Semester 2 Week 11 PP (Revision) Flashcards
Critically evaluate the suggestion that the annual report should take the form of an integrated report, including details of strategy and corporate social responsibility.
May 2016 exam
How to approach:
Don’t just write everything you know about integrated reporting/CSR – think about the actual question.
The best answers have arguments for and against.
Essentially it’s asking whether integrated reporting/CSR should be required so….
Briefly introduce…
What CSR and integrated reporting is
Why some people support them (no more than 2 sentences)
Why some people are against (again no more than 2 sentences)
2-4 marks
Arguments for:
Better information for users therefore better decisions
Makes companies more accountable
Useful for companies themselves to do this exercise
Can help fight against pollution, modern slavery etc.
2 marks each – so about 8 marks then
Arguments against:
No set layout/standards makes this difficult to follow
Companies can use this as a marketing tool
Anti-competitive to make companies publish sensitive information
Not as yet audited – how do we know figures are correct
2 marks each – so about 8 marks then
Conclusion:
Briefly introduce…
What do you think the main points are?
What’s their counter argument?
What do you overall feel?
2-4 marks
This is just an example approach, rather than a rigid rule
Hughes owns 100% of Sharp Ltd.
What does this make them?
On 1 March 2018 Green Ltd purchased a 100% shareholding in Blue Ltd for £17.5m in cash. Blue Ltd’s retained earnings at 1 March 2018 were £8.7 million. Neither company paid dividends during the year.
At the date of acquisition, the fair value of Blue’s assets were equal to their carrying amounts with the exception of the items listed below which exceed their carrying amounts as follows:
-Inventory £300,000
-Plant and equipment (remaining useful life 5 years) £500,000
Blue Ltd has not adjusted the carrying amounts or adjusted for depreciation as a result of the fair value exercise. The inventories had all been sold by the year end.
An impairment test conducted at the year-end revealed that consolidated goodwill of Blue Ltd had been impaired by 10%.
On 1 October 2018, Green Ltd sold goods to Blue Ltd for £100,000, at a gross profit margin of 50%. 10% of these goods had been sold by Blue Ltd as at 28 February 2019.
Required:
Prepare the consolidated statement of financial position of the Green group as at 28 February 2019. (25 marks)
What are the 3 cashflow sections?
Cashflows from operating activities:
The cashflows from the day to day trading activities of the business. For example if the business was a greengrocer the cash in and out from selling fruit and vegetables, if it was a sheet metal manufacturer the cash in and out from manufacturing sheet metal etc. There are two allowable ways to lay this out:
The direct method
The indirect method
Both are used in real life, both are examinable. You need to know how to do both.
Cashflows from investing activities:
The cash in and out from investing in the business (e.g. buying and selling non-current assets, investments in other companies, giving loans).
Cashflows from financing activities:
The cash in and out the business related to how it is funded (e.g. dividends, share issues, bonds etc.)
Total:
The three sections added together give us the overall cash movement for the year.
Example cashflow: file:///C:/Users/keira/Downloads/example-3%20(5).xht
How do you calculate the operating activities using the direct method?
This is calculated by:
Cash received from customers
Less
Cash paid to suppliers and employees
Cash received from customers:
Calculated by
Opening receivables
+
Revenue
-
Closing receivables
Cash paid to suppliers and employees:
Opening payables
+
Purchases
+
CASH expenses
-
Closing payables
What is the operating activities using both the direct and indirect methods.
What is the information gap?
Difference between what directors know about the company and what shareholders know about the company.
Directors may not want to tell shareholders the bad stuff eg contingent liabilities.
Disclosure notes help close the information gap.
What is contingent liability?
“it depends”
Eg court case (directors know about it, but shareholders don’t)
Disclose in notes.
Gives reader more info and helps them make buy/sell decisions
Related party disclosures are of little value as they are “too complex to apply in practice”. (EFRAG, 2010)
Outline why related party disclosures are required and critically discuss whether they are too complex to be applied well.
So the question is essentially asking :
What are related party disclosure notes?
Company has to outline any related party transactions that took place.
Why are they required?
Otherwise this information is not available to most users
Are they too complex?
Two sided argument – try and concentrate on what notes are there to do.
What are the different asset classes?
Amortised cost -
Assets in this category have to:
Have cashflows purely consisting of interest and capital (i.e. no dividends or similar)
Be planned to help to maturity (i.e. not held for short term trading).
Fair Value Through P&L (FVTPL) -
Anything not amortised cost will be FVTPL by default, so this includes:
Items without interest and capital cashflows (e.g. shares).
Items which are not being held to maturity
FVTPL means we hold them at fair (market) value taking any gains or losses through the P&L.
Two “additional” classes
Fair Value Through Other Comprehensive Income (equities)
(FVTOCI equities)
A company which has an equity investment (has bought shares in another company) it can make a decision called an election to classify this investment as FVTOCI rather than FVTPL. This means that although the shares will still be held at fair (market) value but that any gains and losses will the revaluation reserve (not the P&L).
There is also a fourth class of asset
Fair Value Through Other Comprehensive Income (debt) (FVTOCI debt)
These are debt (bonds etc.) items which have been purchased specifically to help manage the company’s liquidity.
Treatment is a “half-way house” between FV and amortised cost. We do not cover the treatment further in this course.
How do you treat amortised costs?
When an asset is held at amortised cost it is treated as follows:
Balance at year end = balance at year start + (effective interest rate x balance at year start) – cash received
Note: The effective interest rate x balance at year start gives the interest income for the year.
We only record the cash actually received. There is no accrual made.
What does the tax journal look like?
