Financial Reporting
Domain 1 - Financial Reporting. This section tests the external reporting decisions behind the four primary statements: revenue, leases, inventory, income taxes, fair value, pensions, EPS and the statement of cash flows. Items are short fact patterns in which one policy choice or one classification judgement moves the number.
Rules that carry the most marks
- Revenue (ASC 606 / IFRS 15), five steps: identify the contract, identify performance obligations, determine the transaction price, allocate on relative standalone selling price (SSP), recognise when or as control transfers. Variable consideration is included only to the extent a significant reversal is not probable.
- Cash flow classification differs: US GAAP puts interest paid, interest received and dividends received in operating, and dividends paid in financing. IFRS allows interest paid and dividends paid as operating or financing, and interest received as operating or investing - applied consistently.
- Inventory: LIFO is prohibited under IFRS, permitted under US GAAP; write-down reversals are allowed under IFRS, prohibited under US GAAP.
- Leases: IFRS 16 puts essentially all lessee leases on the balance sheet as a right-of-use asset; US GAAP retains an operating/finance split for lessees.
Worked example
A vendor sells equipment with installation for a fixed $1,000,000. SSP is $900,000 for equipment and $300,000 for installation, and the customer can benefit from the equipment without the installation, so there are two performance obligations. Total SSP $1,200,000. Allocate: equipment = 1,000,000 × 900/1,200 = $750,000; installation = $250,000. Equipment revenue is recognised at delivery; installation revenue as the service is performed. The $200,000 discount is spread proportionally, not dumped on one obligation.
Traps
- Pushing the whole discount onto a single performance obligation.
- Classifying interest received as operating under IFRS without electing a policy.
- Calling a lease operating under IFRS because title does not transfer - IFRS tests control and right of use.
- Recognising revenue on cash collected rather than on transfer of control.