Financial Reporting and Analysis
This domain tests how Ind AS measurement choices feed into the ratios you use to judge performance and quality of earnings - not just reciting standards.
Core rules
- Ind AS 115: five steps - identify the contract, identify performance obligations, determine the transaction price (including variable consideration, constrained), allocate to obligations, recognise on satisfaction (over time or at a point in time).
- Ind AS 116: single lessee model, recognising a right-of-use asset and lease liability discounted at the incremental borrowing rate; exemptions for short-term and low-value assets. It converts operating lease rent into depreciation and finance cost, raising EBITDA and earlier-period profit while adding debt.
- Ind AS 109: expected credit loss with a three-stage model - 12-month ECL at Stage 1, lifetime ECL at Stage 2, credit-impaired with interest on net carrying amount at Stage 3.
- Ind AS 36: recoverable amount is the higher of fair value less costs to sell and value in use; impairment testing of goodwill is annual.
- DuPont: ROE = net profit margin × asset turnover × equity multiplier. Decompose before concluding that performance improved.
Worked example
A company reports net margin 8%, asset turnover 1.5 and equity multiplier 2.0, giving ROE 24%. Next year the margin falls to 6.4% but the equity multiplier rises to 2.5, leaving ROE unchanged at 24%. The decomposition shows the gain came entirely from leverage: profit per rupee of sales fell 20% and the balance sheet carries more financial risk. A quality-of-earnings check (CFO/PAT, accrual build-up in receivables, and Ind AS 116's effect on EBITDA) confirms whether the headline ratio is flattered. The examiner wants the leverage effect named, not just arithmetic.
Traps
Comparing EBITDA across companies when one capitalises leases under Ind AS 116; ignoring dilution from share-based payment; and treating a rising ROE as improving performance when it is leveraging.