Pack 16- Accounting for Limited Companies

What are the contents of published accounts established by?

The International Accounting Standards Board

What were the objectives of the international accounting standard?

To set out how the financial statements should be presented to ensure comparability with previous accounting periods and other companies.

What does the Accounting standard state that the purpose of financial statements is to do?

Provide information about:
-Financial position
-Financial performance
-Cash flows used for making economic decisions

What does the IAS1 Presentation of Financial statements state that a set of final accounts should include?

-Income statement
-SOFP
-Statement of cash flows
-Statement of changes in equity
-Notes to the Financial statements
-Directors' report
-Auditors' report

How many considerations does IAS1 give when preparing company financial statements?

2

What are the two considerations that IAS1 gives when preparing financial statements?

1) Offsetting
2) Comparative information

What is offsetting?

It is generally not permitted to set-off assets and liabilities, and income and expenses against each other in order to show a net figure

What is an example of offsetting?

Cash at bank is not to be netted off against a bank overdraft

What is comparative information?

Requirement to show figures from previous time periods in the financial statements, to help users of the statements

What is the structure and content of IAS 1 called?

The general principles

What are some general principles?

-Financial statements clearly shown separately from other information which may be provided from stakeholders
-Name of company shown
-Period covered by financial statements shown
-Currency indicated
-Levels of rounding for money e.g. thousands

In the general principles what are the financial statements clearly shown separate from?

Other information which may be provided for stakeholders

What are accounting policies?

Specific accounting methods selected by directors and followed by the company e.g. method of depreciation

What does IAS 1 require for accounting policies?

For there to be details of accounting policies used

What must happen when an accounting policy is given in an international accounting standard?

Then that policy must apply

What must happen when there is no accounting standard in regards to policies?

Then the managers of a company must use their judgement to provide information that is relevant and reliable

Once a company adopts accounting policies how must they be applied to similar transactions?

Consistently

Why would accounting policies for similar items not be consistent?

If an accounting standard allows differing policies to be applied to categories of item

When can changes of accounting policies only occur?

-If change required by an accounting standard
-If change results in financial statements providing more reliable and more relevant info

Why are accounting policies important to the user of published accounts?

Enable the user to:
-Understand accounts
-Rely on accounts as being free from bias
-Make comparison with different countries
-Make reliable decisions based on the info

Why must public limited companies publish their financial statements?

-Companies Act 2006 requires them to
-To attract potential investors

Why does the Companies Act of 2006 require public limited companies to publish their financial statements?

To keep business owners informed of the performance of the business e.g. shareholders want to know when dividends will be paid

Why does the published income statement not have to detail every single overhead or expense incurred on the company?

As doing so would be to disclose important management information to competitors

What items does IAS 1 presentation of financial statements require there to be on the face of the income statement?

1)Revenue
2)Finance costs- interest paid on loans or overdrafts
3)Tax expense- cannot be known until I.S. produced and appears on SOFP as current liability

How does the I.S. conclude?

By showing profit or loss for the period attributable to shareholders

What must expenses be?

Analysed in some way

What happens to a lot of the details on the I.S.?

It is summarised

What are examples of summarised details on the I.S.?

-Distribution expenses (include warehouse costs, post and packaging etc.)
-Sales and marketing (advertising costs, salaries of sales people etc.)
-Administrative costs (office costs, rent and rates)

What are examples of distribution expenses ?

-Warehouse costs
-Post and packaging

What are examples of sales and marketing expenses?

-Advertising costs
-Salaries of sales people

What are examples of administrative costs?

-Office costs
-Rent and rates

What is the Income statement layout for limited companies?

Example PLC
Income statement for the year ended 30th September 2018
£m
Revenue 60931
Cost of sales (55871)
Gross profit 5060
Distribution expenses (480)
Administration expenses (1196)
Profit from operations 3384
Finance Income 150
Finance costs (483)
Profit before tax 3051
Taxation (162)
Profit for the year 2889

Why might the net profit or loss shown in a business' final accounts not reveal adequately the actual results of business activity?

-Does not mention bank and cash flow
-Does not mention external factors e.g. rate of inflation
-Liquidity not explained in business (Acid test ratio)
-Does not show non profit transactions e.g. Capital drawings

Write down an example of a IAS1 Statement of financial position for limited companies?

Example plc
Statement of Financial Position as at 30th September 2018
Non-current assets
Property, plant and machinery

Current assets
Inventory
Trade and other receivables
Cash and cash equivalents
Total assets

Equity and Liabilities
Share Capital
Reserves
Retained Earning
Total Equity

Non-current liabilities
Mortgage
Loan

Current Liabilities
Trade and other payables

Total Current Liabilities
Total liabilities
Total Equity and Liabilities

What disclosures does IAS 1 require of share capital either on the face of the SOFP or in notes?

-The number of shares authorised
-The number of shares issued and fully paid, and issued but not fully paid
-The par (or nominal value)

What do the notes required by IAS 1 to the financial statements provide detailed information regarding?

-Basis of preparation used in financial statements and the specific accounting policies used
-Information required by international accounting standards that is not already included in the financial statements
-Any additional info relevant to the understanding of financial statements

Where would a statement of changes in equity be included?

Notes of account

What does IAS 1 require of the statement of changes in equity?

That it is one of the end of year financial statements

What does the Statement of changes in equity show?

-Changes that have taken place to the shareholders' stake in the company
-Unrealised profits which are taken directly to the reserves e.g. upwards gain of revaluation of property

What is an example of a simple Statement of Changes in Equity?

£000
Balance 1 January 2018 6579
Profit for the year 380
6959
Dividends paid 300
Balance 31st December 2018 6659

What would also be included in the statement of changes in equity?

The issue of any new shares

What is a rights issue?

An issue of shares by a limited company designed to raise some cash

In a rights issue how do directors offer shares to existing shareholders?

In proportion to their existing shareholding, usually at a reduced price to encourage existing shareholders to buy them

What are the advantages of a Rights issue?

-Offering shares to existing shareholders is much cheaper than issuing them to the general public and thus more successful
-As shares offered to existing shareholders control of company remains with the same individuals as before

Why do the same individuals maintain control of the company during a rights issue?

As it is only offered to existing shareholders

When does a bonus issue occur?

When directors of a company decide to change the structure of a company's balance sheet by increasing share capital and reducing reserves.

Why unlike a rights issue is there no cash involved in a bonus issue?

As shares are given free to shareholders

Why may a bonus issue be given?

-If business has been particularly successful over a period of time, its reserves may have grown to the extent that they are greater than the issued share capital
-Bonus issue may be given if company does not have cash to pay dividend or wants to hold onto to cash within business

What is a 'one for three' bonus issue?

Where a shareholder receives one free share for every three currently held but they do not give the company any cash

Why is a bonus issue not the same as a rights issue?

-No share premium would be involved and no cash received
-Ordinary share capital would increase but another reserve would reduce so the total of equity section would remain the same

How does a bonus issue affect a company's balance sheet?

-Issued shares are increased by value of bonus issue
-Reserves are decreased by the same amount

Can any reserve be used to finance a bonus issue?

Yes but there are certain types of reserves which have limited uses and it is these capital reserves which are normally used

What type of reserves are usually used to finance a bonus issue?

Capital reserves

What type of reserves are much more flexible than capital reserves?

Revenue reserves as companies can use them to pay cash dividends to shareholders in future

What are the benefits of published accounts?

-Produced annually and available to shareholders and stakeholders
-Filed with Registrar of Companies within 6 months of financial year end
-Accounts of larger companies audited by external auditors
-Accounting framework ensures published accounts follow same legal and accounting standards, allows comparisons with other years and companies

What are the limitations of published accounts?

-Based on historical info
-By the time info available to users of the accounts it is out of date as within 6 months of financial year end
-Additional info is disclosed e.g. can't see exactly how much was spent on wages
-Give little indication to the future
-Cannot record aspects of the company which will affect future performance e.g. motivation of workforce
-Not accessible/ too complex for non-specialist users

How can a business show a true and fair view of the financial position?

By asking a professional to revalue assets of the business to accurately reflect its current market value

What usually is the valuation of the non-current asset on the SOFP?

The carrying amount which is calculated as the cost of the asset minus the accumulated depreciation

What is fair value valuation for non-current assets?

A sale price agreed by a willing buyer and seller, assuming both parties enter the transaction freely.

What is opened when a non-current asset is valued upwards?

A revaluation reserve is opened

What is the double entry for an upwards revaluation of a non-current asset?

-Debit the non-current asset
-Credit the revaluation reserve

What is a schedule of non-current assets?

Summary of non-current assets and any new non-current assets bought, sold and the depreciation charge for the year. Allows NBV to be calculated and then appears on SOFP.

What is an example of a Schedule of Non-current assets?

Property Fixtures and Fittings and equipment
£000 £000
Cost
At 1st April 2017 2,000 625
Additions - 130
Disposals - (100)
Revaluation 20
At 31st March 2018 2,020 655
Depreciation
At 1st April 2017 20 300
Charge for year 15 55
Elimination on disposal (28)
Elimination on Revaluation
At 31st March 2018 35 327
NBV at 31st March 2018 1,985 328
NBV at 31st March 2017

What are additions on the schedule of non-current assets?

Any non-current assets bought during the year

What are disposals on the non-current assets?

Any non-current assets sold during the year

What is elimination on disposal on the schedule of non-current assets?

Depreciation attached to the non-current assets which have been disposed of

What is the elimination on revaluation on the schedule of non-current assets?

If an asset has increased in value you need to eliminate past depreciation

What are directors of a limited company?

Appointed by shareholders to manage company on their behalf and directors are put in a position of trust by shareholders to be responsible for stewardship of company's accounting info.

Under the Companies Act 2006 what do directors have a general duty to do?

-Act within their powers
-Promote the success of the company
-Exercise independent judgement
-Exercise reasonable care, skill and diligence
-Avoid conflicts of interest
-Not accept benefits from third parties
-Disclose an interest in any proposed transactions involving the company

What are directors responsible for regarding the Companies Act 2006?

Ensuring the provisions of the Companies Act 2006 which relate to the accounting records and financial statements are followed

What are the main provisions of the Acts in relation to the financial statements that directors must follow?

-Prepare the company's financial statements in accordance with Companies Act, IAS and accounting principles/concepts
-Must write a directors report which reviews the main activities of the business
-File financial statements with Registrar of companies
-Responsible for stewardship and record accurate info in published financial statements
-Ensure financial statements audited and show true and fair view of business
-Ensure financial statements are comparable, understandable, relevant and reliable

What are the main roles of a director?

-Determine company's strategic objectives and policies
-Monitor progress towards achieving objectives and policies
-Appointing senior management
-Accounting for company's activities to relevant parties e.g. shareholder
-Accountable to shareholders for company's performance

What is the directors report?

A report which forms part of the published accounts

What does the directors report contain details of?

-Principle activities of the company
-Review of the activities of company
-Likely future developments
-Directors names and shareholdings
-Proposed dividends
-Significant differences between book value and market value
-Actions taken on employee involvement and consultation
-Company's policies e.g. employment of disabled people

What may a company have a policy on in regards to the directors report?

Employment of disabled people

What is an auditor?

An independent accountant whose job is to investigate financial statements and report to shareholders whether financial statements show true and fair view of the business.

What do auditors have to report to shareholders?

Whether the financial statements show a true and fair reflection of the business

Why are auditors required?

Because they check the interests of the owners of the business (the shareholders)

What do auditors ensure?

Ensure that directors are disclosing correct info to the owners and are not trying to hind info

What have directors done in some cases with the absence of an auditor?

As directors have invested money

What of the shareholders do auditors protect?

Their investment

Who is responsible for preparing the companies accounts?

The directors

Who must audit the accounts of larger companies?

Must be audited by external auditors appointed by the shareholders to check the accounts

Where is the auditors report printed?

In the published accounts

What is the three main sections of the auditors report?

1) Respective responsibilities of directors and auditors
2) Basis of audit opinion
3) Opinion

What is the respective responsibilities of directors and auditors section on the auditors report?

States directors are responsible for preparing the accounts, while auditors responsible for forming an opinion on the accounts.

What is the basis of audit opinion section on the auditors report?

The way in which the audit was conducted, other assessments, and the way in which the audit was planned and performed

What is the opinion section on the auditors report?

The auditor's view of the company's accounts

What opinions make the auditors opinion on the auditor's report 'unqualified'?

-The financial statements have been prepared properly
-Financial statements give a true and fair view of the company's affairs in accordance with company law and International financial reporting standards
-Info given in 'directors' report is consistent with financial statements

How would the opinion on the auditors report be 'qualified'?

If auditors feel certain parts of the financial statements have not been dealt with correctly and it is important enough to be brought to Registrar of companies and other account users e.g. investors or suppliers.

What are internal stakeholders?

People who have a stake in the ownership of the company or employed by the company

What are examples of internal stakeholders?

-Shareholders
-Management
-Employees

Why are shareholders internal stakeholders?

The profits of the company and dividends paid

Why is management an internal stakeholder?

To see if company is expanding and offering management opportunities for the future

Why are employees internal stakeholders?

To ensure continued employment and the ability to fund pay increases

What are external stakeholders?

Those who have business dealings with the company or are interested in the company at a national or local level

What are examples of external stakeholders?

-Customers
-Suppliers
-Lenders
-Government and government agencies
-Local community

Why are customers external stakeholders?

As they need to ensure that goods and services provided by the company will still be available in the future

Why are suppliers external stakeholders?

The ability of the company to pay for goods and services supplied

Why are lenders external stakeholders?

To see security available for loans and the ability to repay loans as they fall due