Financial Reporting and Analysis: Standards and Ratio Interpretation
Financial reporting questions test both recognition and measurement under IFRS and the ability to interpret the resulting statements. You must be comfortable with revenue recognition (performance obligations, transaction price, allocation), leases (right-of-use asset and lease liability), property, plant and equipment (cost versus revaluation, depreciation, impairment), inventory (lower of cost and net realisable value), and financial instruments (amortised cost versus fair value). Consolidation basics - control, goodwill, non-controlling interests, intra-group eliminations - are frequently examined.
Traps abound. A revaluation surplus goes to other comprehensive income, not profit or loss, and is not distributable. Research costs are expensed while development costs may be capitalised only if criteria are met. A change in accounting estimate is applied prospectively, whereas a change in policy is retrospective. Deferred tax arises on temporary differences, not on permanent ones.
For analysis, know the ratio families: profitability (gross margin, ROCE), liquidity (current and quick ratios), efficiency (inventory days, receivables days, asset turnover) and gearing (debt/equity, interest cover). Questions often ask you to explain why a ratio moved, so link it to a cause rather than merely computing it.
Worked example: Gross profit 300,000 on revenue 1,000,000 gives a 30% margin. If next year revenue is 1,200,000 and margin falls to 25%, gross profit is 300,000 - unchanged in absolute terms but a deterioration in percentage terms, possibly from discounting or rising input costs. Always state the direction and a plausible reason.