1. Introduction to Financial Reporting Revision
This masterclass provides a concise summary of the key accounting standards relevant to the Audit & Assurance exam. A strong understanding of these standards is essential for identifying risks of material misstatement and designing appropriate audit procedures. You must know what the correct accounting treatment is to be able to identify a misstatement.
Exam Strategy: Applying Accounting Standards
In the exam, you won't just be asked to define a standard. You'll be given a scenario and asked to apply it. For example, a question might describe a client's inventory valuation policy. You must be able to recall the rules of IAS 2 and explain why the client's policy is a potential misstatement.
2. Key Financial Reporting Standards
IAS 2: Inventories
Core Principle: Inventories should be valued at the lower of cost and net realisable value (NRV). Cost includes all costs to bring the inventory to its present location and condition. NRV is the estimated selling price in the ordinary course of business, less costs to complete and sell. Costs that are not included are abnormal waste and storage costs.
IAS 10: Events After the Reporting Period
Adjusting Events: Provide evidence of conditions that existed at the year-end. They require an adjustment to the financial statements. Examples: a customer going bankrupt shortly after the year-end, or the discovery of fraud.
Non-adjusting Events: Indicate conditions that arose after the year-end. They require disclosure in the notes if they are material. Examples: a fire at a warehouse, a new share issue, or a major acquisition.
IAS 16: Property, Plant and Equipment (PPE)
Initial Recognition: PPE is initially recognized at cost. Subsequent expenditure is capitalized if it enhances the economic benefits of the asset.
Depreciation: The cost of an asset is systematically allocated over its useful life. The method and useful life should be reviewed annually.
Revaluation: This is optional. If an asset is revalued, all assets in that class must be revalued. Revaluation gains are recognized in other comprehensive income, unless they reverse a previous revaluation loss recognized in profit or loss.
IAS 37: Provisions, Contingent Liabilities and Contingent Assets
Provisions: A provision should be recognized when there is a present obligation from a past event, it is probable that an outflow of economic benefits will be required, and a reliable estimate can be made.
Contingent Liabilities: A possible obligation that should not be recognized. Disclosure is required unless the possibility of an outflow is remote.
Contingent Assets: A possible asset that should not be recognized. Disclosure is required if an inflow is probable. It is only recognized if the inflow is virtually certain.
IAS 38: Intangible Assets
Recognition: An intangible asset is recognized at cost if it is identifiable, controlled by the entity, will generate future economic benefits, and its cost can be measured reliably.
Research vs. Development: Costs from the research phase must be expensed immediately. Costs from the development phase can be capitalized only if a series of criteria are met (technical feasibility, intention to complete, ability to sell/use, etc.).
IFRS 15: Revenue from Contracts with Customers
This standard provides a five-step model for revenue recognition:
- Identify the contract with the customer.
- Identify the performance obligations.
- Determine the transaction price.
- Allocate the price to the obligations.
- Recognize revenue when (or as) the performance obligation is satisfied.