Financial Accounting and Reporting
Financial Accounting and Reporting tests your ability to apply accrual accounting and IFRS recognition and measurement rules to prepare and interpret general-purpose financial statements.
Recognition and the accrual engine
- Revenue is recognized when a performance obligation is satisfied and control transfers, not when cash is received. IFRS 15 uses five steps: identify the contract; identify performance obligations; determine the transaction price; allocate the price to obligations; recognize revenue when each obligation is satisfied.
- Expenses follow the same logic: record when incurred, not when paid. Period-end adjusting entries cover accruals, prepayments, depreciation, impairment, and expected credit losses.
- A customer deposit before delivery is a contract liability, not revenue.
Measurement rules that recur
- Inventory is measured at the lower of cost and net realizable value under IAS 2. FIFO and weighted average are permitted; LIFO is not permitted under IFRS.
- Property, plant and equipment under IAS 16 includes purchase price, directly attributable costs, and an initial estimate of dismantling obligations. Depreciate over the useful life; test for impairment under IAS 36 when indicators exist.
- A change in useful life is a change in accounting estimate applied prospectively, not a prior-period error.
Worked example
On 1 October a company pays 24,000 for 12 months of insurance. The year-end is 31 December. The initial entry is Dr Prepaid insurance 24,000 / Cr Cash 24,000. By year-end, 3 months have expired: 24,000 × 3/12 = 6,000. The adjusting entry is Dr Insurance expense 6,000 / Cr Prepaid insurance 6,000. The statement of financial position shows a prepayment of 18,000 and the income statement shows an expense of 6,000. Reasoning: the cash payment is an asset until the coverage period passes; the expense is allocated on a time basis.
Traps that cost marks
- Recording a cash receipt as revenue before control transfers; the credit belongs in contract liabilities.
- Expensing costs that are directly attributable to bringing an asset to its working condition, or depreciating land.
- Forgetting deferred tax on temporary differences and treating all tax differences as permanent.
- Presenting a revaluation surplus in profit or loss instead of other comprehensive income.