Accounting standards and conceptual framework application
This domain tests applying the Conceptual Framework and individual IFRSs to transactions and balances. You need to select the relevant standard, apply its recognition and measurement rules, and explain the resulting journal entries or presentation, rather than reciting definitions.
Framework and hierarchy
The Conceptual Framework sets the objective of financial reporting, qualitative characteristics, elements, recognition and measurement. Relevance and faithful representation are fundamental; comparability, verifiability, timeliness and understandability are enhancing. Where a standard specifically applies, apply it; then look to similar standards; then the definitions. Measurement bases include historical cost, fair value, value in use and current cost. Materiality is entity-specific.
Standards to apply
IFRS 15 requires five steps: identify the contract, identify performance obligations, determine the transaction price, allocate it, and recognise revenue when control transfers. IFRS 16 makes lessees recognise a right-of-use asset and lease liability. IAS 16 requires component depreciation and permits revaluation. IAS 38 governs intangible recognition. IAS 36 tests impairment against recoverable amount. IAS 37 recognises a provision only for a present obligation, probable outflow and reliable estimate. IAS 12 recognises deferred tax on temporary differences. IFRS 9 classifies financial assets by business model and cash flow characteristics. IAS 10 separates adjusting from non-adjusting events.
Worked example
A contract has equipment and installation for total 130,000. Standalone selling prices are equipment 100,000 and installation 40,000, total 140,000. Allocate: equipment 130,000 × 100/140 = 92,857; installation 37,143. If equipment transfers at a point in time and installation is a separate performance obligation satisfied over time, revenue is recognised accordingly. The discount is allocated proportionately because it is not observable in the standalone prices. This shows transaction price allocation, not cash received.
Traps
Do not recognise revenue merely on cash receipt. Do not provide for future operating losses. Do not amortise goodwill. Do not ignore deferred tax on fair value adjustments. Do not name a standard without checking its recognition criteria.