f7 reporting financial performance
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FRS 3
REPORTING FINANCIAL
PERFORMANCE
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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