Accounting

• Listed Companies

  Must produce semi-annually interim reports
• Small and Medium Sized Companies

  Small: Satisfy 2 or more

  • Turnover < £10.2m
  • Balance sheet < £5.1m
  • Average no. employees < 50

  Medium: Satisfy 2 or more

  • Turnover < £36m
  • Balance Sheet < £18m
  • Average no. employees < 250
• Small and Medium-sized companies


  Exempt from delivering full annual financial statements
• Objectives of accounts

  • To summarise results of transactions to help management run the company
  • To report to interested parties the state of affairs of the company and enable analysis of the company by them
• Accounting Standards

  • UK: FRSs, issued by the FRC
  • International: IFRSs, issued byt IASB

  UK accounts are prepared under IFRS when the requirement to adopt IFRS applies to consolidated accounts of listed companies
• GAAP


  Generally Accepted Accounting Principles
• GAAP

  • UK companies not preparing accounts under IFRS continue to comply with FRC standards
  • FRS 102 and the Companies Act of 2006 make up UK GAAP
  • FRS 102 is a single standard
• Types of audit reports

  unqualified

  qualified
• Capital Expenditure


  Cash expenditure reported as the creation or improvement of an asset
• Revenue Expenditure


  Cash expenditure reported as a reduction in profit
• Non-Current Assets


  Carried in the balance sheet at COST, less accumulated depreciation

  E.g., PPE
• Goodwill


  Goodwill = Purchase consideration - Net assets acquired

  Arises on the purchase of a company

  Accounting Treatment (IAS 36)

  • Capitalise in the balance sheet
  • Only amortise if cannot be maintained indefinitely
  • Annual impairment reviews
• Straight line method


  The value of an asset is reduced over its useful life. The same amount is reduces each accounting period

  
• Reducing Balance Method


  Depreciation is calculated at a fixed percentage rate of the book value of the assets

  
• Inventories

  Categories:

  • Raw materials
  • work in progress
  • Finished goods
• Inventories

  Accounting Treatment:

  • Value at the lower of COST and NRV
  • NRV = Net realisable value

  FIFO: Newer, higher value items left in stock

  LIFO: Older, lower value items left in stock

  
  

  FIFO assumes that the first item to enter the inventory is the first to be sold. Most common option
• Share Capital


  The Nominal Value of issued shares
• Reserves

  Share premium

  Revaluation reserve

  Profit and loss reserve

  Uses: Funding scrip issues (free shares)

  • Writing off start-up costs
• Profit and loss reserve

  Distributable profit
• Changes in share capital

  • Rights issues
  • Scrip issues
  • Stock splits
  • Share buybacks
• Liabilities Categories

  • Share capital
  • Reserves
  • Shareholders' funds
  • Debentures
  • Trade payables
  • Overdraft
• Non-current liabilities

  • Additional sources of capital above shareholders' funds

  Debentures: Unsecured debt capital

  Secured debt capital

  Loans from financial institutions; e.g., notes
• Non-current liabilities


  Interest paid from pre-tax profit; advantage over equity

  Risks compared to equity; interest and capital have to repaid due
• Current liabilities

  Falling due within one year

  • Loan capital with less than one year to redemption
  • Bank loans with less than one year to repayment
  • Trade payables
  • Accruals and deferred income
• Contingent liabilities


  Potential liabilities that did not exit at the balance sheet date; for example court actions you know that you have

  • Goods sold under warranty

  Accounting Treatment (IAS 37): Disclose existence in notes, but do not put on balance sheet.

  • Artificially inflating provisions is fraud
• Pensions Costs

  Defined benefit pensions: Pensions promised as a result of the final salary of the employee

  • Accounting Treatment (IAS 19); Cost of employee benefits should be recognised in the period in which they are EARNED, not paid

  Pension surplus: Fair value of plan assets - fair value of DB obligation
• Post-Balance Sheet Events


  Events occurring between the balance sheet date and the date the accounts are approved

  • IAS 10

  Adjusting Events: subsequent evidence of a condition that existed at the balance sheet date, e.g., obsolete stock

  Non-adjusting events: event occurring after the balance sheet date but before accounts approval, e.g., major acquisition/subsidiary disposal
• Adjusting events


  Adjust accounts at balance sheet date
• Non-adjusting events

  Disclose in accounts

  • event occurring after the balance sheet date
• IFRS 9


  Accounting for instruments
• IAS 32


  Accounting requirements for the presentation of financial instruments. Classifying instruments into liabilities, assets, and equity
• IFRS 7


  Disclosing financial instruments
• Equity


  No contractual obligation to deliver cash or another financial asset

  • At terms that may be unfavourable to the holder
  • At initial recognition based on the substance of the contract, not the legal form

  E.G., a preference share with a mandatory redemption and fixed rate dividend is a liability.
• Hedges


  Separate disclosures of:

  • Fair value hedges
  • Cash flow hedges
• Financial assets

  Four categories:

  1. Held for trading through P&L account
  2. Held to maturity
  3. Loans and receivables
  4. Anything else; available-for-sale
• Financial Liabilities

  1. Fair value for trading liabilities
  2. Measured at amortised cost
• Changes to share capital and reserves:

  • Share capital
  • Share premium
  • Revaluation reserve
  • P&L reserve; e.g., dividend distribution
• Cash Flow Statement

  3 headings:

  1. Operating activities
  2. Investing activities
  3. Financing activities
• Operating Activities

  • Operating profit
  • Inventories
  • Payables
  • Receivables
  • Depreciation
• Holding Company (IAS 27)

  • Holds 50%+ of voting rights in another subsidiary
  • Exercises dominant influence through a wholly owned subsidiary (49%) or partially owned subsidiary (20%+)