ICAP CAF CAF-1: Financial Accounting and Reporting Syllabus

What is the difference between a Receipts and Payments Account and an Income and Expenditure Account for an NPO?

Receipts and Payments is a cash summary (like a cash book, includes capital and revenue, ignores accruals). Income and Expenditure is prepared on accruals basis, includes only revenue items, and shows surplus/deficit (like a P&L).

For an NPO, how is a subscription-based source treated: how do you compute subscription income for the period?

Subscription income = subscriptions received in cash, add closing subscriptions in arrears, less opening arrears, add opening advance subscriptions, less closing advance subscriptions (adjusting cash to accruals basis).

What columns/components make up a Statement of Changes in Equity?

Columns for each equity component (share capital, share premium, revaluation surplus, other reserves, retained earnings, total). Rows: opening balance, prior period adjustments/restated balance, total comprehensive income (profit + OCI), share issues, dividends, transfers between reserves, closing balance.

Where are dividends paid and share issues reported in the financial statements?

Dividends declared/paid and shares issued are transactions with owners and are reported in the Statement of Changes in Equity (not in profit or loss).

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

Operating activities, investing activities and financing activities.

Under IAS 7, give two examples each of investing and financing cash flows.

Investing: purchase/sale of PPE and intangibles, purchase/sale of investments, interest/dividends received (permitted). Financing: proceeds from issuing shares or debt, repayment of borrowings, dividends paid, lease principal payments.

Under the indirect method of IAS 7, how is cash generated from operations calculated starting from profit before tax?

Profit before tax, add back non-cash/non-operating items (depreciation, amortisation, impairment, loss on disposal, finance costs), less non-operating income (interest/dividend income, gain on disposal), then adjust for working capital changes (decrease in inventory/receivables added, increase deducted; increase in payables added).

Under IAS 7, how does an increase in inventory and an increase in trade payables each affect cash from operations (indirect method)?

An increase in inventory decreases cash (deducted); an increase in trade payables increases cash (added).

What is the definition of 'cash equivalents' under IAS 7?

Short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value (generally maturity of 3 months or less from acquisition).

Under IAS 8, define accounting policies and an accounting estimate.

Accounting policies are the specific principles, bases, conventions, rules and practices applied in preparing financial statements. An accounting estimate is a monetary amount subject to measurement uncertainty (e.g. useful life, provision, allowance for doubtful debts).

Under IAS 8, how are changes in accounting policy, changes in estimate, and errors accounted for?

Change in policy: applied retrospectively (restate comparatives). Change in estimate: applied prospectively (current and future periods). Prior period errors: corrected retrospectively (restate comparatives, adjust opening retained earnings).

Under IAS 8, when is a voluntary change in accounting policy permitted?

Only if required by an IFRS, or if the change results in financial statements providing reliable and more relevant information about the effects of transactions, events or conditions.

Define a 'prior period error' under IAS 8.

An omission from, or misstatement in, the entity's financial statements for prior periods arising from a failure to use, or misuse of, reliable information that was available and could reasonably be expected to have been obtained when those statements were authorised for issue.

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

Current ratio = Current assets / Current liabilities. Quick ratio = (Current assets − Inventory) / Current liabilities.

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

Gross profit margin = (Gross profit / Revenue) × 100. Operating profit margin = (Operating profit / Revenue) × 100.

State the formula for Return on Capital Employed (ROCE).

ROCE = Profit before interest and tax (operating profit) / Capital employed × 100, where Capital employed = Total equity + Non-current liabilities (or Total assets − Current liabilities).

State the formulas for inventory turnover (days), receivables collection period and payables payment period.

Inventory days = (Inventory / Cost of sales) × 365. Receivables days = (Trade receivables / Credit sales) × 365. Payables days = (Trade payables / Credit purchases or cost of sales) × 365.

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

Debt/Equity gearing = Debt (interest-bearing borrowings) / Equity × 100. Alternatively = Debt / (Debt + Equity) × 100. Higher gearing means higher financial risk.

State the formula for interest cover and what it indicates.

Interest cover = Profit before interest and tax / Finance costs (interest). It indicates how many times the entity's operating profit covers its interest obligations; higher is safer.

What is the formula for the operating cycle (cash conversion / working capital cycle)?

Operating cycle (days) = Inventory days + Receivables days − Payables days. It measures the time between paying for inventory and collecting cash from customers.

What is benchmarking in the context of financial statement analysis, and name two types?

Benchmarking is comparing an entity's performance against a standard. Types: internal (against prior periods/budgets), and external (against competitors or industry averages/best practice).

List three limitations of ratio analysis when assessing performance and financial position.

Based on historical data; affected by different accounting policies/estimates; ignores qualitative factors; can be distorted by inflation, seasonality, or window dressing; ratios need comparatives/context to be meaningful.

Define 'window dressing' of financial statements and give two examples.

Window dressing is arranging transactions to make the financial position/performance appear better than it really is at the reporting date. Examples: delaying supplier payments or accelerating receivables collection to improve liquidity ratios near year-end; sale and repurchase of assets to inflate cash; channel stuffing to boost revenue.

Under IAS 16, what costs are included in the initial cost of an item of property, plant and equipment?

Purchase price (incl. import duties and non-refundable taxes, less trade discounts), directly attributable costs of bringing the asset to location/condition (site prep, delivery, installation, testing, professional fees), and the initial estimate of dismantling/restoration costs.

Under IAS 16, what are the two measurement models after recognition, and how is each applied?

Cost model: carry at cost less accumulated depreciation and impairment. Revaluation model: carry at fair value at revaluation date less subsequent accumulated depreciation and impairment; revaluations must be kept sufficiently up to date and applied to the whole class.

Under IAS 16, how is a revaluation increase and a revaluation decrease accounted for?

Increase: credited to OCI and accumulated in revaluation surplus (unless reversing a previous decrease charged to P&L, then to P&L to that extent). Decrease: charged to P&L (unless reversing a previous surplus, then debited to OCI/revaluation surplus to that extent).

Under IAS 16, what happens to depreciation after a revaluation and what is the treatment of excess depreciation?

Depreciation is based on the revalued amount over remaining useful life. The entity may transfer the excess depreciation (revalued depreciation less original cost depreciation) from revaluation surplus directly to retained earnings each year (a reserve transfer, not through P&L).

Under IAS 16, when should the residual value, useful life and depreciation method of an asset be reviewed?

At least at each financial year-end; any change is treated as a change in accounting estimate under IAS 8 (applied prospectively).

Under IAS 23, what are 'borrowing costs' and what is the core principle for qualifying assets?

Borrowing costs are interest and other costs incurred in connection with borrowing funds. 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; other borrowing costs are expensed.

Under IAS 23, define a 'qualifying asset' and state when capitalisation of borrowing costs begins, is suspended and ceases.

A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale. Capitalisation begins when expenditure and borrowing costs are incurred and activities to prepare the asset are in progress; is suspended during extended periods in which active development is paused; and ceases when substantially all activities to prepare the asset are complete.

Under IAS 23, how is the capitalisation rate determined for general borrowings?

Use the weighted average of borrowing costs applicable to the entity's general borrowings outstanding during the period (excluding specific borrowings) applied to expenditure on the asset; capitalised amount cannot exceed actual borrowing costs incurred. For specific borrowings, capitalise actual costs less any investment income earned on temporary investment of those funds.

Under IAS 36, when must an entity test an asset for impairment, and what assets must be tested annually regardless of indicators?

Test whenever there is an indication of impairment (at each reporting date assess indicators). Goodwill, intangible assets with indefinite useful lives, and intangibles not yet available for use must be tested for impairment annually regardless of any indication.

Under IAS 36, define 'recoverable amount' and when an impairment loss arises.

Recoverable amount is the higher of an asset's fair value less costs of disposal and its value in use. An impairment loss arises when carrying amount exceeds recoverable amount; the asset is written down to recoverable amount.

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, discounted at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset.

Under IAS 36, how is an impairment loss on a CGU containing goodwill allocated?

First to goodwill allocated to the CGU; then to the other assets of the unit pro rata on the basis of their carrying amounts. No asset is reduced below the highest of its fair value less costs of disposal, value in use, or zero.

Under IAS 36, can impairment losses be reversed, and is there any exception?

Yes, impairment losses (other than on goodwill) may be reversed if recoverable amount increases due to a change in estimates, capped at the carrying amount that would have existed had no impairment been recognised. Impairment losses on goodwill can never be reversed.

Under IAS 40, define 'investment property' and give an example of what is excluded.

Property (land or building, or part) held to earn rentals or for capital appreciation or both, rather than for use in production/supply of goods or services or administrative purposes, or sale in the ordinary course of business. Excluded: owner-occupied property (IAS 16) and property held for sale in the ordinary course of business (IAS 2).

Under IAS 40, what are the two measurement models after recognition and how are fair value changes treated?

Fair value model: remeasure to fair value each period with all changes (gains and losses) recognised in profit or loss; no depreciation. Cost model: carry at cost less accumulated depreciation and impairment (as IAS 16), with fair value disclosed. The chosen model is applied to all investment property.

Under IAS 20, what are the two broad approaches to recognising government grants and which does IAS 20 require?

Capital approach (grant credited directly to equity) vs income approach (grant recognised in profit or loss). IAS 20 requires the income approach: grants are recognised in profit or loss on a systematic basis over the periods in which the related costs they compensate are recognised.

Under IAS 20, how may a grant related to an asset be presented in the statement of financial position?

Either (a) set up as deferred income and released to profit or loss over the asset's useful life, or (b) deducted from the carrying amount of the asset (reducing depreciation). Both methods are acceptable.

Under IAS 20, how is the repayment of a government grant accounted for?

Treated as a change in accounting estimate (prospectively). For income-related grants, applied first against any unamortised deferred income, with excess recognised in P&L. For asset-related grants, increase the asset's carrying amount or reduce deferred income, recognising cumulative extra depreciation immediately in P&L.

Under IAS 41, what is a 'biological asset', 'agricultural produce' and a 'bearer plant'?

Biological asset: a living animal or plant. Agricultural produce: the harvested produce of the entity's biological assets. Bearer plant: a living plant used in producing agricultural produce, expected to bear produce for more than one period, with a remote likelihood of being sold as produce (bearer plants are accounted for under IAS 16).

Under IAS 41, how are biological assets and agricultural produce measured, and where are changes in value recognised?

Biological assets are measured at fair value less costs to sell at each reporting date (unless fair value cannot be reliably measured at initial recognition, then cost less depreciation/impairment). Agricultural produce is measured at fair value less costs to sell at the point of harvest. Gains/losses on changes in fair value less costs to sell are recognised in profit or loss.