016. The revised statement improves comparability between 2015 and 2016
and makes it clear that revenue and profits actually fell in the year to 31 March 2016. The provision
of more comparable information is the main aim of IAS8 in relation to changes in accounting policy
and is, of course, one of the qualitative characteristics identified by the Conceptual Framework.
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Chapter 5
Property, plant and equipment
5.7
(a) Non-current assets
Broadly, a non-current asset is an asset which is acquired for long-term use within a business. Such
an asset is not acquired for sale to a customer (though it may be sold at the end of its useful life) but
for use in the business over a number of accounting periods.
Strictly speaking, a non-current asset is any asset which does not qualify as a current asset. The full
definition of a current asset is given below.
Typical examples of non-current assets are property, plant and equipment, intangible assets (such as
patents and trademarks) and long-term investments.
Current assets
Broadly, current assets comprise short-term assets which continually flow through the business and
are constantly being realised. IAS1 defines a current asset as an asset which satisfies any of the
following criteria:
(i) it is expected to be realised, or is intended for sale or consumption, within the entity's normal
operating cycle
(ii) it is held primarily for the purpose of being traded
(iii) it is expected to be realised within twelve months after the reporting period
(iv) it is cash or a cash equivalent as defined by international standard IAS7, unless it is restricted
from being exchanged or from being used to settle a liability for at least twelve months after
the reporting period.
Typical examples of current assets are inventories, trade receivables and cash.
(b) Capital expenditure is expenditure which results in the acquisition of a non-current asset or in an
improvement to the earning capacity of an existing non-current asset. For example, expenditure on
acquiring business premises (or building an extension to existing premises) would be classed as
capital expenditure.
Revenue expenditure is expenditure which results in the acquisition of a current asset (e.g.
inventory) or expenditure on items such as selling and distribution expenses, administrative
expenses and finance charges. The cost of repairs or maintenance to a non-current asset (but not the
cost of improvements) would be classed as revenue expenditure.
(c) In general, capital expenditure is shown initially in the statement of financial position and is then
transferred to the statement of comprehensive income over a period of years by means of
depreciation charges. In contrast, revenue expenditure is wholly written off to the statement of
comprehensive income in the year to which it relates.
Therefore, if an item of capital expenditure is incorrectly classified as revenue expenditure, this will
reduce the reported profit of the company for the year in which the expenditure is incurred and will
also reduce the non-current assets figure shown in the statement of financial position. However,
assuming that the asset is depreciable, the absence of depreciation charges in future years will
increase the reported profit of those years so that the company's total profits over the entire useful
life of the asset will in fact be unaffected by the error.
9
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