ICAP CAF key terms

An accounting method that records income when it is earned and expenses when they are incurred, regardless of when cash is received or paid. It aims to match revenues with related costs in the same period.

The assumption that an entity will continue operating for the foreseeable future, without intending or being forced to liquidate or significantly reduce its operations. Financial statements are normally prepared on this basis.

The quality of exercising caution when making accounting estimates under uncertainty, so that assets and income are not overstated and liabilities and expenses are not understated. It does not permit deliberate understatement.

The threshold at which an omission or misstatement of accounting information could influence the economic decisions of users. Materiality depends on the size and nature of the item.

A bookkeeping method in which every transaction is recorded with equal debits and credits in at least two accounts. This keeps the accounting equation in balance.

The systematic allocation of the depreciable amount of a tangible non-current asset over its useful life. It reflects consumption of economic benefits, not necessarily a fall in market value.

A liability of uncertain timing or amount that is recognised when a present obligation exists, a reliable estimate can be made, and an outflow of resources is probable. It is distinct from a contingent liability.

A possible obligation whose existence will be confirmed only by uncertain future events, or a present obligation that is not recognised because outflow is not probable or cannot be measured reliably. It is disclosed unless remote.

The estimated selling price of inventory in the ordinary course of business, less the estimated costs of completion and the costs necessary to make the sale. Inventory is measured at the lower of cost and NRV.

The twelve-month period used for computing and filing income tax, which in Pakistan generally runs from 1 July to 30 June. Taxable income is determined for each tax year.

The amount on which income tax is calculated after deducting allowable expenses and exemptions from gross income under the applicable tax law. It differs from accounting profit because of tax adjustments.

The sales tax charged by a registered supplier on taxable supplies made to customers. The supplier collects it and remits the net amount after deducting input tax to the tax authority.

The sales tax paid by a registered person on purchases of goods or services used in making taxable supplies. It can normally be deducted from output tax to arrive at the net tax payable.

A tax collected at source by a payer who deducts it from specified payments such as salaries, rent, or supplies, and deposits it with the tax authority on behalf of the recipient.

A rate used to assign indirect production costs to products or jobs, usually calculated by dividing estimated overhead by a chosen activity base such as labour hours or machine hours.

Sales revenue minus variable costs. It measures the amount available to cover fixed costs and then generate profit, and is useful in decisions about pricing and product mix.

The level of sales activity at which total revenue equals total costs, resulting in neither profit nor loss. It can be expressed in units or sales value.

A predetermined estimate of what a product or service should cost under expected operating conditions. It provides a benchmark for measuring performance and calculating variances.

The difference between a planned or standard amount and the actual amount incurred or achieved. Variances are analysed to identify causes and take corrective action.

A future cash cost that differs between alternatives being considered. It excludes sunk costs and costs that do not change with the decision.

A clear proposal made by one party to another with the intention of creating a legally binding contract once accepted. It must be communicated and may be withdrawn before acceptance.

An unqualified agreement to all terms of an offer, communicated to the offeror in the manner required or implied. It turns the offer into a binding contract.

Something of value given by each party to a contract, such as money, goods, services, or a promise. It must be lawful and is generally required for a contract to be enforceable.

A legal relationship in which one person, the agent, is authorised to act on behalf of another, the principal, and can create legal relations with third parties. Authority may be express or implied.

The tax effect of temporary differences between the carrying amount of assets and liabilities and their tax bases. It is recognised as a deferred tax asset or liability using expected future tax rates.

A contract that conveys the right to use an identified asset for a period of time in exchange for consideration. Accounting depends on whether risks and rewards of ownership are substantially transferred.

The process of recording revenue when performance obligations in a contract with a customer are satisfied, usually when control of goods or services passes to the customer.

The amount by which an asset's carrying amount exceeds its recoverable amount. Recoverable amount is the higher of fair value less costs of disposal and value in use.

Financial statements that present the parent and its subsidiaries as a single economic entity, combining assets, liabilities, income, and expenses after eliminating intra-group balances and transactions.

A technique that compares financial statement items as ratios to assess profitability, liquidity, efficiency, and solvency. It helps identify trends and support decisions by users.

The excess of current assets over current liabilities. It measures short-term liquidity and the ability to meet day-to-day obligations as they fall due.

The difference between the present value of expected cash inflows and outflows of a project, discounted at an appropriate rate. A positive NPV indicates the project adds value.

A constitutional document that sets out a company's name, registered office, objects, liability of members, and share capital. It governs the company's relationship with the outside world.

A company's internal rulebook governing the rights of members and the conduct of its affairs, including meetings, directors, and share transfers. It must be consistent with the memorandum.

The risk that the auditor expresses an inappropriate opinion on financial statements that are materially misstated. It comprises inherent risk, control risk, and detection risk.

Information used by the auditor to reach conclusions on which the audit opinion is based. It must be sufficient in quantity and appropriate in relevance and reliability.

The processes, policies, and procedures designed by those charged with governance to provide reasonable assurance about reliable reporting, effective operations, and compliance with laws and regulations.

An auditor's opinion stating that financial statements are fairly presented except for a specific matter, such as a material misstatement or limitation on scope that is not pervasive.