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Question 1The conceptual and regulatory framework for financial reporting

Which of the following best describes the objective of general purpose financial reporting?

  1. To provide financial information useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity Correct answer.
  2. To report the entity's compliance with environmental legislation
  3. To enable management to determine the selling price of the entity's products
  4. To provide a basis for assessing the amount of tax payable by the entity

Explanation

The Conceptual Framework states that the objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. These users cannot usually require information directly, so general purpose reports are prepared for them.

Question 2The conceptual and regulatory framework for financial reporting

According to the Conceptual Framework, which group is identified as the primary users of general purpose financial reports?

  1. Existing and potential investors, lenders and other creditors Correct answer.
  2. The entity's employees and trade unions
  3. Customers and suppliers of the entity
  4. Tax authorities and industry regulators

Explanation

The Conceptual Framework identifies existing and potential investors, lenders and other creditors as the primary users of general purpose financial reports because they provide resources to the entity and cannot usually require information directly. Other groups may find the reports useful, but they are not the primary users.

Question 3The conceptual and regulatory framework for financial reporting

Which of the following is a fundamental qualitative characteristic of useful financial information?

  1. Comparability
  2. Relevance Correct answer.
  3. Timeliness
  4. Verifiability

Explanation

Relevance and faithful representation are the two fundamental qualitative characteristics. Comparability, timeliness, verifiability and understandability are enhancing characteristics that improve the usefulness of information that is already relevant and faithfully represented.

Question 4The conceptual and regulatory framework for financial reporting

General purpose financial statements are normally prepared on the going concern basis unless:

  1. the entity operates in a highly competitive industry
  2. the entity's shares are not traded on a stock exchange
  3. the entity has made a loss in the current year
  4. management intends to liquidate the entity or has no realistic alternative but to do so Correct answer.

Explanation

The going concern assumption means the entity is viewed as continuing in operation for the foreseeable future. Financial statements are not prepared on a going concern basis only when management intends to liquidate the entity, cease trading, or has no realistic alternative but to do so.

Question 5The conceptual and regulatory framework for financial reporting

Under the accrual basis of accounting, the effects of transactions and other events are recognised:

  1. at the end of the reporting period regardless of when they occur
  2. when they occur, even if the resulting cash flows occur in a different period Correct answer.
  3. only when the related cash is received or paid
  4. when the entity's management decides to record them

Explanation

The accrual basis recognises transactions and events when they occur, not when cash is received or paid. This gives users information about past transactions and events that is more useful than cash-only information.

Question 6The conceptual and regulatory framework for financial reporting

The Conceptual Framework defines an asset as:

  1. any item that can be reliably measured in monetary terms
  2. a resource owned by the entity and recorded at historical cost
  3. a present economic resource controlled by the entity as a result of past events Correct answer.
  4. a future economic benefit expected to arise from a planned transaction

Explanation

An asset is a present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits; legal ownership is not essential if control exists.

Question 7The conceptual and regulatory framework for financial reporting

Under the Conceptual Framework, a liability is:

  1. an amount owed to owners of the entity
  2. a future sacrifice of economic benefits arising from a planned commitment
  3. a present obligation of the entity to transfer an economic resource as a result of past events Correct answer.
  4. a probable future payment that the entity can avoid without penalty

Explanation

A liability is a present obligation of the entity to transfer an economic resource as a result of past events. The obligation must already exist at the reporting date and must have the potential to require a transfer of an economic resource.

Question 8The conceptual and regulatory framework for financial reporting

Information is material if:

  1. it relates to amounts greater than a fixed percentage of total assets
  2. omitting, misstating or obscuring it could reasonably be expected to influence decisions of primary users Correct answer.
  3. it is prepared in accordance with IFRS Standards
  4. it is relevant to at least one user of the financial statements

Explanation

Materiality is an entity-specific aspect of relevance. Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that primary users make on the basis of the financial statements. There is no universal quantitative threshold.

Question 9The conceptual and regulatory framework for financial reporting

Which of the following best describes a neutral description in financial reporting?

  1. A description that excludes all estimates and judgements
  2. A description that always reports the most favourable outcome for the entity
  3. A description that presents only information required by law
  4. A description without bias in the selection or presentation of financial information Correct answer.

Explanation

Faithful representation requires information to be complete, neutral and free from error. Neutrality means there is no bias in the selection or presentation of financial information; it is supported by the exercise of prudence.

Question 10The conceptual and regulatory framework for financial reporting

Comparability is an enhancing qualitative characteristic. It enables users to:

  1. understand the entity's accounting policies without reading them
  2. assess the future profitability of the entity with certainty
  3. identify similarities and differences between items and between entities Correct answer.
  4. confirm that the financial statements are free from error

Explanation

Comparability enables users to identify and understand similarities in, and differences among, items. Consistency in applying accounting policies helps achieve comparability, but comparability does not require uniform accounting for dissimilar items.

Question 11The conceptual and regulatory framework for financial reporting

According to the Conceptual Framework, an item should be recognised in the financial statements when recognition:

  1. is required by local tax legislation
  2. is supported by a signed contract
  3. provides users with useful information and the item meets the definition of an element, with the cost constraint considered Correct answer.
  4. results in an increase in reported profit

Explanation

Recognition involves applying the definitions of elements and assessing whether recognition provides useful information. That assessment considers relevance, faithful representation and the cost constraint. Recognition does not depend on tax law, the existence of a contract or the effect on profit.

Question 12The conceptual and regulatory framework for financial reporting

Derecognition of an asset normally occurs when the entity:

  1. loses control of all or part of the asset Correct answer.
  2. records an impairment loss against the asset
  3. has held the asset for more than one reporting period
  4. changes the measurement basis used for the asset

Explanation

Derecognition is the removal of all or part of a recognised asset or liability from the statement of financial position. For an asset, derecognition normally occurs when the entity loses control of all or part of the asset.

Question 13The conceptual and regulatory framework for financial reporting

Which of the following is a current value measurement basis under the Conceptual Framework?

  1. Historical cost
  2. Original invoice cost
  3. Fair value Correct answer.
  4. Amortised cost

Explanation

The Conceptual Framework identifies historical cost and current value as measurement bases. Current value includes fair value, value in use or fulfilment value, and current cost. Fair value is therefore a current value measurement basis.

Question 14The conceptual and regulatory framework for financial reporting

Under the financial capital maintenance concept, profit is the amount:

  1. by which closing capital exceeds opening capital after adjusting for owner contributions and distributions, measured in the chosen capital maintenance basis Correct answer.
  2. of cash generated by operations during the period
  3. of revenue recognised less all expenses paid in cash
  4. by which assets exceed liabilities at the reporting date

Explanation

Under financial capital maintenance, profit is earned only after the entity has maintained its capital at the beginning of the period. Capital may be measured in nominal monetary units or in units of constant purchasing power, and profit is the excess after adjusting for owner contributions and distributions.

Question 15The conceptual and regulatory framework for financial reporting

Which body is responsible for issuing IFRS Standards?

  1. The International Federation of Accountants (IFAC)
  2. The IFRS Foundation Monitoring Board
  3. The International Accounting Standards Board (IASB) Correct answer.
  4. The IFRS Interpretations Committee

Explanation

The IASB is the independent standard-setting body of the IFRS Foundation. It develops and issues IFRS Standards, subject to the IFRS Foundation's due process and governance arrangements.

Question 16The conceptual and regulatory framework for financial reporting

What is the main role of the IFRS Interpretations Committee?

  1. To appoint the members of the IASB
  2. To enforce IFRS Standards through legal sanctions
  3. To interpret the application of IFRS Standards and provide guidance on issues not specifically addressed Correct answer.
  4. To approve the annual financial statements of listed companies

Explanation

The IFRS Interpretations Committee reviews financial reporting issues that may arise in practice and develops interpretations of IFRS Standards. It also provides guidance where Standards are silent or unclear.

Question 17The conceptual and regulatory framework for financial reporting

During the IASB's due process, which document is normally published to invite public comment on a proposed new Standard?

  1. The bases for conclusions of an existing Standard
  2. The annual report
  3. The Conceptual Framework
  4. An exposure draft Correct answer.

Explanation

The IASB normally publishes an exposure draft of a proposed Standard to invite public comment. It considers the comments received before redeliberating and deciding whether to issue a final Standard.

Question 18The conceptual and regulatory framework for financial reporting

When financial statements comply with IFRS Standards, an entity must:

  1. make an explicit and unreserved statement of compliance with IFRS Standards in the notes Correct answer.
  2. present all amounts in the currency of the IASB's headquarters
  3. obtain approval from the IASB before issuing the statements
  4. state that the financial statements are fair regardless of any departures from IFRS

Explanation

An entity whose financial statements comply with IFRS Standards must make an explicit and unreserved statement of that compliance in the notes. Compliance cannot be claimed if the statements depart from IFRS Standards in any material respect.

Question 19The conceptual and regulatory framework for financial reporting

How does the Conceptual Framework describe prudence?

  1. The exercise of caution when making judgements under conditions of uncertainty Correct answer.
  2. A basis of measurement that always uses the lowest available value
  3. A prohibition on making accounting estimates
  4. A requirement to understate assets and overstate liabilities

Explanation

Prudence is the exercise of caution when making judgements under conditions of uncertainty. It supports neutrality and does not permit the deliberate understatement of assets or overstatement of liabilities.

Question 20The conceptual and regulatory framework for financial reporting

The cost constraint on useful financial reporting means that:

  1. financial information should be provided only if it is free of charge
  2. the IASB must recover the cost of standard-setting from preparers
  3. the benefits of reporting information should justify the costs of providing and using it Correct answer.
  4. entities should not incur any costs to produce financial information

Explanation

The cost constraint recognises that reporting information imposes costs on preparers and users. Information should be provided only where the benefits of doing so justify those costs.

Question 21The conceptual and regulatory framework for financial reporting

An entity signs a contract to purchase 1,000 units of a commodity at a fixed price in six months. Neither party has performed any part of the contract. Under the Conceptual Framework, does the entity have a liability?

  1. Yes, because the contract is legally enforceable
  2. No, because the contract has not yet been approved by the board
  3. Yes, because the future purchase price is fixed
  4. No, because the entity has no present obligation to transfer an economic resource as a result of past events Correct answer.

Explanation

In an executory contract where neither party has performed, the entity has a right to receive the goods in the future and a conditional obligation to pay when delivery occurs. There is no present obligation to transfer an economic resource arising from past events, so no liability is recognised.

Question 22The conceptual and regulatory framework for financial reporting

An entity has a large number of individually small items of inventory. Which concept determines whether the items are assessed together or separately for recognition and measurement?

  1. The accrual basis
  2. The going concern assumption
  3. The unit of account Correct answer.
  4. The capital maintenance concept

Explanation

The unit of account is the right or obligation, or group of rights or obligations, to which recognition criteria and measurement concepts are applied. It determines whether items are assessed individually or together, and materiality may allow small items to be aggregated.

Question 23The conceptual and regulatory framework for financial reporting

Under the physical capital maintenance concept, profit is recognised only after:

  1. the entity has paid dividends to shareholders
  2. cash receipts exceed cash payments for the period
  3. the entity's productive capacity at the end of the period has been maintained Correct answer.
  4. the entity's nominal money capital has been maintained

Explanation

Physical capital maintenance requires the entity's productive capacity to be maintained before profit is recognised. Profit is the excess of the current value of net assets over the amount needed to maintain productive capacity.

Question 24The conceptual and regulatory framework for financial reporting

What is the status of the Conceptual Framework for Financial Reporting?

  1. It is a practical tool that assists the IASB and preparers, but it does not override any IFRS Standard Correct answer.
  2. It is a legal regulation enforceable by securities regulators
  3. It is an IFRS Standard and overrides all other IFRS Standards
  4. It applies only to entities that have not adopted IFRS Standards

Explanation

The Conceptual Framework is not an IFRS Standard and does not override any Standard. It assists the IASB in developing Standards, preparers in applying accounting policies and others in understanding IFRS Standards.

Question 25The conceptual and regulatory framework for financial reporting

An asset has a very wide range of possible measurement outcomes. Does high measurement uncertainty by itself prevent the asset from being recognised?

  1. No, because IFRS Standards never require disclosure of measurement uncertainty
  2. No, provided the information remains relevant and faithfully represented, with the uncertainty disclosed Correct answer.
  3. Yes, because an asset cannot be recognised unless its amount is certain
  4. Yes, because high measurement uncertainty makes the information unreliable in all cases

Explanation

Measurement uncertainty does not by itself prevent recognition. If an estimate provides relevant and faithfully represented information, the item may be recognised, with disclosure of the sources and effects of the measurement uncertainty.

Question 26The conceptual and regulatory framework for financial reporting

According to the Conceptual Framework, who are the primary users of general purpose financial reports?

  1. Government agencies and industry regulators
  2. Customers, suppliers and the wider public
  3. Existing and potential investors, lenders and other creditors Correct answer.
  4. Employees, trade unions and works councils

Explanation

The Conceptual Framework identifies existing and potential investors, lenders and other creditors as the primary users, because most of them cannot demand information directly from the entity and must rely on general purpose financial reports. Other groups may find the reports useful, but they are not the primary audience the Framework is designed for.

Question 27The conceptual and regulatory framework for financial reporting

Which fundamental qualitative characteristic describes information that is capable of making a difference in the decisions made by users?

  1. Relevance Correct answer.
  2. Comparability
  3. Timeliness
  4. Faithful representation

Explanation

Relevance is a fundamental characteristic, satisfied when information has predictive value, confirmatory value, or both, so that it can influence users' decisions. Faithful representation is the other fundamental characteristic, while comparability and timeliness are enhancing characteristics.

Question 28The conceptual and regulatory framework for financial reporting

Under the accrual basis of accounting required by IAS 1, expenses are recognised:

  1. In the period in which the related cash payment is made
  2. Only once a supplier has issued a legally enforceable invoice
  3. In the periods in which the related economic benefits are consumed or the obligation arises Correct answer.
  4. In whichever period management considers most representative

Explanation

Accrual accounting recognises transactions and events when they occur, not when cash changes hands, so expenses are recorded in the periods in which the associated economic benefits are consumed or the obligation arises. Cash timing and invoicing are therefore not the determining factors.

Question 29The conceptual and regulatory framework for financial reporting

An entity decides not to disclose a material related party transaction because disclosing it would reflect unfavourably on the directors. Which qualitative characteristic is most directly undermined?

  1. Comparability
  2. Understandability
  3. Timeliness
  4. Faithful representation Correct answer.

Explanation

Faithful representation requires information to be complete, neutral and free from material error. Deliberately omitting material information to create a favourable impression is a departure from neutrality and completeness, so the depiction is not faithful.

Question 30The conceptual and regulatory framework for financial reporting

Under the Conceptual Framework, income is defined as:

  1. Any increase in the total equity of the entity, including capital contributed by shareholders
  2. Revenue arising from an entity's ordinary operating activities during the period
  3. Cash receipts generated from customers and other third parties during the period
  4. Increases in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from holders of equity claims Correct answer.

Explanation

The Framework defines income by reference to movements in assets and liabilities that increase equity, while excluding contributions from holders of equity claims, which are transactions with owners rather than income. Revenue is only one category of income, and cash receipts are not the basis of the definition.

Question 31The conceptual and regulatory framework for financial reporting

An entity has net liabilities at the reporting date, but its parent has confirmed in writing that it will provide sufficient financial support for at least twelve months. How should the financial statements be prepared?

  1. On a liquidation basis, because net liabilities always indicate imminent failure
  2. On a break-up basis, valuing all assets at their recoverable amounts
  3. On a going concern basis, with no reference to the net liability position
  4. On a going concern basis, with disclosure of the parent's support and the related uncertainty Correct answer.

Explanation

The going concern assumption applies where management has no intention or necessity to liquidate, and confirmed parental support can justify that assumption even when net liabilities exist. Because the circumstances are unusual, IAS 1 requires disclosure of the support and the judgement involved, together with any material uncertainty.

Question 32The conceptual and regulatory framework for financial reporting

An IFRS Standard's requirements appear to conflict with guidance in the Conceptual Framework. How should the preparer resolve the conflict?

  1. Report both treatments in the notes and let users decide which is more useful
  2. Follow the Conceptual Framework, because it takes precedence over individual Standards
  3. Suspend preparation of the financial statements until the conflict is resolved by the IASB
  4. Follow the requirements of the Standard, which takes precedence over the Framework Correct answer.

Explanation

The Conceptual Framework is not a Standard and does not override any IFRS Standard. Where a Standard applies to a transaction, its requirements prevail, and the Framework is used to develop accounting policies when no Standard deals with the matter.

Question 33The conceptual and regulatory framework for financial reporting

An entity faces a transaction for which no IFRS Standard deals specifically, but a Standard addresses a closely related matter. In applying the IAS 8 hierarchy, where should management look next after considering Standards on similar and related issues?

  1. The definitions, recognition criteria and measurement concepts in the Conceptual Framework Correct answer.
  2. The most recent pronouncements of other standard-setting bodies
  3. Accepted industry practice, regardless of consistency with IFRS
  4. Academic research and economics textbooks

Explanation

IAS 8 requires management to consider, in order: requirements in IFRS dealing with similar and related issues, then the definitions, recognition criteria and measurement concepts in the Conceptual Framework. Only after that may management consider recent pronouncements of other standard setters and other financial reporting literature, provided they do not conflict with IFRS.

Question 34The conceptual and regulatory framework for financial reporting

An entity transfers legal title to a portfolio of receivables to a bank for cash but retains substantially all the credit risk on those receivables. How should the transaction be reported?

  1. As a borrowing secured on the receivables, with the receivables still recognised Correct answer.
  2. As an issue of equity instruments measured at the cash received
  3. As a sale, derecognising the receivables and recognising the difference as a gain
  4. As revenue from the disposal of financial assets in profit or loss

Explanation

Faithful representation requires the economic substance of a transaction to be reported rather than merely its legal form. Because substantially all the risks and rewards of the receivables are retained, the transfer does not qualify for derecognition and the cash received is treated as a secured borrowing.

Question 35The conceptual and regulatory framework for financial reporting

IFRS 13 defines fair value as the price that would be:

  1. Paid to acquire an asset in a forced liquidation sale
  2. Paid to replace an asset with an identical or equivalent asset at the reporting date
  3. Derived from discounting the entity's own expected future cash flows from the asset
  4. Received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date Correct answer.

Explanation

Fair value is a market-based exit price determined under orderly transaction conditions between market participants at the measurement date. It is not entity-specific and is not based on forced or distressed prices.

Question 36The conceptual and regulatory framework for financial reporting

Which measurement basis reflects the present value of the cash flows that an entity expects to derive from the continuing use and eventual disposal of an asset?

  1. Fair value
  2. Historical cost
  3. Value in use Correct answer.
  4. Current cost

Explanation

Value in use is an entity-specific measure based on the cash flows the entity itself expects from using the asset and disposing of it, discounted to present value. Fair value, by contrast, reflects market participants' assumptions rather than the entity's own.

Question 37The conceptual and regulatory framework for financial reporting

In the Conceptual Framework, the term used for the level at which an asset or liability is aggregated or disaggregated for recognition and measurement purposes is the:

  1. Cash-generating unit
  2. Unit of account Correct answer.
  3. Operating segment
  4. Reporting entity

Explanation

The unit of account is the right or group of rights, or obligation or group of obligations, to which recognition and measurement criteria are applied. Its selection can affect whether an item is recognised and how it is measured, but it is distinct from the reporting entity and from concepts used elsewhere in IFRS.

Question 38The conceptual and regulatory framework for financial reporting

Which of the following is a responsibility of the IFRS Foundation Trustees?

  1. Appointing the members of the IASB and providing oversight of its work Correct answer.
  2. Approving the technical content of every IFRS Standard by ballot
  3. Developing and issuing IFRS Interpretations on emerging issues
  4. Determining which IFRS Standards apply to an individual entity's transactions

Explanation

The Trustees are responsible for governance of the IFRS Foundation, including appointing IASB members, overseeing the Board's work and securing funding, while the Board retains full responsibility for technical standard-setting. This separation preserves the IASB's independence.

Question 39The conceptual and regulatory framework for financial reporting

What is the role of the IFRS Advisory Council?

  1. It issues binding interpretations of IFRS Standards for national regulators
  2. It investigates complaints about entities that fail to comply with IFRS Standards
  3. It provides a forum for organisations and individuals interested in financial reporting to advise the IASB and the Trustees on agenda and priorities Correct answer.
  4. It sets the technical requirements of new Standards in place of the IASB

Explanation

The IFRS Advisory Council is a consultative body that gives the IASB and the Trustees advice on the standard-setting agenda, project priorities and the technical implications of proposed Standards. It has no authority to set Standards, issue Interpretations or enforce compliance.

Question 40The conceptual and regulatory framework for financial reporting

An entity publishes audited financial statements eighteen months after its year end, although the information they contain is complete and accurate. Which qualitative characteristic is most directly impaired?

  1. Neutrality
  2. Verifiability
  3. Timeliness Correct answer.
  4. Completeness

Explanation

Timeliness is the enhancing characteristic that requires information to be available to decision-makers in time to influence their decisions. Information that is accurate and complete but very old loses much of its usefulness.

Question 41Accounting for transactions in financial statements

A company buys a machine for use in its production line. Which of the following is included in the initial cost of the machine under IAS 16?

  1. Training of staff on how to operate the machine
  2. Cost of relocating the machine to a new factory next year
  3. The first year's maintenance contract
  4. Delivery and installation costs Correct answer.

Explanation

IAS 16 requires the cost of an item of property, plant and equipment to include its purchase price plus any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating as intended, including delivery and installation. Staff training, relocation and ongoing maintenance are not part of getting the asset ready for its intended use.

Question 42Accounting for transactions in financial statements

A machine costing $120,000 was purchased on 1 July 20X1. It has an estimated residual value of $20,000 and a useful life of five years. The company uses straight-line depreciation and has a 31 December year end. What is the depreciation charge for the year ended 31 December 20X1?

  1. $20,000
  2. $24,000
  3. $10,000 Correct answer.
  4. $12,000

Explanation

Depreciation is calculated on the depreciable amount, being cost less residual value: ($120,000 - $20,000) / 5 years = $20,000 per full year. Since the asset was held for only six months of 20X1, the charge is $20,000 x 6/12 = $10,000.

Question 43Accounting for transactions in financial statements

A building was purchased at a cost of $500,000 and has accumulated depreciation of $200,000. It is now revalued to $450,000 under the revaluation model. No previous revaluations have been recorded. How is the revaluation gain treated?

  1. $250,000 credited to other comprehensive income
  2. $50,000 credited to other comprehensive income
  3. $150,000 credited to other comprehensive income Correct answer.
  4. $150,000 credited to profit or loss

Explanation

The gain is the excess of the revalued amount over the carrying amount: $450,000 - ($500,000 - $200,000) = $150,000. Because the asset has not previously been revalued downwards through profit or loss, the whole surplus is recognised in other comprehensive income and accumulated in equity as a revaluation surplus.

Question 44Accounting for transactions in financial statements

Plant with a carrying amount of $80,000 is revalued to $65,000. The company has no existing revaluation surplus relating to this asset. How should the decrease be accounted for?

  1. Deferred and written off over the asset's remaining useful life
  2. Recognised in other comprehensive income as a revaluation loss
  3. Deducted from the revaluation surplus on other assets in other comprehensive income
  4. Recognised as an expense in profit or loss Correct answer.

Explanation

A revaluation decrease is charged to profit or loss, except to the extent that it reverses a previous revaluation surplus on the same asset held in equity. As there is no such surplus for this asset, the whole $15,000 decrease is an expense of the period.

Question 45Accounting for transactions in financial statements

A company replaces a major component of a plant. The old component, which had a carrying amount of $30,000, is scrapped. The new component costs $90,000 and improves the plant's output. How should the transaction be recorded under IAS 16?

  1. Charge $90,000 to profit or loss as a repair
  2. Add $60,000 to the carrying amount of the plant Correct answer.
  3. Add $120,000 to the carrying amount of the plant
  4. Add $90,000 to the carrying amount of the plant

Explanation

Where a component is replaced, the cost of the new component is capitalised and the carrying amount of the replaced part is derecognised, so the net addition is $90,000 - $30,000 = $60,000. The new component enhances the asset's economic benefits, so it is not treated as a repair.

Question 46Accounting for transactions in financial statements

Under IAS 38, how is expenditure on the research phase of an internal project treated?

  1. Recognised as an expense only if the project is later abandoned
  2. Capitalised and amortised over a maximum of 20 years
  3. Capitalised once technical feasibility has been demonstrated
  4. Written off as an expense when incurred Correct answer.

Explanation

IAS 38 prohibits the recognition of internally generated intangibles arising from research, so research expenditure is expensed as incurred. Only development expenditure may be capitalised, and only once all the specified recognition criteria are met.

Question 47Accounting for transactions in financial statements

How is an intangible asset with an indefinite useful life accounted for under IAS 38?

  1. Amortised over a maximum of 20 years
  2. Not amortised and tested for impairment only when there is an indicator of impairment
  3. Not amortised but tested for impairment annually Correct answer.
  4. Amortised over its expected useful life using a revenue-based method

Explanation

An intangible with an indefinite useful life is not amortised because there is no foreseeable limit to the period over which it will generate cash flows. Instead it must be tested for impairment at least annually and whenever there is an indication that it may be impaired.

Question 48Accounting for transactions in financial statements

A company holds an office building solely to earn rental income and for capital appreciation, and applies the fair value model under IAS 40. At the year end the fair value of the building is $40,000 below its previous carrying amount. How is the decrease recognised?

  1. In other comprehensive income as a revaluation loss
  2. As a reduction of a revaluation surplus first, then in profit or loss
  3. In profit or loss for the year Correct answer.
  4. Deferred and recognised over the remaining life of the building

Explanation

Under the fair value model, investment property is remeasured to fair value at each reporting date and any gain or loss is recognised in profit or loss for the period. The revaluation-surplus mechanics of IAS 16 do not apply to investment property carried at fair value.

Question 49Accounting for transactions in financial statements

A company holds inventory that cost $50,000. Its estimated selling price is $55,000 and the costs necessary to make the sale are $9,000. The current replacement cost is $42,000. At what amount should the inventory be carried?

  1. $46,000 Correct answer.
  2. $50,000
  3. $42,000
  4. $55,000

Explanation

IAS 2 requires inventory to be measured at the lower of cost and net realisable value. Net realisable value is $55,000 - $9,000 = $46,000, which is below cost of $50,000, so a write-down of $4,000 is required and the inventory is carried at $46,000.

Question 50Accounting for transactions in financial statements

A manufacturer is calculating the cost of its finished goods. Which of the following is charged as an expense of the period rather than included in the cost of inventory?

  1. Freight inwards on raw materials
  2. Depreciation of factory plant
  3. Salaries of production supervisors
  4. Abnormal amounts of wasted material Correct answer.

Explanation

IAS 2 requires the cost of conversion to include costs directly related to production units, but abnormal amounts of wasted materials, labour or other production costs are excluded and expensed. Depreciation of plant, carriage inwards and production supervision are normal costs of bringing inventory to its present location and condition.