Published Account 1 Introduction Limited liability companies are

Published Account 1

Introduction Limited liability companies are governed by Companies Ordinance (Cap. 32 Tenth Schedule) to prepare and publish accounts annually which should have to comply with Hong Kong Statements of Standard Accounting Practice (HKSSAP) issued by Hong Kong Society of Accountants Published accounts set out in standardized format 2

Components of Published Accounts Components need special attention: - Extraordinary items Exceptional items Prior year adjustments Post balance sheet events Contingencies 3

Exceptional items 4

Exceptional Items Definition Items related to the ordinary activities of the business but due to exceptional size, nature or incidence Items must be material in size, unusual in nature and expected not to recur frequently and regularly Example exceptional bad debts are written off profits or losses related to discontinued operations e. g. loss on the closure of a transport depot exceptional bad debts are written off profits or losses on the disposal of long-term investments e. g. profit on the disposal of a subsidiary company 5

Exceptional Items Example (cont’l) exceptional bad debts are written off profits or losses on the disposal of fixed assets e. g. loss on the disposal of land, machinery or equipment exceptional bad debts are written off e. g. a major debtor is declared bankrupt exceptional stock is written off e. g. a large amount of obsolete stock amortization of intangible fixed assets which had been capitalized previously e. g. write off goodwill at 2% per annum income or expenses arising from the restructuring of the activities of a business amounts transferred to employee share schemes amounts of litigation settlements 6

Exceptional Items Disclosure requirement: Disclosed in the published profit and loss account as follows: $ Profit before taxation is arrived at after charging: Depreciation X Director’s remuneration X Audit fee X Hire of plant X Interest X Exceptional loss X And after crediting: Income from investment Rental income Exceptional gain $ X X 7

Extraordinary items 8

Extraordinary Items Definition those items which are derived from events or transactions outside the ordinary activities of the business items which are material and expected not to recur frequently and regularly. Events which are completely outside the control of the management Examples: - Losses arising from a natural catastrophe - Losses arising from the expropriation of assets 9

Extraordinary Items Disclosure requirement - Profits or losses from extraordinary items should be excluded from ordinary profit before tax (internal profit and loss) $ Profit before taxation X Less: Taxation X Net Profit after taxation X Extraordinary item (note) X Profit after taxation and extraordinary items X 10

Prior Year Adjustment 11

Prior Year Adjustments Definition Material adjustments made to the previous year’s retained profits of there is a fundamental error in one of the previous year’s accounts or a change in the accounting policy Example- fundamental error in previous year - the omission of a significant amount of purchases in the previous year. 12

Prior Year Adjustments Example- change in accounting policy - Completely written off intangible fixed assets (research and development expenditures or goodwill) which had been capitalized previously - Change in stock valuation method - Change in depreciation method 13

Prior Year Adjustments Disclosure Requirement Opening retained profits should be adjusted: $ Profit before taxation Less: Taxation Add/less: Extraordinary item Profit after tax and extraordinary item Less: Appropriation Retained profits for the year Add: Retained profit bought forward Retained profits brought forward Add/Less: Prior year adjustment X X • A note is required to show the nature of the prior year adjustment $ X X X X X 14

Contingencies 15

Contingencies Definition condition which exists at the balance sheet date, where the outcome will be confirmed only on the occurrence or non occurrence of one or more uncertain future events 16

Contingencies Accounting treatment- depending on the degree of contingency Possibility of Occurrence For Contingent Gain For Contingent Loss With certainty Accruals Probable A contingency (to be disclosed in notes) Accruals Possible Not to disclose A Contingency (to be disclosed in notes) With a slight chance Not to disclose 17

Contingencies Examples of contingent losses: - A discounted bill of exchange - A guarantee given for a borrowing by another company - A pending legal claim Example of a contingent gain: - A pending litigation settlement from another company Disclosure requirement: Contingencies should not be recognized in the accounts. A note is required to describe the nature of a contingency. 18

Post Balance Sheet Events 19

Post Balance Sheet Events Definition: Those events, both favourable and unfavourable, which occur between the balance sheet date and the date on which the financial statements are approved by the board of directors 20

Post Balance Sheet Events Adjusting Events Non-adjusting Events 21

Adjusting Events Definition: Those events, both favourable or unfavourable, which occur between the balance sheet date and the date on which the financial statements are approved by the board of directors 22

Adjusting Events - Example determination of the purchase or sale price of a fixed assets purchased or sold during the year permanent diminution in the value of a property permanent diminution in the value of a long-term investment in an unlisted company determination of the net realizable value of stock based on the available evidence, the determination that the estimate of the accrued profit on a long-term contract was incorrect a major trade debtor goes into liquidation dividends declared by subsidiaries and associated companies for periods prior to the balance sheet date a change in the taxation rate applicable to periods prior to the balance sheet date determination or receipt of insurance claims relating to the current year discovery of errors or fraud which affect the true and fair view of the financial statements 23

Non-adjusting Events Definition Those events which concern conditions that did not exist at the balance sheet date. 24

Non-adjusting Events - Example mergers and acquisitions reconstructions and proposed reconstructions issuance of shares and debentures purchases and sales of fixed assets and investments losses of fixed assets as a result of a disaster such as fire or flood extending trading activities or starting new activities changes in foreign exchange rates government actions such as the expropriation of assets strikes and industrial actions changes in pension benefits 25

Example Refer to textbook P. 159 26

Harbour Ltd. Profit and Loss Account for the year ended 31 December 1994 $ $ Turnover (note 1) 1, 881, 600 Profit before taxation is arrived at (working) 111, 600 after charging: Auditor’s remuneration (2) 1, 000 Directors’ remuneration (25600+5000) (2) 30, 600 Goodwill written off (2) 1, 500 Debenture interest ($200, 000 x 4%) (2, 12) 8, 000 Fire loss (2) 20, 000 Loss on disposal (trial) 2, 000 Exceptional bad debts (13) 70, 000 Depreciation (note 1, 3) 29, 600 and after crediting: Income from quoted investments 3, 000 Income from unquoted investments 1, 000 Profit tax for the year (1) 44, 000 41, 800 Less: overprovision in previous year (1) 2, 200 69800 27

Working: Adjustment for profit before tax: Original Less disposal loss (trial) Bad debt (13) Debenture interest (8000 -6000) (12, 2) 185600 2000 70000 2000 11600 28

Cont’ $ Appropriations: Debenture redemption reserve (trial) Dividends (400000*0. 0402) (1) Retained profits for the year Retained profits brought forward (trial) Less: Prior year adjustment (note 2) 50, 000 16, 080 86, 200 1, 200 $ 69, 806 66, 080 3, 720 85, 000 88, 720 29

Harbour Ltd. Balance Sheet as at 31 December 1994 $ Fixed Assets (note 3) Intangible Fixed Assets $ $ 1, 149, 000 Goodwill (trial) Investments Quoted investments, at cost (market value: $57, 000) (4, trial) Current Assets Stocks (5, trial) Debtors (80000 -70000 -1200) (13, trial) Bills Receivable (trial) Prepayment (trial) Short-term investment, at cost (director’s valuation: $38, 000) (14, trial) Called up capital not paid (250*0. 6) (14) Cash at bank (trial) 4500 50, 000 108, 460 8, 800 22000 7600 30, 000 150 285, 670 462, 680 30

$ Less: Current Liabilities Creditors (trial) 60000 Bills Payable (trial) 17000 Proposed dividends (40000*0. 0402) (1) 16, 080 Provision for tax (4000+44000 -2200) (1, trail)45800 4% Debentures (next year: 1995) 50, 000 Net Current Assets/Working Capital Financed by: Share Capital (note 4) (14, trial) Reserves (note 5) $ 270, 220 1, 473, 720 475, 000 848, 720 Long-term Liabilities 4% Debentures (note 6) (after 2 nd year: 96, 97, 98) 150, 000 1, 473, 720 31

1. Harbour Ltd. Notes to the Accounts Principal Accounting Policies (a)Turnover represents the invoiced amount of goods sold less returns. (b)Depreciation is calculated to write off the cost of fixed assets over their estimated useful lives on a straight line basis at the following annual rates: Buildings 2% Plant and machinery 10% Office equipment 15% No depreciation is provided on leasehold land. ( c )Stocks are valued at the lower of cost and net realizable value. Cost is determined on a first-in-first-out basis. Work in progress and finished goods include an appropriate proportion of production overhead expenses. (d)Goodwill is amortized over a period of 5 years in equal instalments. 32

2. Prior Year Adjustment The prior year adjustment relates to a change of accounting policy in the treatment of development expenditures. 33

240+60 (11, trial) 3. Fixed assets Land Cost At 1 Jan 94 Disposals (11) $000 400. 0 115. 0 Plant and Office Machinery Equipment $000 At 31 Dec 94 Aggregate Dep At 1 Jan 94 Disposals Charge for the year(3) At 31 Dec 94 (trial) Total $000 22. 0 837. 0 (60. 0) 600. 0 240. 0 22. 0 1, 377. 0 108. 0 (12. 0) 4. 7 210. 4 (12. 0) 24. 0 3. 3 29. 6 100. 0 120. 0 115000*2% 24000*10% 8. 0 228. 0 300. 0 (60. 0) Revaluation (3) Net book value At 31 Dec 93 At 31 Dec 94 Buildings 600. 0 1000. 0 115. 0 2. 3 400. 0 1, 000. 0 17. 3 15. 0 192. 0 120. 0 22000*15% 17. 3 14. 0 626. 6 1, 149. 34

During the year, the leasehold land was revalued to $1, 000 and the surplus on revaluation of $600, 000 was credited directly to the revaluation reserve. The valuation was made by a firm of independent valuers. 35

4. Share Capital Authorized: 1, 000 ordinary shares of $1 each Issued and called up: 475, 000 ordinary shares of $1 each 475, 000 $ 1, 000 In March 1994, 75, 000 ordinary shares were offered to the public at 1. 8 per share payable as follows: On application $1. 2 per share including premium On allotment $0. 6 per share These new shares rank pari passu in all respects with the existing shares except that they are not entitled to receive the final dividend declared for the year. 36

5. Reserves Debenture Redemption Reserve DRR $ At 1 Jan 94 (trial) Transfer from 50, 000 P&L (trial) Revaluation (3) Issue of share Prior yr adj. (10) Share premium $ 50, 000 Revaluation reserve $ 1000000 -40000 50, 000 60, 000 110, 000 100, 000 600, 000 60, 000 Retained profits for the year At 31 Dec 94 Retained Profits Total $ $ 86, 200 600, 000 (1, 200) 3, 720 88, 720 848, 720 37

250000/5 6. 4% Debentures (12) The company redeemed $50, 000 4% debentures on 1 Jan. 94 at par. 7. Capital Commitments (6) Commitments outstanding at 31 Dec. 1994 not provided for in the financial statement were as follows: $ Contracted for 200, 000 Authorized but not contracted for 300, 000 500, 000 38

8. Contingent Liabilities (7) At 31 Dec. 1994, there was an unsecured guarantee given by the company for the bank overdraft facility of a supplier in the amount of $95, 000. 9. Post Balance Sheet Event (8) On 3 Jan. 1995, the company acquired the business of Foreign Company for a cash consideration of $139, 000. 39