Financial statements

36 terms · each links to a full explanation with a worked example and the exam traps

Accrual basisThe accounting rule under which income is recorded when it is earned and expenses when they are incurred, regardless of when the cash actually moves.
Adjusted profit after taxReported profit after tax with one-off, non-recurring items and their tax effect stripped out, so one year can be compared fairly with another.
Authorised capitalThe maximum amount of share capital a company is allowed to issue, fixed in its Memorandum of Association — a ceiling on what can be created, not money the company has.
Capital work in progressProperty, plant and equipment that a company is still building or installing and that is not yet ready for use — held separately from PPE until completion.
Cash flow hedgeA hedge of the variability of future cash flows — such as a highly probable foreign currency receipt — whose effective gains and losses are held in equity until the hedged cash flow hits profit and loss.
Consolidated financial statementA single set of financial statements combining a parent company with every subsidiary it controls, so a group's true scale of business is not hidden inside a stand-alone filing.
Contingent liabilityAn obligation that may or may not arise, depending on the outcome of an uncertain future event — a lawsuit, a tax dispute, a guarantee — disclosed in the notes rather than booked in the accounts.
Core working capitalInventory plus trade receivables minus trade payables — the money permanently trapped in the operating cycle, stripped of cash and borrowings, which have nothing to do with trading.
Deferred revenueA liability representing the value of a future obligation owed for revenue already collected in advance — money received but not yet earned.
Diluted EPSEarnings per share recalculated as if every instrument that can convert into equity had already converted — the pessimistic, and usually the more honest, share count.
EBITEarnings before interest and taxes — the workbook's operating profit, struck one step below EBITDA after depreciation and amortisation, and the profit that has to cover the interest bill.
EBITDAProfit from running the business, measured before interest, tax, depreciation and amortisation — so before how the company is funded and how it accounts for its assets.
Embedded derivativeA derivative component hidden inside a non-derivative contract, which Ind AS 109 requires to be pulled out and accounted for separately unless it is "closely related" to the host contract.
Fair value hedgeA hedge of the exposure to changes in fair value of a recognised asset or liability, or an unrecognised firm commitment, attributable to a particular risk that could affect profit and loss.
Fair Value Through Profit or LossThe default Ind AS 109 measurement for a derivative not in a qualifying hedging relationship — recognised at fair value on the balance sheet, with every gain or loss taken straight to profit and loss.
GoodwillThe amount an acquirer pays over and above the fair value of the net assets it takes over, shown as an intangible asset and tested periodically for impairment.
Hedge accountingAn optional accounting treatment that matches the timing of gains and losses on a designated hedging derivative with the item it hedges, instead of taking the derivative's fair value changes straight to profit and loss.
Hedged itemThe asset, liability, cash flow or firm commitment that carries the risk being protected — the exposure a hedging instrument is designated against, and without which there is no hedge at all.
Hedge effectivenessThe degree to which changes in the fair value or cash flows of a hedged item, attributable to the hedged risk, are offset by changes in the fair value or cash flows of the hedging instrument.
ICAI Guidance NoteICAI's revised 2021 note on accounting for derivative contracts, effective for accounting periods beginning on or after 1 April 2021, requiring every derivative on the balance sheet at fair value.
Inventory hedge accounting adjustmentA separate basis adjustment carrying the fair value change of hedged inventory, kept apart from the AS 2 valuation, and released to cost of goods sold when the inventory is finally sold.
Issued capitalThe part of a company's authorised capital that has actually been issued to investors — promoters, the public or specified investors — counted at face value, whatever price the shares were sold at.
Net investment hedgeA hedge of the foreign exchange risk on a net investment in a non-integral foreign operation, with the effective gains and losses on the hedging instrument recognised directly in equity.
Non-controlling (minority) interestThe share of a subsidiary's equity and profits belonging to shareholders other than the parent — a line that appears only in consolidated financial statements.
Off-balance sheet itemAn asset, liability or exposure that does not appear on a company's balance sheet, such as certain leases, contingent liabilities or derivative contracts disclosed only in the notes.
Operating Cash FlowCash actually generated by a business's core operations — profit after tax with non-cash charges added back and working capital movements adjusted, before any capital expenditure.
Other Comprehensive IncomeGains and losses that Ind AS requires or permits to bypass the profit and loss account — they change shareholders' equity and never touch earnings per share.
Paid-up capitalThe part of the issued capital that shareholders have actually paid for — issued capital less the calls still outstanding on partly paid shares.
Partly paid-up sharesShares on which the company has not yet collected the full face value; the holder must pay the balance when called, and on default the shares — and the money already paid — can be forfeited.
ProvisionAn amount a company sets aside on its balance sheet for a liability that is probable but whose exact amount is not yet known, such as a warranty or a pending legal claim.
Prudence principleThe accounting rule that anticipated losses on open derivative positions must be provisioned for, while anticipated profits are ignored until actually realised.
Qualified audit reportAn auditor's opinion that part or all of a company's financial statements do not give a true and fair view — issued when the auditor disagrees with an accounting policy or finds a serious discrepancy.
ReservePart of a company's equity set aside from profit for a general or specific future use, such as a general reserve or a capital reserve — distinct from a provision, which is a liability.
Share premiumThe amount a company receives over the face value of a share when it issues shares above par — Rs 40 on a Rs 10 share sold at Rs 50. It is capital raised, not profit.
Stand-alone financial statementThe financial statement of one registered company alone, showing only its own numbers — as against a consolidated statement, which adds in every subsidiary the company controls.
Trailing earningsEarnings measured over the most recent period up to today, calculated on a rolling basis — most often as Trailing Twelve Months, distinct from historical or forward earnings.