Association of Chartered Certified Accountants (ACCA) Financial Reporting (FR) Syllabus

Under IAS 20, what are the two methods of presenting a government grant related to income?

Either present it as a separate credit (other income) in profit or loss, or deduct it from the related expense. It is recognised in P/L on a systematic basis matching the costs it compensates.

Under IAS 20, what are the two acceptable presentations of a government grant related to an asset?

Either recognise the grant as deferred income released to P/L over the asset's life, or deduct the grant from the carrying amount of the asset (reducing the depreciation charge).

Under IAS 38, what are the two recognition criteria for an intangible asset?

It must be identifiable (separable or arising from contractual/legal rights), and it is probable that expected future economic benefits will flow to the entity and the cost can be measured reliably.

Under IAS 38, how are research and development expenditures treated?

Research costs are always expensed as incurred. Development costs must be capitalised once all PIRATE criteria are met (Probable future benefits, Intention to complete, Resources adequate, Ability to use/sell, Technical feasibility, Expenditure measurable reliably).

Under IAS 38, can internally generated goodwill and brands be recognised as assets?

No. Internally generated goodwill, brands, mastheads, publishing titles and customer lists are not recognised as intangible assets because their cost cannot be reliably distinguished from the cost of developing the business as a whole.

Under IAS 36, define an asset's recoverable amount.

The higher of an asset's (or cash-generating unit's) fair value less costs of disposal and its value in use. $$\text{Recoverable amount} = \max(\text{FV} - \text{costs to sell},\ \text{Value in use})$$

Under IAS 36, what is 'value in use'?

The present value of the future cash flows expected to be derived from an asset or cash-generating unit, including the cash flows from its eventual disposal, discounted at a pre-tax rate reflecting current market assessments of the time value of money and asset-specific risks.

Under IAS 36, in what order is an impairment loss for a cash-generating unit (with goodwill) allocated?

First to any goodwill allocated to the CGU, then to the other assets of the unit pro rata on the basis of their carrying amounts (but no asset is reduced below the highest of its FV less costs of disposal, value in use, or zero).

Under IAS 36, can an impairment loss on goodwill be reversed?

No. An impairment loss recognised for goodwill must never be reversed in a subsequent period.

Under IAS 40, what are the two measurement models for investment property after initial recognition?

The fair value model (remeasure to fair value each period with gains/losses in P/L; no depreciation) or the cost model (as per IAS 16, with fair value disclosed).

Under IFRS 16, how does a lessee initially measure a lease (right-of-use asset and liability)?

The lease liability is the present value of future lease payments discounted at the rate implicit in the lease (or the incremental borrowing rate). The right-of-use asset equals the liability plus initial direct costs, prepayments, and dismantling costs, less incentives received.

Under IFRS 16, what two recognition exemptions may a lessee apply (expensing on a straight-line basis)?

Short-term leases (term of 12 months or less with no purchase option) and leases of low-value underlying assets.

Under IFRS 16, how does a lessor classify leases and account for a finance lease?

A lessor classifies a lease as finance (transfers substantially all risks and rewards) or operating. For a finance lease, the lessor derecognises the asset and recognises a net investment (receivable), recognising finance income over the lease term.

Under IAS 37, state the three recognition criteria for a provision.

A present obligation (legal or constructive) arising from a past event, a probable outflow of economic benefits, and a reliable estimate of the amount can be made.

Under IAS 37, distinguish between a provision, a contingent liability and a contingent asset in terms of treatment.

Provision: recognised (probable outflow, reliable estimate). Contingent liability: disclosed only (possible obligation, or probable but not reliably measurable). Contingent asset: disclosed if probable, recognised only when virtually certain.

Under IAS 37, how should a provision be measured?

At the best estimate of the expenditure required to settle the present obligation at the reporting date; where material it is discounted to present value, and the unwinding of the discount is charged as a finance cost.

State the five steps of the IFRS 15 revenue recognition model.

1) Identify the contract with a customer; 2) Identify the performance obligations; 3) Determine the transaction price; 4) Allocate the transaction price to the performance obligations; 5) Recognise revenue when (or as) each performance obligation is satisfied.

Under IFRS 15, what criteria indicate that a performance obligation is satisfied over time?

If any of: (a) the customer simultaneously receives and consumes the benefits as the entity performs; (b) performance creates/enhances an asset the customer controls; or (c) performance creates an asset with no alternative use and the entity has an enforceable right to payment for performance to date.

Under IFRS 15, what is a contract liability and a contract asset?

A contract liability is an obligation to transfer goods/services for which the entity has received (or is due) consideration (e.g. deferred income). A contract asset is the right to consideration in exchange for goods/services already transferred, conditional on something other than passage of time.

Under IAS 12, define a taxable temporary difference and the resulting balance.

A taxable temporary difference is a difference between an asset/liability's carrying amount and its tax base that will result in taxable amounts in future periods; it gives rise to a deferred tax liability. $$\text{Deferred tax} = \text{Temporary difference} \times \text{tax rate}$$

Under IAS 12, what is the 'tax base' of an asset?

The amount that will be deductible for tax purposes against any taxable economic benefits when the carrying amount of the asset is recovered. If benefits are not taxable, the tax base equals the carrying amount.

Under IAS 12, how is the deferred tax on a revaluation of PPE accounted for?

The deferred tax arising on the revaluation surplus is recognised in other comprehensive income (consistent with the item that gave rise to it), not in profit or loss.

Under IFRS 9, what are the three measurement categories for financial assets?

Amortised cost; fair value through other comprehensive income (FVOCI); and fair value through profit or loss (FVTPL).

Under IFRS 9, what two tests determine whether a financial asset is measured at amortised cost?

The business model test (held to collect contractual cash flows) and the contractual cash flow characteristics (SPPI) test — cash flows are solely payments of principal and interest on the principal outstanding.

Under IFRS 9, how is amortised cost / effective interest calculated for a financial liability such as a bond?

Interest expense each period = opening carrying amount $\times$ effective interest rate. The carrying amount rolls forward: $$\text{Closing} = \text{Opening} + \text{Effective interest} - \text{Cash paid}$$

Under IFRS 9, what is the expected credit loss (ECL) model and its two main stages?

An impairment model recognising loss allowances based on expected (not incurred) credit losses. Stage 1: 12-month ECL where credit risk has not significantly increased; Stage 2/3: lifetime ECL where credit risk has significantly increased or the asset is credit-impaired.

In a consolidated statement of financial position, how is goodwill on acquisition calculated (full goodwill method)?

$$\text{Goodwill} = (\text{Consideration transferred} + \text{NCI at acquisition} + \text{FV of previously held interest}) - \text{FV of net identifiable assets acquired}$$

How is non-controlling interest measured at the reporting date in the consolidated statement of financial position?

$$\text{NCI} = \text{NCI at acquisition} + (\text{NCI\% of post-acquisition change in net assets/reserves})$$ Under the fair value method, NCI at acquisition is its fair value (including NCI's share of goodwill).

How are intra-group balances and unrealised profit on inventory eliminated on consolidation?

Intra-group receivables/payables are cancelled. Unrealised profit in closing inventory is eliminated by reducing consolidated inventory and the seller's retained earnings (and the NCI share if the seller is the subsidiary).

In the consolidated statement of profit or loss, how are revenue and cost of sales of a subsidiary acquired mid-year treated?

Consolidate 100% of the subsidiary's income and expenses, but only from the date of acquisition (i.e. time-apportioned for the post-acquisition period), after eliminating intra-group trading.

How is profit for the year attributed between the parent and NCI in the consolidated statement of profit or loss?

Total consolidated profit is split: NCI's share = NCI% $\times$ subsidiary's post-acquisition profit (adjusted for fair value depreciation, unrealised profit and goodwill impairment attributable to NCI); the remainder is attributable to owners of the parent.

Under IAS 28, how is an associate accounted for and what defines significant influence?

An associate is accounted for using the equity method. Significant influence is the power to participate in financial and operating policy decisions (not control), presumed where the investor holds 20% to 50% of the voting power.

Under the equity method, how is the carrying amount of an investment in an associate measured?

$$\text{Carrying amount} = \text{Cost} + \text{share of post-acquisition profits/reserves} - \text{dividends received} - \text{impairment}$$

Under IFRS 11, distinguish a joint operation from a joint venture.

In a joint operation the parties have rights to the assets and obligations for the liabilities (each accounts for its own share of assets, liabilities, income and expenses). In a joint venture the parties have rights to the net assets and use the equity method (IAS 28).

In preparing single-company financial statements, where is a revaluation gain on PPE and a fair value gain on FVTPL investments presented?

A revaluation gain on PPE is presented in other comprehensive income (revaluation surplus). A fair value gain on a financial asset classified as FVTPL is presented in profit or loss.

Under IAS 7, what are the three classifications of cash flows in the statement of cash flows?

Operating activities, investing activities and financing activities.

Under IAS 7, how does the indirect method derive cash generated from operations?

Start with profit before tax, add back non-cash items (depreciation, amortisation, impairment) and finance costs, remove investment income, then adjust for working capital changes (increase in inventory/receivables decreases cash; increase in payables increases cash).

Under IAS 7, give examples of cash flows classified under investing activities.

Purchases and sales of property, plant and equipment and intangibles, acquisitions/disposals of subsidiaries and other investments, and interest/dividends received (where so classified).

Under IAS 33, state the formula for basic earnings per share.

$$\text{Basic EPS} = \frac{\text{Profit attributable to ordinary equity holders}}{\text{Weighted average number of ordinary shares}}$$

Under IAS 33, how is the bonus fraction applied to a rights issue when calculating the weighted average number of shares?

A rights issue includes a bonus element, so prior periods' shares are multiplied by the bonus fraction: $$\frac{\text{Cum-rights (actual) price}}{\text{Theoretical ex-rights price (TERP)}}$$

Under IAS 33, how is diluted EPS adjusted for convertible loan notes?

Increase the numerator by the after-tax interest saved on the convertible debt and increase the denominator by the number of ordinary shares that would arise on conversion.

Under IAS 8, how is a change in accounting policy versus a change in accounting estimate treated?

A change in accounting policy is applied retrospectively (restate prior periods/opening reserves). A change in accounting estimate is applied prospectively (in the current and future periods).

Under IAS 8, how should a prior period error be corrected?

Retrospectively, by restating the comparative amounts for the prior period(s) presented (or adjusting opening balances of the earliest period presented if the error occurred before that).

Under IFRS 5, how is a non-current asset held for sale measured and presented?

Measured at the lower of carrying amount and fair value less costs to sell; it is no longer depreciated and is presented separately from other assets. Discontinued operations' results are shown as a single line on the face of the statement of profit or loss.

Under IAS 10, distinguish adjusting and non-adjusting events after the reporting period.

Adjusting events provide evidence of conditions existing at the reporting date (adjust the financial statements). Non-adjusting events relate to conditions arising after the reporting date (disclose if material, do not adjust).

State the formulas for gross profit margin and operating (net) profit margin.

$$\text{Gross margin} = \frac{\text{Gross profit}}{\text{Revenue}} \times 100\% \qquad \text{Operating margin} = \frac{\text{Operating profit}}{\text{Revenue}} \times 100\%$$

State the formula for return on capital employed (ROCE).

$$\text{ROCE} = \frac{\text{Operating profit (PBIT)}}{\text{Capital employed}} \times 100\%$$ where capital employed = total equity + non-current liabilities (or total assets − current liabilities).

State the formulas for the current ratio and the quick (acid-test) ratio.

$$\text{Current ratio} = \frac{\text{Current assets}}{\text{Current liabilities}} \qquad \text{Quick ratio} = \frac{\text{Current assets} - \text{Inventory}}{\text{Current liabilities}}$$

State the formula for the gearing ratio (debt-to-equity and debt-to-capital basis).

$$\text{Gearing} = \frac{\text{Debt}}{\text{Equity}} \times 100\% \quad\text{or}\quad \frac{\text{Debt}}{\text{Debt} + \text{Equity}} \times 100\%$$

State the formulas for inventory holding period and trade receivables collection period (in days).

$$\text{Inventory days} = \frac{\text{Inventory}}{\text{Cost of sales}} \times 365 \qquad \text{Receivables days} = \frac{\text{Trade receivables}}{\text{Credit sales}} \times 365$$

State the formula for the trade payables payment period (in days).

$$\text{Payables days} = \frac{\text{Trade payables}}{\text{Credit purchases (or cost of sales)}} \times 365$$

State the formula for interest cover and explain what it measures.

$$\text{Interest cover} = \frac{\text{Profit before interest and tax (PBIT)}}{\text{Finance costs}}$$ It measures the number of times operating profit covers interest payable — a key indicator of solvency/risk for lenders.

How does the cash operating cycle relate to working capital management?

$$\text{Cash cycle} = \text{Inventory days} + \text{Receivables days} - \text{Payables days}$$ A longer cycle ties up more cash in working capital; a shorter (or negative) cycle improves liquidity.

When interpreting financial statements for a potential lender, which ratios are most relevant and why?

Gearing and interest cover (assess financial risk and ability to service debt), liquidity ratios (current/quick, ability to meet short-term obligations), and cash flow from operations (genuine cash generation) rather than profit alone.

When interpreting financial statements for a potential equity investor, which ratios matter most?

Profitability (ROCE, margins, EPS), dividend cover and dividend yield, growth in revenue/profit, and gearing (risk to returns). Investors focus on return and capital growth prospects.

Why might a high return on capital employed (ROCE) be misleading when comparing two companies?

ROCE can be inflated by old, heavily depreciated (low carrying amount) assets, by leasing/off-balance-sheet financing, by use of the cost vs revaluation model, or by different capital structures — reducing comparability of the denominator.

State three inherent limitations of ratio analysis when interpreting performance.

Ratios are based on historical figures (may not reflect current/future position); they can be distorted by different accounting policies and estimates; and they ignore non-financial factors, seasonality, inflation and the effect of one-off items, reducing comparability.

How can creative accounting or window dressing undermine the interpretation of financial statements?

Management may time transactions (e.g. sale and repurchase, channel stuffing), choose favourable estimates/policies, or reclassify items to improve apparent profit, liquidity or gearing — so users should review accounting policies, cash flows and notes critically.

What special considerations arise when interpreting the financial statements of a not-for-profit entity?

Profit ratios are less relevant; focus shifts to value for money (economy, efficiency, effectiveness), achievement of objectives, surplus/deficit against budget, and stewardship of funds rather than return to shareholders.

How does a statement of cash flows aid interpretation beyond the profit or loss statement?

It reveals the quality of earnings by showing whether profits convert into cash, highlights reliance on financing, capital expenditure levels, and liquidity/solvency trends — cash being harder to manipulate than accruals-based profit.