Institute of Chartered Accountants in England and Wales (ICAEW) ACA Advanced Level: Corporate Reporting Syllabus

Under IFRS 9, how are gains/losses recognised for a cash flow hedge versus a fair value hedge?

Fair value hedge: gain/loss on the hedging instrument and the hedged item's risk are both recognised in profit or loss. Cash flow hedge: the effective portion of the instrument's gain/loss goes to OCI (cash flow hedge reserve), the ineffective portion to P&L; the reserve is later reclassified.

What are the main categories of disclosure required by IFRS 7 for financial instruments?

Disclosures about the significance of financial instruments (balance sheet, income statement, hedge accounting) and disclosures about the nature and extent of risks: credit risk, liquidity risk and market risk — including qualitative and quantitative information and a sensitivity analysis for market risk.

Under IFRS 2, what is the measurement principle for an equity-settled share-based payment with employees?

Measure at the fair value of the equity instruments granted at the grant date, and recognise this amount as an expense over the vesting period with a corresponding increase in equity. The grant-date fair value is not subsequently re-measured for equity-settled awards.

Under IFRS 2, how are vesting conditions handled when measuring equity-settled share-based payments?

Market conditions and non-vesting conditions are reflected in the grant-date fair value and are not 'trued up'. Non-market vesting conditions (service and non-market performance conditions) are reflected by adjusting the number of instruments expected to vest, re-estimated each period (true-up).

Under IFRS 2, how does the measurement of a cash-settled share-based payment differ from an equity-settled one?

A cash-settled award (e.g. share appreciation rights) is recognised as a liability measured at fair value, and that liability is re-measured to fair value at each reporting date and at settlement, with all changes recognised in profit or loss.

Under IAS 19, what is the fundamental difference between a defined contribution plan and a defined benefit plan?

In a defined contribution plan the employer's obligation is limited to its agreed contributions; the actuarial and investment risk falls on the employee. In a defined benefit plan the employer promises a specified benefit and bears the actuarial and investment risk; an obligation is measured actuarially.

Under IAS 19, what are the components of the net defined benefit liability (asset) recognised on the statement of financial position?

$$\text{Net liability/(asset)} = \text{Present value of defined benefit obligation} - \text{Fair value of plan assets}$$ Where there is a surplus, it is restricted to the asset ceiling (the available economic benefit via refunds or reduced future contributions).

Under IAS 19, how are the changes in the net defined benefit liability allocated between profit or loss and OCI?

To profit or loss: current and past service cost, any gain/loss on settlement, and net interest (on the net liability/asset). To OCI: remeasurements — actuarial gains and losses, the return on plan assets excluding amounts in net interest, and changes in the effect of the asset ceiling. OCI remeasurements are not reclassified.

Under IAS 19, how is the net interest component calculated?

Net interest is the opening net defined benefit liability/(asset) multiplied by the discount rate (the yield on high-quality corporate bonds), with allowance for contributions and benefit payments during the period. It is recognised in profit or loss.

Under IAS 12, how is deferred tax defined and measured at a basic level?

Deferred tax arises on temporary differences — differences between the carrying amount of an asset/liability and its tax base. It is measured using tax rates expected to apply when the asset is realised/liability settled (enacted or substantively enacted rates), and is not discounted.

Under IAS 12, when is a deferred tax asset recognised for deductible temporary differences and unused tax losses?

Only to the extent that it is probable that future taxable profit will be available against which the deductible temporary difference, unused tax losses or tax credits can be utilised.

Under IAS 12, what deferred tax arises on the fair value uplift of a subsidiary's net assets on consolidation?

A temporary difference arises because the carrying amount (fair value) differs from the tax base. Deferred tax is recognised on the fair value adjustments as part of the acquisition accounting, which increases net assets acquired and therefore affects goodwill.

Under the IFRS 15 five-step model, what are the five steps for revenue recognition?

1) Identify the contract; 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 determine whether revenue for a performance obligation is recognised over time rather than at a point in time?

Over time if any one is met: the customer simultaneously receives and consumes the benefits as the entity performs; the entity 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, how is a contract accounted for when the entity acts as an agent rather than a principal?

A principal controls the good/service before transfer and recognises gross revenue. An agent merely arranges for another party to provide the good/service and recognises revenue equal only to the fee or commission (net amount) it earns.

When analysing financial statements, give the formulas for the current ratio and the quick (acid-test) ratio.

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

Give the formulas for gearing (debt-to-equity) and interest cover used in financial statement analysis.

$$\text{Gearing} = \frac{\text{Debt}}{\text{Equity}}\quad\text{(or }\frac{\text{Debt}}{\text{Debt}+\text{Equity}}\text{)}$$ $$\text{Interest cover} = \frac{\text{Profit before interest and tax}}{\text{Finance costs (interest)}}$$

Give the formulas for return on capital employed (ROCE) and net profit margin.

$$\text{ROCE} = \frac{\text{Operating profit (PBIT)}}{\text{Capital employed}} = \frac{\text{PBIT}}{\text{Total equity} + \text{Non-current liabilities}}$$ $$\text{Net profit margin} = \frac{\text{Net profit}}{\text{Revenue}}\times 100\%$$

Give the formulas for the three working-capital cycle ratios: inventory days, receivables days and payables days.

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

What is the operating cycle (cash conversion cycle) and its formula?

It is the time between paying for inventory and collecting cash from customers. $$\text{Cash conversion cycle} = \text{Inventory days} + \text{Receivables days} - \text{Payables days}$$

Under IFRS 8, how is an operating segment identified, and what is the basis for segment reporting?

An operating segment is a component that earns revenues and incurs expenses, whose results are regularly reviewed by the chief operating decision maker (CODM) to allocate resources and assess performance, and for which discrete financial information is available. Reporting follows the 'management approach' — segments are reported as viewed internally.

Under IFRS 8, what quantitative thresholds make an operating segment separately reportable?

A segment is reportable if it meets any 10% threshold: its reported revenue (external + intersegment) is at least 10% of combined revenue; or its reported profit/loss is at least 10% of the greater (in absolute amount) of combined profit or combined loss; or its assets are at least 10% of combined assets. Reportable segments must total at least 75% of external revenue.

Under IAS 24, who are considered related parties of a reporting entity (key examples)?

Parties that control, jointly control or significantly influence the entity (and vice versa); members of the same group; associates and joint ventures; key management personnel and their close family members; and post-employment benefit plans for the entity's employees. Related party relationships must be disclosed even if no transactions occur.

Under IAS 33, give the formulas for basic and diluted earnings per share.

$$\text{Basic EPS} = \frac{\text{Profit attributable to ordinary equity holders}}{\text{Weighted average number of ordinary shares}}$$ Diluted EPS adjusts the numerator (e.g. add back after-tax interest saved on convertibles) and the denominator (add the dilutive potential ordinary shares such as options and convertibles).

Under IAS 33, how is the weighted average number of shares adjusted for a bonus (capitalisation) issue?

A bonus issue adds no resources, so the additional shares are treated as if they had always been in issue. The weighted average for the current and all comparative periods is multiplied by the bonus fraction (retrospective adjustment), so prior-period EPS is restated.

Under IAS 33, how is a rights issue (at below market price) handled in the EPS weighted-average calculation?

A rights issue contains a bonus element, so a bonus fraction is applied: $$\text{Bonus fraction} = \frac{\text{Fair value per share before exercise}}{\text{Theoretical ex-rights price (TERP)}}$$ Comparatives are restated by this factor and the current-year shares are time-apportioned.

What does sustainability/non-financial reporting under IFRS S1 and IFRS S2 require, and who issues them?

Issued by the ISSB (International Sustainability Standards Board). IFRS S1 sets general requirements for disclosure of sustainability-related financial information; IFRS S2 covers climate-related disclosures. Both are built around four pillars: governance, strategy, risk management, and metrics and targets, focusing on information material to investors' decisions.

In ethical reporting judgements, what are the five fundamental principles of the IESBA/ICAEW Code of Ethics?

Integrity, Objectivity, Professional competence and due care, Confidentiality, and Professional behaviour. Threats to these (self-interest, self-review, advocacy, familiarity and intimidation) must be evaluated and reduced to an acceptable level by safeguards.

What are the levels of assurance and the corresponding conclusions for an assurance engagement on financial information?

Reasonable assurance (high, not absolute) gives a positive conclusion — e.g. 'in our opinion the financial statements give a true and fair view' (an audit). Limited assurance gives a lower level with a negative-form conclusion — e.g. 'nothing has come to our attention that causes us to believe...' (e.g. a review engagement).

What matters should an auditor communicate to those charged with governance, and under which auditing standard?

Under ISA 260, the auditor communicates: the auditor's responsibilities, planned scope and timing, significant findings (including significant qualitative accounting practices, significant difficulties, and uncorrected misstatements), and auditor independence. Significant deficiencies in internal control are communicated under ISA 265.