Financial Accounting and Reporting: Standards Applied to Numbers
What the exam tests
Financial Accounting and Reporting tests application of the conceptual framework and standards to recognition, measurement, presentation and consolidation. Questions typically give a transaction and ask for the journal entry, measurement or disclosure.
Core rules
- The conceptual framework requires relevance and faithful representation; accrual and going concern are underlying assumptions; substance over form governs presentation.
- Revenue (IFRS/Ind AS 15): identify the contract, identify performance obligations, determine the transaction price, allocate it on relative standalone selling prices, and recognise when control transfers.
- Leases (IFRS/Ind AS 16 for lessees): recognise a right-of-use asset and a lease liability at the present value of unavoidable payments; depreciate the asset and unwind interest.
- Impairment (IAS/Ind AS 36): recoverable amount is the higher of fair value less costs of disposal and value in use. Goodwill impairment cannot be reversed.
- Consolidation (IFRS/Ind AS 10): control requires power over relevant activities, exposure to variable returns, and ability to use power to affect those returns.
Worked example
A lessee signs a three-year lease with ₹10,000 payable annually in arrears; the incremental borrowing rate is 8%. PV = 10,000 × 2.5771 = ₹25,771. Year 1 depreciation = 25,771/3 = ₹8,590; interest = 25,771 × 8% = ₹2,062; closing liability = ₹17,833. The former off-balance-sheet treatment for lessees no longer applies.
Traps
- Allocating a discount by residual method instead of relative standalone selling prices.
- Treating short-term or low-value lease exemptions as automatic.
- Reversing goodwill impairment.
- Capitalising research costs; only qualifying development costs are capitalised.
- Including sales-based variable lease payments in the lease liability.