Lecture 10

Question 1

What is Case 7 for the consolidated Balance sheet?

Answer 1

Differences in accounting policies i.e depreciation

Question 2

Lets say the parent company uses Straight line depreciation and Subsidiary use Reducing balance, what is the problem?

Answer 2

The rule of Consolidated balance sheet is that you add like items, so you need to adjust for this difference in accounting policy. You have to adjust subsidiary asset as if it always followed that of the parent.

Question 3

What is the accounting policy adjustment shorthand called?

Answer 3

(APadj)

Question 4

Where is Accounting policy adjustment (APadj) posted?

Answer 4

So you are changing value of asset which means you have to change something in the equity section, which is the RE of the consolidated balance sheet and NCI.

Question 5

Subsidiary depreciates plant and equipment over 10 years. Its plant and equipment at cost on the balance sheet date is 120,000. The parent depreciates the same equipment over 12 years. The NBV of plant and equipment in the subsidiary accounts is 60,000. Parent owns 65% of the subsidiary’s share capital. How would you adjust this

Answer 5

Depreciation expense in subsidiary accounts: 120,000/10 = 12,000

Depreciation expense using Parent depreciation policy: 120,000/12 = 10,000

Historic cost = 120,000 -Current NBV = 60,000

=> Accumulated depreciation = 60,000

=> Asset owned for 5 years (12,000*5 = 60,000)

Meaning overprovision of depreciation.

10000 X 5 = 50000 which is Parent

In CBS Assets ↑ by 10,000

• Subsidiary plant and equipment :
• NBV = 120,000 – 5 years * 10,000 = 70,000

CBS RE ↑ by 65%*10,000 = 6,500

• CBS NCI ↑ by 35%*10,000 = 3,500

Question 6

Now finishing that, what will we learn today?

Answer 6

How to make fianancial accounts more informative

Question 7

What are the key areas we will look at today?

Answer 7

Taxation

Financial statements regulation in the UK

Discloures requirements

Basic financial statements

Supplementary financial statements

Ways to make finanical reporting more informative

Inflation accounting

Question 8

What is the difference between a direct tax and a indirect tax?

Answer 8

o Direct taxes – taxes where the burdern of tax cannot be passed on ( income tax)

o Indirect taxes – taxes where the burderen of tax can be passed on. ( exceise duties, on drugs, alchol

Question 9

What is corporation tax?

Answer 9

Tax on the company’s taxable profit

Question 10

What is key to understand about corporation tax?

Answer 10

Taxable profit is not equal to accounting profit (before tax)

Question 11

How does Corporation tax look on an income statement?

Answer 11

Question 12

How do we go from profit before tax to taxible profit?

Answer 12

Question 13

What are non deductible expenses ?

Answer 13

Depreciation

o General provisions (e.g. provisions for doubtful debts)

o Entertainment expenses

o Expenses of a capital nature (e.g. expenses for acquiring non-current assets)

o Losses on sale of non-current assets

Question 14

Why do we add non deductible expenses?

Answer 14

They are non cash trasncations and estimates, meaning there could be manipulation, so tax authorities don’t allow these subtractions.

Question 15

Why is entertainment expense non-deductible?

Answer 15

It is against public policy.

Question 16

The more expenses you have means what?

Answer 16

The more tax they collect increases

Question 17

What is Non taxable income?

Answer 17

Income when you sold a Non current asset, it is non taxable lin the corperation tax, as it is taxed under capital gains tax.

Also dividends received from other companies ( tax authorites want companies to give dividends, hence dividends are non taxable. )

Question 18

What is Capital allowances

Answer 18

This is typically for plant and machinery. You have something called the annual investment allowance, this rate can vary depending on the year. So the tax authorites at the beginning of every yeat will say this years capital allowance will be so much e.g. lets say the threshold is £200000, this means if you buy any plant and machinery that is less than or equal to 200000, there is no tax on it.

Question 19

Lets say you have a a piece of equipment and plant with value 300000 and the AlA is 200000 what happens?

Answer 19

You have something called the writting down allowance of 100000, the wriitting down allowance may be 18% so 18% of 100000.

Question 20

The AIA amount has temporarily increased to £1 million between 1 Jan 2019 and 31 Dec 2020, Why?

Answer 20

The more allowance you give, the more incentivised firms are to invest, but why this year?, this is due to brexit , as companies were planning to move out of the EU so they have everyone a tax benefit, to invest more locally.

Question 21

What is the First year capital allowance and Second year WDA?

Answer 21

First year capital allowance = 100%*200,000=200,000 (reduction of taxable income)

Second year WDA allowance 18%*450,000 = £81,000

Question 22

What is the normal due date for corporation tax?

Answer 22

Normal due date: 9 months after the end of the accounting period

Question 23

With large companies what is their due date?

Answer 23

Large companies must pay their tax by quaretly instalements.

Question 24

a. Capital allowances for the year using a writing-down allowance of 18% are calculated to be £120,000
b. Sundry expenses includes the following:

Entertaining 2,000

General provision for doubtful debts 3,000

Specific bad debts written off 1,000

Legal costs on purchase of new freehold office block 5,000

How do you calculate taxiblep profit?

Answer 24

You do not add bad debt expense, as it is not an estimate

You add legal costs, as this was in purchase of a NCA

DR Taxation expense 48000

CR taxation liability 48000

Question 25

So what is the I/S looking like for the year 31 march 2016 showing taxation and SOFP.

Answer 25

Question 26

What happens when there is a tax oveprovision or underprovision?

Answer 26

Tax overprovision -----this year’s tax charge decreases Tax underprovision------ this year’s tax charge increases

Question 27

Suppose that in the year ended 31 March 2015, Manrico plc had estimated its CT charge as £35,000, but later agreed its taxation liability with HM Revenue and Customs at £30,000. The taxation charge of 31 march 2016 was 43000 and CT was 48000, how do you represent this on I/S What would be double entry?

Answer 27

Dr CT liability £5000 CR Tax expense £5000 Previous year entries Dr Tax expense 35,000 Cr Tax liability 35,000 It should of been Dr Tax liability 30,000 Cr Cash 30,000

Question 28

Lets say their is an undeprovision of 50 Previous year entries: Dr Tax charge 100 Cr Tax liability 100?

Answer 28

An underprovision would increase the income tax charge for the year DR Profit and loss account (Income tax) 50 CR Current liabilities (CT liability) 50 Previous year entries: Dr Tax charge 100 Cr Tax liability 100 So it should of been Dr Tax liability 150 Cr Cash 150

Question 29

What regulation standards do Listed companies follow?

Answer 29

International accounting standards (IAS) and International financial reporting standards.

Question 30

What financial regulation do Non-listed companies follow?

Answer 30

Companies act or IAS/IFRS

Question 31

Why was IFRS introduced?

Answer 31

Due to increase globalisation, IFRS has been introudced as they want firms to be comparable and consistent

Question 32

Who is the international accounting standards set by ?

Answer 32

They are set by the international standards board, which leads to IFRS

Question 33

What were the main reasons the international accounting standards board was established?

Answer 33

1) High quality accouting globally 2) Uniformity 3) Transparency and comparability 4) Helps people to invest more cross border ( research shows)

Question 34

What is the problem with International accounting standards?

Answer 34

The firms that operate locally need specific regulation , the common standards ignore local systems Also for small firms, the cost of following IFRS is too large.

Question 35

Lets say in an exam question it says Marino PLC received 5000 dividends from another UK company what do you do that affects taxable profit.

Answer 35

you take this away, in as non taxable income, meaning that there will be a reduction in taxible profit.

Question 36

The directors of every company are required to do what?

Answer 36

They are required to send copies of accounts to: 1) Shareholders 2) All debenture holders 3) The registar of companies( central authority that maintains all the accounts of companies in the UK)

Question 37

Do all sized companies have to share the same information to the 3 types of people talked about in previous question. 1. All shareholders 2. All debenture holders 3. The Registrar of Companies

Answer 37

Small and medium companies are allowed to send to the registar modified accounts which contain much less detail than the full accounts required by the act.

Question 38

What are all companies also legally required to do, in terms of public information?

Answer 38

Companies are required to publish their financial statements on their website.

Question 39

What are the 5 pieces of information that firms are required to provide?

Answer 39

Income statement Statement of financial position Cash flow statement A statement of changes in equity Notes on accouting policiess and other explanotory notes

Question 40

What is a statement of changes in equitiy?

Answer 40

Tells you how the equity section changed e.g. issusing shares, changes in profits or losses , so the beginning equity to ending equity)

Question 41

What is the Notes on accounting polices?

Answer 41

These notes tells you measurement basis, accounting polices which are followed (e.g. whether straight line or reducing balance) . They also provide supporting information and other items which cannot be included in the financial statements. ( e.g. future contractual commitments like deliver 10000 units of goods in future, you cannot put this on SOFP due to prudence princple/

Question 42

What is another report that you have to provide if you are company?

Answer 42

A supplementary report.

Question 43

What are the 5 supplementary reports?

Answer 43

o Directors’ report/ Chairman’s statement o Strategic Report o Corporate governance statement / Remuneration Report o Auditors’ report o Summary financial statements – No longer used

Question 44

What is an External auditiors report?

Answer 44

Audtiors look at the intergrity of the finanical statements, looking at if they are true and fair, and comply with finanical regulation. Audits can red flag things such as if they don't thinkk the firm will survive in the futrue and companies not providing sufficient information on a section)

Question 45

What is the problem of companies paying for external audits ( e.g. the big 4)

Answer 45

The auditors will always try to give good opinions about the company, allowing share price to increase.

Question 46

What are the 2 ways to increase the predictive role of accounting?

Answer 46

1) – Current value accounting (e.g. fair values), meaning easier to predict future. 2) Increase discloures

Question 47

During inflation what tends to happen to profits?

Answer 47

They tend to be overstated.

Question 48

e.g. A Car Retailer acquired a new Mercedes motor car for £25,000 as part of its showroom inventories. The car was held for 3 months and was sold for £30,000. Due to inflation the cost of replacing the car at the point of sale increased to £26,250 show this on an income statement

Answer 48

Question 49

During period of rising prices, financial statements based on historic cost may not fairly present financial position because of three problems:

Answer 49

* the equity base erosion is not recognised * the assets will tend to be understated * any gains and losses from holding monetary items are not recognised ( e.g. in period of high inflation holding £100 is not the same as holding £100 tommorow.

Question 50

What are 2 ways to sort the problem with inflation?

Answer 50

CPP - Current purchasing power method ( maintain the owners investment) CCA - Current cost accounting ( You maintain the business operations)

Question 51

How does the Current purchasing power method work?

Answer 51

Adjusting accounting figures by the change in a general price index, such as the Retail Price Index (RPI). RPI is used to measure the change in purchasing power of the pound.( you take a basket of goods and check the value of the basket every year)

Question 52

HOW would this look on I/S work out gross profit

Answer 52

SO you have to adjust COS for the retail price index changes

Question 53

How would statement of financial position look like?

Answer 53

Question 54

Inventories bought on 1st Oct cost £10,000 when RPI was 100. They were sold for £15,000 when RPI was 110. Calculate Profit/loss using CPP A. £5,000 B. £4,000 C. £15,000 D. (£4,000)

Answer 54

B) 4000 Profit = 15000 - (10000 X 110/100) 15000-11000 =4000

Question 55

What is a problem with the current purcahsing power method?

Answer 55

When you use RPI and use a basket of household goods, you cant use this to adjust for example aeroplanes, Thus CCA solve this problem.

Question 56

How do you calculate Current cost accounting?

Answer 56

adjusting items for their specific price changes using replacement cost (i.e. the current cost of replacing an item)

Question 57

For example, as you are preparing for 31 august how does the I/S look like? Information can be used from previous example.

Answer 57

You find 20% of inventory from previous example.

Question 58

How does the SOFP look like for this example

Answer 58

YOU HAVE TO ADD THE RISES TO THE EQUITY SECTION

Question 59

Inventories bought on 1st Oct cost £10,000 when RPI was 100. They were sold for £15,000 when RPI was 110. Price of inventories went up 20 % between buying and selling. Calculate profit/loss using CCA A. £5,000 B. £4,000 C. £3,000 D. £10,000

Answer 59

15000 - (10000 x 1.2) 15000-12000 =3000 c) 3000

Question 60

Which method is better Current cost accounting or Current purcahsing power method?

Answer 60

1) CPP is commended for its reliability ( reliable as it is calculated by office of national statisicts), but its relevance is questionable ( doesn't make sense for certiain industries s 2) CCA is commended for its relevance, but its reliability can be an issue ( estimating market values, leading to manipulation)

Question 61

What are the differences between Current purchasing power method and Current cost accounting in terms of the money measurement convention ( a resource can be included in financial statements only if its measurable in monetary terms) ?

Answer 61

1) CPP abandons the money measurement convention as items are expressed in terms of pounds of current purchasing power. 2) The CCA maintains the money measurement convention and only adjusts for specific price changes.

Question 62

What is key to remember about inflation accounting?

Answer 62

Both of these are not main reports but rather supplementary reports.