Define accounting policy and principle. Explain the need for IFRS.
Accounting policy: Specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements (e.g., depreciation method, inventory costing method).
Accounting principle: Broad foundational concepts that guide accounting (e.g., accrual principle, going concern, matching principle).
Need for IFRS:
- Provides a single set of high-quality, understandable, enforceable global accounting standards.
- Improves comparability and transparency of financial statements across jurisdictions.
- Reduces information asymmetry for investors and lenders.
- Facilitates cross-border investment, capital raising and consolidation of multinational groups.
- Encourages consistent recognition, measurement and disclosure — reducing diversity arising from local GAAPs.
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Benefits and challenges of adopting IFRS globally. How does IFRS improve comparability?
Benefits:
- Better comparability of financial statements across countries.
- Increased transparency and consistency in reporting.
- Easier access to global capital markets.
- Reduced cost of capital and lower cost for multinational consolidation.
- Improved investor confidence and cross-border M&A efficiency.
Challenges:
- Implementation cost (systems, training, restatements).
- Need for IFRS adaptation to local legal/tax/regulatory environments.
- Differences in interpretation, enforcement and audit quality between jurisdictions.
- Transitional issues (e.g., initial recognition, retrospective application).
- Cultural and language barriers, and tax law linkage to accounting in some countries.
How IFRS improves comparability:
- Standardized recognition and measurement rules (same criteria for revenue, assets, liabilities).
- Consistent presentation and disclosure requirements (same line items and notes).
- Common definitions (e.g., control, fair value).
- Result: users can compare financial performance and position of entities across jurisdictions with reduced adjustments.
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Explain ‘Goodwill’, ‘Minority Interest’ and ‘Bargain Purchase’ in business combinations.
Goodwill: Excess of purchase consideration over the fair value of identifiable net assets acquired in a business combination. Represents future economic benefits not separately identifiable (e.g., customer relations, workforce). Initially recognised as an intangible asset; not amortised under IFRS — tested annually for impairment (IAS 36).
Minority Interest (Non-controlling interest, NCI): The portion of equity in a subsidiary not attributable, directly or indirectly, to the parent. Recognised in consolidated statement of financial position and reconciled in consolidated equity. Measured either at fair value or at the NCI’s proportionate share of identifiable net assets (per acquisition method).
Bargain Purchase (Gain on bargain purchase): Occurs when fair value of identifiable net assets acquired exceeds consideration transferred. Under IFRS 3, the acquirer reassesses measurements and if confirmed, recognises the excess immediately as a gain in profit or loss.
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Why is fair value measurement important in business combinations?
- Ensures that identifiable assets and liabilities are recognised at current market-related values, giving a realistic view of what was acquired.
- Determines amount of goodwill or gain on bargain purchase.
- Affects subsequent depreciation/amortisation and impairment testing.
- Improves relevance and comparability for users by reflecting market conditions at acquisition date.
- Helps in allocating purchase price to specific assets and liabilities accurately.
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Define related party and explain why related party disclosure is important.
Related party (IAS 24): A person or entity that is related to the reporting entity if that person/entity has control, joint control, significant influence over the reporting entity, is a member of key management personnel, is an entity under common control, or has close family relationships with such persons. Examples: parent, subsidiaries, associates, joint ventures, key management personnel, close family members, and entities controlled by those parties.
Importance of disclosure: Related party transactions may not occur at arm’s length and can affect fairness and transparency. Disclosures reveal potential conflicts of interest, terms and amounts, enabling stakeholders to assess their impact on financial position and performance.
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How does related party disclosure protect shareholders and stakeholders from conflicts of interest?
- Exposes transactions that might benefit insiders (e.g., favourable loans, sales at non-market prices).
- Allows stakeholders to judge whether transactions were fair and in the company’s interest.
- Provides transparency on amounts, terms and outstanding balances with related parties.
- Strengthens governance by making management accountable.
- Helps regulators, auditors and investors detect and deter self-dealing and misuse of resources.
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Recognition and disclosure requirements of related parties as per IAS 24 (with examples).
Recognition: Related party transactions are recognised according to relevant IFRSs (e.g., revenue, loans, leases). IAS 24 does not change recognition rules but requires disclosure.
Disclosure requirements include:
- Nature of relationship where related party transactions occurred.
- Amounts of transactions and outstanding balances (including terms and provisions for doubtful debts).
- Details of key management personnel compensation (short-term, post-employment, other long-term, termination, share-based payments).
- Transactions and balances with parent, subsidiaries and associates (e.g., sales to a parent of $500k; loan from a related company $200k, due in 2 years, interest rate).
- Example: If the company sold inventory $100,000 to an entity controlled by the CEO under below-market terms, disclose nature (entity controlled by CEO), amount, outstanding receivable, and terms (discount, payment period).
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Define adjusting and non-adjusting events after the reporting period with examples. Why distinguish?
Adjusting events: Events after the reporting period that provide evidence of conditions that existed at the reporting date and thus require adjustments to amounts recognised in the financial statements.
- Example: Court judgment after year-end confirming liability for an event that occurred before year-end; discovery of fraud affecting previously reported balances; settlement of a lawsuit arising from a condition existing at reporting date.
Non-adjusting events: Events that are indicative of conditions that arose after the reporting period. These do not adjust recognised amounts but may require disclosure if material.
- Example: Announcement of a major business combination after year-end; a decline in market value due to events after reporting date; natural disaster after reporting date causing substantial loss.
Why distinguish: Because adjusting events change the amounts in the financial statements (ensures statements reflect conditions at reporting date), whereas non-adjusting events do not change recognised amounts but may be so material that disclosure is necessary for users’ decision-making.
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Recognition and disclosure requirements of subsequent events as per IAS 10.
Recognition: Adjust financial statements for adjusting events — i.e., reflect in the financial statements those adjustments that provide evidence of conditions existing at reporting date.
Disclosure (for non-adjusting events): If non-adjusting events are material, disclose: nature of the event and an estimate of its financial effect (or a statement that such estimate cannot be made).
Other IAS 10 points: If entity becomes aware after reporting period that going concern is no longer appropriate, adjust disclosures and, if necessary, prepare financial statements on a different basis. Date of authorisation for issue and who authorised must be disclosed; if authorisation date is after events that require adjustment, disclose that fact.
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Role of events after the reporting period in enhancing reliability of financial statements.
- Ensure reported numbers reflect all information available about conditions existing at reporting date (improves accuracy).
- Provide users with material developments after reporting date (transparency).
- Helps users assess subsequent risks and prospects (relevance).
- Reinforces management accountability for significant events impacting financial position and performance.
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Define interim financial reporting and explain its importance.
Interim financial reporting: Financial reports covering a period shorter than a full financial year (e.g., quarterly or half-yearly reports). IAS 34 sets principles for interim reporting.
Importance:
- Provides timely information for users to make decisions between annual reports.
- Helps monitor performance and liquidity during the year.
- Useful for regulatory compliance and investor communication.
- Enables timely corrective action by management and reduces information asymmetry.
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Minimum components of an interim financial report as per IAS 34.
IAS 34 requires at minimum:
- Condensed statement of financial position (balance sheet) at period end and comparative prior period end.
- Condensed statement of profit or loss and other comprehensive income for the interim period and year-to-date, plus comparative.
- Condensed statement of changes in equity (year-to-date) and comparative.
- Condensed statement of cash flows (year-to-date) and comparative.
- Selected explanatory notes: significant events and transactions, seasonality, changes in estimates, related party transactions, and significant events after reporting period.
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Why interim reports may show a different picture than annual reports.
- Shorter period: seasonal businesses may have uneven revenue/cost patterns.
- Interim figures may be more volatile and sensitive to timing of transactions.
- Some annual accruals, year-end adjustments, and tax provisions may not yet be made.
- One-off events or cyclical items might dominate interim results but wash out over a year.
- Interim reports often use estimates; full-year results allow more complete information and adjustments.
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Define functional currency and presentation currency. Explain recognition of exchange differences.
Functional currency: Currency of the primary economic environment in which the entity operates (the currency in which entity mainly generates and expends cash).
Presentation currency: Currency in which the entity presents its financial statements (may differ from functional currency).
Exchange differences recognition:
- Monetary items: Measured at closing rate; exchange gains/losses from retranslation of monetary items recognised in profit or loss (except to extent qualifying for other comprehensive income under specific standards).
- Non-monetary items measured at historical cost: Translate at exchange rate at transaction date (no subsequent retranslation).
- Non-monetary items measured at fair value: Translate using the exchange rate at date the fair value was determined.
- Foreign operations (consolidation): Assets and liabilities of foreign subsidiaries translated at closing rate; income and expenses at actual rates or average rates; resulting translation differences recorded in OCI and presented as a separate component of equity (the foreign currency translation reserve) — recycled to profit or loss on disposal of foreign operation.
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Define an operating segment and criteria for identifying reportable segments.
Operating segment (IFRS 8): A component of an entity:
- Engages in business activities earning revenue and incurring expenses;
- Whose operating 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.
- Criteria for reportable segments: After identifying operating segments, reportable segments are those that meet any of:
- 10% size tests: Segment revenue (including intersegment) ≥ 10% of combined revenue; or segment profit or loss ≥ 10% of combined profit (absolute); or segment assets ≥ 10% of combined assets.
- Reporting entity test: Total external revenue of reportable segments must be at least 75% of consolidated external revenue; otherwise additional segments disclosed until 75% threshold met.
- Also consider judgement and qualitative factors if quantitative tests not met.
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Disclosure requirements of operating segments as per IFRS 8.
IFRS 8 requires disclosures for each reportable segment:
- Segment profit or loss, segment assets and liabilities (if provided to CODM), basis of measurement.
- Reconciliations of segment totals to consolidated figures (e.g., total segment revenue to consolidated revenue, total segment assets to consolidated assets).
- Information about revenues from external customers, intra-segment revenues, major customers (if single external customer >=10% of revenue, disclose that fact).
- Entity-wide disclosures: geographical revenues, non-current assets by location, reliance on major customers, products and services summary.
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Significance of segment reporting for investors and stakeholders.
- Provides insight into different business lines and geographic performance.
- Helps identify risks and returns of specific activities.
- Improves resource allocation decisions by investors and lenders.
- Enables better valuation by modelling segments separately.
- Increases management accountability for specific operations.
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Define financial assets and liabilities. Explain impairment of financial assets.
Financial assets: Cash, contracts that give the entity a right to receive cash or another financial asset (e.g., receivables, debt instruments, equity instruments, derivatives). Defined in IFRS 9.
Financial liabilities: Contracts that impose an obligation to deliver cash or another financial asset (e.g., payables, borrowings, derivatives).
Impairment of financial assets (IFRS 9): Expected Credit Loss (ECL) model — entities recognise loss allowances based on expected credit losses rather than incurred losses. Key points:
- 12-month ECL: For credit exposures without significant increase in credit risk since initial recognition (recognise lifetime ECL for credit-impaired or significantly deteriorated exposures).
- Lifetime ECL: When significant increase in credit risk or credit-impaired.
- Forward-looking information: Consider macroeconomic factors, probability-weighted scenarios.
- Measurement: Multiply probability of default (PD), loss given default (LGD), exposure at default (EAD).
- Result: earlier recognition of expected losses, more timely provisioning.
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Short notes on (any two) — I’ll pick IASB and IFRS.
IASB (International Accounting Standards Board): Independent standard-setting body that develops and publishes International Financial Reporting Standards (IFRS). Established in 2001 to replace the IASC; aims to develop a single set of high-quality, enforceable global accounting standards. Works with jurisdictions, stakeholders and due process (consultation, exposure drafts).
IFRS (International Financial Reporting Standards): Accounting standards and interpretations issued by the IASB (includes IFRS, IAS — older standards from IASC — and IFRIC/SIC interpretations). Applicable in many jurisdictions worldwide, covering recognition, measurement, presentation and disclosure for a wide range of transactions.
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Define earnings per share (EPS) and discuss its significance and limitations.
EPS definition: Profit attributable to ordinary shareholders divided by weighted average number of ordinary shares outstanding during the period. Often reported as Basic EPS and Diluted EPS.
Significance:
- Widely used indicator of company profitability on per-share basis.
- Used in valuation metrics (P/E ratio).
- Useful for comparing profitability across companies/same company over time (with caution).
- Limitations:
- Affected by accounting policies (e.g., revenue recognition, one-off items).
- Can be manipulated by share buybacks or capital structure changes.
- Ignores cash flow and balance sheet strength.
- Does not reflect changes in share count during the period without careful weighted averaging.
- Single-number focus may be misleading for companies with volatile/allocation issues.
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Differentiate between Basic EPS and Diluted EPS.
Basic EPS: Net profit (after tax) attributable to ordinary shareholders divided by weighted average number of ordinary shares outstanding. Ignores potential dilution.
Diluted EPS: Adjusts numerator and denominator to reflect the effect of all dilutive potential ordinary shares (e.g., stock options, convertible debt, convertible preferred shares, warrants) assuming conversion/exercise. Diluted EPS ≤ Basic EPS (unless anti-dilutive items are excluded).
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Define fair value (IFRS 13), its importance and measurement challenges.
Fair value (IFRS 13): Price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price).
Importance:
- Provides market-based measurement for many assets and liabilities (financial instruments, investment property, business combinations).
- Enhances relevance and comparability by reflecting current market conditions.
- Critical in allocation of purchase price, impairment testing, financial instrument valuation.
- Measurement challenges:
- Lack of active market => reliance on models and unobservable inputs (Level 3) increases subjectivity.
- Model risk: assumptions, discount rates, cash flow forecasts.
- Valuation complexity for illiquid or unique assets.
- Procyclicality: fair values can be volatile, increasing earnings volatility.
- Data limitations and requirement for frequent remeasurement.
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Distinguish contingent liabilities and contingent assets with examples.
Contingent liability: Possible obligation arising from past events whose existence will be confirmed only by uncertain future events not wholly within the entity’s control, or present obligation not recognised because outflow is not probable or amount cannot be reliably measured. Example: A pending lawsuit where an unfavourable outcome is possible (not probable) — disclose but not recognise.
Contingent asset: Possible asset from past events whose existence will be confirmed only by uncertain future events. Example: Claim for damages where favourable outcome is possible — disclose if inflow is probable; not recognised until virtually certain.
Recognition: Liabilities recognised as provisions (IAS 37) when probable outflow and reliable estimate; contingent items disclosed unless remote.
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How do provisions differ from reserves, and why is the distinction important?
Provisions (IAS 37): Liabilities of uncertain timing or amount recognised on the balance sheet when present obligation from past event is probable and reliable estimate can be made (e.g., warranty provision, restructuring provision). Recognised as expense and liability.
Reserves: Equity appropriations or retained earnings allocations (accounting/management designations) not liabilities — e.g., legal reserve, retained earnings set aside for dividends, revaluation reserve (OCI). Not recognised as obligations to outsiders.
Importance of distinction: Provisions reduce profit and create liabilities affecting creditors and solvency metrics; reserves are internal equity allocations that signal management intent but do not represent present obligations. Users must know whether an amount is a genuine liability or merely an equity allocation.
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How do share-based payment arrangements align employees’ and shareholders’ interests?
- Provide employees with equity or rights that increase in value when company share price rises, incentivising employees to increase shareholder value.
- Encourage long-term performance orientation and retention (vesting periods).
- Tie compensation to performance metrics and share performance, aligning risk-reward with shareholders.
- Disclosure requirements (IFRS 2) ensure transparency of cost and dilution effect.
- Note: Careful plan design needed to avoid excessive dilution or misaligned incentives.
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Discuss ownership structures that create challenges in consolidation.
- Cross-holdings: Companies owning shares in each other complicate consolidation eliminations.
- Complex multi-layered structures: Several intermediate parents/subsidiaries, special purpose entities, variable interest entities.
- Non-controlling interests and differing accounting policies: Measurement and presentation choices for NCIs.
- Entities under common control: Business combinations under common control often lack explicit IFRS guidance (judgement required).
- Dual-class shares & voting vs economic interest mismatch: Control may be exercised with little equity interest (e.g., founder shares), complicating consolidation and non-controlling interest measurement.
- Temporary control or de facto control: Assessing control where no formal majority (e.g., through board influence, agreements).
- All require careful assessment of control under IFRS 10.
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Explain the treatment of partial acquisitions and step acquisitions.
Partial acquisition: When acquirer obtains less than 100% of a subsidiary at acquisition date. Under IFRS 3 (acquisition method), recognise identifiable assets/liabilities at fair value; measure non-controlling interest either at fair value or at proportionate share of net assets; goodwill reflects consideration for acquired interest plus any measured NCI.
Step acquisition (purchase in stages): When control is obtained in stages, previously held equity interests are remeasured to fair value at the acquisition date; any resulting gain or loss recognised in profit or loss; then proceed to recognise the identifiable assets/liabilities at fair value and compute goodwill (consider full consideration plus fair value of previously held interest minus fair value of identifiable net assets).
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Accounting for changes in ownership interests without loss of control.
When a parent changes its ownership interest in a subsidiary but retains control (e.g., buys additional shares from NCI or sells part of its interest but still controls):
- The transaction is treated as an equity transaction. No gain or loss is recognised in profit or loss.
- The difference between consideration paid/received and the change in NCI is recognised in equity (e.g., retained earnings or a separate reserve).
- Disclose the nature of the transaction and effects on equity and NCI.
- If control is lost, then derecognition procedures and profit/loss on disposal apply (IFRS 10 / IFRS 3 as relevant).