The aim of ACCA Paper F7(INT), Financial reporting, is to develop knowledge and skills in understanding and applying accounting standards and the theoretical framework in the preparation of financial statements of entities, including groups and how to analyse and interpret those financial statements.

A. A CONCEPTUAL FRAMEWORK FOR ACCOUNTING

1. The need for a conceptual framework

• (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]

2. Understanding relevance, reliability, and comparability

• (a) Discuss what is meant by understandability in relation to the provision of financial information.[2]
• (b) Discuss what is meant by relevance and reliability and describe the qualities that enhance these characteristics.[2]
• (c) Discuss the importance of comparability to users of financial statements.[2]
• (d) Distinguish between changes in accounting policies and changes in accounting estimates and describe how accounting standards apply the principle of comparability where an entity changes its accounting policies.[2]
• (e) Recognise and account for changes in accounting policies and the correction of prior period errors.[2]

3. 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]
• (i) assets and liabilities
• (ii) income and expenses.
• (c) Discuss what is meant by the balance sheet approach to recognition; indicate when income and expense recognition should occur.[2]
  (d) Demonstrate the role of the principle of substance over form in relation to recognising sales revenue.[2]
  (e) Explain the following measures and compute amounts using:[2]
• (i) historical cost
• (ii) fair value/current cost
• (iii) net realisable value
• (iv) present value of future cash flows.

4. The legal versus the commercial view of accounting

• (a) Explain and demonstrate the importance of recording the commercial substance rather than the legal form of transactions – give examples of previous abuses in this area.[2]
• (b) Describe the features which may indicate that the substance of transactions differs from their legal form.[2]
• (c) Apply the principle of substance over form to the recognition and derecognition of assets and liabilities.[2]
• (d) Recognise the substance of transactions in general, and specifically account for the following types of transaction:[2]
• (i) goods sold on sale or return/consignment inventory
• (ii) sale and repurchase/leaseback agreements
• (iii) factoring of receivables.

5. Alternative models and practices

• (a) Describe the advantages and disadvantages of the use of historical cost accounting.[2]
• (b) Discuss whether the use of current value accounting overcomes the problems of historical cost accounting.[2]
• (c) Describe the concept of financial and physical capital maintenance and how this affects the determination of profits.[1]

6. The concept of ‘faithful representation’ (‘true and fair view’ )

• (a) Describe what is meant by financial statements achieving a faithful representation.[2]
• (b) Discuss whether faithful representation constitutes more than compliance with accounting standards.[1]
• (c) Indicate the circumstances and required disclosures where a ‘true and fair’ override may apply.[1]

B. REGULATORY FRAMEWORK FOR FINANCIAL REPORTING

1. Reasons for the existence of a regulatory framework

• (a) Explain why a regulatory framework is needed.[2]
• (b) Explain why accounting standards on their own are not a complete regulatory framework.[2]
• (c) Distinguish between a principles-based and a rules-based framework and discuss whether they can be complementary.[1]

2. The standard setting process

• (a) Describe the structure and objectives of the IASC Foundation, the International Accounting Standards Board (IASB), the Standards Advisory Council (SAC) and the International Financial Reporting Interpretations Committee (IFRIC).[2]
• (b) Describe the IASB’s standard-setting process including revisions to and interpretations of standards.[2]
• (c) Explain the relationship of national standard setters (e.g. FASB and ASB) to the IASB in respect of the standard-setting process.[2]

3. Specialised, not-for-profit and public sector entities

• (a) Distinguish between the primary aims of not-for profit and public sector entities and those of profit-oriented entities.[2]
• (b) Discuss the extent to which International Financial Reporting Standards (IFRSs) are relevant to specialised, not-for-profit and public sector entities.[2]

C. FINANCIAL STATEMENTS

1. Statements of cash flows

• (a) Prepare a statement of cash flows for a single entity (not a group) in accordance with relevant accounting standards using the direct and the indirect method.[2]
• (b) Compare the usefulness of cash flow information with that of an income statement.[2]
• (c) Interpret a statement of cash flows (together with other financial information) to assess the performance and financial position of an entity.[2]

2. Tangible fixed assets

• (a) Define and compute the initial measurement of a non-current (including a self-constructed) asset.[2]
• (b) Identify subsequent expenditure that may be capitalised (including borrowing costs), distinguishing between capital and revenue items.[2]
• (c) Discuss the requirements of relevant accounting standards in relation to the revaluation of non-current assets.[2]
• (d) Account for revaluation and disposal gains and losses for non-current assets.[2]
• (e) Compute depreciation based on the cost and revaluation models and on assets that have two or more significant parts (complex assets).[2]
• (f) Apply the provisions of relevant accounting standards in relation to accounting for government grants.[2]
• (g) Discuss why the treatment of investment properties should differ from other properties.[2]
• (h) Apply the requirements of relevant accounting standards for investment property.[2]

3. Intangible assets

• (a) Discuss the nature and accounting treatment of internally generated and purchased intangibles.[2]
• (b) Distinguish between goodwill and other intangible assets.[2]
• (c) Describe the criteria for the initial recognition and measurement of intangible assets.[2]
• (d) Describe the subsequent accounting treatment, including the principle of impairment tests in relation to goodwill.[2]
• (e) Indicate why the value of purchase consideration for an investment may be less than the value of the acquired identifiable net assets and how the difference should be accounted for.[2]
• (f) Describe and apply the requirements of relevant accounting standards to research and development expenditure.[2]

4. Inventory

• (a) Describe and apply the principles of inventory valuation.[2]
• (b) Define a construction contract and discuss the role of accounting concepts in the recognition of profit.[2]
• (c) Describe the acceptable methods of determining the stage (percentage) of completion of a contract.[2]
• (d) Prepare financial statement extracts for construction contracts.[2]

5. Financial assets and financial liabilities

• (a) Explain the need for an accounting standard on financial instruments.[1]
  (b) Define financial instruments in terms of financial assets and financial liabilities.[1]
  (c) Indicate for the following categories of financial instruments how they should be measured and how any
  gains and losses from subsequent measurement should be treated in the financial statements:[1]
• (i) fair value through profit and loss
• (ii) held to maturity (use of amortised cost, interest to income)
• (iii) available for sale (carried at fair value with changes to equity, but dividends to income)
• (iv) loans and receivables.
• (d) Distinguish between debt and equity capital.[2]
  (e) Apply the requirements of relevant accounting standards to the issue and finance costs of:[2]
• (i) equity
• (ii) redeemable preference shares and debt instruments with no conversion rights (principle of amortised cost).

6. Leases

• (a) Explain why recording the legal form of a finance lease can be misleading to users (referring to the commercial substance of such leases).[2]
• (b) Describe and apply the method of determining a lease type (i.e. an operating or finance lease).[2]
• (c) Discuss the effect on the financial statements of a finance lease being incorrectly treated as an operating lease.[2]
• (d) Account for assets financed by finance leases in the records of the lessee.[2]
• (e) Account for operating leases in the records of the lessee.[2]

7. Provisions, contingent liabilities and contingent assets

• (a) Explain why an accounting standard on provisions is necessary.[2]
• (b) Distinguish between legal and constructive obligations.[2]
• (c) State when provisions may and may not be made and demonstrate how they should be accounted for.[2]
• (d) Explain how provisions should be measured.[1]
• (e) Define contingent assets and liabilities and describe their accounting treatment.[2]
• (f) Identify and account for: [2]
• (i) warranties/guarantees
• (ii) onerous contracts
• (iii) environmental and similar provisions
• (iv) provisions for future repairs or refurbishments.

8. Impairment of assets

• (a) Define an impairment loss.[2]
• (b) Identify the circumstances that may indicate impairments to assets.[2]
• (c) Describe what is meant by an cash generating unit (CGU).[2]
• (d) State the basis on which impairment losses should be allocated, and allocate an impairment loss to the assets of a CGU.[2]

9. Taxation

• (a) Account for current taxation in accordance with relevant accounting standards.[2]
• (b) Record entries relating to taxation in the accounting records.[2]
• (c) Explain the effect of taxable temporary differences on accounting and taxable profits.[2]
• (d) Compute and record deferred tax amounts in the financial statements.[2]

10. Regulatory requirements relating to the preparation of financial statements

• (a) Describe the structure (format) and content of financial statements presented under IFRS.[2]
• (b) Prepare an entity’s financial statements in accordance with the prescribed structure and content.[2]

11 Reporting financial performance

• (a) Discuss the importance of identifying and reporting the results of continuing and discontinued operations.[2]
• (b) Define and account for non-current assets held for sale and discontinued operations. [2]
• (c) Indicate the circumstances where separate disclosure of material items of income and expense is required.[2]
• (d) Explain the contents and purpose of the statement of changes in equity (or the alternative of a statement of income and expense and movement in capital and reserves.[2]
• (e) Describe and prepare a statement of changes in equity.[2]
• (f) Earnings per share (EPS)
• (i) calculate the EPS in accordance with relevant accounting standards (dealing with bonus issues, full market value issues and rights issues).[2]
• (ii) explain the relevance of the diluted EPS and calculate the DEPS involving convertible debt and share options (warrants).[2]
• (iii) explain why the trend of EPS may be a more accurate indicator of performance than a company’s profit trend and the importance of EPS as a stock market indicator.[2]
• (iv) discuss the limitation of EPS as a performance measure.[3]

D. BUSINESS COMBINATIONS

1. The concept and principles of a group

• (a) Describe the concept of a group as a single economic unit.[2]
• (b) Explain and apply the definition of a subsidiary within relevant accounting standards.[2]
• (c) Describe why directors may not wish to consolidate a subsidiary and the circumstances where this is permitted.[2]
• (d) Explain the need for using coterminous year ends and uniform accounting polices when preparing consolidated financial statements.[2]
• (e) Explain why it is necessary to eliminate intra-group transactions.[2]

2. The concept of consolidated financial statements

• (a) Explain the objective of consolidated financial statements.[2]
• (b) Indicate the effect that the related party relationship between a parent and subsidiary may have on the subsidiary’s entity statements and the consolidated financial statements.[2]
• (c) Explain why it is necessary to use fair values for the consideration for an investment in a subsidiary together with the fair values of a subsidiary’s identifiable assets
• and liabilities when preparing consolidated financial statements.[2]
• (d) Describe and apply the required accounting treatment of consolidated goodwill.[2]

3. Preparation of consolidated financial statements including an associate

• (a) Prepare a consolidated statement of financial position for a simple group (parent and one subsidiary) dealing with pre and post acquisition profits, minority interests and consolidated goodwill.[2]
• (b) Prepare a consolidated income statement for a simple group dealing with an acquisition in the period and minority interest.[2]
• (c) Explain and account for other reserves (e.g. share premium and revaluation reserves).[1]
• (d) Account for the effects (in the income statement and statement of financial position) of intra-group trading.[2]
• (e) Account for the effects of fair value adjustments (including their effect on consolidated goodwill) to:[2]
• (i) depreciating and non-depreciating fixed assets
• (ii) inventory
• (iii) monetary liabilities
• (iv) assets and liabilities not included in the subsidiary’s own statement of financial position, including contingent assets and liabilities
• (f) Account for goodwill impairment.[2]
• (g) Define an associate and explain the principles and reasoning for the use of equity accounting.[2]
• (h) Prepare consolidated financial statements to include a single subsidiary and an associate.[2]

E. ANALYSING AND INTERPRETING FINANCIAL STATEMENTS

1. Limitations of financial statements

• (a) Indicate the problems of using historic information to predict future performance and trends.[2]
• (b) Discuss how financial statements may be manipulated to produce a desired effect (creative accounting, window dressing).[2]
• (c) Recognise how related party relationships have the potential to mislead users.[2]
• (d) Explain why statement of financial position figures may not be representative of average values throughout the period for example, due to:
• (i) seasonal trading
• (ii) major asset acquisitions near the end of the accounting period.[2]

2. Calculation and interpretation of accounting ratios and trends to address users’ and stakeholders’ needs

• (a) Define and compute relevant financial ratios.[2]
• (b) Explain what aspects of performance specific ratios are intended to assess.[2]
• (c) Analyse and interpret ratios to give an assessment of an entity’s performance and financial position in comparison with:[2]
• (i) an entity’s previous period’s financial statements
• (ii) another similar entity for the same reporting period
• (iii) industry average ratios.
• (d) Interpret an entity’s financial statements to give advice from the perspectives of different stakeholders.[2]
• (e) Discuss how the interpretation of current value-based financial statements would differ from those using historical cost-based accounts.[2]

3. Limitations of interpretation techniques

• (a) Discuss the limitations in the use of ratio analysis for assessing corporate performance.[2]
• (b) Discuss the effect that changes in accounting policies or the use of different accounting policies between entities can have on the ability to interpret performance.[2]
• (c) Indicate other information, including non-financial information, that may be of relevance to the assessment of an entity’s performance.[2]

4. Specialised, not-for-profit and public sector entities

• (a) Discuss the different approaches that may be required when assessing the performance of specialised,not-for-profit and public sector organisations.[2]

The superscript numbers in square brackets indicate the intellectual depth at which the subject area could be assessed within the examination. Level 1 (knowledge and comprehension) broadly equates with the Knowledge module, Level 2 (application and analysis) with the Skills module and Level 3 (synthesis and evaluation) to the Professional level. However, lower level skills can continue to be assessed as you progress through each module and level.
Examination format

The examination is a three-hour paper. All questions are compulsory. It will contain both computational and discursive elements.

Some questions will adopt a scenario / case study approach.

Question 1 will be a question on the preparation of group financial statements and/or extracts thereof and may include a small related discussion element. Computations will be designed to test an understanding of principles.

Question 2 will test the reporting of non-group financial statements. This may be from information in a trial balance or by restating draft financial statements.

Question 3 is likely to be an appraisal of an entity’s performance and may involve statements of cash flows.

Questions 4 and 5 will cover the remainder of the syllabus.

An individual question may often involve elements that relate to different areas of the syllabus. For example, the preparation of an entity’s financial statements could include matters relating to several accounting standards.

Questions may ask candidates to comment on the appropriateness or acceptibility of management’s opinion or chosen accounting treatment.

Questions will test an understanding of accounting principles and concepts and how these are applied to practical examples.

Questions on topic areas that are also included in Financial Accounting will be examined at an appropriately greater depth in Financial Reporting.

Candidates will be expected to have an appreciation of the need for specific accounting standards and why they have been issued. For detailed or complex standards, candidates need to be aware of their principles and key elements.

Number of marks
Three questions (25 marks each) - 75
Question 4 - 15
Question 5 - 10
Total time allowed: 3 hours - 100