F7 Reporting Financial Performance

8/12/2019 F7 Reporting Financial Performance

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Copyright: Pru Marriott University of

FRS 3

REPORTING FINANCIAL

PERFORMANCE


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Copyright: Pru Marriott Universityof Glamorgan

Introduction

FRS 3 attempts to improve the quality of financial informationprovided to shareholders. It is applied in conjunction with CA.

The standard addresses the following issues:

New structure to the profit and loss account;

Extraordinary items; Statement of total recognised gains and losses;

Other disclosure requirements:

A note of historical cost profits and losses;

A reconciliation of movements in shareholders

funds; Earnings per share;

Covers prior period adjustments.


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New Structure to the P&L A/c

Number of important components of financialperformance highlighted:

i. results of continuing operations;

ii. results of acquisitions during the year;

iii. results of discontinued operations*;

iv. certain exceptional items#:

v. extraordinary items

@


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* Discontinued Operations

Operations sold or terminated satisfying all the following:

Completed in period or before maximum of 3

months into following period (or date directors

sign the accounts if earlier);

Activities ceased permanently;

Material effect;

Clearly distinguishable.


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# Exceptional Items

Material

Within the ordinary activitiesIdentified because of size or incidence

Items requiring

Separate disclosure

Items NOT requiring

Separate disclosure

Super Exceptionals

Shown afterOperating profit

Allocate to appropriate statutory

format headings & attributed tocontinuing or discontinued

operations as appropriate.

If sufficiently material show on

face of P&L

Abnormal write-offs: Stock and

Bad debts

Abnormal provisions for losses on

Long-term contracts

Settlement of insurance claims

Sale or termination of an

operationFundamental reorganisation or

restructuring

Disposal of fixed asset


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@ Extraordinary Items

Material

High degree of abnormalityFall outside ordinary activities

Not expected to recur

This would be exceptional.

That would be extraordinary.


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@ Extraordinary Items

if they occurred:

Shown on the face of the profit and loss account before dividends (tax

on extraordinary item shown separately):

Profit or ordinary activities after tax xxx

Extraordinary item (gross) xxx Tax

on extraordinary item (xxx)

xxx


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Example 1Mop and Bucket2005 2004

Turnover:

Continuing operations

Acquisition

Discontinued operations

Cost of sales

Gross ProfitDistribution costs

Administrative expenses

Operating profit

Provision for loss on operations

to be discontinued

Profit on sale of fixed asset

Major reorganisation costs

Loss on sale of discontinued operations

385,000

15,000

400,000

100,000

285,000

500,000 360,000

285,000

.

75,000

(160,000) (180,000)

340,000 180,000( 50,000)

( 75,300)

( 40,000)

( 75,000)

214,700 65,000

Continuing operations

Acquisitions

Discontinued ( 20)

5

229.7

(10)

-

75

.170,000

( 10,000)65,000

( 20,000)

300

( 15,000)

50010015 = 385 36075 = 285

1001510 + 0.3 = 75.3


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Statement of Total Recognised

Gains and Losses

Primary financial statement

Unrealised surplus or deficit on revaluation of

fixed assets

Unrealised surplus or deficit on revaluation ofinvestment properties

Prior year adjustments

It includes profit and loss for the period, togetherwith all other movements on reserves reflecting

recognised gains and losses attributable toshareholders.

Prior Year Adjustments

MATERIAL adjustments applicable to prior periods

arising from:

Changes in accounting policy

Correction of fundamental errors

They do not include normal recurring adjustments or

corrections of accounting estimates made in priorperiods.


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Profit and loss for the year XXX

Items taken directly to reserves:

Surplus on revaluation of fixed assets XXXSurplus/deficit on revaluation of investment properties XXX

XXX

Total recognised gains and losses XXX

Prior period adjustments XXX

Total gains and losses recognised since last statement XXX

Statement of Total Recognised Gains and Losses


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Reconciliation of Movements in

Shareholders Funds

This reconciliation is included in the accounts as a note

intended to bring together the financial performance of the

entity as reflected in:

Profit and loss account;

STRGL;

All other changes in shareholders funds not

recognised above.


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Profit for the financial year XXX

Dividends* (XXX)

XXX

Other recognised gains and losses (from STRGL) XXXNew share capital* XXX

Net addition to shareholders funds XXX

Opening shareholders funds XXX

Closing shareholders funds XXX

* Items not included in the STRGL

Reconciliation of Movements in Shareholders Funds


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EXAMPLE 2

Extracts from Dustpan Ltds profit and loss account for the year ended 31

December, 2004 were as follows:

000

Profit after tax 1,024

Dividend ( 240)

Retained profit 784

During the year the following events took place:

(a) Assets were revalued upwards by 190,000.(b) 450,000 share capital was issued during the year.

(c) Certain stock items relating to 2004 had been overvalued by 80,000.

This overvaluation has been taken into account in the opening stock

of 2005but not in the closing stock of 2004.

(d) The companys investment properties previously revalued by

181,000 were written down by 181,000.(e) Shareholders funds on 1 January 2005 amounted to 1,700,000.

REQUIRED:

Show how the above events for the year would be recorded in the Statement

of Total Recognised Gains and Losses and the Reconciliation of Movements in

Shareholders Funds.


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Profit and loss for the year

Items taken directly to reserves:

Surplus on revaluation of fixed assets

Deficit on the revaluation of investment properties

Total recognised gains and losses

Prior period adjustments

Total gains and losses recognisedsince last statement

Dustpan Ltd

Statement of Total Recognised Gains and Losses

period ending 31 December 2004

1,024

190( 181)

1,033

( 80)

953


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Profit for the financial year

Dividends

Other recognised gains and losses (from STRGL)

New share capital

Net addition to shareholders fundsOpening shareholders funds

Closing shareholders funds

Dustpan Ltd

Reconciliation of Movements in Shareholders Funds

period ending 31 December 2004

1,024

( 240)

( 71)

784

450

1,1631,700

2,863


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Note of Historical Cost Profits and

LossesMemorandum item only.

It presents an abbreviated profit and loss account which

adjusts profit or loss for the:

realisation of revaluation gains arising fromprevious periods (i.e. difference between the profit

on disposal of a revalued fixed asset and that

which would have been recorded had the asset not

been revalued);

difference between historical cost annual

depreciation charge and the depreciation charge

calculated on the revalued amount.


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Reported profit before tax XXX

Realisation of revaluation gains arising from

previous periods XXX

Difference between historic cost depreciation anddepreciation based on the revalued amount XXX

XXX

Note of Historical Cost Profits and Losses


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ILLUSTRATION

An asset purchased five years ago at a cost of 10,000 hasan estimated life of ten years and an even pattern of usage

with no estimated residual value. Two years ago the asset

was revalued to 14,000. It is now sold for 9,000.

(a) Calculate the realisation of revaluation gains arisingfrom the sale of the revalued fixed asset.

(b) Reconcile the figure calculated in part (a). To do this

you need to calculate:The accumulated depreciation figure based on (1) historic cost

and (2) revalued amount.

The profit or loss on sale of the asset at (1) historic cost and (2)

revalued amount.


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Real isation of p roperty revaluat ion gain:

Revalued amount

Historical NBV @ date of revaluation

Realisation of Revaluation Gains

14,000

7,000

7,000

Accumulated Depreciation:

10,000 / 10 x 3 = 3,000

Net Book Value at date of revaluation

10,000 3,000 = 7,000


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Depreciat ion pa based on histor ic c ost:

10,000 / 10 = 1,000

Depreciat ion pa based on revalued amount:

14,000 / 7 = 2,000


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The prof i t or loss on sale of the asset at histor ic cost

Historical costAccum Depn

Net carrying value

Proceeds from sale

PROFIT ON SALE

The pro f i t or loss on sale of the asset at revalued amoun t

Revalued amount

Accum DepnNet carrying value

Proceeds from sale

LOSS ON SALE

10,0005,000

5,0009,000

4,000

14,000

4,00010,000

9,000

10,000 / 10 x 5 = 5,000

1,000

14,000 / 7 x 2 = 4,000


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The realisation gain calculated in part (a) can now be

reconciled as follows:

Profit on historic cost

Loss on revalued amount

Difference

Add: Additional depreciation

charged on revalued amount

over 2 years

4,000(1,000)

5,000

2,000

7,0007,000 5,000 = 2,000

EXAMPLE 3


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Brush Ltd. reported a profit before tax of 268,000 for

the year ended 31 December 2004. During the year thefollowing transactions in fixed assets took place.

(a) An asset with a book value of 80,000 was

revalued to 120,000. The remaining useful life isestimated to be five years.

(b) An asset (with a five year useful life at the date of

revaluation) that was revalued by 50,000 (book

value 40,000) was sold one year after revaluation

for 78,000.

REQUIRED:

Show the reconciliation of profit to historical cost profit

for the year ended 31 December, 2004.

EXAMPLE 3


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Real isation of p roperty revaluat ion gain:

Revalued amount

Historical NBV @ date of revaluation

Realisation of Revaluation Gains

90,000

40,000

50,000


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Accumulated depreciat ion f igu re based on h istor ic

cost :

40,000 / 5 = 8,000 x 1 = 8,000

Accumulated depreciat ion f igure based on revalued

amount :

90,000 / 5 = 18,000 x 1 = 18,000


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The prof i t or loss on sale of the asset at histor ic cost

Historical costAccum Depn

Net carrying value

Proceeds from sale

PROFIT ON SALE

The pro f i t or loss on sale of the asset at revalued amoun t

Revalued amount

Accum DepnNet carrying value

Proceeds from sale

PROFIT ON SALE

40,0008,000

32,00078,000

46,000

90,000

18,00072,000

78,000

40,000 / 5 x 1 = 8,000

6,000

90,000 / 5 x 1 = 18,000


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The realisation gain calculated in part (a) can now be

reconciled as follows:

Profit on historic cost

Profit on revalued amount

Difference

Add: Additional depreciation

charged on revalued amount

for 1 year

46,0006,000

40,000

10,000

50,00018,000 8,000 = 10,000


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Reported profit before tax

Realisation of revaluation gainsarising from previous periods

Difference between historic cost

depreciation and depreciation

based on the revalued amount

Brush Ltd

Note of Historical Cost Profits andLosses

268,000

50,000

8,000326,000

120,00080,000 / 5 = 8,000

F7 Reporting Financial Performance

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