SBR examines financial reporting and IFRS in a holistic way. Whilst we often study standards in isolation (in silos), problem solving and explanations in the exam will often draw on more than one accounting standard. Understanding how IFRS interact is key to passing SBR.
An example to consider
Explain how capital government grants will be accounted in the profit and loss and the statement of cash flows. You may assume that the capital grant is accounted for as deferred income.
Initial purchase of PPE and the receipt of the grant.
In order to obtain a capital government grant there must also be capital expenditure i.e. the purchase of an item of PPE. The purchase of PPE is a cash outflow which is included in Investing Activities as a negative number.
The receipt of the related capital grant will be a cash inflow and also included in Investing Activities of the cash flow statement as a positive number.
Subsequent accounting – depreciation
Deprecation will be based on the original cost of the PPE and reflect the systematic write off of the asset over its useful life. Depreciation is a non cash expense that is charged in PL and reduces profit.
Cash flow statements start with Operating Activities and with the indirect method reconcile from PBT to the cash generated. Depreciation is added back in the reconciliation after all it has reduced profit but not cash.
So far so good. Read on. Remember that the capital grant is the Ying to the capital expenditure Yan.
Subsequent accounting – capital grant
The deferred income of the capital grant is released to PL at the same rate as depreciation is charged. Like depreciation there is no cash flow. The deferred income is released to PL to match / off set the depreciation expense.
In the cash flow statement in Operating Activities as PBT is reconciled to cash the capital grant released is deducted in the reconciliation. After all the release of the deferred income to PL has increased profits but not increased cash!