ICAEW ACA FAR flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Cash equivalents definition

Short-term, highly liquid investments with original maturity of three months or less and insignificant risk of changes in value. Bank overdrafts are included only where integral to cash management.

IAS 1 current asset test

An asset is current if realised in the normal operating cycle, held primarily for trading, due for realisation within twelve months, or is cash or a cash equivalent with no restriction on exchange.

IAS 2 inventory measurement

Inventory is measured at the lower of cost and net realisable value. Cost formulas permitted are FIFO and weighted average; LIFO is prohibited under IFRS.

Provision recognition criteria

Under IAS 37 a provision is recognised only where a present obligation from a past event is probable and a reliable estimate can be made; otherwise disclose a contingent liability.

ROCE formula

Return on capital employed equals operating profit divided by capital employed, where capital employed is total equity plus non-current liabilities, or equivalently total assets less current liabilities.

Revenue five-step model

IFRS 15 requires identifying the contract, identifying performance obligations, determining the transaction price, allocating it to obligations, and recognising revenue when each obligation is satisfied.

Statement of cash flows classification

IAS 7 requires cash flows classified as operating, investing or financing. Non-cash investing and financing transactions are excluded from the statement and disclosed separately in the notes.

Depreciation change treatment

A change in useful life or residual value is a change in accounting estimate applied prospectively from the date of change, with disclosure of the nature and amount of the effect.

Fundamental qualitative characteristics

Relevance and faithful representation. Relevant information is capable of making a difference to decisions; faithful representation is complete, neutral and free from error.

Asset definition framework

A present economic resource controlled by the entity as a result of past events. An economic resource is a right with the potential to produce economic benefits.

Fair value definition

The price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, an exit price.

Fair value hierarchy levels

Level 1 uses quoted prices in active markets for identical items; Level 2 uses observable inputs other than quoted prices; Level 3 uses unobservable inputs.

Revaluation surplus treatment

An increase in carrying amount under the revaluation model is recognised in other comprehensive income and accumulated in equity; a decrease reverses prior surplus before being expensed.

Lessee initial measurement IFRS 16

The lease liability is the present value of lease payments not paid at commencement, discounted at the interest rate implicit in the lease or the lessee's incremental borrowing rate.

Development cost capitalisation

Development expenditure is capitalised only when technical feasibility, intention and ability to complete, probable future benefits, and reliable measurement of costs are all demonstrated.

Deferred tax measurement

Deferred tax is measured at the rates expected to apply when the temporary difference reverses, based on tax rates enacted or substantively enacted by the reporting date.

Adjusting events after reporting date

Events that provide evidence of conditions existing at the reporting date are adjusting and require the financial statements to be updated, for example settlement of a court case.

IFRS 10 control criteria

An investor controls an investee with power over relevant activities, exposure or rights to variable returns, and the ability to use that power to affect the returns.

Goodwill calculation

Consideration transferred plus non-controlling interest plus fair value of previously held interest, less the fair value of identifiable net assets acquired, measured at the acquisition date.

Bargain purchase gain

Where the fair value of net assets acquired exceeds total consideration and non-controlling interest, the acquirer reassesses the measurement and recognises any remaining excess in profit or loss.

Acquisition-related costs

Costs such as advisory, legal and due diligence fees incurred for a business combination are expensed as incurred, not included in consideration transferred or in goodwill.

NCI measurement choice

For each business combination, non-controlling interest is measured at fair value (full goodwill) or at its proportionate share of identifiable net assets (partial goodwill).

Unrealised profit elimination

Intra-group profit in inventory is eliminated in full on consolidation; upstream profit reduces the subsidiary's post-acquisition reserves and is shared with non-controlling interest.

Equity method accounting

The investment is initially at cost, then adjusted for the investor's share of post-acquisition profit or loss and other comprehensive income, less dividends received and any impairment.

Associate significant influence

Significant influence is the power to participate in financial and operating policy decisions without control or joint control, presumed where the holding is 20 percent or more.

Consolidation of cash flows

Group cash flow statements include all subsidiary cash flows from the acquisition date; dividends paid to non-controlling interests are presented as financing cash flows.

Gearing ratio formula

Gearing equals debt divided by debt plus equity, or debt divided by equity. The definition chosen must be stated because results differ materially between bases.

Interest cover formula

Interest cover equals operating profit divided by finance costs. A falling ratio signals reduced ability to service debt from trading profits.

Working capital cycle

Inventory days plus receivable days minus payable days. A rising cycle indicates more cash tied up in operations and weaker liquidity.

DuPont ROCE breakdown

ROCE equals operating margin multiplied by asset turnover. This shows whether return on capital is driven by pricing and cost control or by efficient asset utilisation.

Earnings per share formula

EPS equals profit attributable to ordinary shareholders divided by the weighted average number of ordinary shares outstanding during the period, adjusted for bonus issues and share splits.

Ratio analysis limitations

Comparability is limited by differing accounting policies, creative accounting and window dressing, inflation, one-off items and lack of an absolute benchmark, so ratios require comparatives and industry context.