Comprehensive IFRS & IAS Interview Guide

The Ultimate IFRS & IAS Technical Review

Quick Jump Index

IFRS 9: Financial Instruments IFRS 15: Revenue Recognition IFRS 16: Leases IAS 1: Presentation of FS IAS 2: Inventories IAS 16: Property, Plant & Equipment IAS 36: Impairment of Assets IAS 37: Provisions & Contingencies IAS 38: Intangible Assets

IFRS 9 Financial Instruments

Core Objective: Sets out the requirements for recognizing and measuring financial assets, financial liabilities, and some contracts to buy or sell non-financial items.

1. Classification and Measurement

Financial assets are classified based on the entity's Business Model for managing them and their Contractual Cash Flow Characteristics (SPPI Test - Solely Payments of Principal and Interest).

Amortized Cost: Business model is to hold to collect contractual cash flows, AND passes the SPPI test.
FVOCI (Fair Value Through OCI): Business model is to hold to collect AND sell, AND passes the SPPI test. (Interest, impairment, and FX gains/losses in P&L; other fair value changes in OCI).
FVTPL (Fair Value Through P&L): Residual category. Applies to trading assets, derivatives, or assets failing the SPPI test.

2. Expected Credit Loss (ECL) Impairment Model

IFRS 9 uses a forward-looking ECL model, applying to assets at amortized cost and FVOCI. It relies on a three-stage approach:

Stage 1 (Performing): Credit risk hasn't increased significantly since initial recognition. Recognize 12-month ECL.
Stage 2 (Underperforming): Significant increase in credit risk (SICR). Recognize Lifetime ECL.
Stage 3 (Non-performing/Impaired): Objective evidence of impairment. Recognize Lifetime ECL and calculate interest revenue on the net carrying amount.

💡 Interview Tip: Be ready to explain the "SPPI Test". For example, a bond linked to an equity index fails SPPI and must be FVTPL. Also, highlight that the ECL model was created to address the "too little, too late" criticism of the old IAS 39 incurred loss model.

IFRS 15 Revenue from Contracts with Customers

Core Objective: Establish a comprehensive framework for determining when to recognize revenue and how much to recognize.

The 5-Step Model (Crucial for Interviews):

Identify the contract: Must have commercial substance, approved by parties, identifiable rights and payment terms, and probable collection.
Identify performance obligations: Promises to transfer distinct goods or services. (Distinct = customer can benefit from it on its own or with readily available resources).
Determine transaction price: Includes fixed consideration, variable consideration (constrained to highly probable amount), time value of money, and non-cash consideration.
Allocate transaction price: Allocate based on relative stand-alone selling prices (SSP) of each distinct performance obligation.
Recognize revenue: When (or as) the entity satisfies a performance obligation by transferring control to the customer.

Timing of Recognition (Step 5 Detail)

Revenue is recognized over time if ANY of these criteria are met (otherwise, it's at a point in time):

Customer simultaneously receives and consumes benefits (e.g., routine cleaning service).
Entity's performance creates/enhances an asset controlled by the customer (e.g., building on customer's land).
Entity creates an asset with no alternative use and has an enforceable right to payment for performance to date (e.g., custom-built machinery).

💡 Interview Tip: Interviewers frequently test "Principal vs. Agent" considerations. A principal controls the good/service before transfer and recognizes gross revenue. An agent arranges for the provision of goods/services and recognizes only the fee or commission (net).

IFRS 16 Leases

Core Objective: Eliminates the classification of leases as either operating or finance leases for lessees, bringing almost all leases onto the balance sheet.

Lessee Accounting Model

Lease Liability: Initially measured at the present value of future lease payments, discounted using the interest rate implicit in the lease (or incremental borrowing rate).
Right-of-Use (ROU) Asset: Initially measured at the amount of the lease liability PLUS any initial direct costs, prepaid lease payments, and estimated dismantling costs, LESS any lease incentives received.
Subsequent Measurement: The ROU asset is depreciated (usually straight-line), and the lease liability incurs interest expense and is reduced by lease payments.

Exemptions (Optional)

Lessees can choose to keep leases off-balance sheet (recognizing expense straight-line) if:

Short-term leases: Lease term is 12 months or less, with no purchase option.
Low-value assets: Underlying asset is of low value when new (e.g., laptops, small office furniture).

💡 Interview Tip: The impact on the Income Statement changes from a single straight-line rent expense (under old operating leases) to a front-loaded total expense (Depreciation + Interest), which impacts EBITDA positively since rent is removed from operating expenses.

IAS 1 Presentation of Financial Statements

Core Objective: Prescribes the basis for presentation of general purpose financial statements to ensure comparability both with the entity's own previous periods and with other entities.

Components of a Complete Set of Financial Statements:

Statement of Financial Position (Balance Sheet).
Statement of Profit or Loss and Other Comprehensive Income (OCI).
Statement of Changes in Equity.
Statement of Cash Flows.
Notes, comprising significant accounting policies and other explanatory information.

Key Underlying Assumptions:

Going Concern: Management must assess if the entity can continue operating for at least the next 12 months. If not, financial statements are prepared on a breakup basis.
Accrual Basis: Transactions are recognized when they occur, not when cash changes hands (except for the Cash Flow statement).
Materiality and Aggregation: Each material class of similar items must be presented separately.
Offsetting: Assets and liabilities, or income and expenses, may not be offset unless required or permitted by an IFRS standard.

IAS 2 Inventories

Core Objective: Prescribes the accounting treatment for inventories, primarily the determination of cost and its subsequent recognition as an expense.

Measurement Rule

Inventories must be measured at the Lower of Cost and Net Realizable Value (NRV).

Cost includes: Costs of purchase, costs of conversion (direct labor and allocated overheads), and other costs to bring inventory to its present location and condition. (Excludes abnormal waste, storage costs of finished goods, and admin overheads).
NRV is: Estimated selling price in the ordinary course of business LESS estimated costs of completion and estimated costs necessary to make the sale.

Cost Formulas

Permitted methods are FIFO (First-In, First-Out) and Weighted Average Cost. Specific identification is used for items that are not interchangeable.

💡 Interview Tip: A highly tested point is that IFRS strictly prohibits the use of the LIFO (Last-In, First-Out) method, unlike US GAAP which permits it.

IAS 16 Property, Plant and Equipment (PPE)

Core Objective: Accounting for physical assets held for use in production, supply of goods/services, rental, or administrative purposes, expected to be used for more than one period.

Subsequent Measurement Options

After initial recognition at cost, an entity chooses one of two models for an entire class of PPE:

Cost Model: Cost less accumulated depreciation and accumulated impairment losses.
Revaluation Model: Fair value at the date of revaluation less subsequent accumulated depreciation and impairment. Revaluations must be made with sufficient regularity.
- Upwards Revaluation: Goes to OCI (Revaluation Surplus).
- Downwards Revaluation: Goes to P&L (unless reversing a previous surplus in OCI).

Depreciation

Depreciable amount is allocated on a systematic basis over the asset's useful life. Component depreciation is required (depreciating significant parts of an asset separately, like an aircraft's engine vs. its fuselage). Useful life, residual value, and depreciation method must be reviewed at least annually.

IAS 36 Impairment of Assets

Core Objective: Ensure that assets are carried at no more than their recoverable amount. Applies to PPE, Intangibles, Goodwill, and Investments in Subs/Associates.

The Impairment Test

An asset is impaired if its Carrying Amount > Recoverable Amount.

Recoverable Amount is the HIGHER of:

Fair Value less Costs of Disposal (FVLCD): Market-based view (what you could sell it for today).
Value in Use (VIU): Entity-specific view (Present value of future cash flows expected to be derived from the asset).

Cash-Generating Units (CGUs)

If it's impossible to test an individual asset (e.g., a single machine that doesn't generate independent cash), it is allocated to a CGU—the smallest identifiable group of assets that generates independent cash inflows.

💡 Interview Tip: Goodwill and intangible assets with an indefinite useful life must be tested for impairment annually, regardless of whether there is an indicator of impairment. Impairment losses on Goodwill can never be reversed.

IAS 37 Provisions, Contingent Liabilities and Contingent Assets

Core Objective: Ensure appropriate recognition criteria and measurement bases are applied to provisions, and that sufficient information is disclosed.

Provisions

A provision is a liability of uncertain timing or amount. Recognize ONLY if all three are met:

Present obligation (legal or constructive) as a result of a past event.
Probable (>50% likelihood) outflow of economic resources.
Reliable estimate can be made.

Contingent Liabilities

A possible obligation, or a present obligation where outflow is not probable or cannot be reliably measured. Do NOT recognize in financial statements. Only disclose in the notes (unless the possibility of outflow is remote, then do nothing).

Contingent Assets

A possible asset arising from past events. Do not recognize. Disclose only if the inflow of economic benefits is probable. (Recognize as an actual asset only when realization is virtually certain).

IAS 38 Intangible Assets

Core Objective: Prescribes the accounting treatment for intangible assets that are not dealt with specifically in another standard.

Definition: An identifiable non-monetary asset without physical substance. Must meet criteria of identifiability (separable or arises from contractual/legal rights), control, and future economic benefits.

Internally Generated Intangibles (Research vs. Development)

Research Phase: Costs are ALWAYS expensed as incurred to P&L.
Development Phase: Costs MUST be capitalized if (and only if) the entity can demonstrate all strict criteria (Technical feasibility, Intention to complete, Ability to use/sell, Probable future economic benefits, Adequate resources, Reliable measurement of costs).

Note: Internally generated goodwill, brands, mastheads, and customer lists are NEVER recognized as intangible assets.

💡 Interview Tip: Distinguish between Finite and Indefinite useful lives. Finite intangibles are amortized over their useful life and tested for impairment if indicators exist. Indefinite life intangibles (e.g., a strong trademark) are NOT amortized, but must be tested for impairment annually.

IFRS Standard Quick summary