Financial Reporting: formula sheet

Key formulas

Accounting equation

Assets = Liabilities + Equity

Equity is the residual: Equity = Assets − Liabilities.

Asset definition

Asset = present economic resource + controlled by the entity + result of past events

All three parts must be present. Control, not legal ownership, is the test.

Liability definition

Liability = present obligation + to transfer an economic resource + result of past events

A future intention or a plan alone is not a present obligation.

Fundamental qualitative characteristics

Useful information = Relevance + Faithful representation

Relevant information has predictive value, confirmatory value or both. Materiality is an entity-specific aspect of relevance. Faithful representation means complete, neutral and free from error.

Enhancing qualitative characteristics

Comparability, Verifiability, Timeliness, Understandability

They improve useful information but cannot make irrelevant or unfaithful information useful.

Recognition criteria

Recognise if: meets definition of an element AND recognition provides relevant, faithfully represented information

Consider cost constraint and uncertainty over existence or measurement. The 2018 Conceptual Framework has no separate probability threshold; a low probability of inflow or outflow matters only through relevance.

Measurement bases

Historical cost | Current value (fair value, value in use / fulfilment value, current cost)

Choose the basis giving the most useful information, considering relevance and faithful representation.

Basic EPS

Basic EPS = (Profit attributable to ordinary equity holders of parent) ÷ (Weighted average number of ordinary shares outstanding)

Deduct preference dividends for the period from profit: cumulative ones whether or not declared, and non-cumulative ones only when declared in respect of the period. Weight new shares from the date consideration is receivable.

Weighted average shares

Σ (shares outstanding × months outstanding ÷ 12)

Bonus issue and share split are applied to all periods presented as if they occurred at the start of the earliest period. They have no weighting by date.

Diluted EPS (basic idea)

Diluted EPS = (Adjusted profit) ÷ (Weighted average shares + dilutive potential ordinary shares)

Add back after-tax interest on convertible debt and preference dividends saved. Include only potential shares that reduce EPS from continuing operations (dilutive).

Options and warrants (treasury share method)

Incremental shares = Options × (Average market price − Exercise price) ÷ Average market price

Options are dilutive only when the exercise price is below the average market price.

Rights issue bonus element

Adjustment factor = Fair value per share before exercise of rights ÷ Theoretical ex-rights fair value per share

Multiply shares outstanding before the rights issue by this factor. Theoretical ex-rights value = (Total fair value before + Proceeds) ÷ (Shares before + New shares).

Indirect method of operating cash flow

Operating cash flow = Profit before tax + Depreciation and other non-cash charges + Finance costs − Investment income ± Working capital changes − Income tax paid

Finance costs and investment income are removed only if classified under financing or investing. For non-financial entities, interest and dividends paid are financing and interest and dividends received are investing, applied consistently each period. Tax paid is operating unless specifically linked to investing or financing.

Ind AS 8 treatment

Policy change: retrospective. Estimate change: prospective. Error: retrospective restatement.

Retrospective application of policy change is subject to impracticability and specific transitional provisions in a standard.

Ind AS 10 test

Adjusting event = evidence of a condition that existed at the end of the reporting period

Non-adjusting events are disclosed (nature and estimated financial effect) if material. If management determines after the reporting period that it intends to liquidate the entity or cease trading, the financial statements are not prepared on a going-concern basis. This is a change in the basis of accounting, not an adjusting event.

Ind AS 108 quantitative thresholds

Reportable if revenue (incl. inter-segment), or absolute profit or loss, or assets is 10% or more of the combined total

Profit test compares with the greater of combined profit of profit-making segments and combined loss of loss-making segments (absolute). Reported segments should generally cover at least 75% of external revenue.

Inventory measurement (Ind AS 2)

Carrying amount = lower of cost and net realisable value (NRV)

NRV = estimated selling price − estimated costs of completion − estimated costs necessary to make the sale. Compare item by item or by group of similar items.

Cost of PPE (Ind AS 16)

Cost = purchase price + import duties and non-refundable taxes − trade discounts + directly attributable costs + initial estimate of dismantling and restoration costs

Exclude general overheads, training and initial operating losses. Depreciate each significant component separately over its own useful life.

Recoverable amount (Ind AS 36)

Recoverable amount = higher of (fair value less costs of disposal) and value in use

Impairment loss = carrying amount − recoverable amount, if carrying amount is higher. If either measure exceeds the carrying amount, there is no impairment.

Provision test (Ind AS 37)

Recognise if: present obligation from a past event AND outflow probable (more likely than not) AND reliable estimate

If any condition fails, do not recognise. Disclose a contingent liability unless outflow is remote.

Lease liability at commencement (Ind AS 116)

Lease liability = present value of unpaid lease payments, discounted at the rate implicit in the lease (or the lessee's incremental borrowing rate if it cannot be readily determined)

ROU asset = initial lease liability + lease payments made at or before commencement + initial direct costs + restoration cost estimate − incentives received.

Deferred tax (Ind AS 12)

Temporary difference = carrying amount − tax base; deferred tax = temporary difference × tax rate enacted or substantively enacted

For an asset, carrying amount above tax base gives a deferred tax liability (taxable temporary difference). Deferred tax assets need probable future taxable profit.

Intangibles: research and development (Ind AS 38)

Research phase: expense. Development phase: capitalise only when all six criteria are demonstrated

The six criteria are: - Technical feasibility of completing the asset so it is available for use or sale. - Intention to complete the asset and use or sell it. - Ability to use or sell the asset. - Probable future economic benefits, shown by a market for the output or by usefulness to the entity if used internally. - Availability of adequate technical, financial and other resources to complete the development. - Ability to measure reliably the expenditure attributable to the asset during development.

Government grant (Ind AS 20)

Grant related to an asset: present as deferred income and recognise in profit or loss on a systematic basis over the asset's useful life

Under Ind AS 20 you cannot deduct the grant from the asset's carrying amount. Grants related to income go to profit or loss in the periods the related costs are recognised, as other income or as a deduction from the expense.

Financial asset classification

Hold to collect + SPPI → Amortised cost | Hold to collect and sell + SPPI → FVTOCI | Otherwise → FVTPL

Fair value option at initial recognition can remove an accounting mismatch. It is irrevocable.

Amortised cost

Gross carrying amount closing = Opening gross + Interest at EIR − Cash received (interest and principal). Net carrying amount = Gross carrying amount − Loss allowance

Interest income is opening gross carrying amount × effective interest rate (EIR). For credit-impaired assets in stage 3, apply EIR to the net amount (gross less loss allowance).

Initial measurement

Financial assets/liabilities not at FVTPL: fair value plus (assets) or minus (liabilities) directly attributable transaction costs | FVTPL: fair value, with costs expensed to P&L

Trade receivables without a significant financing component start at transaction price.

ECL

ECL = Σ (Probability of default × Loss given default × Exposure at default), discounted at EIR

Stage 1: 12-month ECL. Stages 2 and 3: lifetime ECL. Trade receivables: simplified lifetime ECL.

Compound instrument split

Liability = PV of cash flows at market rate of similar non-convertible debt; Equity = Proceeds − Liability

Equity portion is not remeasured afterwards. Transaction costs are allocated in proportion.

Equity vs liability test (Ind AS 32)

Unavoidable contractual obligation to deliver cash/financial asset → Liability. Fixed-for-fixed own-share settlement → Equity

Substance over legal form. Variable number of shares to settle a fixed value gives a liability.

Cash flow hedge

Cash flow hedge reserve (OCI) = Lower of (absolute cumulative gain/loss on hedging instrument, absolute cumulative change in fair value (present value) of hedged item). Remainder = ineffectiveness → P&L

The lower-of test applies in absolute amounts where the instrument and the hedged item move in opposite directions, as in a working hedge. Any remainder of the instrument's gain or loss is recognised in profit or loss as ineffectiveness. The OCI amount is later reclassified when the hedged item affects profit or loss, or included in the cost of a non-financial asset.

Fair value hedge

Gain/loss on hedging instrument → P&L; Gain/loss on hedged item attributable to hedged risk → adjusts carrying amount and P&L

If the hedged item is an FVTOCI equity investment, both effects go to OCI.

Five-step revenue model

Contract → Performance obligations → Transaction price → Allocation → Recognition

Write all five steps in a descriptive answer, then apply each to the facts.

Allocation of transaction price

Price allocated to obligation = Transaction price × (Stand-alone selling price of obligation ÷ Sum of all stand-alone selling prices)

Applies when the price is a bundle. Discounts are allocated proportionately unless there is observable evidence they relate to specific obligations.

Over-time recognition (input method)

Cumulative revenue = Transaction price × (Cost incurred to date ÷ Total expected cost) ; Revenue for the year = Cumulative revenue − Revenue recognised earlier

Exclude costs that do not reflect progress, such as wasted materials or uninstalled materials in specific cases.

Contract modification

Separate contract if: added goods/services are distinct AND price rises by their stand-alone selling price (adjusted for circumstances). Otherwise: prospective treatment if remaining goods are distinct; cumulative catch-up if not distinct.

First decide whether the modification is approved and what changed.

Principal versus agent

Controls the good/service before transfer → Principal (gross). Does not control → Agent (net fee or commission).

Use indicators: primary responsibility, inventory risk, pricing discretion.

Equity-settled expense

Cumulative expense = Number of awards expected to vest × Grant-date fair value × (Years elapsed ÷ Vesting period) ; Year expense = Cumulative − Earlier cumulative

Fair value fixed at grant date. Credit goes to equity (share-based payment reserve).

Cash-settled liability

Liability at date = Number expected to vest × Fair value of the right at that date × (Years elapsed ÷ Vesting period) ; Year expense = Closing liability − Opening liability + Cash paid in the year

Remeasure at each reporting date and at settlement. Changes go to profit or loss. After the vesting date, the time-proportion factor drops out: the liability equals the number of outstanding rights × the fair value at that date.

Goodwill (full or partial)

Goodwill = Consideration transferred + NCI (at fair value or proportionate share) + Fair value of previously held interest − Net identifiable assets at acquisition date (fair value)

A negative result is a bargain purchase gain, recognised in OCI and accumulated in equity as capital reserve, subject to Ind AS 103 conditions.

Non-controlling interest at reporting date

NCI = NCI at acquisition + NCI% × post-acquisition change in subsidiary's equity (adjusted for fair value adjustments and unrealised profit where applicable)

Under the full goodwill method, NCI also carries its share of goodwill, less any impairment attributed to it.

Consolidated reserves

Group reserves = Parent's reserves + Parent % × post-acquisition reserves of subsidiary − Goodwill impairment attributable to parent − Parent's share of unrealised profit adjustments

Post-acquisition reserves exclude pre-acquisition reserves, which are absorbed in goodwill.

Unrealised profit in inventory

Unrealised profit = Closing inventory from intra-group purchase × Profit margin on sales

If margin is on cost, convert: profit = cost-plus % ÷ (100 + %) × transfer price. Downstream: adjust the parent. Upstream: adjust the subsidiary and share with NCI.

Equity method carrying amount

Closing investment = Cost + Share of post-acquisition profit + Share of OCI − Dividends received − Impairment − Share of unrealised profit eliminated

Dividends reduce the investment. They are not income in consolidated statements.

Change in ownership without loss of control

Adjustment to equity = Consideration paid or received − Change in carrying amount of NCI

The difference goes to equity attributable to owners of the parent. No gain or loss in profit or loss and no change to goodwill.

Gain or loss on loss of control

Gain or loss = Fair value of consideration received + Fair value of retained interest + Carrying amount of NCI − Carrying amount of subsidiary's net assets (including goodwill)

Amounts earlier in OCI relating to the subsidiary are reclassified or transferred as other Ind AS require.

Joint arrangement classification

Rights to assets and obligations for liabilities → Joint operation. Rights to net assets → Joint venture.

Joint operator accounts for its own share line by line. Joint venturer uses the equity method.

Foreign currency transaction initial recording

Amount in ₹ = Foreign currency amount × Spot rate on transaction date

An average rate may be used for a period only if rates do not fluctuate significantly.

Exchange difference on monetary item

Difference = FC amount × (Closing rate − Rate at which previously recorded)

Normally recognised in profit or loss. Check the direction for asset versus liability.

Non-monetary items translation

Historical cost items: transaction-date rate. Fair value items: rate on fair value measurement date

Do not restate at the closing rate unless carried at fair value measured at that date.

Capitalisation on specific borrowings

Eligible cost = Actual borrowing cost incurred − Investment income on temporary investment of unspent funds

Applies to funds borrowed specifically for the qualifying asset.

Capitalisation on general borrowings

Eligible cost = Capitalisation rate × Expenditure on the asset; Capitalisation rate = Borrowing costs incurred on general borrowings during the period ÷ Weighted average amount of those general borrowings outstanding

The amount capitalised cannot exceed the borrowing costs actually incurred in the period.

Fair value hierarchy

Priority of inputs: Level 1 (quoted, identical, active market) highest; Level 2 (observable) next; Level 3 (unobservable) lowest

Level 1 inputs have the highest priority and Level 3 the lowest. The whole measurement is categorised at the level of the lowest-level input that is significant to it.

Ind AS 101 transition

Date of transition: the beginning of the earliest period for which full comparative information under Ind AS is presented in the first Ind AS financial statements

The opening Ind AS balance sheet is prepared at this date. Use Ind AS in force at the first Ind AS reporting date. Adjust differences in retained earnings or other equity.

Hyperinflation restatement

Restated amount = Historical amount × (Index at reporting date ÷ Index at date item was recorded)

Apply to non-monetary items at cost. Monetary items are already in current units.

Quick revision

• Name the Ind AS first, then apply it: issue, standard, treatment, amount, effect.
• Check the exact conditions of each rule before applying it; the facts in the case decide the outcome.
• Under Ind AS 109, classification of a financial asset depends on the business model and the contractual cash flow test.
• Financial liabilities and equity are separated under Ind AS 32 by the contractual obligation to pay cash or another financial asset.
• Under Ind AS 115, work through the five steps in order: contract, performance obligations, price, allocation, recognition.
• Share-based payments are generally measured at grant date fair value for equity-settled awards and spread over the vesting period.
• In Ind AS 103, the acquirer is identified, acquisition date set, and assets and liabilities taken at fair value.
• Goodwill arises when consideration plus non-controlling interest exceeds net identifiable assets at fair value; otherwise check for a bargain purchase.
• In consolidation, eliminate intragroup balances and unrealised profits in full before computing group figures.
• Foreign currency transactions start at the spot rate on the transaction date; monetary items are retranslated at the closing rate.
• Always show the disclosure or presentation effect when the question asks for it, not just the number.
• Tie your accounting result to the tax, audit or finance angle if the case raises it.

Common mistakes

• Saying the Conceptual Framework overrides an Ind AS. Fix: State that the framework is not a standard. A specific Ind AS prevails where there is a conflict.
• Using legal ownership as the test for an asset. Fix: Use control of the economic resource. Apply substance over form, as part of faithful representation.
• Treating every post-balance-sheet event as adjusting, or none as adjusting Fix: Ask whether the event confirms a condition existing at the reporting date. A customer's insolvency confirming a receivable that was doubtful is adjusting. A fire after year end is non-adjusting.
• Applying a change in estimate retrospectively Fix: Change in estimate (useful life, residual value, provisions) goes in profit or loss of the current and future periods. Change of depreciation method is also treated as a change in estimate.
• Recognising a provision for a future operating loss or for a restructuring that is only planned. Fix: Ask whether a present obligation exists from a past event. Future operating losses are never provided for. A restructuring provision needs a detailed formal plan and a valid expectation in those affected, for example through announcement or starting implementation.
• Using only the fair value to test impairment, or comparing impairment loss with the wrong figure. Fix: Take the higher of fair value less costs of disposal and value in use. If either exceeds the carrying amount, no impairment arises.
• Classifying a debt instrument only by its legal form or by what the entity prefers. Fix: Always state both tests. A bond with a leveraged return or equity-linked payoff fails SPPI and goes to FVTPL even if held to collect.
• Treating redeemable preference shares as equity because they are called shares. Fix: Apply Ind AS 32. If redemption is mandatory or at the holder's option, there is an unavoidable obligation, so it is a financial liability, and dividends are finance cost.
• Treating a bundled sale as one obligation and recognising all revenue on delivery. Fix: Test each item for being distinct. If so, allocate the price on relative stand-alone selling prices and recognise each separately.
• Showing gross revenue for an agent, such as a travel or marketplace platform. Fix: Check control before transfer. If the entity only arranges the sale, report the commission as revenue.

Exam tips

• Write the definition first, then test every part against the facts. Marks are given for each part.
• Always mention that a specific Ind AS prevails over the Conceptual Framework, and apply that Ind AS when the transaction is covered by one.
• In case-scenario MCQs, look for words such as control, past event, present obligation and substance. They signal which test to use.
• Use Ind AS only. Avoid references to old AS in your answer.
• In Paper 6, link framework points to audit or tax angles in the same case when the facts allow.
• In case studies, the standard is rarely named. Train yourself to map trigger words to the standard before reading the question.
• For EPS, always show the weighted-average share table as a working note. Marks are given for the method even when the final number is off.
• Write Ind AS 8 and Ind AS 10 answers in provision, facts, conclusion form, and add the disclosure required. Examiners reward the disclosure line.