IFRS standards
The key rules in IAS 1, IAS 2, IAS 16, IAS 37, IAS 38, IFRS 15 and IFRS 16, with calculations.
ACCA exams this helps with: FR Financial Reporting SBR Strategic Business Reporting See the ACCA map
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What it is: IFRS (International Financial Reporting Standards) are the rules companies follow to measure and show the figures in their accounts.
Why you need it: If every company used the same rules, you can compare their accounts fairly, even across countries.
How they are named: Each standard covers one topic. Older standards start with “IAS”. Newer ones start with “IFRS”. Example: IAS 2 is about inventory. IFRS 16 is about leases.
Example. IAS 2 says inventory is shown at the lower of cost and net realisable value (what it can be sold for, minus selling costs). Goods cost £500 but can now be sold for only £300. They are shown at £300.
Key words
- IFRS / IAS
- International Financial Reporting Standards: the rules that set how companies measure and present their figures. Older standards are called IAS. Both are still in use.Example: IAS 2 is the standard for inventory. IFRS 16 is the standard for leases.
- Recognise
- To include an item as a figure in the financial statements (not just describe it in the notes).Example: A probable legal claim is recognised as a provision. A possible one is only disclosed.
- Measure
- To decide the amount at which an item is shown in the accounts.Example: Inventory is measured at the lower of cost and net realisable value.
- Fair value
- The price an asset would sell for (or a liability would cost to transfer) in a normal sale between willing parties on the measurement date.Example: A building bought for £500,000 would sell for £800,000 today. Its fair value is £800,000.
- NRV
- Net realisable value: what an item of stock is expected to sell for, minus the costs of finishing and selling it. Stock is valued at the lower of cost and NRV.Example: Gift tins sell for £4.50 and cost £0.50 each to sell, so NRV is £4.00. They cost £6.00, so they are valued at £4.00.
Learn
For a written question about a standard, do four things: (1) name the standard, (2) state the rule exactly, (3) apply it to the facts in the question, (4) explain the effect on the accounts.
What makes information useful
There are two fundamental qualities. Relevance: it could change a user’s decision. Faithful representation: it is complete, neutral and free from error. There are four enhancing qualities: comparability, verifiability, timeliness and understandability.
Presentation of financial statements
A complete set has five parts: the statement of financial position, the statement of profit or loss and other comprehensive income, the statement of changes in equity, the statement of cash flows, and the notes. Assets and liabilities are split into current (within 12 months) and non-current.
Inventories
Show inventory at the lower of cost and net realisable value (NRV). NRV = expected selling price − costs to finish the item − costs to sell it. Allowed cost methods: FIFO (first in, first out) and weighted average. Unique items use their actual cost. LIFO (last in, first out) is not allowed.
Example: Cost £500. Selling price £450. Selling costs £30. NRV = £420. Show it at £420.
Property, plant and equipment
Cost includes the purchase price and the costs needed to get the asset working. After that, choose the cost model or the revaluation model for each whole class of assets. A revaluation gain goes to other comprehensive income (the revaluation surplus), not profit. Depreciate the asset over its useful life.
Provisions
Include a provision only if all three are true: there is an obligation now from a past event, a payment is probable (more likely than not), and the amount can be estimated reliably. If a payment is only possible, it is a contingent liability. Describe it in the notes. Do not include it in the figures.
Intangible assets
Research costs are always an expense. Development costs become an asset only when all the conditions are met: it is technically possible, the company intends and is able to finish it and use or sell it, it will probably bring money in, the resources to finish it are available, and the costs can be measured.
Revenue from contracts with customers
- Find the contract.
- List the separate promises (performance obligations).
- Find the total price (transaction price).
- Share the price between the promises, using the price each would sell for on its own.
- Count revenue when (or as) each promise is delivered.
Leases
The company using the asset (the lessee) records a right-of-use asset and a lease liability. The liability is the present value of the lease payments. Depreciate the asset. Add interest to the liability. Two exemptions: leases of 12 months or less, and low-value assets. These can be treated as a simple expense.
Watch it explained
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Videos from YouTube tutors
These videos are made by independent tutors on YouTube, not by Trial Balance. Some use US terms or older exam names (for example F7 for FR), but the principles are the same.
Worked example
IFRS 15 allocation. A phone and a 12-month airtime contract are sold together for £600. Sold separately, the phone would be £400 and the airtime £300 (£700 in total).
| Obligation | Standalone price £ | Allocation | Revenue £ |
|---|---|---|---|
| Phone | 400 | 600 × 400/700 | 342.86 |
| Airtime | 300 | 600 × 300/700 | 257.14 |
| Total | 700 | 600.00 |
The phone revenue is recognised when it is handed over. The airtime revenue is recognised month by month over the 12 months, as that obligation is satisfied.
Practice questions
Type or choose your answers, then press Check answer. Questions with a New numbers button can be repeated with different figures.