Question 1

What is the difference between IFRS and UK GAAP?

Accepted Answer

IFRS is a global accounting framework issued by the IASB, while UK GAAP (FRS 102) is the standard for UK entities not required to use IFRS. Key differences include: IFRS 15 vs. FRS 102 Section 23 for revenue (IFRS 15 has a more detailed five-step model); IFRS 16 vs. FRS 102 Section 20 for leases (IFRS 16 requires lessees to capitalise almost all leases, while FRS 102 has an exemption for low-value and short-term leases); and IFRS 9 vs. FRS 102 Section 11 for financial instruments (IFRS 9 uses expected credit loss model, while FRS 102 uses incurred loss model). For the IAB Level 4, you focus on IFRS, but understanding differences helps in practical scenarios.

Question 2

How do I know which IFRS standard applies to a given transaction?

Accepted Answer

First, identify the nature of the transaction (e.g., sale of goods, lease, financial instrument). Then refer to the IASB's Conceptual Framework for definitions of elements (asset, liability, etc.). For revenue, use IFRS 15; for leases, IFRS 16; for financial instruments, IFRS 9; for property, plant and equipment, IAS 16; for intangible assets, IAS 38; for inventories, IAS 2; for provisions, IAS 37; for impairment, IAS 36; for business combinations, IFRS 3; and for consolidated statements, IFRS 10. If a transaction is not covered by a specific standard, refer to IAS 8 (Accounting Policies, Changes in Accounting Estimates and Errors) to develop a policy based on the Conceptual Framework.

Question 3

What is the expected credit loss model under IFRS 9?

Accepted Answer

The expected credit loss (ECL) model under IFRS 9 requires entities to recognise impairment losses based on expected future credit losses, not just incurred losses. For financial assets measured at amortised cost or FVOCI, entities must estimate 12-month ECL (if credit risk has not increased significantly since initial recognition) or lifetime ECL (if credit risk has increased significantly). The model applies to trade receivables, contract assets, lease receivables, and debt instruments. For trade receivables without a significant financing component, a simplified approach is allowed, using a provision matrix based on historical loss rates adjusted for forward-looking information.

Question 4

How do I account for a lease under IFRS 16?

Accepted Answer

Under IFRS 16, lessees recognise a right-of-use asset and a lease liability at the commencement date. The lease liability is measured at the present value of future lease payments (fixed payments, variable payments linked to an index or rate, residual value guarantees, purchase options if reasonably certain, and termination penalties). The right-of-use asset is initially measured at the lease liability amount plus initial direct costs and prepayments, less any lease incentives. Subsequently, the asset is depreciated over the shorter of the lease term or useful life, and the liability is reduced by lease payments allocated to principal (interest expense is recognised separately). Lessors classify leases as finance or operating leases, with finance leases recognising a receivable and operating leases recognising income on a straight-line basis.

Question 5

What is the difference between the cost model and revaluation model for property, plant and equipment?

Accepted Answer

Under the cost model (IAS 16), an asset is carried at cost less accumulated depreciation and impairment losses. Under the revaluation model, an asset is carried at fair value at the date of revaluation less subsequent depreciation and impairment. Revaluations must be made with sufficient regularity to ensure carrying amount does not differ materially from fair value. Increases in value are recognised in other comprehensive income (OCI) and accumulated in revaluation surplus (equity), unless reversing a previous decrease recognised in profit or loss. Decreases are recognised in profit or loss to the extent they exceed any previous revaluation surplus. The revaluation model is more common for property, while plant and equipment are often held at cost due to volatility in fair values.

Question 6

How do I treat deferred tax in IFRS financial statements?

Accepted Answer

Deferred tax is accounted for under IAS 12 (Income Taxes). It arises from temporary differences between the carrying amount of assets/liabilities in the financial statements and their tax base. Deferred tax liabilities are recognised for all taxable temporary differences (e.g., accelerated tax depreciation), while deferred tax assets are recognised for deductible temporary differences (e.g., provisions not yet deductible) and unused tax losses, subject to probable future taxable profits. Deferred tax is measured at the tax rates expected to apply when the asset is realised or liability settled, based on enacted or substantively enacted rates. It is classified as non-current on the statement of financial position. Changes in deferred tax are recognised in profit or loss, except for items recognised in OCI (e.g., revaluation surplus) or directly in equity.

Prepare and appraise financial statements

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