ICAP CA Financial Accounting and Reporting Syllabus

Under the indirect method (IAS 7), name three adjustments made to profit before tax to reach cash generated from operations.

Add back depreciation/amortisation and impairment; remove gains/losses on disposal and interest/investment income; adjust for changes in inventories, receivables and payables (working capital movements).

Under IAS 7, how may interest and dividends paid be classified?

Interest paid and dividends paid may be classified as operating or financing activities; interest and dividends received may be classified as operating or investing — chosen consistently. (Under IAS 7, for non-financial entities a common treatment is operating for interest, financing for dividends paid.)

State the IAS 16 recognition criteria for an item of property, plant and equipment.

Cost is recognised as an asset if it is probable that future economic benefits will flow to the entity and the cost can be measured reliably.

What is included in the initial cost of an item of PPE under IAS 16?

Purchase price (less trade discounts) plus import duties and non-refundable taxes; directly attributable costs of bringing the asset to location and condition for intended use; and the initial estimate of dismantling/removal and site restoration costs (a decommissioning provision).

Define depreciation and the depreciable amount under IAS 16.

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Depreciable amount = cost (or revalued amount) less residual value.

Name three depreciation methods permitted under IAS 16 and give the straight-line formula.

Straight-line, reducing (diminishing) balance, and units of production. Straight-line charge = (Cost − Residual value) ÷ Useful life.

Under IAS 16, how is component depreciation applied?

Each part of an item of PPE with a cost significant to total cost must be depreciated separately (component approach), as different parts may have different useful lives or patterns of consumption.

How is a revaluation surplus accounted for under the IAS 16 revaluation model on an upward revaluation?

The increase is recognised in OCI and accumulated in equity as a revaluation surplus, unless it reverses a previous revaluation decrease of the same asset that was charged to P&L, in which case it is credited to P&L to that extent.

Under IAS 16, how is a revaluation decrease (deficit) treated?

A decrease is recognised in profit or loss, except that it is debited to OCI to the extent of any existing revaluation surplus relating to the same asset, reducing that surplus.

What is the 'excess depreciation' transfer permitted under the IAS 16 revaluation model?

An entity may transfer each year from revaluation surplus to retained earnings the difference between depreciation on the revalued amount and depreciation on original cost. This transfer is within equity (reserve movement), not through profit or loss.

Under IAS 16, how is a gain or loss on derecognition (disposal) of PPE measured and presented?

It equals net disposal proceeds minus carrying amount, recognised in profit or loss (not as revenue). Any related revaluation surplus is transferred directly to retained earnings, not recycled to P&L.

Under IAS 23, which borrowing costs must be capitalised?

Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset must be capitalised as part of the cost of that asset; all other borrowing costs are expensed.

Define a qualifying asset under IAS 23.

A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale.

How is the amount to capitalise calculated under IAS 23 for specific versus general borrowings?

For specific borrowings: actual borrowing costs incurred less any investment income earned on temporary investment of those funds. For general borrowings: apply the weighted average capitalisation rate of general borrowings to expenditure on the asset.

Under IAS 23, when does capitalisation of borrowing costs begin, suspend and cease?

Begins when expenditure and borrowing costs are incurred and activities to prepare the asset are in progress. Suspended during extended periods in which active development is interrupted. Ceases when substantially all activities to prepare the asset for its intended use/sale are complete.

Define investment property under IAS 40.

Property (land or a building, or part of a building, or both) held to earn rentals or for capital appreciation or both, rather than for use in production/supply or administration (IAS 16) or for sale in the ordinary course of business (IAS 2).

What two measurement models does IAS 40 permit after initial recognition, and how does each treat changes in value?

Fair value model — measured at fair value with changes recognised in profit or loss, and no depreciation. Cost model — measured at cost less accumulated depreciation and impairment, with fair value disclosed.

Under IAS 40, how is a transfer of property to/from investment property triggered and measured under the fair value model?

Transfers are made only when there is a change in use (evidenced by e.g. commencement/ending of owner-occupation or development). On transfer from owner-occupied (IAS 16) at the date of change in use, IAS 16 revaluation rules apply up to that date; thereafter IAS 40 fair value applies.

Under IAS 38, what is the definition of an intangible asset?

An identifiable non-monetary asset without physical substance. 'Identifiable' means it is separable (can be sold/transferred separately) or arises from contractual or other legal rights.

Under IAS 38, when may development expenditure be capitalised? (PIRATE criteria)

All must be met: Probable future economic benefits; Intention to complete and use/sell; Resources (technical, financial) available to complete; Ability to use or sell; Technical feasibility of completion; and Expenditure can be measured reliably. Research costs must always be expensed.

How does IAS 38 treat internally generated goodwill and brands?

Internally generated goodwill, brands, mastheads, publishing titles and customer lists are not recognised as assets because their cost cannot be reliably distinguished from the cost of developing the business as a whole.

Under IAS 38, how are intangible assets with indefinite useful lives treated?

They are not amortised but are tested for impairment annually (and whenever there is an indication of impairment); the indefinite-life assessment is reviewed each period.

Define an impairment loss under IAS 36.

An impairment loss is the amount by which the carrying amount of an asset (or cash-generating unit) exceeds its recoverable amount.

How is recoverable amount determined under IAS 36?

Recoverable amount is the higher of fair value less costs of disposal and value in use. Value in use is the present value of the future cash flows expected from the asset's continuing use and ultimate disposal.

Under IAS 36, in what order is an impairment loss allocated to assets within a cash-generating unit containing goodwill?

First to 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 written below the highest of its FVLCD, value in use, or zero.

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

No. Reversals of impairment losses are recognised for other assets (up to what the carrying amount would have been net of depreciation had no impairment occurred), but an impairment loss recognised for goodwill must never be reversed.

How are inventories measured under IAS 2?

At the lower of cost and net realisable value (NRV).

Define net realisable value (NRV) under IAS 2.

The estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

What is included in the cost of inventories under IAS 2?

Costs of purchase (price plus import duties, transport, handling, less trade discounts/rebates), costs of conversion (direct labour and allocated fixed and variable production overheads), and other costs incurred in bringing inventories to their present location and condition.

Which cost formulas does IAS 2 permit, and which is prohibited?

Permitted: specific identification (for non-interchangeable items), First-In-First-Out (FIFO), and weighted average cost. LIFO (Last-In-First-Out) is prohibited.

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 is the core principle of revenue recognition?

Recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

Under IFRS 15, when is a performance obligation satisfied over time?

When any one criterion is met: the customer simultaneously receives and consumes the benefits as the entity performs; the entity's performance creates/enhances an asset the customer controls; or the asset has no alternative use to the entity and the entity has an enforceable right to payment for performance completed to date.

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

A contract asset arises when the entity has performed (transferred goods/services) but the right to consideration is conditional on something other than the passage of time. A contract liability arises when the entity has received (or is due) consideration before performing — i.e. an obligation to transfer goods/services.

Under IAS 37, what three conditions must be met to recognise a provision?

1) A present obligation (legal or constructive) exists as a result of a past event; 2) it is probable that an outflow of resources embodying economic benefits will be required to settle it; and 3) a reliable estimate of the amount can be made.

Under IAS 37, how is a contingent liability treated?

A contingent liability is not recognised but disclosed (unless the outflow is remote). It is a possible obligation confirmed by future events, or a present obligation not recognised because outflow is not probable or cannot be measured reliably.

Under IAS 37, how is a contingent asset treated?

A contingent asset is not recognised; it is disclosed where an inflow of economic benefits is probable. When realisation becomes virtually certain, the asset is no longer contingent and is recognised.

How is a provision measured under IAS 37?

At the best estimate of the expenditure required to settle the present obligation at the reporting date. For a large population, the expected value (probability-weighted) is used; for a single obligation, the most likely outcome. Where material, the provision is discounted to present value.

Under IAS 12, define a temporary difference and distinguish taxable from deductible.

A temporary difference is the difference between the carrying amount of an asset/liability and its tax base. Taxable temporary differences give rise to deferred tax liabilities; deductible temporary differences give rise to deferred tax assets.

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 the benefits are not taxable, the tax base equals the carrying amount.

Under IAS 12, when is a deferred tax asset recognised?

A deferred tax asset is recognised for deductible temporary differences, unused tax losses and unused tax credits, to the extent that it is probable that future taxable profit will be available against which they can be utilised.

At what tax rates are deferred tax balances measured under IAS 12?

At the tax rates expected to apply when the asset is realised or the liability settled, based on rates (and laws) enacted or substantively enacted by the end of the reporting period. Deferred tax is not discounted.

Under IFRS 16, how does a lessee account for a lease at commencement?

The lessee recognises a right-of-use asset and a lease liability. The liability is the present value of the lease payments; the ROU asset comprises the liability plus initial direct costs, prepayments and estimated restoration costs, less lease incentives received.

Under IFRS 16, what two recognition exemptions are available to lessees?

Short-term leases (12 months or less with no purchase option) and leases of low-value underlying assets. For these the lessee may recognise lease payments as an expense on a straight-line (or other systematic) basis.

Under IFRS 16, how does a lessee subsequently measure the lease liability and the right-of-use asset?

The lease liability is increased by interest (using the effective interest method) and reduced by lease payments. The right-of-use asset is generally measured at cost less accumulated depreciation and impairment (depreciated over the shorter of lease term and useful life).

Under IFRS 16, how does a lessor classify leases and what distinguishes the two types?

A lessor classifies each lease as a finance lease or an operating lease. A finance lease transfers substantially all the risks and rewards incidental to ownership; if it does not, it is an operating lease (lessor accounting for operating leases is broadly unchanged from IAS 17).