Advanced Financial Reporting and Analysis cheat sheet

Key terms

Sale and leaseback

An entity sells an asset and leases it back from the buyer; where the sale meets IFRS 15's requirements to be a genuine sale, the seller-lessee measures the retained right-of-use asset at the proportion of the previous carrying amount relating to the right retained, recognising only the gain or loss relating to the rights transferred to the buyer-lessor.

Lessor accounting

A lessor (including a dealer in leased assets, such as a Kenyan motor dealer financing vehicles through leases) classifies each lease as a finance lease or an operating lease.

Finance and operating leases in the lessor's books

A finance lease transfers : a finance lease transfers substantially all the risks and rewards of ownership and is derecognised from the lessor's assets in favour of a lease receivable, while an operating lease keeps the asset on the lessor's own statement of financial position, depreciated in the ordinary way, with lease income recognised on a straight-line basis over the lease term.

Short-term employee benefits

Wages, salaries and paid annual leave expected to be settled within 12 months, recognised as an expense as the employee renders service, undiscounted.

Post-employment benefits (defined contribution)

The employer's obligation is limited to the contributions it agrees to pay, for example statutory contributions to Kenya's National Social Security Fund (NSSF) or a registered occupational scheme, expensed as contributions fall due, with no further liability once paid.

Post-employment benefits (defined benefit)

The employer promises a specified benefit and bears the actuarial and investment risk; the net defined benefit liability (or asset) is the present value of the obligation less the fair value of plan assets, with actuarial gains and losses (remeasurements) recognised in other comprehensive income, not profit or loss.

Other long-term and termination benefits

For example long-service awards, and benefits payable on termination of employment (such as statutory severance pay under the Employment Act, 2007), recognised when the entity can no longer withdraw the offer or when related restructuring costs are recognised, whichever is earlier.

Equity-settled share-based payment

Measured at the fair value of the equity instruments granted at grant date, expensed over the vesting period, with a corresponding credit to equity; not remeasured for later changes in fair value.

Cash-settled share-based payment

Measured at the fair value of the liability, remeasured at each reporting date until settlement, with changes recognised in profit or loss, for example a share appreciation right paid in cash rather than shares.

Expected credit loss (ECL) model

Requires a loss allowance for expected, not just incurred, credit losses on financial assets at amortised cost or FVOCI, using a three-stage model (12-month ECL for performing assets, lifetime ECL once credit risk has increased significantly, and for credit-impaired assets), the full version of the simplified trade-receivable approach in CPA Financial Accounting.

Hedge accounting

Permits gains and losses on a hedging instrument (such as a forward foreign exchange contract) and the hedged item to be recognised in the same period, matching the accounting to the entity's risk management, subject to strict qualifying criteria and formal documentation, for example a Kenyan flower exporter hedging euro-denominated export receipts.

Embedded derivative

A component of a hybrid contract that also has non-derivative host characteristics, separated from the host and accounted for as a stand-alone derivative only where specific conditions are met, largely a non-issue for a financial-asset host under IFRS 9's own classification rules, but still relevant for a non-financial host contract.

Value in use

The present value of the future cash flows expected from an asset, discounted at a rate reflecting current market assessments of the time value of money and the asset's specific risks.

Cash-generating unit (CGU)

The smallest identifiable group of assets that generates cash inflows largely independent of other assets, used where an individual asset (such as goodwill, which generates no cash flows on its own) cannot be tested for impairment in isolation.

Allocating an impairment loss

First against any goodwill allocated to the CGU, then pro-rata across the CGU's other assets, none written down below the highest of its own fair value less costs to sell, value in use, or zero.