SOCPA Financial Accounting cheat sheet

Objective of general purpose financial statements: provide financial information useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.

Fundamental qualitative characteristics: relevance (predictive value, confirmatory value, materiality) and faithful representation (complete, neutral, free from error).

Enhancing qualitative characteristics: comparability, verifiability, timeliness and understandability; they cannot make irrelevant or unfaithful information useful.

Elements: asset = present economic resource controlled by the entity as a result of past events; liability = present obligation to transfer an economic resource as a result of past events; equity = residual interest.

Recognition criteria: an element is recognised when it meets the definition and recognition provides users with useful information (relevance and faithful representation of the item).

Measurement bases: historical cost, fair value, value in use/fulfilment value, and current cost; IFRS permits mixed measurement depending on the standard.

Going concern: financial statements prepared on the assumption the entity will continue in operation for the foreseeable future unless liquidation or cessation is intended.

Accrual basis: effects of transactions are recognised when they occur, not when cash is received or paid; offsetting of assets and liabilities is prohibited unless required or permitted by a standard.

Accounting cycle order: record transactions in journals, post to ledger, prepare unadjusted trial balance, adjusting entries, adjusted trial balance, financial statements, closing entries, post-closing trial balance.

Adjusting entries fall into deferrals (prepaid expense, unearned revenue) and accruals (accrued expense, accrued revenue); each affects one income statement and one statement of financial position account.

Prepaid expense adjustment: expense = amount used; remaining asset = amount unused. Unearned revenue adjustment: revenue recognised = amount earned; remaining liability = amount unearned.

Closing entries transfer revenue and expense balances to retained earnings (via income summary) and zero out temporary accounts; permanent accounts are not closed.

Trial balance equality proves only that debits equal credits, not that transactions were recorded correctly or that the ledger is free of error.

Statement of financial position classification: current if expected to be realised/settled within 12 months or the normal operating cycle, held for trading, or cash without restriction.

Statement of cash flows: operating (indirect method starts with profit before tax, adjusts non-cash items and working capital), investing (non-current assets), financing (equity and borrowings).

Retained earnings roll-forward: opening retained earnings + profit for the year − dividends declared ± prior period adjustments and other comprehensive income transfers.

IFRS 15 five-step model: identify the contract, identify performance obligations, determine the transaction price, allocate the price to performance obligations, recognise revenue when each obligation is satisfied.

A contract exists only if it has commercial substance, approval, identifiable rights, payment terms, and collection is probable.

Transaction price includes variable consideration estimated using expected value or most likely amount, constrained so a significant revenue reversal is not highly probable.

Financing component: if payment timing gives the customer or entity a significant benefit of financing, adjust the price using a discount rate; practical expedient if the period is one year or less.

Point-in-time vs over-time: recognise over time if the customer receives and consumes benefits simultaneously, the entity creates or enhances an asset the customer controls, or the performance creates an asset with no alternative use and the entity has a right to payment.

Contract costs: incremental costs of obtaining a contract are capitalised if recoverable (practical expedient if amortisation period is one year or less); costs to fulfil are capitalised if they relate directly to a contract and generate resources.

Trade receivables measured at transaction price less expected credit loss allowance under IFRS 9; simplified approach uses a lifetime loss allowance matrix.

Factoring without recourse derecognises the receivable; with recourse, retain the receivable and recognise a secured borrowing unless risks and rewards transfer.

IAS 2 measurement: lower of cost and net realisable value (NRV = estimated selling price less costs of completion and costs to sell), applied item by item.

Cost of inventories includes purchase cost, conversion costs (direct labour and production overheads absorbed on normal capacity) and other costs to bring inventory to its present location and condition.

Excluded from inventory cost: abnormal waste, storage costs (unless necessary in the production process), administrative overheads, and selling costs.

Cost formulas: specific identification for items not ordinarily interchangeable; FIFO or weighted average for interchangeable items; LIFO is prohibited under IFRS.

Cost of sales = opening inventory + purchases (and conversion costs) − closing inventory; under a periodic system inventory is counted at period end.

Write-down to NRV is recognised as an expense in profit or loss; a subsequent reversal (up to original cost) is recognised as a reduction in the inventory expense.

Fixed production overhead allocation uses normal capacity; unallocated overhead due to low production is expensed, not capitalised into inventory.

Inventory pledged as security must be disclosed; inventories carried at fair value less costs to sell (e.g. commodity brokers) are exempt from the lower-of-cost rule.

Initial measurement of PPE at cost: purchase price (net of trade discounts), directly attributable costs, and initial estimate of dismantling/restoration costs.

Cost model: cost less accumulated depreciation and accumulated impairment. Revaluation model: fair value at revaluation date less subsequent depreciation and impairment; revaluations must be regular.

Revaluation surplus on increase goes to other comprehensive income and accumulates in equity; a decrease reverses prior surplus, otherwise it is expensed.

Depreciation begins when the asset is available for use and ceases at the earlier of derecognition or classification as held for sale; residual value and useful life are reviewed at least annually.

Component accounting: each part of an asset with a cost significant relative to the total is depreciated separately.

Borrowing costs that are directly attributable to a qualifying asset are capitalised under IAS 23; capitalisation ceases when the asset is substantially ready for its intended use.

Intangible assets: identifiable, non-monetary, without physical substance; internally generated brands, mastheads and goodwill are not recognised.

Research costs are expensed; development costs are capitalised only if technical feasibility, intention and ability to complete, probable future economic benefits, available resources and reliable measurement are all demonstrated.

Goodwill is not amortised; it is tested for impairment annually or more frequently if indicators exist, and indefinite-life intangibles are treated the same way.

Provision recognised when: a present obligation (legal or constructive) exists from a past event, an outflow of resources is probable, and the amount can be reliably estimated.

Measurement: best estimate of the expenditure required to settle the obligation at the reporting date; where the effect is material, discount to present value using a pre-tax rate reflecting current market risks.

Onerous contract provision = unavoidable costs of meeting the contract less expected economic benefits; the unavoidable cost is the lower of exit cost and cost of fulfilment.

Restructuring provision recognised only when a detailed formal plan exists and a valid expectation is raised in those affected (announcement or implementation begun).

Contingent liability: a possible obligation or a present obligation not recognised because outflow is not probable or cannot be measured; disclose unless remote.

Contingent asset: not recognised; disclosed where an inflow is probable, and recognised only when realisation is virtually certain.

Future operating losses are not provided for; a reimbursement (e.g. insurance) is recognised as a separate asset only when virtually certain.

Financial guarantee contracts and constructive obligations from published policy or established practice can create provisions even without a legal obligation.

Ordinary shares are recorded at proceeds received net of directly attributable issue costs; issue costs of a business combination are expensed.

Share premium (additional paid-in capital) arises on issue above par value and is not a distributable reserve in most jurisdictions.

Treasury shares: deduct cost from equity; no gain or loss is recognised on sale, and any difference on reissue is taken to share premium or retained earnings.

Dividends are recognised as a liability only when declared and legally binding; interim dividends follow the same principle.

Retained earnings = accumulated profits less dividends and transfers to reserves; prior period errors are corrected retrospectively through retained earnings.

Reserves classification: share premium, revaluation surplus (not distributable), other components of equity (e.g. hedging, translation), and general reserves.

Bonus (capitalisation) issue: transfer from reserves to share capital; total equity unchanged and no cash flow. Rights issue proceeds split between share capital and premium.

Statement of changes in equity reconciles opening and closing balances for each component, showing total comprehensive income, owner transactions and other movements separately.

Equity-settled share-based payment measured at fair value of the equity instruments at grant date; recognised over the vesting period with a corresponding increase in equity.

Service and non-market vesting conditions are reflected by adjusting the number of instruments expected to vest; market conditions are built into grant-date fair value and are not subsequently adjusted.

Cash-settled share-based payment measured at fair value of the liability at each reporting date, with changes recognised in profit or loss until settlement.

Basic EPS = (profit or loss attributable to ordinary shareholders) ÷ weighted average number of ordinary shares outstanding during the period.

Weighted average shares are time-weighted for issues at full price; a bonus issue or share split is treated as if it had always existed and prior period EPS is restated.

Diluted EPS adjusts profit and share count for dilutive potential ordinary shares (convertibles, options, warrants); anti-dilutive instruments are excluded.

Treasury stock method for options: incremental shares = options outstanding − (proceeds ÷ average market price); proceeds include the exercise price plus unrecognised share-based payment expense.

Diluted EPS is presented only when it is lower than basic EPS; potential ordinary shares are assessed for dilution in order of most to least dilutive.

Lessee recognises a right-of-use asset and a lease liability at the present value of lease payments not paid at the commencement date, discounted using the interest rate implicit in the lease or the lessee's incremental borrowing rate.

Lease payments included in measurement: fixed payments less incentives, variable payments linked to an index or rate, residual value guarantees, purchase option exercise price if reasonably certain, and termination penalties if applicable.

Short-term leases (12 months or less, no purchase option) and low-value asset leases may be expensed on a straight-line basis as a practical expedient.

Subsequent measurement: lease liability accreted using the discount rate; right-of-use asset depreciated over the lease term or useful life if ownership transfers.

Lease term includes the non-cancellable period plus renewal periods reasonably certain to be exercised and termination periods reasonably certain not to be exercised.

Lessor classification: finance lease transfers substantially all risks and rewards (recognise net investment and finance income); operating lease recognises lease income straight-line.

Sale and leaseback: if the transfer qualifies as a sale, recognise a right-of-use asset at the proportion of previous carrying amount retained and a gain only to the extent of rights transferred to the buyer-lessor.

Lease modifications are accounted for as a separate lease if scope increases and consideration increases commensurately; otherwise remeasure the liability using a revised discount rate.

Classification of financial assets depends on the business model for managing them and whether contractual cash flows are solely payments of principal and interest (SPPI).

Amortised cost applies when the SPPI test is met and the business model is hold-to-collect; fair value through OCI with recycling applies to hold-to-collect-and-sell; all other assets are at fair value through profit or loss.

Effective interest method allocates interest income/expense over the instrument's life using the rate that exactly discounts expected future cash flows to the gross carrying amount.

Expected credit loss (ECL) model: 12-month ECL at initial recognition; lifetime ECL when credit risk increases significantly; simplified approach permits lifetime ECL for trade receivables.

ECL = probability of default × loss given default × exposure at default, discounted to the reporting date; forward-looking information must be incorporated.

Financial liabilities at amortised cost are measured using the effective interest method; those held for trading or designated are at fair value through profit or loss.

Hybrid instruments: a financial liability with an equity conversion feature is split into a liability component (present value of cash flows) and an equity component (residual).

Hedge accounting requires formal designation and documentation; fair value hedges adjust the hedged item, cash flow hedges recognise the effective portion in OCI.

Control exists when the investor has power over the investee, exposure to variable returns, and the ability to use power to affect those returns; all three are required.

Acquisition method: identify the acquirer, determine the acquisition date, recognise and measure identifiable assets acquired and liabilities assumed at fair value, and recognise goodwill or a bargain gain.

Goodwill = consideration transferred + non-controlling interest + previously held equity interest − fair value of net identifiable assets acquired.

Non-controlling interest measured either at fair value (full goodwill) or at the proportionate share of net identifiable assets (partial goodwill).

Consolidation adjustments: eliminate intragroup balances, transactions, income and expenses; eliminate the parent's investment against the subsidiary's equity; recognise NCI separately in equity.

Unrealised profit on intragroup inventory sales is eliminated in full (parent's share adjusts group retained earnings; NCI share adjusts NCI for upstream sales).

Consolidated retained earnings = parent's retained earnings + group share of post-acquisition subsidiary retained earnings less goodwill impairment and consolidation adjustments.

A step acquisition remeasures the previously held interest to fair value at the acquisition date, with the gain or loss recognised in profit or loss.

Current ratio = current assets ÷ current liabilities; quick ratio = (current assets − inventories) ÷ current liabilities.

Gross margin = gross profit ÷ revenue; operating margin = operating profit ÷ revenue; net margin = profit for the year ÷ revenue.

Return on equity = profit attributable to ordinary shareholders ÷ average ordinary shareholders' equity; return on assets = operating profit ÷ average total assets.

Inventory turnover = cost of sales ÷ average inventory; days inventory = 365 ÷ inventory turnover. Receivables days = (trade receivables ÷ revenue) × 365.

Gearing = debt ÷ (debt + equity) or debt ÷ equity; interest cover = operating profit ÷ finance costs.

DuPont decomposition: ROE = net margin × asset turnover × financial leverage (equity multiplier).

IAS 1 requires disclosure of significant accounting policies, judgements with the most significant effect, and estimation uncertainty with sensitivity information.

IFRS 8 operating segments are reported on the basis used internally by the chief operating decision maker; disclose segment profit, assets, liabilities, products, customers and geographical information.