Financial Accounting and Reporting (SLFRS/LKAS)
Financial Accounting and Reporting tests whether you can apply Sri Lanka Accounting Standards - SLFRS and the older LKAS, issued by CA Sri Lanka and converged with IFRS/IAS - plus the Conceptual Framework, to prepare and interpret general-purpose financial statements.
Core rules
- Underlying assumptions: accrual, going concern, materiality and substance over legal form.
- SLFRS 15 five steps: identify the contract; identify performance obligations; determine the transaction price (variable consideration constrained, using expected value or most likely amount); allocate on relative standalone selling prices; recognise revenue when or as control transfers.
- SLFRS 16: the lessee records a right-of-use asset and a lease liability at the present value of lease payments; the lessor still classifies leases as finance or operating.
- SLFRS 9: classification depends on the business model and cash-flow characteristics (amortised cost, FVOCI, FVTPL); impairment uses expected credit losses.
- LKAS 2: inventory at the lower of cost and net realisable value, using FIFO or weighted average (LIFO is prohibited).
- LKAS 16: cost includes purchase price, directly attributable costs and dismantling estimates; depreciation starts when the asset is available for use; residual value and life are reviewed each year end.
- LKAS 37: a provision needs a present obligation, a probable outflow and a reliable estimate - otherwise disclose a contingent liability.
Worked example
An entity sells equipment with installation for Rs 1,000,000. Standalone selling prices are Rs 900,000 (equipment) and Rs 300,000 (installation), totalling Rs 1,200,000. The Rs 200,000 discount is allocated proportionately: equipment = 1,000,000 × 900/1,200 = Rs 750,000; installation = Rs 250,000. Equipment revenue is recognised when control passes and installation revenue over the installation period. Recognising the full Rs 1,000,000 on delivery overstates revenue and profit.
Traps that cost marks
- Expensing a major inspection or overhaul that qualifies as a separate component.
- Providing for future operating losses, which LKAS 37 forbids.
- Omitting deferred tax on a revaluation surplus.
- Treating a declared dividend as an expense rather than a distribution.