Page 1 Of 8 Semester 2 2020 21 School Of Social Sciences
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Prepare financial statements for Diologics plc for the year ending 31 March 2021 based on the provided trial balance, notes on assets, taxation, leasing, and contracts. Include a statement of total comprehensive income, statement of changes in equity, and statement of financial position. Explain treatment of leased equipment in 150 words.
Paper For Above instruction
Introduction
The preparation of financial statements for Diologics plc involves consolidating various accounting estimates and adjustments based on the provided trial balance, notes, and relevant accounting standards. The key tasks include recognizing revenue, costs, restructuring, depreciations, revaluations, tax implications, lease accounting, and contractual obligations for the year ending 31 March 2021.
Statement of Total Comprehensive Income
Revenue and cost figures are derived directly from the trial balance. The revenue includes recognized revenue from the contract for smart meters, accounting for progress, and deducting the deposit where applicable. Expenses include cost of sales, distribution, administrative expenses, and interest. Adjustments for depreciation, revaluation, and lease payments are incorporated, including the lease of equipment recognizing right-of-use assets and lease liabilities per IFRS 16.
Profit before tax is adjusted for depreciation, revaluation surplus, finance charges for the lease, and taxation at 25%. The total comprehensive income consolidates the net income with other comprehensive income items, mainly revaluation gains and foreign currency translation differences if applicable, which are minimal here.
Statement of Changes in Equity
The statement reflects opening balances, share capital, share premium, revaluation reserve adjusted for revaluation surpluses, retained earnings, and the movements due to net income and dividends paid. Revaluation of land increases the revaluation reserve, and the current year's profit increases retained earnings after dividends.
Statement of Financial Position
Assets include non-current assets (land revalued to £4 million, buildings and plant at WDV, leased equipment as right-of-use asset), current assets (receivables, inventories, bank). Liabilities include payables, tax, lease liabilities, and long-term loans. Equity incorporates issued share capital, share premium, revaluation reserve, and retained earnings.
Lease treatment explanation (150 words)
The leased testing equipment should be recognized as a right-of-use asset and a corresponding lease liability on the balance sheet in compliance with IFRS 16 Leases. The initial recognition is based on the present value of fixed lease payments (£65,950 annually) discounted at the incremental borrowing rate (10%). The lease payment made in advance is initially recorded as a prepaid expense, and subsequently, the lease liability accrues interest and reduces as payments are made. In the income statement, depreciation of the right-of-use asset and interest expense on the lease liability are recognized. This treatment ensures that the expense aligns with the period of economic benefit from the leased asset, providing a more accurate reflection of financial position and performance than treating lease payments solely as expenses.
References
- IAS 16 Property, Plant and Equipment
- IFRS 16 Leases
- IAS 12 Income Taxes
- IAS 36 Impairment of Assets
- International Accounting Standards Board (IASB), IFRS Standards
- Revsine, L., Collins, W. D., Johnson, H. T., Merrill, G. B. (2015). Financial Reporting & Analysis.
- Arnold, P., & Bailey, S. (2020). Financial Accounting: An international introduction.
- McGregor, W., & Bell, K. (2014). Financial Accounting, IFRS Edition.
- International Financial Reporting Standards (IFRS) Foundation Publications
- Harrison, W. T., & Horngren, C. T. (2014). Financial & Managerial Accounting.