Financial Accounting and Reporting
This domain tests whether candidates can prepare and interpret financial statements under a principles-based framework. Questions focus on recognition, measurement, presentation, and disclosure, often through adjustments to profit or financial position. Strong candidates explain the accounting logic, not just the final number.
Core rules
- Financial statements use accrual accounting, going concern, consistency, and materiality. Recognition follows control, obligation, or probable inflow or outflow.
- Revenue under IFRS 15 uses five steps: identify the contract, identify performance obligations, determine the transaction price, allocate the price, and recognise revenue when control transfers.
- Variable consideration is estimated and constrained so that a significant revenue reversal is not highly probable.
- Leases under IFRS 16 recognise a right-of-use asset and a lease liability at present value, with exceptions for short-term and low-value leases.
- IAS 36 impairment compares carrying amount with recoverable amount, which is the higher of fair value less costs of disposal and value in use. Goodwill impairment is not reversed.
- IAS 37 provisions are recognised for present obligations that are probable and reliably measurable. Contingent assets are not recognised.
Worked example
A contract has a transaction price of 1,200 and two performance obligations with standalone selling prices of 800 and 600. Total standalone selling price is 1,400. Allocation is 1,200 x 800/1,400 = 686 and 1,200 x 600/1,400 = 514. If the first obligation is equipment transferred at a point in time and the second is installation over six months, revenue of 686 is recognised on delivery, while 514 is recognised over time as installation progresses. A discount is allocated proportionately unless observable evidence supports a different allocation. Contract liabilities must be kept separate from receivables.
Traps that cost marks
Do not confuse cash received with revenue earned. Do not allocate a discount entirely to one obligation without evidence. Do not capitalise costs that do not meet the asset recognition criteria. Do not ignore discounting for long-term provisions. Do not reverse an impairment of goodwill. Check whether a contingency is an asset or a liability before recognising it.