Ask Me Help Desk - Accounting ISA 1 format P&L / B.S questions

Hey guys, I was wondering if any one here is familiar with the IAS 1 Statement of Comprehensive Income (SCI. aka P&L ) and Statement of Financial Position (SFP. aka B.S)?

1. If anyone could tell how to treat underlined entries from the following T.B?:

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2. Can some one kindly check the T-accounts from the above TB and following notes?

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I would appreciate any advise suggestions, improvement even source for reading materials on the subject.

Thank you!

I can only help to some extent because I don't know international accounting and am familiar with only some of the differences in terminology.

But I can start with the fact that the problem is a little on the odd side. First, what are the columns? I would assume this is like a comparative statement of 2009 and 2010, except that the inventory for 1/1 is listed in the left column and the retained earnings 1/1 is listed in the right column. Columns should always have labels so you know what the heck they're supposed to be!!

Also, mixing receivables and payables lumped together? You can't do that. And returns in and out??

It's possible this is just cause I see problems from other countries presented so differently sometimes than what I'm used to that I'm just not recognizing something here, but honestly, I don't get it.

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Originally Posted by morgaine300

I can only help to some extent because I don't know international accounting and am familiar with only some of the differences in terminology.

But I can start with the fact that the problem is a little on the odd side. First, what are the columns? I would assume this is like a comparative statement of 2009 and 2010, except that the inventory for 1/1 is listed in the left column and the retained earnings 1/1 is listed in the right column. Columns should always have labels so you know what the heck they're supposed to be!!!

Also, mixing receivables and payables lumped together? You can't do that. And returns in and out???

It's possible this is just cause I see problems from other countries presented so differently sometimes than what I'm used to that I'm just not recognizing something here, but honestly, I don't get it.

1. International accounting is no different than accounting of any country, except that their respective GAAPs govern preparation and presentation requirements.

2. The question shows a trial balance. I agree that the columns should be identified, nut this perhaps is the normal practice for UK based exams.

3. If you see the list of balances as a trial balance, you will then agree that the receivables and payables as well as the returns in and out are not lumped together. Instead they are shown separately as respective debits and credit.

4. The question is quite simple, all that is needed is the preparation of financial statements using the format prescribed in the International Accounting Standard 1.

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Originally Posted by rehmanvohra

2. The question shows a trial balance. I agree that the columns should be identified, nut this perhaps is the normal practice for UK based exams.

3. If you see the list of balances as a trial balance, you will then agree that the receivables and payables as well as the returns in and out are not lumped together. Instead they are shown separately as respective debits and credit.

That never occurred to me. We never do trial balances with balances in both columns on the same line -- i.e. asset with corresponding A/D on same line, receivables and payables on same line. Never. Not to mention that we always do them in order starting with assets. I didn't recognize it at all as being a trial balance - it looks pretty odd to me.

And there are absolutely some differences with the international - the problem is that I don't know what they all are, and therefore never know when something could apply. And since it's asking for financials, don't you think "presentation" might be important? Not to mention different terminology that sometimes throws me off. Here's one for you - VAT liability debit? I don't know anything about VAT.

So I still maintain that I can only help to an extent. So why didn't you bother with it while you were here?

I'm about to prove to rehmanvohra exactly how "not easy" this is when you're from another country and methods are completely different. Granted, debits & credits still follow the same rules - but "paperwork" stuff is way different sometimes.

I have no clue what you are doing in the t accounts. They don't look anything like what I would do with one. First, I don't know what b/d and c/d mean. I don't have any idea why you seem to be trying to balance the two sides to each other. I don't know where 3/4th's of the numbers are coming from.

Let's just take the "Bank" one. First, I'm assuming that's a loan. We don't call it "Bank" - we call it a payable. But it's a credit, they listed it on the line with the cash, and the only assumption I can make is that you owe the bank. OK, beginning balance of 620. Great. But why is the 170 going in that account, and for that matter, back out of it? The problem has said nothing about whether the company got 170 in cash or it's a receivable or what. Why is it going through a payable to the bank? And why is it going both in and out? I'd pretend that you're just doing it incorrectly - except that it's already written in there, printed. You didn't do that. So - I don't get it. OK, the 180 is from the purchase of furniture & fixtures. It doesn't say it was on credit. Are you supposed to be assuming that goes to the payable?

I don't know why you're doing what you're doing, but I can see the 970 is the total of the right side. Why put 800 into the left side to make it equal on both sides? I don't see the point. So therefore I would have no idea if it's correct or not. However, I can see that all you're doing is putting in what ends up being the ending balance - so I can attempt to ignore that. (That all seems a bit of a waste, and just makes it harder to learn.)

I don't know what a "P&L A/C" is. My original introduction to that term made me think it was like our Income Summary account, but I finally figured out that's not true. I have since never been able to figure out what that account is supposed to be.

As to numbers...

I don't know why you're changing the unadjusted balances for the 3 fixed asset accounts. The equipment account I can see you've used the book value, but the whole point of having the offsetting credit balance in the accumulated depreciation account is so that it goes against the debit in the equipment to create a book value. That is, debit of 2770 in equipment less 1250 credit in the deprecation gives you the book value of 1520. You need to keep the 2770 in the equipment account for that to work.

The unadjusted balance in Furn & Fix - don't know where that came from because that's not consistent with what you did to the equipment account. The book value is 1160, so that's not it. I don't know where 1102 came from.

The balances you start with should be the ones given in the problem, the unadjusted ones. You've kept all the depreciation ones, the bank one, and tax ones at their unadjusted balances. Why not do the others the same way?

I'd have a hard time helping with that equipment disposal because I don't understand how this is done. I don't know what the Equipment Disposal account is supposed to be for or how it's used. It says it was sold for the book value of 170,000. That would be no gain or loss - I don't see why another account should come into play here. I can go over the numbers, but don't understand the entries you're making. If book value is 170,000, what was the accumulated depreciation on it? That has to come out.

The Furn & Fix would be OK if you'd start with the unadjusted balance given in the problem. I don't know where you got any of the 3 depreciation amounts for the current year. You need to show some calculations.

Sorry, I know this is all over the place, but it's really difficult scrolling back up to your t accounts, and jumping back & forth to the Excel file where I set all this up. So the comments are pretty random.

A few comments on the trial balance that you underlined (or wrote). Trade receivables & trade payables are just current asset & current liability, respectively. If you're into complicated stuff like this, I'm not sure where the confusion is on two very common current accounts. Same with other receivables and other payables.

Long term provision for business reorganization - I'm assuming that's like what I'd call an appropriate of retained earnings. If so, it would be listed in the retained earnings section.

The corporation tax liability is just a current payable (due in 1 day - current). The non-current asset investment is exactly what it says it is. It would be listed right under the fixed assets. The interest received is a revenue. Here this would be under "other income and expense," along with the bond interest expense, which would be the section under the income from operations. (But you know, that could be one of those rules that's different. I don't know.) (I really don't like how this thing keeps saying "received" and "paid" instead of revenue and expense - because they don't mean the same thing.)

'Returns in' offsets the sales. 'Returns out' offsets the purchases.

That loss on partial closure -- hmm, also part of a reorganization. Never seen those lumped. And your rules could be different. The closure would be in its own section, following income from continuing operations. But a reorganization just ends up with the rest of the expenses.?

As for your little notes on the dividends - they aren't "costs." Well, they are by a finance definition, but this isn't finance. All dividends come off retained earnings. (My understanding is that this is done at the bottom of the income statement, whereas we would do a retained earnings statement for that.)

As for the VAT liability - couldn't even begin to guess why that's a debit. Our sales tax would be a credit and a liability. We don't have VAT (yet - and it better stay that way!), so I don't know anything about it.

Before any suggestions, please recheck the trial balance totals, you will find that the debits and credit disagree by £112,000 which means that the VAT liability appearing as a debit should be in fact a credit.

As regards T accounts:
1. Bank Account payment for additional equipment is £920,000 and not £170,000
2. Land and Buildings account should begin with £4,400,000. Insert Revaluation reserve amount of £1,724,000, although this is not correct. The Revaluation Reserve must appear as a separate item in the Statement of Changes In Equity. Recalculate depreciation expense.
3. Distribution Equipment - change the addition to £920,000. This will also affect its depreciation,
4. Furniture and Fixtures opening balance must be at its cost of £1,540,000. This will require restatement depreciation expense.
5. There is no profit or loss on disposal of equipment, since it has been sold at its book value.

As regards underlined items of the trial balance, I wish to suggest that:

1. Loss on partial closure and reorganisation £390,000 be adjusted against its provision of £700,000 plus current provision of £50,000.

Notes:
1 You need to provide for preference dividends. Amount due is £264,000 out of which £220,000 has been paid.

2 You need not provide for proposed dividends as per revised IAS 8

I hope this helps.

I just love when problems are incorrect to start with, unless of course the purpose is to find the errors.

Questions:
First, so what kind of account is this "P&L a/c"? I know it's not Income Summary as I originally thought, although that would have made sense, since it's a closing account. But I've seen it used in other ways and have never understood what that account is.

Do these corporations actually decide about dividends in a next year? i.e. they only "propose" a dividend that isn't recorded? Our dividends are always declared before the end of the year, and generally can be estimated a couple of months in advance. So they're always recorded in a current year.

Nothing in the problem says they've actually declared the entire 264,000. This is either another assumption that's meant to be made, or the laws are just different. We argued over this once, that a partial dividend could not be paid, which would imply if they paid 220,000 they must be intending to pay the whole thing. That isn't the case here - they could pay only 220,000 and the rest go into arrears. So from my point of view, I see no assumption that the entire 264,000 was indeed declared.

Am I correct that the "provision" is a retained earnings account, what I would call an appropriation?

(Do you think you could answer these without quoting 10-paragraph long IAS statements? I don't have time to read and "study" stuff - I'm not a student, merely trying to pick up some tidbits. Just a basic, simple answer will do.)

And at this point I think we need to hear back from OP on some of his/her calculations

Another thing I just caught - 1250 coming out of the A/D for equipment. All of the equipment did not get sold, so all the depreciation isn't going to come out. I guess I already mentioned that you need to calculate what the depreciation must've been if book value was 170.

I also finally see that you're using pre-adjusted book values for the depreciation. You need to make all adjustments first as depreciation will be based on final, adjusted ending balances.

As regards the first post:

Quote:

First, so what kind of account is this "P&L a/c"? I know it's not Income Summary as I originally thought, although that would have made sense, since it's a closing account. But I've seen it used in other ways and have never understood what that account is.

P&L account is abbreviated form of Profit and Loss Account. It is the same as Income Statement. Reference to P&L account in the T accounts refer to the transfers to be reported in Profit and Loss account.

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Do these corporations actually decide about dividends in a next year? i.e. they only "propose" a dividend that isn't recorded? Our dividends are always declared before the end of the year, and generally can be estimated a couple of months in advance. So they're always recorded in a current year.

Prior to the amendment in IAS, it was a common practice to report dividends proposed by the Board of Directors. This usually happens after the end of accounting year but before the accounts are approved by the Board. The changes suggest that since the proposal is made after the year end, it does not create an obligation to pay dividends until approved by the shareholders in the general meeting. Hence only those dividends should be reported which have been declared before the accounting year end.

Quote:

Nothing in the problem says they've actually declared the entire 264,000. This is either another assumption that's meant to be made, or the laws are just different. We argued over this once, that a partial dividend could not be paid, which would imply if they paid 220,000 they must be intending to pay the whole thing. That isn't the case here - they could pay only 220,000 and the rest go into arrears. So from my point of view, I see no assumption that the entire 264,000 was indeed declared.

The payment of £220,000 as preference dividends is an interim payment. Since the preference shareholders are entitled to 12% of £2,400,000 (£264,000) and there are sufficient profits available, there is an obligation to pay the full amount.

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Am I correct that the "provision" is a retained earnings account, what I would call an appropriation

Yes you may call that since a provision is an estimate of a liability of an uncertain amount based on certain past events that create an obligation.

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And at this point I think we need to hear back from OP on some of his/her calculations

You are absolutely correct, the silence is mysterious.

As regards the second post:

Quote:

Another thing I just caught - 1250 coming out of the A/D for equipment. All of the equipment did not get sold, so all the depreciation isn't going to come out. I guess I already mentioned that you need to calculate what the depreciation must've been if book value was 170.

Agreed. This is simply a mistake by the OP to quote £1,250,000. The adjustment for accumulated depreciation on disposal must be £1,100,000 - 170,000 = £930,000

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I also finally see that you're using pre-adjusted book values for the depreciation. You need to make all adjustments first as depreciation will be based on final, adjusted ending balances.

Again these are mistakes committed by the OP.

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P&L account is abbreviated form of Profit and Loss Account. It is the same as Income Statement. Reference to P&L account in the T accounts refer to the transfers to be reported in Profit and Loss account.

Ah, so it's not an account at all, but a "reference." OK, makes perfect sense.

Quote:

Prior to the amendment in IAS, it was a common practice to report dividends proposed by the Board of Directors. This usually happens after the end of accounting year but before the accounts are approved by the Board. The changes suggest that since the proposal is made after the year end, it does not create an obligation to pay dividends until approved by the shareholders in the general meeting. Hence only those dividends should be reported which have been declared before the accounting year end.

Hmm -- I never learned anything about proposals. I learned you record when it's declared. But I do see why my confusion. (I also discovered, however, that not all dividends are paid before year-end. I'm making assumptions from my mutual funds - but another subject altogether.)

Quote:

The payment of £220,000 as preference dividends is an interim payment. Since the preference shareholders are entitled to 12% of £2,400,000 (£264,000) and there are sufficient profits available, there is an obligation to pay the full amount.

I don't know. Sounds like legal issues and I never learned the legalities behind this issue. I only know our books here do this all the time - paying partial dividends and not the rest. I couldn't know what they teach in Britain.

As for the second post, I was talking to the OP.

Thanks for the response.