Accounting, Taxation, and Financial Reporting
What the exam tests
This domain tests the reporting and tax treatment behind credit decisions: IFRS 9 impairment, revenue and asset recognition, deferred tax, withholding tax, VAT, and the deductibility of provisions and interest.
Core rules
- Under IFRS 9, classify exposures into stages. Stage 1 uses 12-month expected credit loss; Stage 2 uses lifetime ECL after significant increase in credit risk; Stage 3 is credit-impaired.
- ECL is probability-weighted and forward-looking; it is not the same as the prudential provisioning table.
- General provisions are usually not tax-deductible until a loss is written off or meets specific criteria; deferred tax may arise.
- Withholding tax on interest and fees is a credit against tax, not a cost, where the recipient can utilize it.
- Revenue recognition depends on transfer of goods or services, not cash receipt.
Worked example
A ₦1bn loan moves from Stage 1 with 0.5% ECL (₦5m) to Stage 2 with 3% lifetime ECL (₦30m). The impairment charge rises by ₦25m and reduces profit, even though cash interest is still being paid. If it becomes Stage 3 with 40% ECL, the charge is ₦400m. The reasoning shows why a performing loan can still consume profit through stage migration.
Traps
Using incurred-loss thinking; netting provisions against the loan without disclosure; treating withholding tax as an expense; and assuming all provisions are tax-deductible. Also check whether fees are recognized over time or at a point.
Key points
- IFRS 9 staging drives the impairment charge.
- ECL is forward-looking and probability-weighted.
- General provisions are generally not immediately tax-deductible.
- Withholding tax is usually a credit, not a cost.
- Stage migration can hit profit before cash default.