Free ACCA FR Exam Flashcards

Relevance and faithful representation are fundamental: information lacking either is not useful at all. Comparability, verifiability, timeliness and understandability are enhancing — they make useful information more useful but cannot rescue information that is irrelevant or misrepresented.

An asset is a present economic resource controlled by the entity as a result of past events. An economic resource is a right with the potential to produce economic benefits — the benefits need only be possible, not certain.

Historical cost and current value. Current value covers fair value, value in use (fulfilment value for a liability) and current cost; unlike historical cost, each is updated to conditions at the measurement date, so it captures price changes but relies on estimates.

IFRS 18 Presentation and Disclosure in Financial Statements. It classifies income and expenses into operating, investing, financing, income taxes and discontinued operations categories and requires three subtotals — operating profit, profit before financing and income taxes, and profit or loss — the first two of which are new.

Only when the item meets the definition of an element and recognising it gives users relevant information and a faithful representation, subject to the cost constraint. Recognition may be inappropriate where existence is uncertain, the probability of an inflow or outflow is low, or measurement uncertainty is very high — there is no longer a separate 'probable' test.

Because consolidated financial statements present the group as a single economic entity. Only transactions with parties outside the group create genuine group income, expense, receivables or payables, so internal trading and balances must be cancelled.

Purchase price plus every cost directly attributable to bringing the asset to the location and condition needed to operate — site preparation, delivery, installation, professional fees and any dismantling obligation. Under IAS 23, borrowing costs directly attributable to a qualifying asset are capitalised while construction continues.

In other comprehensive income and accumulated in a revaluation surplus, except to the extent it reverses a previous revaluation loss charged to profit or loss, which is credited back to profit or loss. IAS 16 requires the entire class of assets to be revalued, not selected items.

IAS 40 permits a cost model or a fair value model, applied consistently to all investment property. Under the fair value model the property is not depreciated and every remeasurement gain or loss goes to profit or loss, never to other comprehensive income.

Only when all the IAS 38 criteria are met: technical feasibility, intention to complete, ability to use or sell, probable future economic benefits, adequate resources to finish, and reliable measurement of the expenditure. Research costs must always be expensed as incurred.

Compare carrying amount with recoverable amount, which is the higher of fair value less costs of disposal and value in use; any shortfall is the impairment loss. Goodwill must be tested for impairment at least annually, whether or not indicators exist.

First against any goodwill allocated to the unit, then pro rata across the unit's other assets within the scope of IAS 36 (so not inventories or receivables) on their carrying amounts. No individual asset may be reduced below the highest of its fair value less costs of disposal, its value in use, and zero.

The lower of cost and net realisable value, compared line by line rather than in total. Cost may be measured using FIFO or weighted average cost; LIFO is not permitted.

The business model for holding the asset and whether its contractual cash flows are solely payments of principal and interest. Hold to collect plus SPPI gives amortised cost, hold to collect and sell plus SPPI gives fair value through OCI, and everything else is fair value through profit or loss — unless the entity irrevocably elects FVOCI for an equity investment not held for trading.

By split accounting: the liability component is the present value of the interest and redemption cash flows discounted at the market rate for similar non-convertible debt, and the equity component is the residual balance of the proceeds. The equity element is never remeasured afterwards.

A lease liability at the present value of the unpaid lease payments and a corresponding right-of-use asset that is subsequently depreciated. Recognition exemptions are available for short-term leases of 12 months or less with no purchase option, and for leases of low-value assets.

A present obligation, legal or constructive, arising from a past event; a probable outflow of economic benefits; and a reliable estimate of the amount. If an outflow is only possible rather than probable, IAS 37 requires disclosure as a contingent liability instead, unless the chance is remote.

Tax arising on temporary differences between the carrying amount of an asset or liability and its tax base. IAS 12 measures it using the tax rates expected when the difference reverses, based on rates enacted or substantively enacted by the reporting date, and prohibits discounting.

Identify the contract; identify the separate performance obligations; determine the transaction price; allocate that price to the obligations using relative stand-alone selling prices; and recognise revenue when, or as, each performance obligation is satisfied.

IAS 21 retranslates monetary items such as receivables, payables and loans at the closing rate, with exchange differences going to profit or loss. Non-monetary items carried at historical cost stay at the exchange rate ruling on the transaction date.

A bonus issue brings in no new resources, so the shares are treated as if always in issue and the prior-year EPS is restated. A rights issue is part bonus and part full price, so shares before the issue are multiplied by the cum-rights price divided by the theoretical ex-rights price.

Under IFRS 5, at the lower of carrying amount and fair value less costs to sell, and depreciation stops from the date of classification. The asset is then presented separately from other assets in the statement of financial position.

Profit before interest and tax (operating profit) divided by capital employed, where capital employed is total equity plus non-current liabilities, or equivalently total assets less current liabilities. It shows how efficiently long-term finance has been converted into operating returns.

Gross margin is gross profit over revenue and reflects selling prices and direct production or purchase costs. Operating margin is operating profit over revenue, so it also captures how well overheads such as distribution and administration are controlled.

Asset turnover is revenue divided by capital employed, expressed as a number of times, showing the sales generated by each unit of long-term capital. ROCE equals operating margin multiplied by asset turnover, so a change in ROCE can always be traced to one or both.

The current ratio is current assets divided by current liabilities. The quick ratio excludes inventory, normally the least liquid current asset, so it is a stricter test of whether short-term obligations can be met without selling stock first.

Inventory divided by cost of sales, multiplied by 365. A lengthening period may signal slow-moving or obsolete goods, falling demand, or deliberate stockpiling ahead of expected sales or supplier price rises.

Trade receivables divided by credit revenue, multiplied by 365. A lengthening collection period points to weaker credit control or customers in difficulty, and raises the risk of irrecoverable debts.

Trade payables divided by credit purchases, multiplied by 365, using cost of sales as a proxy when purchases are not disclosed. A stretched payment period often indicates cash shortages and risks losing supplier goodwill and settlement discounts.

Either debt divided by equity, or debt divided by debt plus equity, expressed as a percentage. High gearing means interest is paid before any return to shareholders, so profits available to owners and earnings per share swing more sharply as operating profit moves.

Profit before interest and tax divided by finance costs, expressed as a number of times. A low or falling figure means operating profit leaves little cushion for interest payments, which lenders read as higher default risk.

Profit can rise simply because the entity issued more shares and invested the proceeds, whereas EPS relates earnings to the shares that generated them. EPS remains weak for comparing different entities, because accounting policies and capital structures differ.

Cash movements are factual and largely free of the estimates and policy choices — depreciation methods, accruals, provisions — that shape profit. It also reveals whether operating activities actually generate the cash needed to fund investment, debt repayment and dividends.

Different accounting policies, estimation techniques and year-end dates undermine comparability, and ratios ignore non-financial factors such as workforce quality, brand strength and order books. The underlying statements are also historic, so they may not predict future performance.

They aggregate subsidiaries with different activities, margins and risk profiles into single figures, so weak segments can hide behind strong ones. Group ratios are further distorted when subsidiaries are acquired or disposed of part-way through the year.

Balances at a single date are not averages: seasonal traders often choose a year end when inventory and receivables are at their lowest, flattering liquidity ratios. A large asset purchase just before the year end also inflates capital employed before it has generated any revenue.

Performance is judged on achievement of objectives and value for money — economy, efficiency and effectiveness — rather than on profit or return to owners. Ratios such as ROCE and EPS have little meaning where there is no share capital and no profit motive.

Fair value of the consideration transferred, plus the non-controlling interest, plus the fair value of any previously held equity interest, less the fair value of the identifiable net assets acquired at the acquisition date. Because consideration is measured at acquisition-date fair value, deferred consideration is discounted and contingent consideration is included at fair value even though the final payment is uncertain.

At fair value, which produces full goodwill including the share attributable to the non-controlling interest, or at the non-controlling interest's proportionate share of the identifiable net assets, which recognises only the parent's goodwill. The choice is made acquisition by acquisition.

A bargain purchase, where the net assets acquired exceed the consideration, is recognised as a gain in profit or loss once the calculations have been reassessed. Acquisition costs such as legal and due diligence fees are expensed and never added to goodwill.

Power over the investee, exposure or rights to variable returns from involvement with it, and the ability to use that power to affect those returns. All three are needed, so control can exist with 50% or fewer of the voting rights.

Under the equity method: cost plus the group's share of post-acquisition reserves, less any impairment, shown as one line in the consolidated statement of financial position. The consolidated profit or loss shows only the group's share of the associate's profit, not a line-by-line consolidation.

Its income and expenses are consolidated only from the acquisition date, usually by time-apportioning the annual results unless income or expenses accrue unevenly. Its assets and liabilities are consolidated in full at the reporting date.

Remove the profit still sitting in unsold closing inventory from the selling company's retained earnings and reduce group inventory by the same amount. Where the subsidiary was the seller, the adjustment reduces its profit, so the non-controlling interest share falls as well.

The two current account balances must first be agreed by recording cash or goods in transit in the receiving company's books. Only once the balances match can they be cancelled in full against each other on consolidation.

It increases the identifiable net assets acquired, which reduces the goodwill recognised. Any extra depreciation on the uplift is charged against post-acquisition profit and shared between the group and the non-controlling interest.

Where the non-controlling interest was measured at fair value, the impairment is shared between the group and the non-controlling interest in the ownership ratio. Where it was measured at the proportionate share of net assets, the whole impairment is charged to the group, because no goodwill was recognised for the non-controlling interest.

Every income and expense line is added in full, whatever the parent's ownership percentage, after cancelling intra-group trading and any unrealised profit. The resulting profit for the year is then split between the owners of the parent and the non-controlling interest.

The movement from opening to closing balance in each component of equity — share capital, share premium, revaluation surplus and retained earnings. It is the only primary statement that brings together total comprehensive income, share issues, dividends and reserve transfers.

Start with operating profit (the IFRS 18 subtotal), not profit before tax. Add back non-cash operating charges such as depreciation, amortisation and impairments, remove non-cash gains such as profits on disposal, then adjust for movements in inventory, receivables and payables and deduct income taxes paid. For most entities interest paid and dividends paid are now financing cash flows, so they no longer appear in operating activities.