Financial Reporting Standards and the Regulatory Framework
What you must command
Here the examiner tests conceptual underpinning and standard-level rules. Know the objective of general purpose financial statements, the qualitative characteristics (relevance, faithful representation, comparability, verifiability, timeliness, understandability), the cost constraint, and the definitions of asset, liability, equity, income, and expenses from the Conceptual Framework. Know the status of IFRS: standards, interpretations, the hierarchy in IAS 8 when no standard applies, and the distinction between recognition, measurement, and disclosure. Expect questions on IAS 1 presentation and going concern, IAS 8 changes in accounting policy versus estimates versus prior-period errors, IAS 10 events after the reporting period (adjusting versus non-adjusting), IAS 37 provisions and contingent liabilities, IFRS 15 revenue at a point in time versus over time, IFRS 16 lessee recognition, IFRS 9 classification and expected credit losses, IAS 16 and IAS 40 measurement models, and the regulatory layer: statutory audit, corporate governance codes, and the role of the standard-setter and securities regulator.
Traps candidates fall into
- Policy versus estimate. A change in measurement basis or presentation is a policy change applied retrospectively; a change in useful life or residual value is an estimate applied prospectively.
- Adjusting events. An event after the reporting period that provides evidence of conditions existing at year-end is adjusting; a fire or a new business combination after year-end is not.
- Provision versus contingent liability. A present obligation with a reliable estimate is recognised; a possible obligation is disclosed only.
- Over-time revenue. Control transferring over time requires a measure of progress; a right to payment for performance to date is a strong indicator.
- Fair value versus cost. Revaluation surpluses go to other comprehensive income; revaluation decreases go to profit or loss to the extent they reverse prior gains.
Rule of thumb
Ask three questions in order: is there a standard on point; if not, does the Conceptual Framework give an answer; and is the item recognised, disclosed, or both? Recognition requires definition, probability of economic benefit, and reliable measurement.
Worked example
A customer prepays for a service delivered over twelve months, invoiced 120,000 on 1 October. At 31 December, three months are complete, so revenue of 30,000 is recognised and a contract liability of 90,000 is presented.