Financial Accounting and Reporting
What this domain tests
Financial Accounting and Reporting examines whether you can apply the IASB Conceptual Framework and IFRS recognition and measurement rules to prepare and interpret financial statements. Expect double-entry corrections, adjusting journals, single-entity statements and basic consolidation principles.
Core rules
- Accrual and going concern underpin everything: income is recognised when earned, not when cash arrives; assets and liabilities are recognised when the definition and recognition criteria are met.
- Revenue (IFRS 15) follows five steps: identify the contract; identify performance obligations; determine the transaction price; allocate it to the obligations by relative standalone selling price; recognise revenue as each obligation is satisfied.
- Depreciation spreads cost less residual value over useful life; residual value, life and method are reviewed at least annually.
- Provisions need a present obligation from a past event, a probable outflow and a reliable estimate; a future operating loss alone does not justify a provision.
Worked example
A company sells equipment with a two-year service contract for a single price of £120,000. Standalone prices are £96,000 for the equipment and £24,000 for the service, totalling £120,000. The allocation is therefore £96,000 to equipment and £24,000 to service. Revenue of £96,000 is recognised on delivery; the £24,000 is deferred and released at £1,000 per month (£24,000 ÷ 24). At the first year end, £12,000 remains in contract liabilities.
Traps that cost marks
- Booking the full £120,000 on invoice: the service element is unearned.
- Treating repairs as capital expenditure, or writing off a genuine asset improvement.
- Ignoring deferred tax on temporary differences created by accelerated capital allowances.